The gap trap

According to the United Nations Conference on Trade and Development (UNCTAD), for example, developing countries need annual renewable energy investments of about USD 1.7 trillion but attracted only USD 544 billion in clean energy FDI in 2022. Investments in renewables have nearly tripled since 2015, but the money has largely gone to developed countries.

And when they do have opportunities to close the gap, developing nations often find they can only do so on difficult – if not prohibitive – terms. According to UNCTAD, the least developed nations rely on external sources for almost three-quarters of their energy investment, but pay up to seven times more than developed countries to access international capital markets.

Valuable virtues

To some extent the variability of the gap reflects the traditional economic and regulatory virtues that help to determine our Infrastructure Index rankings. Countries with the best governance, disclosure and transparency around their processes tend to be those that find it easiest to attract financing. But precisely because of those virtues, they are often not those whose need for financing is most acute.

Few people would want a world in which funds were effectively limitless – it would lead to a proliferation of ill-conceived and unviable projects. But that is a problem we are miles away from having. Instead we are in a situation where, in many nations, vital infrastructure is going undeveloped while ‘dry powder’ levels in infrastructure funds are at record levels.

Some in the market see this as not a question of whether finance is available, but of how individual markets and projects can be structured to attract it.

Creating incentives

An extension of this argument is that, if governments can get better at identifying and structuring projects that are capable of attracting private sector investment, they can then focus their own resources – and those from entities such as development banks – on supporting the most socially, economically and environmentally important projects that struggle to meet private sector investment criteria. But this argument has been around for a long time, and the neat division of funding it implies has yet to come about (partly because creating the incentives required to generate the right level of investor return can be tricky due to risks presented by a myriad of governance and implementation factors).

Furthermore, it is not always politically acceptable to permit the private sector to ‘cherry-pick’ the most attractive projects. In some places there is still strong resistance to privatisations and sell-offs, even if they benefit customers. Juan Carlos Quiñones has noted the ironic challenge of needing to convince public opinion that private sector involvement in some infrastructure projects is not a privatisation of public facilities but the operation and maintenance by the private sector of a facility that belongs to the public.

The Bridgetown Initiative

Will we see a determined effort by developing nations to challenge the status quo? There have already been some efforts in this direction, notably the Bridgetown Initiative, led by Mia Mottley, the prime minister of Barbados.

Launched at COP27, Bridgetown aims to reform the global financial system in a way that enables it to respond to challenges such as SDGs and climate change with the provision of inclusive and resilient finance. The Loss and Damage Fund agreed at COP27 was one Bridgetown demand.

In 2023, the Paris Summit for a New Global Financial Pact saw the launch of the Bridgetown Agenda 2.0, with proposals ranging from immediate liquidity support measures to reform of the governance and operations of international financial institutions. Bridgetown proposals are certain to be debated at COP28, which is also expected to see proposals from the UAE Presidency aimed at ‘fixing climate finance’, which is one of the Presidency’s four priority action pillars.