Due to forex and country risks , low and middle-income (LMIC) sovereigns and infrastructure businesses often must pay prohibitively high interest rates on loans or bonds. As a result , the quantity of sustainable infrastructure built in LMICs is far less than is needed to meet the Sustainable Development Goals (SDGs). A UN report  estimates the investment gap at $4 trillion a year. To put this in perspective, the World Bank in 2022 made $70.8 billion available to developing countries in the form of credits, loans, and grants. Efforts are underway to expand the World Bank’s annual lending significantly , but its capacity will remain an order of magnitude below total LMIC requirements. What is needed are mechanisms to de-risk private institutional investments in LMICs so that investors’ reluctance to invest in developing countries can be overcome.
Affordable and abundant energy is the basis for every modern economy. Full electrification is a necessary condition for a thriving economy  to achieve prosperity and a stable currency (although as the example of Argentina  demonstrates, it is not by itself a sufficient basis). It is a remarkable fact that several hundred million people in sub-Saharan Africa continue to live without regular access to electricity , despite the fact that global renewable electricity equipment supply chains could readily be ramped up to provide the necessary equipment. In engineering terms, if financial and regulatory risks and constraints could be swept aside, globally ubiquitous low-cost clean energy superabundance  could be within reach.
We are not on track to meet either SDG7  (access to affordable clean, modern energy for everyone) or SDG13  (climate stabilization). Climate stability is a global commons good  that cannot be achieved without shifting developing countries to non-fossil energy, and so highly developed countries (HDCs) have an existential interest in ensuring that LMICs get on a green development path as quickly and comprehensively as possible. This will entail achieving both SDG7 and SDG13 together, and to do that, an enormous scale-up  of clean, non-fossil energy infrastructure in developing countries is urgently necessary. How can this be achieved? Two basic strategies are available: (i) Help developing countries develop an ‘enabling environment’ that will more readily attract investment, and (ii) make use of developed countries’ balance sheets and financial power to provide mechanisms to de-risk investments in developing countries, so that the high up-front capital investment requirements  of renewable energy and other sustainable infrastructure can be made more affordable  by keeping the cost of capital much lower than developing countries can achieve on their own.
Here, we explore the hypothesis that the most realistic way to advance achievement of SDGs 7 and 13 is for highly-developed-country (HDC) sovereigns to help LMICs implement both strategies concurrently. HDCs and international institutions must provide effective technical and policy advice and assistance with regulatory reforms to generate an enabling environment for large-scale private investment, whilst at the same time helping LMICs – or companies operating in LMICs – raise the money needed for sustainable infrastructure at low interest rates. The latter will entail leaning on HDCs’ superior credit ratings through some form of conditional credit guarantees for LMIC infrastructure projects, and/or direct investment by HDCs in infrastructure projects in LMICs. The critical questions are how HDCs could be motivated to take on the risks this will entail, and what specific financial and advisory mechanisms are best suited to implement the twin strategies.
Three approaches for HDCs to help raise money for sustainable infrastructure development in developing countries can be considered: (a) HDCs could raise money by issuing sovereign debt, and then on-lend the money to credible developers of crucial infrastructure projects in developing countries at concessional interest rates. (b) A hybrid financial debt instrument backed by both LMIC and HDC sovereigns could be designed, with HDCs sovereigns offering secondary credit guarantees in case LMICs default on their obligations. This approach would entail significantly higher interest rates than direct HDC sovereign debt, but lower interest rates than LMIC sovereign debt would obtain (as it is not de-risked by secondary or partial HDC credit guarantees). (c) Investment vehicles set up by HDC sovereigns could make direct equity investments in clean infrastructure in developing countries on a cost-recovery, capped-profit, or plain-vanilla for-profit basis.
To simplify the discussion, let’s posit that the same type of investment vehicle could be used for all three of these different ways of raising low-cost capital for infrastructure development in LMICs. Let’s envision a category of special-purpose National Sustainable Infrastructure Funds (SIFs), which would either on-lend money to qualifying infrastructure projects in LMICs, or make direct equity investments in such projects, or both.
