Infrastructure Finance Needs of IsDB Member Countries to achieve SDGs and to Conform to Paris Agreement BI-ADFIMI-KNKS Joint CEO Seminar on "Islamic Structured Finance: Cases of Infrastructure Project Finance in IsDB Member Countries" Professor Habib Ahmed 12 November 2019, Jakarta, Indonesia Sharjah Chair in Islamic Law & Finance Durham University Business School United Kingdom
Presentation Plan • SDGs, Climate Agreement & Infrastructure • Financing Infrastructure • Case Studies 2
SDGs: Ambitious Vision for Transformation Pillars of SDGs: Economic, environmental and social sustainability MDGs (2000-2015) SDGs (2016-2030) Goals/ 8/21/60 17/169/232 Targets/Indicators Holistic: Economic, Social, Priority Areas Human Development Environmental 3 Source: Moheildin (2019) Scope Developing Countries Universal
Paris Agreement 2015 • Central aim is to strengthen the global response to the threat of climate change – Keep global temperature rise this century well below 2 0 C above pre-industrial levels and to pursue efgorts to limit the temperature increase even further to 1.5 0 C • Strengthen the ability of countries to deal with the impacts of climate change • Reaching these ambitious goals would require – Appropriate fjnancial fmows – A new technology framework – An enhanced capacity building framework • ‘Environmental Sustainability’ component of SDGs overlaps with the goals of Paris Agreement—use ‘green’ alternatives to achieve the SDGs 4
Infrastructure and SDGs • Infrastructure : Social overhead capital producing public goods & services essential for functioning and growth of economies – provides basic and essential services to household sector (power, water, health, transportation, etc.) – is an input in production , lowers the cost and enhances productivity • Empirical studies : Better infrastructure increases growth and reduces income inequality • Achieving SDGs linked to infrastructure – Overall infrastructure: SDG 9 – Economic infrastructure: SDG 6, SDG 7 & SDG 11 – Social infrastructure: SDG 3, SDG 4 5
Infrastructure & Climate Change • Estimated 60% of the world’s greenhouse gases (GHG) emissions come from infrastructure • SDGs and Paris Agreement requires using climate-smart and climate- resilient infrastructure • Comprehensive defjnition of infrastructure – T raditional (grey) infrastructure – Natural infrastructure (forest landscapes, wetlands, watershed etc.) 6 Source: NCE (2016), Sustainable Infrastructure Imperative, p. 4.
Infrastructure Status of Regions & OIC Member Countries 5.6 6.0 5.1 5.1 4.9 4.8 4.6 4.5 4.4 5.0 4.2 4.0 3.8 3.8 3.6 3.4 3.5 3.4 3.4 3.3 4.0 2.9 2.9 2.9 3.0 2.0 1.0 0.0 Index Value (0-7 best) Overall Infrastructure Transport Infrastructure Electricity & T elephony Infrastructure 7 7 Source: WEF (2018), The Global Competitive Index Historical Dataset
Presentation Plan • SDGs, Climate Agreement & Infrastructure • Financing Infrastructure • Case Studies 8
SDGs & Paris Agreement: Funding Needs & Gaps • UNCTAD—achieving SDGs would require – US$ 5-7 trillion annual investment – Developing countries investment gap—US$ 2.5 trillion/per year • Overall costs of implementing PA could cost 0.5 to 1% of GDP for 2 o C target (1 to 1.3% for 1.5% target of 1.5 o C) – Not doing anything will cost much more is terms of damage to humans, natural infrastructure & economies – Costs of health savings from reduced air pollution— https://www.thejournal.ie/paris-climate-agreement-costs-health-benefjts-3879180-Mar201 9 1.4 to 2.5 times greater than costs of climate 8/
Change in Infrastructure Spending Required for a 2 o C Scenario (% change in exp. Over 2015-2030) Extraction of oil, gas and coal Buildings, energy and transportation Renewable energy, nuclear, CCS, low-carbon transport, climate-proofed water and sanitation, etc. Standard water/sanitation, high-carbon transport (e.g. roads), energy production, 10 10 10 and telecommunications Source: NCE (2016), Sustainable Infrastructure Imperative
Global Cumulative Infrastructure Spending and Investment Needs 2016- 2040 93.7 78.8 100 80 60 14.9 40 20 0 USD trillion 11 Source: GIH and Oxford Economics (2018)
Cumulative Regional Infrastructure Spending Requirements 2016-2040 28.4 26.5 22.4 30.0 19.7 25.0 14.8 12.8 12.4 20.0 8.5 6.0 7.8 7.2 15.0 5.6 4.3 5.2 1.7 2.6 2.7 2.0 0.2 3.9 1.9 1.6 1.9 1.7 10.0 5.0 USD trillion - Cummulative at current trends 2016-2040 Cummulative at investment needs 2016-2040 Infrastructure spending gap 2016-2040 Total Investment Needs per OIC MC per year USD 22.1 billion 12 Source: GIH and Oxford Economics (2018) Investment Gap per OIC MC per year USD 4.9 billion
