Mobilization of private sector resources to invest in, for instance, clean energy and transportation, makes sense when interest rates are low or negative. It also makes sense for institutional investors and others that seek portfolio diversification.
The focus on infrastructure has an important macroeconomic aspect. Fiscal outlays in current expenditure are usually perceived as requiring compensation through future taxes and hence result in a damped consumer response. By contrast, private and public outlays in quality infrastructure that respond to concrete demands tend to increase permanent income, and therefore boost consumer confidence. It can thus be an effective way to spark sustainable growth. This mechanism is valid even if the immediate expenditure in infrastructure occurs in far-away geographies.
Geographic diversification of investments is also a sensible response to the big demographic shifts we see in developed nations. We know that by 2050, Europe will have 34 percent of its people aged 60 or over. In Canada, the proportion aged 65 and over is lower than in most G8 countries, but it will grow faster than elsewhere in coming years.
Finding long-term income streams to sustain these aging populations will help increase confidence in developed nations and revert current low interest rates in the medium term.
In such a scenario, institutional investors have a very important role in exploring opportunities of investments in developing nations, as some of the leading Canadian pension funds have been doing for years.
We, at the World Bank Group, believe that increasing these institutional investment flows, especially in the fixed income space, can deliver good outcomes in terms of global development and also address important demands in advanced countries.
Such an increase may require new financial tools and means to develop an adequate investment environment in many countries.
We believe the Bank Group can help create conditions to foster these flows, by, for instance, helping developing countries align the interests of domestic and foreign investors through the development of local capital markets.
Emerging markets can be reliable partners, with increasingly transparent regulations and appropriate risk profiles. And the Bank Group is ready to provide financial instruments to help bridge the gap between these risk profiles and the risk appetite of investors in relevant situations.
Having handled a portfolio of more than 130 billion dollars as CEO of Brazil's second-largest private bank, I can relate to investors’ concerns.
But in my tenure as Brazil’s Finance Minister, I saw that low private investment in areas like infrastructure constrained growth.
And today, as CFO of the largest multilateral development institution, I ask, how can we address uncertainties so that the private sector can help end poverty and broaden prosperity?
This is the subject of much work at the Bank and of continuous consultation with private and public sector partners, which has led us to identify a three-pronged approach to de-risking investments.
First, we should continue to influence the environment in which projects are developed—improving preparation and the use of insurance, while also making more project data available to investors.
Second, we should work to standardize contracts and documentation, so we can more easily compare opportunities. And we should use guarantees and other products that may help address the risk appetite of investors.
Third, we should understand and discuss the regulatory constraints and fiduciary responsibilities of asset managers, and create an ecosystem to help them explore opportunities in infrastructure. This would entail developing tools such as fixed-income infrastructure indexes and emerging market bonds, especially in support of countries’ climate change strategies.
Let me spend a moment on guarantees. They can help mobilize capital for projects that are viable but will not proceed unless investors and lenders are protected against certain risks or catastrophes.
My organization offers a range of guarantee instruments. World Bank partial guarantees, for instance, can cover government failure to meet payment and/or performance obligations. They complement guarantees offered by our private sector agencies—the Multilateral Investment Guarantee Agency and the International Finance Corporation – which can be more flexible. Many of our guarantees can be issued in different currencies, for any sector, and structured to match the needs of individual transactions. By reducing project risk, they expand access to funding for a broader universe of investors and savers.
So, addressing the three main areas of the investment value chain will help narrow the infrastructure gap, connecting capital in developed countries to investment opportunities in developing countries.
Such a strategy can help developing countries while offering a steady income stream to investors. We are already seeing it work with our Global Infrastructure Facility, launched with Canada’s participation in 2014. It is making progress including support for a hydropower plant that will meet 68 percent of energy needs in the Solomon Islands. The GIF is also gearing up to raise funds to provide specific guarantees.
Stimulating more private financing is also a focus of the International Development Association—the World Bank Group’s fund for the poorest countries. Today, IDA is proposing to use 2.5 billion dollars in a Private Sector Window to support engagements in these countries.
We have also made strides in creating opportunities for institutional investors in the private equity space. IFC’s Asset Management Company mobilizes third party capital to co-invest in projects with IFC. Launched in 2009, it has over 9.1 billion dollars in assets under management across 13 funds. And three years ago, the Government of Canada helped launch the IFC Catalyst Fund, focusing on climate-smart initiatives in emerging markets.
These are just a few ways we can help the private sector engage. Meaning that billions of people living without essential services will be more able to lift themselves out of poverty as the world creates avenues to effectively address global challenges such as climate change.
The issues we face demand a focused and coordinated international response across multiple areas—and a commitment to finance solutions to the most persistent development challenges.
Together, however, we can lead through these uncertain times. We can bolster the investment landscape in emerging markets and build a stronger future. One that combines a return on financial investment with a return on human investment. Where no one lives in poverty and everyone has the opportunity for a better life.