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The Sustainable Infrastructure Opportunity

Section one

The Sustainable Infrastructure Opportunity

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Section one | The Sustainable Infrastructure Opportunity

Introduction

The year 2015 was a landmark one for sustainable development and climate change.

The world set ambitious goals through the Addis Conference on Financing for Development in July 2015, the adoption of the 2030 Agenda and the Sustainable Development Goals (SDGs) in September, and by reaching a landmark international agreement on climate action at COP21 in Paris in December. This new global agenda has mobilised the support not only of national leaders, but also of mayors, business leaders, investors, civil society and citizens. Now the task is to quickly turn that momentum into on-the-ground action to implement the Paris Agreement, achieve the SDGs, and reignite global economic growth.

Sustainable infrastructure is crucial to all three goals. Investing in it can support inclusive growth, enhance access to basic services that can reduce poverty and accelerate development, and promote environmental sustainability.

Suma Chakrabarti: On Momentum for Low-Carbon Growth

For growth: Boosting investment in sustainable infrastructure can stimulate demand at a time when many economies are struggling. The International Monetary Fund (IMF) estimates that for advanced economies, investing an extra 1% of GDP in infrastructure will yield, on average, a 1.5% increase in GDP within four years.1 In emerging and developing economies, where infrastructure is often inadequate, the benefits for productivity and growth can be even greater, particularly if the investments are accompanied by reforms that increase institutional capacity for better planning and stronger budget processes and rules to guide public spending.2 Beyond the immediate boost to growth, investment in sustainable infrastructure can spur innovation and efficiency in key systems such as energy, mobility and logistics. Since the economic and financial crisis that started in 2008, governments have responded with a number of monetary, fiscal and structural policy reforms to boost growth. While important, these have not yet fully delivered the scale and quality of growth desired. The divide between the poorest and the wealthiest continues to grow in many countries, and large gaps persist in basic infrastructure and related services in a number of countries. Awareness is rising of the role that boosting investment in sustainable infrastructure can play to complement and bolster other reforms to deliver better long-term, sustainable and inclusive growth. The pace of action must be accelerated to realise these opportunities.

For inclusive development: Infrastructure is key to the delivery of a number of essential services. It provides a foundation for much of the SDGs’ vision for inclusive development. Infrastructure is directly addressed in SDG 9, which calls for resilient infrastructure and sustainable industrialisation. It is key to achieving multiple other goals, such as SDG 6, for instance, on clean water and sanitation and SDG 7 on affordable, reliable, sustainable and modern energy for all. Those basic components, in turn, make it possible to achieve SDG 8 on sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all. Sustainable infrastructure is also central to SDG 11 on safe, resilient and sustainable cities. And natural infrastructure is crucial to SDG 2 on ending hunger and to SDG 15 on protecting forests and biodiversity and combatting desertification. 

For the climate: Infrastructure underpins all the major sources of greenhouse gas emissions: our energy systems, transport systems, buildings, industrial operations and land use. The existing stock of infrastructure and its use are associated with more than 60% of the world’s total greenhouse gas (GHG) emissions.3 The types of infrastructure we build – coal power plants vs. wind farms and solar arrays, for example, or mega-highways vs. public transit systems – will determine whether we stay on a high-carbon growth path or move towards a climate-smart future. Investing in sustainable infrastructure is thus critical to achieving SDG 13 on combating change climate and its impacts. Not only will it determine GHG emission levels, but it is crucial for resilience: infrastructure can help us withstand climate change impacts and extreme events, or it can increase vulnerability, particularly for the poor.4 Countries that are still building much of their basic infrastructure, such as in much of Africa and parts of Asia, have a major opportunity to build climate-smart from the outset, often at no or little additional cost, and avoid costly retrofitting later. They have an opportunity to lead the way on green development, leapfrogging some of the inefficient infrastructure developments that are now proving costly in other countries.

Carlos Lopes: On Africa

Growth, development and climate action are inextricably tied. Development is impossible without growth, and growth is pointless unless it lifts up the poorest. Climate change threatens both growth and development. If we don’t take ambitious action now, it is estimated that up to 720 million people could fall back into poverty by 20505and the costs of adaptation could reach US$500 billion dollars per year, unravelling development gains to date.6The future impacts of climate change on poverty relate to today’s policy choices.7World Bank research shows that rapid, inclusive and climate-informed development, including sustainable infrastructure, can prevent most short-term impacts whereas immediate pro-poor, emissions-reduction policies can drastically limit long-term consequences.

