Two projects in developing countries show how policy, regulation and innovative financing can enable sustainable infrastructure investment
Infrastructure investment has a substantial impact on medium and long-term economic growth and plays a significant role in the policies for post-COVID-19 recovery. But investment in sustainable infrastructure more specifically can maximise this positive impact by achieving transformative outcomes for people and the planet as we strive to meet the United Nations Transforming our world: the 2030 Agenda for Sustainable Development.
At a fundamental level, sustainable infrastructure includes infrastructure that stands the test of time, is well designed, constructed, operated, and used efficiently to deliver social, economic, environmental, and governance outcomes over the life of a project.
The last decade has seen a growing investor appetite toward sustainable infrastructure investments. However, there are challenges to accelerating these investments at the speed and scale needed. In many countries, policies and regulations that enable sustainable infrastructure investment are lacking, along with innovative financial structuring that allows scalability. In this article we explore two projects - the Tibar Bay Port in Timor-Leste and the Clean Ganga Program in India - that illustrate how these challenges can be overcome.
Setting up the policy and regulatory framework
In the Pacific, most infrastructure is publicly procured and operated, frequently through donor financing. Operations and maintenance (O&M) are a consistent challenge with public institutions often lacking the capacity, resources, and incentives to sustainably maintain infrastructure, resulting in the unsustainable cycle of build, insufficient maintenance, deterioration, and accelerated replacement. In Timor-Leste, the government introduced private participation for the Tibar Bay Port to break this cycle. At the same time, it needed to create a regulatory and institutional regime to attract a quality investor while providing the government with confidence it would deliver on public sector goals. As a new, untested market with an uncertain legal and regulatory environment, attracting investors was a challenge. After consulting with the International Finance Corporation (IFC) and others, the government decided the Tibar Bay Port, the largest source of foreign direct investment outside the oil industry, would be regulated through its public-private partnerships (PPP) contract. While regulation by contract can be a complex arrangement, for this project it was the best option for providing clarity about the roles and responsibilities of both partners and how they will be enforced, giving confidence to potential investors.
In India, the 2,500km Ganges River passes through 10 states and is a source of water for 400 million people - it also absorbs three billion litres of waste per day. Previous attempts to build municipal wastewater and sewage treatment infrastructure had been unsuccessful in incentivising private contractors to deliver a sustainable service. In 2014, the Government of India established the National Mission for Clean Ganga (NMCG) and established a new hybrid-annuity PPP model (HAM) that focused on sustainable sewage treatment services and outcomes instead of just asset creation. Under the HAM model, the government would pay 40% of the project construction costs with the remaining 60% paid as performance-based annuities and O&M costs, giving the government leverage over the performance of the sewage plants.
Establishing a precedent and ensuring bankability
But in India, the proposed 15-year HAM contracts were not attractive to the market: partnering with municipalities was seen as a credit risk and the projects lacked potential revenue streams. Municipal credit risk was addressed by enabling NMCG to take the counterparty credit risk for cities but finding innovative solutions for securing revenue streams was more complex. A solution developed by the IFC and the World Bank made the model more bankable by enabling the sale of treated wastewater to industries, sludge for agricultural use, and generating power through biogas. This provided bidders with environmentally friendly opportunities to increase their revenue while bringing down costs for the public sector, thereby improving its sustainability. This innovation led to the Indian Oil Corporation purchasing treated wastewater to cool its refinery, a first of its kind off-take agreement, which will save 20 million litres of fresh water a day. NMCG is now looking to create a larger market for recycled wastewater through this program.
In Timor-Leste, it was critical that the private partner took full traffic risk for the port to manage fiscal risks for the government. But the project also needed to be bankable, so the government employed viability gap funding (VGF) as the bid variable for the first time, with the winning bidder being the one that required the least VGF. This hybrid public-private financing model benefits from the advantages of lower costs of financing (in the case of USD130 million public funds) being used to leverage a larger private sector contribution of USD150m from the Bollore Group. This brought with it international expertise in port design, construction, and operations under a performance-based contract that would otherwise never have been accessible to a small country like Timor-Leste.
In India, the HAM model is now being scaled-up across the wastewater and sewage treatment sector. The transaction documents developed by the IFC for these projects have been approved as standard PPP documents for the program and the model is now being replicated in 27 cities along the Ganges attracting over USD500 million in private investment.
In Timor-Leste, the Tibar Bay Port project prompted the development of a PPP law and regulations based on the process used for developing the project. This is establishing clarity on the roles and responsibilities of different entities within government for future projects. Today, Timor-Leste is embarking on three new PPP projects in aviation, affordable housing, and other sectors. The Tibar Bay Port project is just one example of projects where the IFC and its Pacific partners are helping to bridge the gap between economic necessity and financial viability using hybrid PPP structures.
Scaling-up sustainable infrastructure is possible
Major global and regional investors will look at well-structured projects when the policy and regulatory frameworks are in place to provide clarity. There are numerous ways this can be established, through regulation by contract in the case of Tibar Bay Port or through PPP legislation. The key, is making sure the rules are clear and enforceable to attract private investment, provide for public oversight, and ensure long-term sustainable benefits of the infrastructure.
Additionally, we have seen that innovative hybrid public-private financing models not only make projects more bankable and attractive to quality investors, but also provide governments with greater leverage over the performance of key assets and services. Whether through VGF for capital costs or annuity payments for services, governments can gain added control over critical services that underpin the economic and environmental goals of governments.
Finding innovative opportunities for revenue generation, when possible, can drive investor appetite while lowering costs for governments, further improving infrastructure sustainability.
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