Mobilizing Private Capital for Sustainable Infrastructure
A 2022 study by the Inter-American Development Bank (IDB) estimated that the infrastructure and social spending needed by 2030 to meet climate change goals in Latin American and the Caribbean (LAC) is between 7% and 19% of GDP – the tremendous need for sustainable infrastructure is clear, as it is the lack of bankable projects and limitations in funding for those that exist.
Climate-related investments needed in the region through the end of the decade stand at between $470 billion and $1.3 trillion, depending on initial conditions and proposed economic and social targets. Governments are unable to fund such amounts, so they are increasingly turning to the private sector to raise capital and relieve the pressure.
Tapping on sources of domestic and international capital from commercial banks, pension funds, insurance companies and other investors represents a valuable opportunity to continue accelerating a private sector-led development in LAC.
At IDB Invest, the private sector arm of the IDB Group, we make direct investments in infrastructure projects and mobilize capital market investors. Since 2016, we have been working to provide access to new opportunities for investors looking to share in the region’s sustainable growth. To date, we have mobilized over $10 billion from investors across the globe, of which 60% has been dedicated to climate change projects in LAC.
Together with our infrastructure clients and our partners in mobilization and blended finance, we have reached this level through the development of innovative financial structures and the mitigation of non-financial risks by applying our best-practice environmental and social, corporate governance and integrity policies, among others. Examples of how we are moving the needle for infrastructure investments in LAC include the following:
• The A Loan-B Bond structure provides the benefits of the IDB Group umbrella to local and international bond investors, in many cases to bring the scale and tradeability needed to incentivize investment in non-investment grade projects. We started the product in the private placement market and are now moving to the 144A market, targeting qualified institutional investors. So far, we have utilized the product to mobilize $759 million from private investors for projects in the renewable energy and transport sectors.
• IDB Invest’s Guarantees help to mitigate key risks that capital markets investors don’t want to take. For a recent project in Paraguay, IDB Invest’s guarantee during construction mitigated right of way and cost overrun risks, thereby allowing the bondholders to put their money in sooner and invest during the project’s higher-risk construction period.
• Our Unfunded Risk Participation Product leverages our funding capacity in LAC to mobilize investment from lending institutions and investors who have the risk appetites to support sustainable infrastructure investments in LAC, but don’t have access to cost-effective funding solutions in specific countries. In the case of a recent solar project in Brazil, IDB Invest will fund the loan to the project, but it will do so with a counter-guarantee from the commercial bank investor participants.
• Blended Finance Resources from donor agencies is particularly effective as a mobilization tool for sustainable infrastructure investments that can lead to market-enabling outcomes to increase private sector participation down the road. Mobilizing blended finance, IDB Invest financed the first four wind and solar projects in Uruguay from 2014 with La Jacinta to 2016 with Natelu Yarnel and Casablanca Giacote. Later in 2020, we saw the entry of commercial banks and institutional investors in the sector refinancing the projects at more attractive prices, which was a clear demonstration that our initial intervention resulted in a change in risk perception and movement in the market.
• IDB Invest helps mitigate non-financial risks for which capital markets investors have little or no appetite. In addition to the role we play in reducing political uncertainty, application of our high environmental and social, corporate governance, and integrity standards reduces the likelihood and impact of non-financial risk events and ultimately makes highly impactful projects more appealing to capital markets investors.
A 2022 BCG report noted that global assets under management have reached $112 trillion, with consistent growth in the past decade. Although investments are heavily weighted towards investment grade assets, it is estimated that from 1% to 3% are invested in emerging markets. This means that private capital is available, and the challenge is indeed in the structuring of bankable projects with the right instruments to connect those infrastructure assets with private investors.
IDB Invest is up to the challenge and will continue to work with our clients and partners to develop sustainable infrastructure to reduce carbon emissions and make LAC more resilient to the impacts of climate change.
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