Sources of Infrastructure Financing 13 Source: Adapted from Ahmed (2017)
Sources of Infrastructure Financing Estimates in Emerging Economies & • Bulk of fjnancing Developing Countries (60%) provided by government • Alternative sources Other Developing Country Finance (<$20bil) ODA/MDB Finance ($40-60bil) to funds are sought Government Budgets ($500-550 bil) NDBs ($70-100bil) due to − Increasing demands Private Finance ($150-250bil) on public funds, budget defjcits, and increasing public debt − Huge investments needs for infrastructure fjnance to meet the 14 Source: Bhattacharya A., Romani M. (2013) SDGs
T otal Infrastructure Investments & Private Sector Contribution (2011- 2015) 2.73% 2.79% 6.71% 16.9% 3.21% 13.9% 14.04% 9.8% 1.91% 37.1% 1.09% 19.3% 1.33% 23.8% 3.13% 17.8% 8.26% 46.0% 1.04% 21.0% 0.46% 26.4% 0.30% 14.7% 3.01% 14.8% 0.37% 20.7% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0% 50.0% T otal infrastructure investment (% GDP) T otal value of private fjnance infrastructure (% of GDP) 15 15 Source: https://infracompass.gihub.org/compare_countries
Investment Horizon & Risk Appetite of Difgerent Financial Institutions Institution Investment Risk Appetite Horizon Commercial Banks Short term Low to medium Nonlife insurance Short term Medium Investment Company Short to medium term Depends on funds mandates Life insurance and Long term Medium private pension Public pension Long term Medium Sovereign wealth Long term Medium to high funds Endowments and Long term High Nonbank fjnancial institutions are more suitable for foundations investments in Infrastructure fjnancing 16 ource: ADB (2018), African Economic Outlook 2018, African Development Bank, p. 109.
Global Infrastructure Investment Equity and PPP by T ype of Owner 76% 80% 70% 64% 60% 60% 52% 50% 46% 50% 45% 44% 39% 38% 40% 32% 32% 30% 24% 18% 20% 15% 14% % of total 13% 12% 12% 11% 9% 9% 8% 8% 7% 7% 6% 6% 6% 10% 5% 5% 5% 5% 4% 4% 3% 2% 2% 1% 1% 0% Corporate Infrastructure fund/investment fjrm Pension fund Sovereign wealth fund/government agency Other 17 Source: PWC & GIIA (2017)
T otal Islamic Finance Investments in Infrastructure Sector (2017- Total assets 2018) Percentage Infrastructure Sectors (2017- (USD billions) going to Investments 2018) Infrastructure by Islamic Finance (USD Billion) Islamic Banking 1,598.9 4.74% 75.8 Takaful 42.5 2.0% 0.9 Sukuk 344.8 11.57% 39.9 IDB Project 3.12 Financing Total 119.7 Average per member country 2.1 18 Source: COMCEC (2019)
Size of Capital Market Related Sectors OIC Countries 11.0 All countries 44.2 16.5 1.1 6.8 27.9 Low income 60.6 31.9 2.0 53.1 9.2 Lower middle income 34.7 1.8 0.9 2.9 11.4 Upper middle income 62.5 23.8 1.8 14.4 14.7 High income 68.1 42.7 2.3 76.3 42.2 - 50.0 100.0 150.0 200.0 250.0 Stock market capitalization to GDP (%) Outstanding domestic private debt securities to GDP (%) Corporate bond issuance volume to GDP (%) Mutual fund assets to GDP (%) Pension fund assets to GDP (%) 19 urce: World Bank Financial Development Database 2018
Presentation Plan • SDGs, Climate Agreement & Infrastructure • Financing Infrastructure • Case Studies 20 20
Green and Sustainable Finance Sustainable Developmen t Environment Social Economic Governance Stakeholder s Climate Climate Other Government change change environment mitigation adaption al Fin. Institutions Low carbon Fin. Markets Climate Social Finance Green Sustainable 21 21 21 Source: UN (2018), Greening the Rule of the Ga
Governments: Indonesia Global Green Sukuk • Governed by Green Sukuk/Bond Framework Financing requirements to deal with climate mitigation (CICERO reviewed)—identifjes sectors/projects where funds can be invested and adaption activities – Dark Green: Renewable energy, resilience to climate change 81 90 – Medium Green: Sustainable transport, waste to 80 energy & waste management, sustainable 70 55.1 agriculture 60 50 • March 2018—World’s fjrst Global Green US$ (bn.) 40 Sukuk issued 30 – Value: US$ 1.25bn 20 – T enor: 5 years 10 – Financing mode: Wakala 0 Estimated costs (2015-2020, $16.2bn/year) – Profjt rate: 3.75% 22
Indonesia Global Green Sukuk: Demand/Allocation Allocation based on geography Allocation based on type of investors 35% 32% 16% 30% 35% 25% 25% 20% 18% 20% 15% 15% 10% 29% 10% 5% 0% Asset manager/Fund manager Banks/Private Banks Pension fund/Insurance SWF/Central Bank 23
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