Infrastructure can be the pillar upon which we base our growth, development and climate action, or it can crumble beneath us. If we want a prosperous, climate-resilient future, we must invest in sustainable infrastructure; it is the growth story of the future.

Figure 1

Sustainable infrastructure supports many of the Sustainable Development Goals

Source(s)

Bhattacharya et al. 2016.8

Box 1 — What is sustainable infrastructure?

Infrastructure, as we use the term in this report, refers to human-built structures and facilities that underpin power and other energy systems (including upstream infrastructure, such as the fuel production sector), transport, telecommunications, water and waste management.9 It includes investments in systems that improve resource efficiency and demand-side management, such as energy and water efficiency measures. We also interpret the term to include “natural” infrastructure in the form of land use, agriculture and forestry management. Natural, ecosystem-based infrastructure is increasingly recognised as an important complement to traditional “hard” infrastructure, for example by absorbing emissions though forests and soils, or by attenuating the impacts of floods on traditional infrastructure. It can even be a substitute for more traditional infrastructure, for example by providing water purification in many cases at lower cost than the development of a new water treatment plant. By sustainable infrastructure, we mean it is:

Socially sustainable: Sustainable infrastructure is inclusive – it serves all, not just a select few – and contributes to enhanced livelihoods and social wellbeing. 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. Socially sustainable natural infrastructure will protect the resources that communities depend on and build resilience to natural hazards and climate change.

Economically sustainable: 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: 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.

While some infrastructure is unsustainable by one or more of these measures, what constitutes sustainable infrastructure often depends on national circumstances, where sustainability will need to be gauged relative to what could have been built or developed instead. For example, investing in combined-cycle natural gas power plants might help a country or a region phase-out coal power in the near-term but it might also “lock in” natural gas at the expense of renewables.10In the final sections of this report, we explore the meaning of sustainable infrastructure in three key economic systems: energy, cities and land use. This includes, for example, discussions of the opportunities and challenges to increasing investments in energy efficiency measures in buildings and industrial facilities, in mass transit systems to reduce the use of individual vehicles, and in efficient land use, agricultural and irrigation infrastructure.

A final key point about sustainable infrastructure is that it contributes to resilience. Infrastructure will increasingly need to withstand climate change impacts and extreme weather events such as floods, droughts and extreme heat – and help protect us from these impacts. This means existing infrastructure needs to be “climate-proofed”, and climate risks need to be taken into account in the design of new infrastructure – natural and built. Tackling climate risks through infrastructure design, maintenance and operation will benefit all and is essential to reduce poverty and protect the most vulnerable populations.

The world will invest more in infrastructure over the next 15 years than our entire current stock. To meet demand, which will rise further because of a growing population, faster urbanisation and advances in technology, the world needs to invest about US$90 trillion in infrastructure between now and 2030– roughly doubling current global investment levels.11While the next 15 years are critical, the investment choices we make even over the next 2-3 years will start to lock in for decades to come either a climate-smart, inclusive growth pathway, or a high-carbon, inefficient and unsustainable pathway. This is our chance to ensure that we build more infrastructure and the right kinds of infrastructure, to support economic, social and climate goals.

A key insight of Better Growth, Better Climate,12the 2014 flagship report of the Global Commission on the Economy and Climate, was that low-carbon and resilient infrastructure does not need to cost much more than the “business as usual” alternatives (see Figure 2). The report showed that a shift to low-carbon infrastructure would increase investment needs by as little as 5%, and those higher capital costs could potentially be fully offset by lower operating costs – for example, from reduced fuel use.13

The first key step is to change how we finance infrastructure, to reflect the new global realities and show results on the ground. That is the focus of this report.

The approval of the SDGs and the signing of the Paris Agreement have made it clear that the transition to a sustainable, climate-resilient future is already under way. The challenge now is to ensure that it benefits all countries at all stages of development.

Achieving that is a task not only for governments, financial institutions and businesses, but for citizens as well, who not only use infrastructure, but also fund it through their taxes, pensions and personal investments. Already, individuals are making more informed decisions, joining shareholder movements and citizen groups to learn more about where their money goes and seeking to influence the direction of public and private investments alike. The awareness, involvement and support of individual citizens is crucial to enable the actions that will drive sustainable infrastructure investment.

Figure 2

Infrastructure spending changes needed for a 2 °C scenario (percentage change)

Infrastructure spending changes needed for a 2 °C scenario (percentage change)
Source(s)

Note: Δ is the mathematical symbol for change.

