Poverty Eradication and Shared Prosperity through Infrastructure – What Role can the Private Sector Play?
Distinguished guests, ladies and gentlemen,
I’d like to thank JETRO for co-organizing today’s seminar.
Today I want to discuss the link between the developing world’s vast need for infrastructure on the one side, and the opportunities for private money on the other.
I am particularly delighted to do this here in Tokyo. Japan is a strong partner of the World Bank Group and interested in exploring the potential that infrastructure investments hold for development.
Growing Importance – Growing Infrastructure Need
Let me start by describing the new reality. According to data we released last month , measured in comparable prices, emerging and developing economies now make up half of the world economy. This is up from less than a third two decades ago.
Six of the world’s twelve largest economies are now in the World Bank’s middle income category.
The latest data – based on 2011 figures - shows that China accounts for 15 percent of the world total economy compared to 17 percent for the United States. Based on this, China is about to take the position of the largest economy in the world, much sooner than expected. And India is now in third place.
Also consider another reality. Developing economies have been growing faster than developed economies in the past 20 years, particularly since the global financial crisis.
The Gaps Are Apparent
But in order to secure sustained growth and fulfill their potential, emerging and developing countries need to step up their investments in infrastructure.
Today, 1.2 billion people live without electricity.
2.8 billion cook with solid fuels.
About one billion live more than 2 kilometers from the next all-weather road.
60% of world’s population has no internet access.
Despite the progress we have seen over the last decades, we still have over 1 billion people living on less than $1.25 a day. And 2.4 billion people live on less than $2.
Let’s be clear: poverty alleviation is closely related to the stock and quality of infrastructure and access to basic services. So too is growth and shared prosperity.
Without infrastructure, we cannot connect people to jobs or goods to markets. And we cannot increase productivity.
For example, Latin America, which underinvested in infrastructure in the 1990s bumped up against inflation when growth reached 3 or 4 percent.
Infrastructure investment can create short-term growth, as we’ve seen in recent stimulus programs around the world.
In fact, for every US$100 million in infrastructure investment, 20,000 to 50,000 temporary jobs can be created, particularly in labor intensive sectors such as road maintenance.
But that’s the short term. Long-term growth can only be sustained through efficient infrastructure services like energy supply, telecom or trade infrastructure such as rail and ports.
Currently, developing and emerging countries invest about US$1 trillion dollars a year in infrastructure. But think of the future price tag. They will need to double spending every year until 2020 to meet the needs of their people and realize their potential. This could go up by over 200 billion every year if we factor in the spending required to reduce greenhouse gas emissions and adaption to more volatile climates.
How To Fill The Gap?
We all know that public purses are too stretched to close the infrastructure gap.
Official development assistance is playing its part, but the size of the gap clearly highlights the need for solutions involving the private sector.
A key challenge for financing infrastructure in emerging markets and developing economies is not a shortage of capital, but a shortage of capital willing to invest in the more complex and riskier environments.
Institutional investors, as an example, are sitting on at least 20 trillion dollars of long-term capital looking for investments that would match their long-term liabilities. They are looking for long-term returns that they cannot get from bonds. They are also looking for predictability, security and regulated returns that are sometimes available in OECD infrastructure investments, but rarely found in emerging economies.
Even among investors focused on infrastructure, little finds its way into low income countries. Of the top 15 infrastructure investors in 2011 only South Africa had investments in Africa.
Not Just About Money
So, it’s more than money needed to fill the infrastructure gap. Governments have to implement policies that will provide the political, contractual and regulatory certainty that are needed to attract private investors.
The World Bank Group is addressing these factors with our clients -- whether we offer risk instruments and credit enhancements, working on improving regulatory frameworks, pricing and institutional capacity. It means preparing good projects, structuring and arranging them so that they can attract long-term capital from diverse sources.
I do want to stress three points that are critical to increasing private investment in infrastructure:
First, we have to be clear on who does what. Private investors bring capital to infrastructure projects, but they don’t fund them. For them, expected returns need to be attractive. Taxpayers and consumers ultimately pay for infrastructure. For them, the services need to be of high quality and affordable. Governments need to ensure that citizens can access services, particularly poor and vulnerable people. .
Second, to maximize the benefits of private involvement, investors have to have a stake in becoming long-term operators of utilities operating under commercial principles. They will do so when they find regulation that can be trusted to protect consumers and their investments.
Third, we all know you cannot finance a house with a 5-year mortgage, let alone a new rail line or highway or power plant. We need long-term finance and the right kind of risk instruments, particularly in the face of possible rising interest rates and volatility in capital markets.
Finally, project pipelines need to be viable and bankable and the institutions that bring them to market have to be robust.
The Japan Experience
Japan stands as a classic example of a country that has benefited greatly from infrastructure investment.
