Cartagena, Colombia, Sep 5 (EFE).- Public development banks play a crucial role in directing private capital towards infrastructure projects, according to a study by the Inter-American Development Bank (IDB). Preliminary findings were unveiled Tuesday in Cartagena during the Finance in Common Summit (FiCS).
Joan Prats, the leading financial specialist for Connectivity, Markets, and Finance at the IDB, noted that “Public development banks are a significant source of overall financing for these projects.” Under the “Project Finance” model – aimed at long-term large initiatives – they accounted for 20.5% of the market between 2004 and 2021, as per the study data.
However, Prats emphasized that the banks’ catalytic power is their most crucial attribute.
PARTICIPANTS AND ALLOCATION OF RESOURCES
The study showed that 26 entities from 10 countries participated in private infrastructure financing under the Project Finance model. Water, at 24.4%, and Energy, at 23.7%, were sectors receiving the most investment from national development banks between 2004 and 2021.
Countries with the most activity from these institutions in financing infrastructure include Brazil, Mexico, Colombia, and Chile.
Anderson Caputo, head of the Division of Connectivity, Markets, and Finance at the IDB, said, “Public development banks in Latin America play a strategic role in addressing market failures that prevent more substantial private sector infrastructure investment.”
“They are essential in helping reduce private investors’ perceived risks in such projects and ensuring these investments align with our countries’ sustainable and inclusive development goals,” added Caputo.
ADDRESSING HIGH-RISK PERCEPTIONS
The IDB study indicates that public development banks have facilitated private investment by mitigating factors contributing to high-risk perceptions in infrastructure projects. An instance of this is the deployment of standardized programs providing greater certainty to investors and the use of financial instruments tailored to reduce credit risk.
The study found that these banks are the largest debt financiers providing in local currency, contributing 81% of their total financing, outpacing the private sector and bilateral and multilateral agencies. Furthermore, they offer longer financing terms, comparable to those given by bilateral and multilateral development entities.
Clemente del Valle, an economist at the University of the Andes in Bogotá, emphasized the importance of development banks working together for a programmatic approach.
“Public development banking is pivotal. It should bridge the gap between the private sector and governments. A proficient development bank needs to understand the risks and benefits involved,” he said.
Del Valle also highlighted that innovation is “very important” for the advancement of infrastructure projects.
The study’s findings presented Tuesday were jointly prepared by the IDB and the Latin American Association of Development Financing Institutions (ALIDE). Their aim is to strengthen the operations of national development banks in the region, seeking to bridge the infrastructure gap in Latin America.
Consequently, estimates suggest the region needs to invest $2.2 trillion by 2030 in water, sanitation, energy, transportation, and telecommunications. This would bolster the necessary infrastructure to meet the United Nations’ Sustainable Development Goals. EFE