Bhattacharya et al., 2016; Global Commission on the Economy and Climate, 2014.14

Current investment trends

Over the past decade, annual infrastructure investment has grown by about US$1 trillion, reaching an estimated US$3.4 trillion per year in 2014.15This is still not nearly enough to match investment needs, which are estimated at about US$6 trillion per year, on average, to 2030.

The main source of finance and investment in infrastructure in developing countries is public resources, comprised of direct budgetary contributions and external public finance.16However, the private sector also plays an increasingly key role – to a greater or lesser extent depending on the type of economy. In developing countries, about 60% of infrastructure investment comes from public funds, on average. By comparison, in advanced economies, the private sector accounts for 60% of relevant investment, and only about 40% comes from the public sector.

Public investment rates are a good proxy for assessing investment trends. While advanced economies have seen declining public investment over the past three decades, emerging markets and low-income developing countries have bucked this trend, especially since the 2000s. In developing countries, public investment rates increased from around 4–5% of GDP in the mid-2000s to 6–7% of GDP today.17Indeed, developing countries now account for about 65% of total infrastructure investment today (or US$2.2 trillion per year) – a far greater proportion than previously estimated.18

China’s share is the largest, estimated at a staggering US$1.3 trillion, 38% of total global infrastructure investment in 2014 – more than was invested in all developed countries combined.19India, Russia and the oil-rich countries of the Middle East have also substantially increased spending in recent years. Sub-Saharan Africa has stepped up infrastructure investment significantly as well, including through the Programme for Infrastructure Development in Africa (PIDA), which is developing a vision and strategic framework for regional and continental infrastructure,20but with wide variations among countries. More modest increases can be seen in Latin America and Southeast Asia. Among advanced economies, Australia, New Zealand and Canada have seen robust growth in infrastructure spending, while the United States and Japan registered more modest growth, and the European Union’s public investment rates have kept declining since the economic slowdown in 2009.

As shown in Figure 3, the sectoral distribution of infrastructure investment varies by income group. Across all countries, the most is spent on the transport and energy sectors: 40% and 30% of total investment, respectively. However, advanced and emerging market economies put more focus on transport, in particular rebuilding and maintaining existing infrastructure and building new roads, rail and other transport infrastructure, such as ports and airports. Low-income developing economies, on the other hand, put more focus on energy infrastructure, aiming to provide energy to cities, rural areas and industry to enable development.

 

Figure 3

Sectoral Distribution of Infrastructure Financing, 2010-2012

Sectoral Distribution of Infrastructure Financing, 2010-2012
Notes

Based on a sample of 75 countries. This does not include investment in natural infrastructure.

Source(s)

Bielenberg et al., 2016.21

Table 1 provides an overview of the drivers of demand for sustainable infrastructure in countries at different stages of development, as well as differences in their respective capacities to finance those investments.

Table 1

Financing sustainable infrastructure – challenges vary by type of economy

Type of economy Drivers of demand for sustainable infrastructure investment State of play for the supply of finance for infrastructure investment
Global
  • Rapid pace and nature of growth in emerging and developing economies relative to advanced economies
  • 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
  • Large investment gap
  • Multi-decadal decline in public investment (investment to GDP)
  • Uneven participation of private sector
  • Slow and uneven pace of policy reforms to incentivise investment in sustainability
Low-income developing economies*
  • Expanding access to basic services: housing, clean water and sanitation, energy, mobility and irrigation for agriculture
  • Building resilience to climate change and other stresses
  • Improving connectivity, e.g. through mobile networks for financial services, early warning systems and road networks for access to markets
  • Weak foundations for public investment that constrain direct budgetary contributions, heightening reliance on external development finance as a main source of finance
  • Weak domestic capital markets and low creditworthiness that limit potential for private investment
  • Insufficient policies and weak enabling conditions to attract domestic or foreign investment to sustainable infrastructure
  • Limited capacity and use of infrastructure planning at the national and subnational levels, and uneven attention to sustainability where such planning processes exist
Emerging and middle-income developing economies
  • Need to achieve greater access to basic services – water, energy, food, mobility – and address the infrastructure deficit
  • Trend of urbanisation and regional connectivity in emerging and developing economies
  • Growing middle classes with rising incomes
  • Heightened focus on resilient, low-carbon infrastructure
  • Relatively sound public institutions and solid foundations for public investment
  • Policy enabling conditions for green investment have the potential to be strengthened; national development banks often have potential to support infrastructure investment.
  • Strong capital markets and relatively high levels of domestic private investment, as well as potential to demonstrate creditworthiness and improve access to bond markets
Advanced economies
  • Replacing or rehabilitating existing infrastructure, because past neglect of infrastructure has led to large backlogs, as well as water and efficiency losses
  • Opportunities provided by upgrades to improve the sustainability footprint of existing infrastructure
  • Policy enabling conditions increasingly in place to incentivise sustainable infrastructure investment
  • Strong capital markets and creditworthiness providing access to bonds markets and other debt financing through banks
  • Emergence of green banking
  • Growing use of green bond markets and other means to attract institutional investors
Notes

The infrastructure investment demand projections in this report reflect assumptions about rapid growth projections that will shift many low-income countries to middle-income status by 2030, diminishing the number of countries in this group and the relative size of its demand by 2030.

