Good morning. On behalf of the World Bank Group, I am delighted to address this meeting of policy makers, financiers, strategic investors, technology providers, and colleagues from international organizations on the topic of quality infrastructure.
We are happy to organize this seminar together with Japan’s Ministry of Finance and OECD on such a timely and important topic.
As we start and on behalf of the World Bank Group, I would like to extend our sincerest condolences and sympathies for the loss of lives, injuries and devastation caused by the recent torrential rains and typhoons which triggered extensive floods and landslides in Japan. There is no doubt that Japan will overcome the terrible aftermath, and guide the rest of the world how to build up resilience.
Resilience is one of the key component of qualityof infrastructure, in a world with increasingly intense natural disasters.
For an institution such as the World Bank Group, the modifier “quality” signifies an important expansion of the G20 focus on financing infrastructure. I have just come from the third G20 Sherpa meeting, and there was agreement that including the elements of quality in our infrastructure policy and investment ambitions enriches the objective of transforming infrastructure into an asset class and has an impact on billions of lives.
This is because if the lifecycle cost of each investment is not incorporated from the start, if safety and public health features are ignored during design, if the contracts are not competitive and transparent, or if environmental and social liabilities are not fully accounted for—including the resilience of the built assets— then infrastructure investment will fail to generate the impact that citizens and conscious investors demand and communities need.
Quality can be expressed in many ways, such as how you enhance irrigation infrastructure, or innovate with efficient technology in bridges and roads, or ensure accessibility and sustainability in mass transit systems and greening of infrastructure, or make urban development plans more sustainable and responsive to communities.
Quality helps avoid the waste of money and lives by making sure that roads are built considering their lifecycle cost and adequate maintenance is provided for existing assets. The present value cost of rehabilitating a road that has not gone through regular maintenance can be five to 10 times the cost of simply maintaining that same road. This is why well-designed public-private partnerships incorporate the lifecycle economics of the projects in their contracts, and why not having maintenance contracts for roads in the public sector creates only illusory savings. Doing it right can save lives, since 90% of road deaths occur in low- and middle-income countries.
Quality is important for the poor. Consider energy: nearly 3 billion people rely on wood, coal, charcoal, or animal waste for cooking and heating, which cause health risks. These people are waiting for low-cost and reliable quality power supply to relieve them of these terrible hazards.
Quality can also help stop the death of nearly 1,000 children a day due to preventable diarrheal diseases, as we strive to reach to the 600 million people who still lack access to a clean source of drinking water and even more that are without access to adequate sanitation.
Consider what a transformative urban infrastructure based on smarter decisions, better design and construction, innovative financing, and participation of private sector can bring to the world when we know that the number of people living in cities will increase by 50% in the next 25 years, to a total of 6 billion.
And of course, quality in infrastructure is crucial in a time when trade is so important, and we face the challenge of congested and inadequate ports, airports, and roadways that are a drag on prosperity.
In all these sectors, quality goes beyond engineering. Independent and responsible regulation and supervision are essential and can generate important efficiency gains. Studies show that they can reduce losses across power and water distribution systems by 10 to 20 percent, and the frequency of outages or service stoppages by 15 to 20 percent.
Consultation with and involvement of the population affected by projects are also key.
Financing and WBG activities
As the CFO of my institution, let me also to raise another aspect in which quality is essential to infrastructure.
We all have heard about the apparent glut of savings in advanced economies, due to the combination of demographics and structural shifts that make the most dynamic sectors less capital intensive. This has led pension plans and other institutional investors to look for long-term reliable sources of income. We know that infrastructure can provide these income streams, but only with the adequate level of quality, good planning, economic soundness, and long-term resilience.
The mobilization of private capital for cross-border investment remains critically important amid scarce public resources in many emerging markets and developing economies. However, the pattern of investment has evolved from mostly equity-based FDI in the 1990s to debt-based portfolio strategies. This creates new demands for the structure of infrastructure projects and the design of suitable risk mitigating instruments, especially from MDBs.
Have no doubt, institutional investors have low tolerance for low-quality assets, and we will not be able to make infrastructure into an asset class just by adding financial enhancements or “de-risking.”
Quality is also essential if we want to transfer assets from the balance sheet of governments—or banks—to long-term investors. Ensuring the integration of quality factors early on is what may allow us to support governments to build new assets, absorbing the difficulties to manage risks of the greenfield phase, with the expectation that these assets will be recycled to the private sector later on.
At the World Bank Group we are working hard to achieve these objectives, focusing our efforts through what we refer to as “maximizing financing for development-MFD.” This approach leverages the private sector and optimizes the use of scarce public resources, while continuing to promote good governance and ensure environmental and social sustainability.
Thanks to the World Bank’s ESG guidelines, safeguards are increasingly being incorporated in investment decisions and are required for Bank support of investment projects. And with new Procurement Guidelines that incentivize lifecycle costing, quality considerations can be built into the design of projects from the outset.
We share the government of Japan’s view that it is critical to raise awareness and scale-up attention to quality dimensions of infrastructure in developing countries: economic efficiency, safety, environmental and social sustainability, local economic and social contribution, and resilience against natural disasters. Therefore, we have grown our commitment to funding the preparation of commercially viable projects, in many cases in through our Quality in Infrastructure Investment partnership.
Because we also recognize that there is a limit in the risk capacity of institutional investors, and regulatory constraints to the exposure that banks can have to infrastructure, we are also developing facilities aimed at absorbing those risks that are more suitable to be supported by the public sector. Together with other MDBs, we are expanding the offering of innovative credit enhancement instruments designed to respond to investor needs.
These considerations are even more important as the global financial conditions continue to evolve and we see more market volatility, issues of debt sustainability for low-income countries and indications of rising protectionism.
We believe that the potential of the emerging markets and developing economies is real and a source of global stability, with a growing middle class and a dynamic demography, particularly in some regions. For the global economy to reap the benefits of this surge in consumer purchasing power, we need to help these economies to continue to improve their productivity, creating opportunities to expand trade and human capital.
A sizable part of the growth of the world economy and profits already come from these regions, and using the global savings to support the economically sound expansion of climate friendly, resilient, quality infrastructure is an endeavor that deserves coordinated efforts at the global level in the period ahead—which makes the upcoming Japanese G20 Presidency so propitious.
Thank you for your attention, your participation, and for being our partners in this important work.