G20 and BRICS Update #23: Development: Super-sized or Sustainable?

The debate of a proposed infrastructure initiative within the United Nations (UN) proves to be a revealing case study of how the Group of 20, an informal entity with restricted membership, has been able to influence and pre-empt outcomes in a formal, universal membership institution such as the UN.

The debate is occurring in the context of negotiating the outcome document of the UN Financing for Development (FfD) Conference which will take place in Addis Ababa in July.

The G20 views “financing for development” as its priority as well. For instance, at an April 2015 Think 20 event in Washington, the Turkish Deputy Prime Minister Ali Babacan stated that the G20 addresses the need for infrastructure finance, leaving social and environmental matters to other institutions with mandates in those areas.

This overlooks the reality that project success depends upon a triple bottom line: economic, environmental and social. For instance, a dam will not function if it is not climate resilient. An integrated approach is not a luxury. As described below, the UN has a mandate to promote holistic development.

In the G20, infrastructure development has been a high priority ever since 2010 when, under the Korean Presidency, the group placed the issue on its agenda. Under successive leaderships of France, Mexico, Russia, Australia and now Turkey, the Group has shaped a new model for financing infrastructure, which can be described as follows:

• Infrastructure finance should be mobilized from the nearly USD 85 trillion in savings held by (mostly private) institutional investors such as mutual funds, pension funds, hedge and private equity funds, insurance companies, and so on.

• The problem is not scarcity of funds for infrastructure, but of “bankable projects,” that is, projects that such investors would regard as offering high and sufficiently secure rates of return.

• To attract such financing, the onus is on recipient countries to not only fill a “pipeline” of large “bankable projects,” but also undertake tariff, tax, and regulatory reforms that will provide an enabling

environment, which will assuage investors’ fears.

• Development finance institutions should take a backseat in their role as lenders for infrastructure and help create or improve “Project Preparation Facilities” (PPFs) to standardize the blueprints not only for “bankable projects” but also for reforms that will constitute an enabling environment for investors. Along these lines, their resources, as well as domestic public resources (such as local pension funds and financing of national development banks) should be devoted to leveraging private sector investment.

• The secure revenue streams from infrastructure projects should provide the collateral for new and innovative instruments to trade in financial markets.