Understanding the Role of Private Capital to Assist the World Bank in its Initiative to Build Resilience to Disaster and Climate Risks in Rapidly Growing Cities
Client
Semester
Cities in developing countries across the globe are in urgent need to develop urban resilience infrastructure, driven by a variety of factors: population growth, rapid urbanization process, rising middle class and more frequent disasters resulting from climate change. High-quality urban resilience infrastructure is the key to ensuring long-term sustainable growth, but there exists a multi-trillion-dollar financing gap that public funding alone cannot fill. This report identifies the obstacles for private capital to invest in resilience infrastructure, and provides corresponding recommendations for attracting private finances into the field.
The extensive literature review and interviews with investors from commercial banks, multinational development banks, private equity funds, pension funds and sovereign wealth funds reveal that investors recognize valuable opportunities within the space of urban resilience infrastructure despite all the current challenges.
It is clear that investors do not share a consensus regarding what resilience infrastructure means or how they themselves can benefit from investing in this type of projects. Secondly, private investors do not see how vehicles for financing resilience infrastructure projects are different from other financial vehicles. Moreover, the lack of information on previous projects and future projects causes troubles for investors to accurately make investment decisions. Most infrastructure projects are too small in scale and the pipelines are unclear, rendering transaction costs prohibitively high for private investors. Lastly, investors perceive high risks investing in resilience infrastructure projects in developing countries.
In light of the five challenges identified through the Capstone team’s research, this report provides five recommendations.
- Define the product in a way that clearly differentiates resilience infrastructure projects;
- Enhance transparency of and access to data and information on previous resilience infrastructure projects, which means more available and accessible information for investors;
- Create a marketplace for resilience infrastructure projects and to assist governments in marketing their projects to private investors;
- Bundle up small projects, rather than seeking for funding for each individual enterprise. This can help reduce transaction costs and diversity risks for investors;
- Provide institutional guarantees to back resilience infrastructure projects.
Resilience infrastructure is an area of substantial opportunities for private investors and the World Bank should capitalize on its strengths, mitigate its weaknesses and embrace the opportunities to bring more private finances into resilience infrastructure projects.