Karim El Aynaoui, Executive President of the Policy Center for the New South, and Otaviano Canuto, former vice president and executive director of the WB and executive director of the IMF, discuss “the how” in financing green infrastructure in Project Syndicate.
According to the experts, investing in green infrastructure is incontestable evidence, but the dilemma remains how emerging-market and developing economies (EMDEs) will manage to finance it with their limited fiscal space.
To combat climate change and bring about development, El Aynaoui and Canuto contend that excess private savings need to be mobilized in advanced economies. In other words, green infrastructure will become a reality when the public and private sectors contribute to its concretization.
The authors convincingly state that private investors financing green infrastructure is conditional upon the compatibility of their own incentives, constraints, and objectives with the project invested in. They also mention the importance of what stage the project is at (development, construction, or operation) for the private investor to be interested, adding that “inadequate risk coverage, lack of data, and the heterogeneity of project structures, regulatory environments, and contractual standards can all act as barriers to investment.”
Other barriers to investing in green infrastructure include currency risk, scarcity of appropriate financial instruments, and the cost and complexity of the ones available.
In this sense, they state that matching projects and investors is a must with providing “a wide range of well-structured investment products tailored for different types of institutional investors and their respective risk/return profiles.”
Moreover, El Aynaoui and Canuto mention multilateral finance institutions as a solution for perceived high-risk investments by capital markets. This investment can, later on, lure in private investors, now reassured.
The experts enumerate risk management instruments the private sector can utilize while financing green infrastructure. They cite risk-transfer and credit-enhancement instruments, political-risk insurance, strategic alliances with foreign entities, and partnerships with local companies.
That being said, the public sector is called on to take more responsibility in terms of project design, underscoring the need for “public-sector planning and priority-setting.”