Sustainable Infrastructure Investment

By Armida S. Alisjahbana on

Infrastructure needs and investment is high on the Global Development Agenda. Its realization depends not only on each country’s capacity to address its infrastructure needs in isolation. Often times, cooperation among countries and countries with international institutions is needed to bolster its realization.

Sustainable and Quality Infrastructure Investment are two sides of the same coin. Quality infrastructure investment could facilitate the achievement of SDGs, which are global development commitments of all countries concerned.

What is Sustainable Infrastructure Investment and how does it link to quality infrastructure investment and finance? To quote the Report of the Global Commission on the Economy and Climate 2016, Sustainable Infrastructure is infrastructure that is socially, economically, and environmentally sustainable. The Report describes the three Pillars of Sustainable Infrastructure Investment as follows.

Socially sustainable infrastructure is inclusive – it serves all, not just a select few – and contributes to enhanced livelihoods and social well-being. It may be expressly designed to meet the needs of the poor by increasing access to basic services such as clean energy, water and sanitation, by supporting poverty reduction, and by reducing vulnerability to climate change.

Economically sustainable infrastructure does not burden governments with unpayable debt, or impose painfully high costs on users. It helps create jobs and boost GDP, and may include opportunities to build capacity among local suppliers and developers and strengthen livelihoods.

Environmentally sustainable infrastructure limits all types of pollution during both construction and operation, and supports the conservation and sustainable use of natural resources. It contributes to a low-carbon, resource-efficient economy, for example, through energy- and water-efficiency. It is resilient to climate risks such as sea-level rise and extreme weather events, and – particularly with natural infrastructure – can also increase resilience.

Sustainable infrastructure investment will support the achievement of SDGs through enhancing access to basic services, promotes inclusive growth and promotes environmental sustainability.

As countries are at different levels of development, it is important to understand the drivers for successful sustainable infrastructure investment by type of countries based on their development stage. Global Commission on the Economy and Climate Report, 2016 classify drivers of demand for sustainable infrastructure investment as follows.

At the global level, the rapid pace and nature of growth in emerging and developing economies relative to advanced economies implies different infrastructure needs. Achieving climate and sustainable development objectives of the Paris Agreement and the SDGs requires early and systemic action and investment in new and existing infrastructure.

The challenges for countries, however are different depending on their country needs and priorities as can be ascertained by type of countries. Infrastructure demand for low and developing countries is more on expanding access to basic services: clean water, sanitation, improving connectivity through road network, infrastructure for ICT, basic infrastructure to support economic activities such as irrigation for agriculture, building resilience and adaptation to the impact of climate change.

The demand drivers for sustainable infrastructure for emerging and middle income developing countries are: the need to fulfill access to basic services – water, sanitation, mobility through multi modal – land, water, air as well as infrastructure for energy provision. The trend of urbanization and regional connectivity and growing middle classes with rising focus on resilient, low-carbon quality infrastructure are increasing features of their needs.

Whereas the demand drivers for sustainable infrastructure for advanced countries are replacing or rehabilitating existing infrastructure stock. Often times this is due to neglect of infrastructure maintenance and rehabilitation. Their infrastructure conditions provide opportunities for upgrades including their sustainability footprint.

How to reconcile Sustainable Infrastructure Investment with Quality Infrastructure Investment?
The Ishe-Shima Five Principles of Quality Infrastructure Investment and Finance adopted by G-7 and endorsed by G-20 countries entail the same spirit through: Principle 1: Ensuring efficiency, reliable operation, sustainability, safety and resilience; Principle 2: Contribution to local community; Principle 3: Addressing social and environmental impacts, and use of International Best Practice’; Principle 4: Alignment with National and Regional Strategies; Principle 5: Resources mobilization.

Sustainable and Quality Infrastructure Investment can be aligned through the priority of addressing National and Regional Priorities and Strategies by taking into account the Economic Sustainability, the Social Sustainability and the Environmental Sustainability. This approach nicely overlaps with Principle 1, 2 and 3 of Ishe-Shima Principles as described above. Why first and foremost is the National Priorities and Strategies? Because infrastructure investment is development priorities for developing and emerging countries concerned and not solely an investment issue. Each country investment needs and priorities are different based on their development path. Take the example of Indonesia (Bappenas, 2014): for the period of 2015- 2019, total infrastructure investment needs are about USD370 billion (41% government, 22% SOEs, and 37% PPP or private sector).

Based on the Medium Term Development Plan 2014-2019 (Bappenas, 2015), the priorities for Indonesia is: First, to fulfill basic infrastructure by 2019: 100% drinking water access as well as sanitation, 96.6% electrification ratio, livable housing, infrastructure for remote and border areas. Second priority is to build connectivity inter-modal to connect regional growth centers, broad band development and energy infrastructure. Third priority is to build sustainable urban transport as Indonesia’s population is rapidly urbanizing. The combination of road, rail based and mass transportation system is being developed in large metropolitan and big cities. Other countries may have different infrastructure development scale and priorities.

The different drivers of sustainable infrastructure investment of the countries concerned will entail different resources mobilization strategies. To arrive at principles of quality infrastructure investment and financing, the first principle is to take on the Economic Principle of sustainable infrastructure investment, i.e. it does not burden governments with unpayable debt, or impose painfully high costs on users. The principles of government finance for basic infrastructure leveraged by community level investment is already a general practice in many developing and emerging countries. Investment in infrastructure that generates revenues may be taken up by SOEs and or private sector through PPP scheme. In some instances cross subsidy by government is still needed. An example would be in the case of toll road projects where government funds are still needed to finance a sub-section of the road to generate sufficient returns to private or SOEs investment.

In closing, to support the development of financing strategies as outlined above, several enabling factors and environment needs to be enhanced. Sound public institutions and foundations for public investment should be developed. Policy enabling conditions for SOEs and private participation need to be strengthened. Capacity to mobilize domestic investment through capital markets and financial institutions is needed as source of investment as it is geared towards more non-government sources.

The author is a senior lecturer at Padjadjaran University, Bandung, and director of the University’s Center of Sustainable Development Goals Studies (SDGs Center). This article is excerpts from the Author’s address at the International Economic Forum on Asia organized by OECD Development Center, Ministry of Foreign Affairs Japan and ERIA, Tokyo, April 14, 2017. In addition, this article was originally published in The Jakarta Post, May 4 2017.

Photo Credit: Norton Rose Fulbright