Financing for Development Final Project: Rodrigo Fernandez

Financing for Development, Rural Water Treatment Plants in the Congo Basin, RDC

With the end of the Millennium Development Goals and the introduction of the Sustainable Development Goals comes an opportunity to make important changes in how we approach development.

Official development assistance, which stands today at about $135 billion a year, is a cornerstone of financing, especially in the poorest and most fragile countries. We have a responsibility to find new ways to leverage such generosity to crowd in private sector funding. We also must stop illicit financial flows and increase Domestic Resource Mobilization.

These measures will allow us to leverage the billions of dollars in official development assistance to trillions in investment of all kinds, whether public or private, national or global.

To have a big impact, we must share ideas and collaborate. To go from billions in official assistance to trillions in investments, we will have to push even further our willingness to collaborate through creative partnerships, especially in the infrastructure sector.

Why is infrastructure investment lagging, even though the potential supply of long-term finance is ample?

The problem is rather that of matching the supply of finance from the private sector with investable projects. The potential supply of long-term financing is ample. Pension funds, insurance companies and other long-term institutional investors have very large and growing long-term liabilities. Hence they need long-term assets. But very little of their financial resources is allocated to infrastructure. In addition, the vast financing potential of international capital markets remains largely untapped.

Private investors could not only help to provide the financing, but also help to ensure that a project is run efficiently

Overcoming the infrastructure bottleneck would boost long-term economic growth. Infrastructure is an input to a wide range of industries and, as such, an important driver of long-term growth. In some emerging markets, the lack of well-performing infrastructure holds back economic development.
"The challenge for project owners, and hence the public sector, is to design contracts such that the risks and returns are distributed in an incentive-compatible way".

Currently, the lion’s share of the growth in infrastructure financing is shouldered by banks. Banks will remain important financiers, in particular in the early stages of new projects. But banks, which have mostly short-term liabilities, are not well-placed to hold long-term assets on their balance sheets for an extended period of time. Therefore, a much broader group of investors needs to be targeted. Bonds would be suitable instruments for large institutional investors, such as pension funds and insurance companies with their long-term liabilities.

Development Banks and Export Credit Agencies, which have a crucial role in financing infrastructure investments in both developing and developed countries, may be able to enhance the efficiency of their finite resources by the judicious use of financial instruments to leverage money.

There are in fact new forms of finance, such as infrastructure investment funds, diaspora bounds, etc., that can help to tap some of the vast resources of the international capital markets.

A broader mix of financial instruments would allow a better diversification of risks among a broader group of investors, as infrastructure financing will need to come increasingly from private sector.

"The problem is rather that of matching the supply of finance from the private sector with investable projects".

The potential supply of long-term financing is ample. Pension funds, insurance companies and other long-term institutional investors have very large and growing long-term liabilities. Hence they need long-term assets. But very little of their financial resources is allocated to infrastructure. In addition, the vast financing potential of international capital markets remains largely untapped.

What creates this bottleneck of channelling funds of long-term investors into infrastructure projects?

The lack of a pipeline of properly structured projects. Infrastructure investments entail complex legal and financial arrangements, requiring a lot of expertise. Building up the necessary expertise is costly, and investors will only be willing to incur these fixed costs if there is a sufficient and predictable pipeline of infrastructure investment opportunities. Creating a pipeline of suitable projects requires a coherent and trusted legal framework for infrastructure projects.

Political risk is among the greatest concerns of private investors (OECD (2014)).

Infrastructure projects only generate positive cash flows and consequently positive financial value after many years. Infrastructure provides services, often to very many: correctly pricing such services and valuing the proceeds from the provision of services should be the starting point for setting up properly structured and investable infrastructure projects.

"Developing countries will need to invest an additional $1 trillion a year up to 2020 to keep pace with the demands of urbanisation, and better global integration and connectivity (G20 (2013))"

The RDC case: Rural Water Supply

Social Infrastructure is the second gross disbursements of ODA with more than 550 million USD

"Clear lack of investment in Water and Sanitation and especially in Basic and Rural Water Supply and Sanitation"
RURAL WATER TREATMENT PLANTS

We propose to implement the Water for Health Program in the rural areas of the Congo Basin

Water for Health Program:

A scalable program designed to give access to potable and safe water trough integrated technical solutions and healthy habits education to rural communities and that includes SDG since its inception.

The access to drinking water is part of the objective 6 of the SDG, "Water and Sanitation". Achieving these objective represents an important increase in the quality of life of the targeted population.

The improvement of the source of potable water not only contributes to the considered objective, but it's also a fundamental strategy to reach objective 1, end poverty, and 3, regarding health and well being.

PNSR Perú

This Program has already been implemented in the Peruvian Amazonas Basin with a total success and a huge positive impact in the live of local populations.

"The best way to make investments attractive is to pack smaller projects together"

Packing together between 200 and 400 rural communities of around 100-2000 people each, with safe water access problems in the Congo basin could be the starting point.

Each of those communities would be supplied with an EPC project that will include the needed technical solution for treating the raw water and give safe pure water to its population, as well as the training of local communities in healthy habits (especially related to water) and the operation and maintenance of the water treatment plants for two years, forming the local technicians in the O&M of the plants.

The Technical Solution

Financing would be key for the project, as RDC is a fragile country.

The project is roughly estimated to cost around 50 millions USD and has an implementation time of between six to nine months and a operation and maintenance of two years.

In this case, and taking into account ODA received by the RDC we would need to mobilize blended public and private finance to be able to implement the project. ODA on its own would be incapable to meet the financing needs but it could leverage and give catalytic support to help mobilize substantially more private capital. In the current context of low interest rates that is expected to hold in the medium term, private capital can generate profit for its owners while also producing significant development benefits.

For that we would propose the following structure for the financing

  • Small Equity from the Government of the RDC: 10%
  • Equity or grant from the MDB'S (AfDB or WB): 20%
  • Guarantee from MIGA
  • Long term private financing (sovereign funds, pension funds, infrastructure funds): 70%

This approach is only an example of an hypothetic scheme to finance a development project in a fragile country. It takes into consideration the needs of rural people in a developing country and it is oriented by the Sustainable Development Goals.

CONCLUSIONS

SDG are Critical for Development

It is critical for developing countries to move forward to the consecution of the Sustainable Development Goals, and for that, developed and developing countries, MDB's, IMF, International Agencies and Private Capital must work together in order to:

  • Enhancing project preparation and risk mitigation to catalyze investment flows
  • Promoting local capital markets and facilitating greater access to local currency finance
  • Supporting local banking and other domestic finance to expand reach
  • Enhancing the impact of the private sector via inclusion and sustainability
  • Providing new and expanded channels to enhance private sector flows and expertise towards development
"If we work all together in the same direction we can attain the SDG Objectives for 2030"

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