Until 1960, Japan was one of the biggest borrowers from the World Bank. As part of its reconstruction, the Bank helped finance over 30 projects including the Kurobe Dam, still the tallest dam in Japan. And of course there was our funding for the Shinkansen, an enduring symbol of Japanese rebirth as an economic and technological powerhouse.
Japan provides powerful evidence that access to reliable infrastructure not only lifts a society out of poverty but can help build a middle class and make growth sustainable.
Japan too has experience in making public-private partnerships work. It has been a leader in leveraging property to entice investors into urban transport systems. The private light rail lines of Tokyo and Osaka are a remarkable example of how the private sector can take risks in infrastructure.
Likewise, Japan Rail's privatization has long been recognized as one of the most successful attempts to transfer operating, maintenance and ownership to the private sector while enhancing the quality of service across the country.
A Quantum Leap In Public Private Cooperation
Japan has taught us that infrastructure investment is vitally important and that public construction contracts cannot be used indefinitely to spur growth. Eventually, prudent fiscal management demands that infrastructure investment priorities are sustainable.
The multilateral and regional development banks are trying to step up and fill the gap between infrastructure needs and the limited availability of long-term government financing.
The World Bank Group’s proposed Global Infrastructure Facility is one such example. It aims to crowd-in private financing, extend maturities and help strengthen infrastructure as an asset class. It aims to support pipeline development, regulatory and sector strengthening and stronger investment environment, making use of our convening power and ability to bring knowledge to the table.
We believe that initiatives like this are going to be vital to make a true quantum leap in public-private cooperation on infrastructure.
In fact, this is part of our new strategic direction. Operating as one World Bank Group, we will put much more effort into bringing the public and private sectors together to tackle the toughest development challenges.
We have two powerful tools at our disposal. IFC, our private sector arm, last year provided record financing for private sector development, of which one–third was mobilized from investment partners. I am very pleased that IFC’s investment portfolio with Japanese sponsors is around $4 billion.
The second tool we have is MIGA, which provides political risk insurance and credit enhancement to the private sector for critical investments in developing and emerging economies. Coverage and investments in the poorest countries, many off them conflict-affected and in sub-Saharan Africa continue to grow.
Bringing development lending, the private sector, and risk insurance together, we are currently designing with our clients truly transformational projects. To give you one example: In Myanmar we put together a 2 billion dollar package that will improve access to energy and health care for poor people.
We believe that the opportunities for the private sector in development are boundless.
But not only that. We know that to achieve our two ambitious goals of ending extreme poverty and boosting shared prosperity, we have to help the private sector create jobs and increase growth.
The Right Infrastructure
Let me raise another important issue. Globally, an estimated US$4 trillion was lost over the past 30 years because of natural disasters. It’s a figure that does not take into account the lives lost and people’s unspeakable suffering. The typhoon last year in the Philippines brought home to all of us yet again the devastating toll only natural disasters take on people and an economy.
These costs can be reduced through effective planning, preparedness and designing the “right” infrastructure—and assuring that it is maintained and regulated appropriately. It’s why it’s so pleasing and so right that together with the government of Japan we have established a disaster risk management hub right here in Tokyo. The work of the hub shows every day that the right investments not only manage risks but also lead to considerable savings in the future, which can be channeled into other development efforts.
The Role of Japan and East Asia
Japan’s and East Asia can play a critical role in meeting infrastructure needs. So far, Japan’s institutional investors allocate only a small share for infrastructure, but a recent study by Standard&Poor’s shows a significant increase and interest in this asset class. The majority of this new infrastructure money will come from the pension fund sector.
The Japan Bank for International Cooperation, Mizuho Bank, Mitsubishi Corporation, and the Pension Fund Association of Japan have built a strategic investment alliance that looks into large-scale infrastructure investments. This is good news.
Add to this the region’s commercial banks with their high liquidity and capital levels and the powerful trading houses, as suppliers and technology providers. Japan and the region could become strong infrastructure players.
We hope it will translate into growing interest in investments rich and in developing countries. And not only as developers and suppliers, but also as operators, especially in the power, water, transport and telecom sectors.
Today’s infrastructure agenda is increasingly viewed as the cornerstone to address many of the broader development challenges in the world—from rapid urbanization to climate change, and job creation.
Tackling such a complex and interconnected agenda requires all of us to look at synergies between sectors while adhering to environmental considerations.
Japan is the World Bank’s r 2nd largest shareholder and a critical provider of support to key development initiatives including IDA, our fund for the poorest countries, the Global Environment Facility and the Japan Social Development Fund, which supports some cutting edge community driven development projects. Japan is also a founding donor to the Public-Private Infrastructure Advisory Facility, which helps governments create a sound enabling environment for private participation in infrastructure.
Now we would like to see Japanese companies more active in the public private partnership market, helping deliver the expertise to help minimize project life-cycle costs, as well as improve environmental conservation and strengthen disaster prevention.
So with that wish, I will end and open the floor for questions and comments. I am very interested in your thoughts and ideas.
Thank you very much.