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Speeches & Transcripts October 26, 2016

Keynote: Mobilizing Investment in Emerging Market Infrastructure

Ladies and gentlemen, good afternoon. It’s a pleasure for me to be here today to discuss the critically important topic of mobilizing money for emerging market infrastructure. I want to thank our hosts at S&P Dow Jones Indices for asking me to speak at this event.

The financing of physical and social infrastructure has always been a corner-stone of the World Bank’s agenda, dating back to our establishment in 1945. As you can infer from the World Bank’s official name, the International Bank for Reconstruction and Development, the World Bank was created specifically to finance the recovery and reconstruction of Europe after the Second World War. In fact, the World Bank’s first loan in 1947 was made to France in the amount of US$250 million mainly to finance the rebuilding of critical transportation infrastructure. Our second loan, made two months later in 1947, was to the Netherlands for US$195 million to finance primarily the rehabilitation of the Dutch shipping industry. Other early loans from the World Bank financed the reconstruction and modernization of steel manufacturing capacity in France, Belgium and Luxembourg. Later, in 1953, the World Bank began lending to Japan largely to help rebuild that country’s energy and transportation infrastructure. For example, a World Bank loan financed the completion of Japan’s very first bullet train line. Those early efforts to reconstruct and develop infrastructure in countries ravaged by the Second World War obviously paid rich dividends, as Western Europe and Japan experienced rapid economic recovery and growth. Having once been our main borrowers, those countries and their robust capital markets are now important sources of financing for the Bank.

We find ourselves at similar cross roads today with so many of the world’s lesser developed and middle income countries facing a critical infrastructure gap. It is estimated that the infrastructure spending needs of these countries, that together account for almost 60% of World’s GDP, is roughly USD$1.5 trillion per year over the next decade. Clearly, the sums involved are enormous. But at the same time, that amount represents less than 2% of the total global bond market, which is estimated to be roughly US$100 trillion in size. With so much capacity in our capital markets, it is with a great deal of enthusiasm that I stand in front of you today to talk about this very important topic of mobilizing financing for infrastructure developments in emerging markets.

The critical importance of infrastructure development to combat poverty and promote equitable and sustainable economic growth certainly has not been lost on the world community, as infrastructure features very prominently in the Sustainable Development Goals, or SDGs. Building on the successes of the Millennium Development Goals, the seventeen SDGs were adopted last September by countries from around the world. Achieving these goals by the target date of 2030 will depend largely on the success we have mobilizing more financing for infrastructure. In fact, SDG number 9 is specifically on infrastructure. Moreover, achieving many of the other SDGs, from clean water to clean energy to creating more sustainable cities all depend on infrastructure development.

Developing economies have accounted for more than 80 per cent of global growth since the start of the global financial crisis. According to the World Bank’s June projections, growth in emerging markets will exceed the global average by more than 30 percent in 2016. This accelerated pace of growth, from globalization and urbanization, has raised the demand for new infrastructure in those economies. According to some estimates, as much as $550 billion has been invested in emerging market infrastructure every year, with around 70 percent of the funds coming from the public sector. The private sector accounts for 20 percent of this funding, with the remaining 10 per cent financed through overseas development assistance. This investment is highly concentrated in just a handful of countries. For example, Brazil, China, India, Mexico and Turkey have regularly accounted for 50% or more of emerging market infrastructure investment each year over the last decade.

This level of infrastructure spending is clearly insufficient to meet the demands, and many challenges remain. On the supply side, laws and regulations enacted after the financial crisis have made it extremely difficult for banks to deploy their balance sheets to finance long-dated infrastructure projects. On the demand side, both the private and public sectors have been loath to take a longer term view. The focus on the short term has hampered investments in infrastructure assets that have a naturally longer gestation period.

Another reason for the mismatch between demand and supply of infrastructure finance is the lack of a pipeline of well-structured, investable projects. By nature, infrastructure investments require complex legal and financial arrangements. Developing the necessary human capital and regulatory environment, such as enabling legislation for public-private partnerships, is a long and difficult process. Money will only begin to flow in significant volume once such an enabling environment is in place and if there is a sufficient and predictable pipeline of infrastructure investment opportunities.

