How to Finance Green Infrastructure by Karim El Aynaoui & Otaviano Canuto
Mobilizing excess savings in advanced economies for much-needed investment in green infrastructure in emerging-market and developing economies will not be easy. But it is possible, if both the public and private sectors do their parts.
WASHINGTON, DC – To spur development and fight climate change, emerging-market and developing economies (EMDEs) will need huge amounts of investment in green infrastructure over the next few decades. But many of these countries have limited fiscal space, especially after the shocks of the last few years. Given this, to meet the EMDEs’ infrastructure needs, we must mobilize excess private savings in the advanced economies. The question is how.
The first step toward building a bridge between private savings and infrastructure investment in EMDEs is to understand investors’ needs. Institutional investors, like all other types of debt and equity investors, have their own incentives, constraints, and objectives, all of which inform their allocations of funds, including which types of projects (greenfield vs. brownfield) to support, where, and at what stage of the project cycle (development, construction, or operation). Inadequate risk coverage, lack of data, and the heterogeneity of project structures, regulatory environments, and contractual standards can all act as barriers to investment.
The challenge is to define “attractive investment opportunities” and match investors to them in a more systematic way. Central to this effort should be the provision of a wide range of well-structured investment products tailored for different types of institutional investors and their respective risk/return profiles. For example, institutional investors (such as pension funds) might be inclined to participate at a project’s earlier stages (prior to operation) if refinancing risks are covered and construction risk is addressed.
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