Economics

Private
Poverty. Investors
They Just Can Help
Need to End
Think Small and Local.
by David Jackson and Jaffer Machano
February 09, 2021

Jorg Greuel/Getty Images

Summary. Infrastructure investment can not only combat the poverty of today —
it has the potential to stave off the poverty of the future. And yet only $6 billion of
private infrastructure investment went to the world’s poorest countries between
2010 and 2019 — that’s less than 1% of the total $1.1 trillion invested during that
period. This remarkable dearth of financing took place during a historic period of
loose monetary policy, in which central banks flooded global markets with liquidity.
The authors argue that now is the time to incentivize investors to direct capital
towards promising infrastructure projects in low-income countries. close

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“It is important to remember that all poverty is local.” Beyond a
mere repurposing of Tip O’Neill’s famed quip about politics, this
line from the UN’s 2009 report “Rethinking Poverty” is an
impressive understatement of a powerful fact. To understand an
individual’s locality is to understand why that person lives, and
could continue to live, in a state of poverty.

More than a locality’s wealth, tax policies, or business

environment, infrastructure is what makes the difference. Quality
infrastructure — from transportation (airports, transit, heavy rail)
to social (education, housing, health care, sanitation) to digital
(broadband) — doesn’t only elevate residents’ quality of life, it
creates and supports the services that catalyze capital investment
and expand the taxpayer base. And in addition to reversing the
poverty of today, infrastructure investment has the potential to
stave off the poverty of the future — a critical lesson given the
prospect that the most economically vulnerable areas of the world
could experience a “lost decade” due to the Covid-19 pandemic
according to the World Bank’s Global Economic Prospects report.

Consider that between 1990 and 2009, coinciding with the

greatest reduction of poverty in human history, the global
population living in urban slum households fell from 47% to 33%.
During that same period, three nations that would emerge from
the poorest to the middle-income wealthiest economies — China,
India and Brazil — saw their urban slum populations reduced
from 44% to 25%, 55% to 24%, and 37% to 22% respectively. A
dramatic expansion in urban infrastructure — from improving
water access and sanitation facilities, to providing durable
housing and sufficient living space, to ensuring reliable electricity
to name a few benefits — was the driving force behind these
reductions that benefitted tens to hundreds of millions of people.

This is precisely why recent private investment trends have been

so disturbing. According to the Global Infrastructure Hub, only $6
billion of private infrastructure investment went to the world’s
poorest countries between 2010 and 2019 — that’s less than 1% of
the total USD $1.1 trillion invested during that period. This
remarkable dearth of financing took place during a historic period
of loose monetary policy, in which central banks flooded global
markets with liquidity. Because financial capital leapfrogged the
poorest markets with the greatest development needs, the
prospect of delivering sustainable development leapfrogged these
markets as well.

One critical reason for this lack of investment involves the gap
between commercial data and private sector decision-making.
Admittedly, there are real investment challenges given these
countries’ lack of deep capital markets, the difficulty of doing
business, and lack of strong rule of law. But data clearly shows
that the 10-year default rate for infrastructure investment in
Africa is less than 2%, with social infrastructure for Africa
historically showcasing the lowest default and highest recovery
rates. Yet, in an era when the flooding of liquidity in global capital
markets has increased investors’ threshold for risk (hence the rise
of the term “stupid money”), investment in promising
infrastructure investments in low-income markets has been a
clear outlier.

Another issue is currency risk. Most infrastructure investments in

low-income countries are entirely denominated in foreign
currencies, not local currencies, which means borrowers are
subjected to foreign exchange risks triggered by currency
fluctuations. Additionally, local governments often have to
request permission from their national governments to borrow in
foreign currency, which can prove challenging even for the
municipalities with strong balance sheets.

Finally, local governments in the world’s poorest countries often

lack the capability to borrow in capital markets. The reasons are
myriad: Localities’ credit profiles are determined by the debt of
national governments regardless of their fiscal standing — one
reason why the World Bank states that only 20% of the 500 largest
cities in developing countries are investment-grade — and many
localities are denied the legal authority to issue debt, levy taxes or
be liable for debts. As a result, national governments emerge as
the borrowers of choice, which means local infrastructure projects
compete with national priorities, including defense, for essential
financing.
Combating poverty in the world’s low-income and least developed
markets will, of course, require public sector action, namely from
central governments, who must empower local governments to
access capital markets. They should extend regulatory authority
to borrow, tax authority to garner municipal revenues for debt
repayment, and legal liability of debt to increase investor
confidence. Localities should also be able to borrow in local
currency without central government authorization, which will
allow investors who can hedge their currency exposure to access
the pool of investments to finance opportunities in developing
countries directly.

But more than public sector action, we need innovation that

incentivizes investors to direct capital towards promising
infrastructure projects in low-income countries. This includes
innovative finance methods and tools to strengthen synergies
between major global capital markets and concessional finance
actors like development finance institutions, multilateral
organizations, and OECD governments. Developed countries can
leverage blended finance instruments to ensure that their
overseas development assistance (ODA) can be used as
concessional first loss capital to entice the private sector to
finance infrastructure projects.

Just as importantly, we need data innovation, beyond the data

regarding commercial viability of projects. It is well past time for
localities’ creditworthiness to be assessed on the strength of their
own balance sheets. This calls for the kind of credit data that can
signal to markets precisely the municipalities with strong balance
sheets and, therefore, creditworthy and investment-grade.
Bringing such data online would not only catalyze private
investment, but it would also empower business and policy
leaders to advocate for separate accounting of national debt from
local debt.

UNCDF is already piloting these very innovations. Along with

United Cities and Local Governments and the Global Fund for
Cities Development, UNCDF has launched an international
municipal investment fund to deliver private and public finance
to locally-based infrastructure projects in developing and least-
 developed countries — with a target capitalization of EU 350
million at first closing. Additionally, we conducted credit tests of
several municipalities and found that seven localities (three in
Bangladesh and four in Nepal) were investment grade. Once we
were able to present this to the government of Bangladesh, we
were able to agree on piloting a credit program with those
municipalities.

We hope our fund and credit data innovations will not only
deliver financing to infrastructure projects in low-income areas,
we also hope it will prove the investability of similar projects,
spurring the rise of new funds and instruments as well as a greater
unlocking of private finance for infrastructure projects that can
deliver from the standpoint of commerce and development.

All poverty is local. But all prosperity is local as well. The path to
prosperity is only as sound as the infrastructure it is built upon. It
is time for private investment, and the global financial system, to
demonstrate this fact.

DJ
David Jackson is the director of the local
development finance practice at the United
Nations Capital Development Fund (UNCDF).

JM
Jaffer Machano is the global programme
director of municipal investment finance at the
United Nations Capital Development Fund
(UNCDF).

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