The World Bank, along with its peer multilateral development banks, has been working to overcome these challenges. Together with our sister institution that focuses on private sector development, the International Finance Corporation, the Bank has been engaged on multiple fronts – ranging from traditional financing to technical assistance to knowledge sharing. The principal challenge for us, and other multilateral development banks, going forward is to be more innovative in this arena. To date, approximately 70% of multilateral development bank support for infrastructure has come in the form of senior loans, and that percentage is clearly too high. Multilateral development bank balance sheets are a precious resource and need to be treated as such by leveraging relatively small and targeted amounts of financing or guarantees in order to mobilize large amounts of private investment. We understand this need to be more innovative, and we absolutely are responding.

One example of this is the support we were able to provide for the Sustainable Transport project in the state of Sao Paulo in Brazil. Committing $300 million on a $729 million project in 2014, the Bank was able to mobilize additional funds through the private sector by offering a credit enhancement against non-payment by the state through the Multilateral Investment Guarantee Agency – another entity party of the World Bank Group.

Another example is the Global Infrastructure Facility (the GIF). Established in April 2015 with an initial capital of $100 million, the GIF was created by the Bank to facilitate the preparation and structuring of public private partnerships. An open platform, the GIF seeks to mobilize capital to spur infrastructure development by coordinating the efforts of multilateral development banks, governments, and the private sector. Representing about $12 trillion in assets under management, GIF’s partners work together to unlock even greater amounts of capital to build a global pipeline of sustainable infrastructure investment projects. In the short time since its creation, the GIF is already in advanced stages to approve grants for a Logistics Infrastructure Program in Brazil, a Dry Ports Development Program in Egypt, and another deep-sea Port in Anaklia in Georgia.

Another World Bank initiative, the Public Private Infrastructure Advisory Facility, partners with other donors, multilateral development agencies, and international financial institutions to provide technical assistance grants to governments to catalyze private sector participation in emerging market infrastructure. Technical assistance provided by this Facility has resulted in many different kinds of positive outcomes, including specific laws, regulations, institutions, as well as infrastructure projects. For instance, the Facility’s support was instrumental in enabling the state of Odisha in India to scale-up renewable energy and catalyze the development of a 1,000 megawatt solar park through PPPs.

On the Treasury side, we have been working hard to leverage our experience and expertise in and access to capital markets to develop solutions to spur infrastructure development in emerging markets. For instance, in response to growing interest from asset managers and institutional investors seeking to invest in this asset class, we recently partnered with Morningstar, a Chicago based investment research and investment management firm to develop a fully investible EM infrastructure bond index. The Emerging Markets Infrastructure Debt Index (EMIDI) would serve as a benchmark, and possibly the basis for a variety of investment products, such as exchange-traded funds or mutual funds. A debt index like this has the potential to promote liquidity and allow institutional and retail investors insight and access into the EM infrastructure space. This will further complement existing equity-based indices such as S&P’s Emerging Markets Infrastructure Index.

The common thread through all of these initiatives we are working on at the World Bank is a focus on finding ways to mobilize private sector investment. We are very optimistic about these endeavors, because, despite the obvious challenges, the opportunities for investors in emerging market infrastructure are equally clear. We are in the middle of an unprecedented and global savings glut, which together with weak growth in the developed world, has led to historically low interest rates. Emerging market infrastructure, with its potential for higher returns is a natural candidate to soak up some of this excess liquidity.

Infrastructure assets have the potential to deliver long dated cash flows with attractive yields and significantly less volatility than equity investments. In fact, many institutional investors recognize the appeal of infrastructure investment as an asset class, but have simply not yet allocated much funds to this area. McKinsey, for example, estimates that if institutional investors simply were to meet their existing target allocations to the infrastructure sector that alone would result in an additional $2.5 trillion in infrastructure investment capital through 2030.

In closing, I want to reiterate the enormous potential that infrastructure holds in increasing economic growth across emerging markets. As bankers, financiers, and market participants, we have a unique opportunity to participate in and contribute to this exciting growth story. I would like to sincerely thank our host S&P Dow Jones Indices for taking up this very important topic of emerging market infrastructure for their 5th annual forum today. I look forward to hearing your views and ideas on this topic. I wish you a very successful seminar.