AfDB vice president: “We must avoid growing today and washing out tomorrow”

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Kevin Kariuki warns that Covid-19 and the effects of climate change mean affordability and financing of infrastructure is more crucial than ever.

Speaking to infrastructure leaders at the Global Infrastructure Conference, African Development Bank (AfDB) vice president Kevin Kariuki has warned that amidst Covid-19 pandemic and reeling under severe challenges of the impacts of climate change, the issue of investing in infrastructure, and the importance of governance and leadership in doing so, needs addressing now.

The AfDB vice president explained that Covid has left many government with significant financial deficits and the lasting effects of climate damage meant infrastructure planning could not depend on public sector spending.

This did not, however, mean the world could afford to leave infrastructure challenges unaddressed.

“Future infrastructure must be resilient to the shocks and stresses associated with climate change induced extreme events and disruptions, thereby contributing to sustainable development and overall societal resilience,” he said.

“In a nutshell, our future roads, buildings, energy, and water infrastructure will all need to be developed with due consideration to their economic, social, and environmental implications.”

Significant economic costs of climate change are already being felt and the impact on global infrastructure meant the sector has to change. 

Dr Kariuki addressed this vital issue. “Continuing infrastructure development as usual without giving due consideration to climate-associated risks, is no longer an option. Sustainable infrastructure development must therefore be premised on sound design, planning, risk-management, and a cost-effective investment approach.”

Doing this, he said, had to reflect socioeconomic and environmental co-benefits, while avoiding poor adaptation by taking a long-term approach to planning and environmental/social safeguard measures.

“We must avoid, ‘growing today and washing out tomorrow’ at all costs!” he warned.

Vulnerable infrastructure and private finance
Dr Kariuki set out the need for infrastructure to be designed, built and maintained in ways that make it environmentally friendly from end to end. Within this, he included economic, financial, social, and institutional factors. But he warned that infrastructure was at risk of catastrophic failure too.

“The truth is that in situations where the apocalyptic wildfires, extreme rainfall and floods, storms, and hurricanes constitute the new normal, global infrastructure will become increasingly vulnerable to these impacts (of climate change) resulting in the disruption of critical infrastructure systems, increased operating costs, increased infrastructure funding gap, with substantial spill-over effects on global economies.”

While government budgets would be severely constrained, he suggested the world was fortunate that private sources of funding were available and could be harnessed to make the difference.

“Thankfully, shortage of financing is not the problem as institutional investors such as pension funds and sovereign wealth funds have around $100 trillion in assets under management globally. These could go a long way in addressing the infrastructure funding gap.”

To attract private capital at the required scale, he suggested, would require improvement in the legal, regulatory, and institutional environment – providing unambiguous laws and other policies as well as guidelines to assure potential investors of the enforceability of their infrastructure contracts. He also suggested that capacity issues needed addressing.

“Governments must address inherent capacity constraints which often leads to few bankable projects and results in protracted negotiations of projects and financing agreements.”

Doing this, he said, would see well-structured projects – complemented by transparent and predictable procurement processes – attract high-calibre investments both in terms of equity and debt.

To achieve this, he welcomed efforts among multilateral development banks to deepen policy dialogue.

“This is why multilateral development banks must deepen policy dialogue around infrastructure to support countries in attending to policy, legal, regulatory, and institutional reforms, and capacity building to facilitate project preparation and enable governments to structure bankable projects.”

He then said governments need to ensure sustainable infrastructure financing including private sector financing, PPP, and blended finance, were in place. Industry and government would also have to foster efficient development of projects.

All of this had to be done fast and done well, he warned, given the scale of the climate crisis already upon many countries.

“It is anticipated that rising sea levels and coastal flooding will have major impacts on city infrastructure including roads, bridges, buildings, railways, industries, tourism facilities, businesses, with domino effects such as loss of employment and output, business disruption, decreased tax revenues, etc.”

How multilateral development banks can help
Sustainable infrastructure development in Africa has to be based on sound design, planning, risk-management, and cost-effective investment to be truly sustainable. This has led the AfDB to mainstream climate change.

“Green growth is now mandatory in all bank operations, including Country and Regional Integration Strategy Papers, meaning that all operations, including infrastructure projects are screened for climate risks and builds resilience into them,” he explained.

Pointing to the AfDB’s work in the energy sector to help countries benchmark their own progress on these issues, he said: “Since 2018, the African Development Bank has been working with its regional member countries to mainstream best practice in regulation through the Electricity Regulatory Index, by benchmarking electricity sector regulation of participating countries against international best practice.”

The vital role of industry
While finance organisations like the AfDB are important, Dr Kariuki then implored industry to perform its expanded role well – advising governments honestly and thinking long term.

“The advisor’s role is critical in establishing bankability of the project – which informs the competitiveness of tender, including quality of sponsor, and therefore cost of the project,” he said, adding “Ensuring that the technical and build contractors are adhering sufficiently to the project specification during development and construction phases, and all the way through to commissioning.”

He also highlighted the role of engineers in helping lenders to manage and mitigate risk.

“The lender engineer typically visits the site regularly and provides assessment of amongst others, the physical progress of works, and the value thereof, and whether this is in line with the implementation schedule, borrower compliance with project-related licensing agreements, as well as reviewing the draw down schedule for the planned project activity.”

Getting this right will be integral to some form of project risk mitigation in the development of sustainable infrastructure, which matters more now than ever.

Dr Kevin Kariuki concluded by restating the task at hand:

“Delivering sustainable global infrastructure in a changing world is a task that comes with huge challenges but also great opportunities for us to rethink the way we have been doing business.”