Charting the finance roadmap

As shown in Table 1 and Figures 3 and 4, there are clear global indications of where and what kinds of infrastructure investment will need to take place over the coming 15 years.

Emerging, middle-income and low-income developing economies will drive the majority of future infrastructure demand – as much as 70% (or about US$4 trillion per year) – given their development needs and the structural transitions they are expected to undergo. And because so much of their infrastructure is yet to be built, greenfield investments could provide them opportunities to leapfrog to clean systems and technologies and become leaders in developing more sustainable infrastructure.

Carlos Lopes: On Africa's Structural Transformation

China will likely account for less of the incremental increase than it has recently. And the composition of these investments is already shifting in China, with an increased focus on replacing old infrastructure with new, and cleaning it up in the process.

In advanced economies – which will account for 30% of the global total – investments will largely focus on rehabilitating or replacing aging existing infrastructure that has suffered from neglect or chronically insufficient investment. The main priorities for these investments are in sustainable energy, cities, and land use, as well as in improving low-carbon transport corridors and water and waste management.

Globally, at least 60% of infrastructure investment over the next 15 years will be made in the energy and transport sectors,22with broad variation across countries and type of economy – from advanced to low-income (see Figure 4).

Figure 4

Percentage of projected cumulative infrastructure demand by sector and income groups 2015-2030

Notes

LIDC includes low income and lower middle income developing countries; EMDEV includes emerging economies and upper middle income developing countries; Advanced includes upper high income and lower high income countries. These categorisations cluster projected demand for infrastructure investment by developing country income groups – looking at these according to the lower or higher capacity in domestic capital markets. This reclustering of income groups explains the shifts in projected demand by sector on the right compared to Figure 3. 

Projections are based on the mid-point of range estimates. They exclude fossil fuel extraction and use, expenditure to enhance energy use efficiency, operation and maintenance costs, and additional investments in sustainability.

Source(s)

Bhattacharya et al., 2016.

Improving water-related infrastructure will be essential to achieving success on human development, social and environmental indicators and to build resilience to climate change. We need to better manage the risks of water-related stress, in particular as these are exacerbated by overuse of natural water resources and by climate change, including risks associated with groundwater depletion, poor river flows, droughts, extreme weather and flooding. Better managing water risk will also help address related vulnerabilities in the power sector, such as potential disruptions due to shortages of cooling water, and shrinking reservoirs and unreliable river flows that jeopardise hydropower and other forms of power production. Sustainable land use practices offer a key solution to water stress and security challenges, but better managing watersheds will also need to be accompanied by large investments in both ecosystem-based natural infrastructure and hard infrastructure to improve access to safe water supply, particularly in growing urban areas (see Section 6 for further discussion on natural infrastructure).

Transport-related investment is set to rise significantly. This presents a major opportunity to make these sectors more environmentally sustainable. Freight, for instance, could be moved over rail instead of on highways. Factoring in sustainability in decisions around regional transport and improving connectivity between population centres, seaports, airports, and other hubs could drive a long-term shift from high-carbon to low-carbon systems. China’s One Belt One Road initiative is a prime example of a major, yet nascent and untapped opportunity to deliver environmental and social sustainability alongside economic development (see also Box 7 on China). The initiative is a strategy for cooperation and development across countries in Eurasia, which will not only set regional connectivity patterns well into the future, but is also expected to amount to US$4–6 trillion of investment across Asia, Europe and Africa.23 For the initiative to meet its full potential it should incorporate social and sustainability aspects that avoid locking in the wrong kinds of infrastructure as the global low-carbon, climate-resilient economy transformation gathers pace.

The sections that follow lay out a roadmap for financing a safer, more prosperous future. We outline the landscape of potential sources of sustainable infrastructure finance, the main barriers that inhibit it, and the actions needed to overcome those barriers. It will be critical to deploy financing from all available sources to achieve the scale and the quality of infrastructure investment we require. The report covers actions targeting governments, businesses, development banks and investors aiming to better harness public and private resources for transformative change. It applies these actions to the public sector through policy and institutional frameworks, to the wider global financial architecture as well as to the three key economic systems that drive growth and emissions24 – energy, cities, and land use – demonstrating the tremendous opportunity before us.

