A Sustainable Recovery Depends on Quality Infrastructure Investment

The pandemic has highlighted the need for a renewed focus on building critical infrastructure.
The pandemic has highlighted the need for a renewed focus on building critical infrastructure.

By Bruno Carrasco, Hanif Rahemtulla, David Bloomgarden

COVID-19 has hit the entire globe at once, slowing investment in resilient infrastructure that will improve lives over the long term. Effective governance is critical to ensure infrastructure projects are well planned, funded, and implemented.

What do COVID-19, Sustainable Development Goals (SDGs) and climate change have in common? They depend on the same solution: quality infrastructure investment that helps us tackle these challenges in an integrated way, even with limited money. It is also important to strengthen tax reforms and develop capital markets. But the biggest difference will come from making infrastructure investment more efficient through early planning, which leads to better project selection and value for money.

Investing in resilient and adaptive infrastructure after COVID-19 can help us reignite global growth, attain the SDGs, and lessen climate risk.

Asia and the Pacific needs to invest an estimated $26 trillion for water and sanitation, telecommunications, power, and transportation from 2016 to 2030. This includes about $200 billion a year to mitigate climate change and $41 billion a year to make infrastructure more resilient. With large upfront costs and long investment time frames, infrastructure governance is essential in order to create a more resilient society and promote future economic development. Such governance includes the institutions, processes, and procedures that guide planning, allocation of money, and implementation of projects.

Governments need to make sure public spending is efficient. They must use their scarce resources to target economic, social, environmental, and climate priorities. According to the IMF, developing countries in Asia and the Pacific lose an average of 32% of their investments due to inefficient planning and development. To be fiscally sustainable, infrastructure investment should be linked with budgets and medium-term spending plans. Governments around the world are under intense fiscal pressure, and this will likely get worse the longer COVID-19 hampers economic growth, while we wait for populations to get vaccinated.

Stronger early planning, along with monitoring, can help decision-makers understand the long-term effects of infrastructure projects and take climate impacts into account. This means having a rigorous process to appraise and select projects by assessing the economic, social, fiscal, environmental, and climate-related costs and benefits. Planning and monitoring systems should be based on a long-term infrastructure vision that includes an assessment of needs.

Projects should also account for the full life cycle of assets, to ensure value for money. Decisions should take into account impacts that are hard to put a price on, such as biodiversity, as well as trade-offs between different objectives. In the medium to long term, the net benefit on average of investing in more resilient infrastructure in developing countries is $4.2 trillion globally with $4 in benefit for each $1 invested, according to the World Bank report Lifelines: The Resilient Infrastructure Opportunity.

Stronger early planning, along with monitoring, can help decision-makers understand the long-term effects of infrastructure projects and take climate impacts into account.

Debt levels, access to loans, and the cost of repaying them will impact public infrastructure investment as countries shift from short-term stimulus support to a fiscal balance over the medium term. Robust, transparent and accountable capital budgeting should support these investments so that they meet development needs cost-effectively and coherently. This could include support for clean energy and smart urban mobility systems, as well as guarantees to offset the risks of new low-carbon technologies. Risk assessment and management are also key to making infrastructure investment more efficient. Building resilient infrastructure requires assessing climate and disaster risks, including geophysical risks such as earthquakes.

The solutions must help achieve low-carbon objectives. The risks of infrastructure projects are often not well integrated in governance and draw only modest attention when big investment decisions are made. It is important to build strong institutional capacity for climate risk analysis, planning, and project implementation. Government ministries must work together more closely, while making policies more effective through transparent monitoring and compliance.

Amid growing budget pressures, governments will need to mobilize private finance along with public investment. The perception of policy, regulatory, and institutional risks has limited institutional investment in developing countries. This will likely continue after COVID-19, considering increased debt and fiscal pressure. Governments can influence the risk profile of infrastructure investments and manage environmental and social risks through careful interventions. These may include promoting diversified risk mitigation instruments and incentives.

Local governments account for a large portion of infrastructure investment. As such, they will play a big role in sustainable and resilient investment as part of the post-pandemic recovery. National and local governments, along with local and regional institutions, can integrate policy and planning to ensure holistic and more effective investments that support the recovery while addressing climate change.

Unlike most natural disasters, COVID-19 has hit the entire globe at once, slowing progress in meeting the SDGs and investing in resilient infrastructure. Given the large upfront costs, the long time frames, and the importance of such investment, it is critical to ensure effective governance for planning, funding and implementing projects.