Build more, build right: Development finance, infrastructure and climate change

OECD Development Co-operation Directorate

©AFP/Mohammad Ponir Hossain/NURPHOTO

The UN Conference on Climate Change in Paris in November-December is the final crucial step in a year which has set forth several global milestones towards shaping a better common future. Tackling climate change is a determining factor in the 17 Sustainable Development Goals (SDGs) agreed in New York in September 2015 in particular; an agreement in Paris would not only bolster all the efforts that led to the historic SDGs, but lift the hopes of everyone on the planet, especially the most vulnerable. 

Over 800 million people still live on less than $1.25 a day and need access to basic food, water, energy, shelter and transport–they need adequate, inclusive and climate resilient infrastructure. What is standing between us and the vision of an ideal world in 2030–a world where the SDGs and low-carbon, inclusive development are finally becoming a reality? It is not so much a question of what is stopping us, but rather of what is missing?

To meet the infrastructure requirements of the SDGs, we definitely need to build more. Yet the financing gap we face is immense. An UNCTAD investment report estimates investment requirements in developing countries range from US$3.6 to $3.9 trillion per year between 2015 and 2030. Current levels of investment are around $1 trillion per year–less than a third of the amount needed.

At the same time, today, a changing climate and extreme weather events threaten transport, energy and water infrastructure globally, while also impacting the potential return on the investments needed in the poorest countries to build infrastructure for the future. So, we need infrastructure that helps reduce poverty, encourages competiveness, and at the same time, we need to make sure that we reduce dependence on fossil fuels, and that all investments are climate resilient. The good news is that extra investment for low carbon, climate resilient future infrastructure would cost 5% more than business as usual over the same period. However, this shift requires a step change in the way new infrastructure is designed and built in developing countries.

Development partners have a role to play here. While the overall importance of development financing for infrastructure in developing countries is relatively small (around 6-7% of total infrastructure financing) in low-income countries–where risks for other investors are high and returns low–official development assistance (ODA) still finances significant shares of the basic infrastructure. Beyond this, ODA can play a key role in mobilising much needed private finance in middle-income countries and emerging economies, and in scaling up private finance.

However, development finance still has a way to go to “build right”. In 2013, some 37% of bilateral and multilateral development finance for infrastructure could be considered low carbon and/or climate resilient, which means the lion’s share still goes towards locking developing countries into infrastructure projects that augur badly for climate and the environment. There are financing gaps affecting individual sectors too. The majority of financing for energy can be considered to address climate change (57%), but the same cannot be said for transport and water sectors where only a third of development finance can be considered to support low carbon and climate resilient infrastructure.

The story is not all discouraging. Development co-operation providers increasingly recognise the need for development finance to address climate change. A global framework for development finance, known as the Addis Ababa Action Agenda, agreed by countries in mid-2015, stresses the need for a global framework for development finance, including aid, private investment and tax, that is environmentally sustainable. Development partners are also supporting and mobilising significant climate finance–around $62 billion in a recent OECD estimate–and this total is increasing year on year.

What is needed is for development finance to be truly transformational. This means that development co-operation providers need to “green” larger shares of their infrastructure portfolios in developing countries. Their finance should support the climate proofing of water supply and sanitation infrastructure in particular. Similarly, with the rapid urbanisation of the developing countries, sustainable transport systems and multi-modal transport links should also receive new emphasis in financing efforts.

Development partners should do more to mobilise the private sector too. Climate-related development finance can play an important role in stimulating private investment interests, as well as harnessing related knowledge and skills to drive innovation for climate change.

Building more and building right is as much about how development finance for green infrastructure is spent as what it is spent on. Ensuring investments are in line with country priorities, that they involve a full range of development partners and stakeholders for maximum impact, and monitoring investments to make sure they are truly effective in reducing emissions and improving resilience: these are all important ingredients of effective development finance in the fight against climate change.

References

4th High Level Forum on Aid Effectiveness (2011), Busan Partnership for Effective Development Co-operation, Busan, http://www.oecd.org/dac/effectiveness/49650173.pdf.

Global Commission on the Economy and Climate (2014), “Better growth, better climate: The New Climate Economy report”, The Global Commission on the Economy and Climate, Washington DC, http://newclimateeconomy.report/wp-content/uploads/2014/08/NCE_GlobalReport.pdf.

Miyamoto, K. and E. Chiofalo (2015), "Official development finance for infrastructure: Support by multilateral and bilateral development partners", OECD Development Cooperation Working Papers, No. 25, OECD Publishing, http://dx.doi.org/10.1787/5jrs3sbcrvzx-en.

OECD (2015), “Climate finance in 2013-14 and the USD 100 billion goal”, in collaboration with Climate Policy Initiative, http://www.oecd.org/environment/cc/OECD-CPI-Climate-Finance-Report.htm.

United Nations Conference on Trade and Development (2014), World Investment Report, United Nations Publications, Geneva, http://unctad.org/en/PublicationsLibrary/wir2014_en.pdf.

©OECD Observer No 304 November 2015




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