  1.  IMF, 2014. Is it time for an infrastructure push? The macroeconomic effects of public investment. In World Economic Outlook, October 2014: Legacies, Clouds, Uncertainties. International Monetary Fund, Washington, DC. 75–114.LINK↩

  2. Ibid.↩

  3. Bhattacharya, A., Meltzer, J., Oppenheim, J., Qureshi, M.Z. and Stern, N., 2016 (forthcoming). Delivering on Sustainable Infrastructure for Better Development and Better Climate. LINK↩

  4. Hallegatte, S., et al., 2015. Shock Waves: Managing the Impacts of Climate Change on Poverty. Climate Change and Development. The World Bank, Washington, DC. LINK↩

  5. Granoff, I., et al., 2015. Zero Poverty, Zero Emissions: Eradicating Extreme Poverty in the Climate Crisis. London: Overseas Development Institute. LINK↩

  6. United Nations Environment Programme, 2016. Ahead of UN Environment Assembly UNEP Says Cost of Adapting to Climate Change Could Hit $500 Billion per year by 2050. LINK↩

  7. Hallegatte, S., et al., 2016. Shock Waves: Managing the Impacts of Climate Change on Poverty.↩

  8. Bhattacharya et al., 2016. Delivering on Sustainable Infrastructure for Better Development and Better Climate.↩

  9. This section is loosely based on Bhattacharya et al., 2016. Delivering on Sustainable Infrastructure for Better Development and Better Climate.↩

  10. For detailed discussion on the benefits and potential risks of gas as a transition fuel, see: Lazarus, M., Tempest, K., Klevnäs, P. and Korsbakken, J. I., 2015. Natural Gas: Guardrails for a Potential Climate Bridge. New Climate Economy contributing paper. Stockholm Environment Institute, Stockholm and Seattle, WA, US. LINK↩

  11. This $90 trillion figure includes investments in built infrastructure such as in urban, transport, water, waster, telecommunications, and energy systems, including energy efficiency, but not natural infrastructure. See:Global Commission on the Economy and Climate (GCEC), 2014. Better Growth, Better Climate: The New Climate Economy Report. The Global Report. Washington, DC. LINK↩

  12.  GCEC, 2014. Better Growth, Better Climate: The New Climate Economy Report.↩

  13. Ibid.

    Meltzer, J. 2016 forthcoming. Financing Low Carbon, Climate Resilient Infrastructure: The Role of Climate Finance and Green Finance. Brookings.  The more recent Brookings report by Meltzer suggests an even smaller increment of about 3% is required to make infrastructure sustainable↩

  14.  Bhattacharya et al., 2016. Delivering on Sustainable Infrastructure for Better Development and Better Climate.

    GCEC, 2014. Better Growth, Better Climate: The New Climate Economy Report.↩

  15. Bhattacharya et al., 2016. Delivering on Sustainable Infrastructure for Better Development and Better Climate.

    Meltzer, J., 2016, Financing Low Carbon, Climate Resilient Infrastructure: The Role of Climate Finance and Green Finance. (forthcoming).↩

  16. Bhattacharya et al., 2016. Delivering on Sustainable Infrastructure for Better Development and Better Climate.  Low income countries are more dependent on external or international development finance that is concessional also known as official development assistance. This can be delivered either through grants or concessional loans.  Non-concessional external finance for infrastructure may also be significant particularly in middle income countries and emerging economies.  For further discussion, see also Miyamoto & Chiofalo 2015. Official Development Finance for Infrastructure. LINK↩

  17. IMF, 2015. Making Public Investment More Efficient. IMF Policy Paper. International Monetary Fund, Washington, DC. LINK↩

  18. Bhattacharya et al., 2016. Delivering on Sustainable Infrastructure for Better Development and Better Climate.↩

  19. Ibid↩

  20. See: LINK↩

  21. Bielenberg et al., 2016. Financing change: how to mobilize private-sector financing for sustainable infrastructure. McKinsey Center for Business and Environment. LINK↩

  22. LINK↩

  23. Medium, 2015. 2015 Shipping Investment Review: China and One Belt One Road. Pacific Tycoon. LINK↩

  24. The water and transport (outside of cities) sectors are captured in the investment numbers. They are not examined here in separate sections. ↩

Introduction
Current investment trends
Charting the finance roadmap
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