In the run-up to this year’s hurricane season much was made of the need for more resilient infrastructure. Infrastructure that can withstand natural disasters, deliver services in the face of significant disruption and be cost-effective and sustainable over the long term.
While all Caribbean citizens and policymakers agree on the need for upgraded and modern infrastructure, what’s less obvious is how these resilient transportation networks, utilities and physical facilities will be financed. Typically the heavy burden of infrastructure costs in the region are shouldered by government, contributing significantly to the region’s rising public debt, but there are a number of ways to make the sector more profitable and more palatable to would-be investors.
Expensive failures
Infrastructure failures (downed power lines, collapsed bridges, flooded roads, etc) cost households and businesses in low- and middle-income countries at least US$390 billion a year, according to the World Bank Group. And the Caribbean is especially vulnerable given the frequent onslaught of unpredictable weather such as flooding, tropical storms, hurricanes and earthquakes.
When critical services go down, it sends shockwaves through a country’s economy, damaging productivity, bringing supply chains to a halt and suspending business for SMEs which can barely afford to miss a day’s takings. The resulting disruption also tarnishes a country’s reputation and may cause potential investors and tourists to take their business elsewhere.
With climate events intensifying and the population increasing, pressure on infrastructure is growing and it’s never been more necessary to give these vital services an overhaul. But there is a lot of work to be done, and precious little financial resources available to do it.
Governments employ a number of methods to unlock funding for infrastructure projects as they seek to share the risk and offset its impact on over-stretched budgets. In Saint Lucia, the government has sought to borrow EC$202.5 million from a syndicate of banks led by the Bank of Saint Lucia to help fund the US$175 million redevelopment of Hewanorra Airport. For other works it has turned to long-time ally Taiwan, snapping up Taiwanese investments for the St Jude’s Hospital redevelopment, the GINet telecommunications project and a US$42 million road development programme. Saint Lucia has also made use of grants, taking around US$43 million from the UK Caribbean Infrastructure Fund for road rehabilitation work on the West Coast Road and Millennium Highway.
The pay off
Grants, loans, public-private partnerships — however the work is funded, it needs to make a return on its investment. According to a recent report from the World Bank, properly managed and designed infrastructure pays for itself, and investing in more resilient power, transportation, water and sanitation and telecommunications services could yield up to US$4.2 trillion over the lifetime of the new infrastructure, with $4 in benefits for every $1 invested. Not only is resilient infrastructure less costly to maintain and repair, it also provides more reliable services which, in turn, ensure continuity in the economy and boost business.
But to truly incorporate resilience, planners need to go back to the basics. The World Bank advises strict and enforceable regulations relating to construction and procurement, well-drafted systems for operation, maintenance and disaster response, and appropriate financing models for construction and upkeep.
Structuring this financing is key. Masterplans cost money and often budgets do not allow for large pay-outs in the preparatory stage. However, a clearly defined risk and resilience analysis can offer significant cost-savings in the long term and generate savings over the life cycle of the initiative. This is where grants and development assistance can play a role, particularly in the climate action sector where groups are eager to fund climate-resilient work. Natural hazards are unavoidable and therefore masterplans must make room for disaster response, including a financial protection strategy.
Post-disaster recovery is usually in the hands of government and therefore the availability of insurance schemes or reserve funds is critical. The World Bank advises a multi-layered risk financing strategy that incorporates emergency aid, insurance of public assets and sovereign reserve funds.
Addressing risk is just one component of making infrastructure an attractive investment. There also needs to be clear communication about those risks. Investors look for transparency, especially in infrastructure projects that are typically large in scale, scope and potential pitfalls. According to World Bank researchers, investors are increasingly interested in ethical enterprises, ie those that display sound Environmental, Social and Governance principles (ESG). Infrastructure projects that have in-built ESG credentials are more likely to attract their interest and satisfy their demand for responsible investing. To help investors identify opportunities and be fully informed, the World Bank is drawing up a resilience rating system. The system aims to simplify technical jargon into easily-digestible key points that investors can use to decide where to put their money. Projects will be assessed on the basis of whether they’ve taken climate and disaster risks into consideration as well as those that support the resilience of the wider community or country.
Attracting FDI
Foreign Direct Investment in the Caribbean topped US$5.6 billion in 2018 and Saint Lucia received US$40 million, according to the Economic Commission for Latin America and the Caribbean. Most of these investors put their money into tourism, manufacturing and natural resources. If the region is going to shift the cost of infrastructure to private investors, it has to take a proactive approach in proving that it will be worth it. Clear regulation, effective planning and prioritising transparency can help lure in foreign funds. And it shouldn’t be a hard sell; resilient infrastructure projects are a sound investment when they have the right team behind them. Cost-effective and necessary, the Caribbean has no choice but to embrace this new way of planning.
“There is no time to waste,” says World Bank CEO Kristalina Georgieva. “With a rapidly changing climate, and large investments in infrastructure taking place in many countries, business as usual over the next decade would cost US$1 trillion more. By getting it right, however, we can provide the critical infrastructure services that will spur sustained and resilient economic development.”