For scenario (a), one or more HDCs, e.g. Germany, France, the European Union, or Japan, could issue ‘green bonds’ at the very low interest rates these sovereigns typically enjoy. The money would then be invested on a large scale in clean energy infrastructure development in LMICs that meet certain criteria defined by the SIFs, which would be investment vehicles owned by those HDCs and managed by teams comprised of both HDC and LMIC professionals with deep regional expertise in LMIC partner countries. Forex and country risks would remain, but if any entities in the world can afford to risk some capital at scale, it is HDC sovereigns. Their interest in avoiding an existential climate catastrophe should be motivation enough to make those investments despite the risks. At the same time, the SIFs would work closely with HDC development agencies and LMIC partners to reduce country risks and ensure the infrastructure development investment money is well-spent, with concomitant investments in improving host LMIC countries’ regulatory regimes and professional and technical capacities relevant to clean energy systems installation and management. The HDC agencies include, for example, Germany’s Gesellschaft für Internationale Zusammenarbeit (GIZ), France’s Agence Française de Développement (AFD Group), and the Japan International Cooperation Agency (JICA).
For scenarios (b) and (c), the role of HDC development agencies would be the same as for scenario (a). The only difference in the three scenarios is in the mode of financing, not in the implementation of HDC-assisted LMIC sustainable infrastructure development programs.
For scenario (b), the structure we envisage would have LMIC sovereigns guarantee SIF bonds to raise money for domestic infrastructure development. HDC governments would serve as backup guarantors, agreeing to absorb losses if and only if a host LMIC government proves unable to make SIF bondholders whole. Leaning on HDC credit ratings in this way, SIFs could issue bonds with lower coupon rates than LMIC sovereigns could achieve on their own, to raise money for LMIC infrastructure investment.
For scenario (c), instead of lending low-interest money to project developers in LMICs, the SIF would directly invest in and own infrastructure projects, channeled through SIF-owned corporate vehicles set up for that purpose in LMICs. For example, one could imagine a global Sustainable Infrastructure Fund set up, owned, and managed by the European Union, with subsidiaries in each LMIC country. In some cases, the subsidiaries could be co-owned by local LMIC interests such as state-owned electricity companies or private project developers, or by LMIC sovereign trusts. Many combinations of equity ownership are possible. An intriguing question is whether such an HDC equity-based fund could be successfully run on a for-profit basis as a global portfolio of sustainable infrastructure investments, with occasional losses in some LMIC projects offset by profits in others. If the answer turns out to be yes, then achieving the goal of climate stabilization by shifting LMICs onto green development pathways could pay for itself. It would be worthwhile for a major HDC group such as the European Union to financially model whether, or under what conditions, this possibility could be realized.
SIFs could be managed as financial intermediary funds (FIFs) by agencies of the HDCs or by multilateral development banks, e.g., the World Bank, European Investment Bank, Islamic Development Bank, or African Development Bank, which could work with LMIC governments and HDC co-guarantors to design and structure SIFs and SIF bonds and provide advice on supportive policies in beneficiary countries to minimize country risk.
Renewable energy infrastructure , especially national solar electrification programs, should be the highest priority for SIF financing, given the crucial enabling importance of affordable, reliable, and ubiquitous access to electricity to LMIC economic development, and the relatively low cost, easy installation and maintenance, modularity, and scalability of solar PV power equipment plus energy storage systems.
HDC sovereigns would likely be willing to provide financial resources to SIFs, whether in the form of direct investments or via bond co-guarantees, only if HDC government agencies or designated partners retain substantial control over how the money raised is spent. Two instruments could serve that purpose: (i) SIF bonds can be written as use-of-proceeds bonds with clearly defined key performance indicator (KPI) targets specifying, in the bond prospectus, SDG-consistent development outcomes the proceeds are intended to fund. To motivate successful follow-through, an LMIC’s success in meeting target KPIs could be rewarded through an additional low-interest loans in the same SIF bond program; and (ii) a close partnership between developing country infrastructure authorities and a designated trusted-partner HDC development agency, with all spending co-authorized by the latter.
Let’s now look in more detail at scenario (b), in which an HDC and LMIC agree to set up a SIF that issues bonds backed primarily by the LMIC sovereign and co-guaranteed by an HDC sovereign. As a hypothetical example for financing scenario (b) (not based on a real case), suppose the governments of Germany and a fictional LMIC we’ll call Xanadu were to co-guarantee a SIF bond series that raises money for development of a national high-voltage transmission grid in Xanadu to enable scaling-up solar and wind power. Relevant KPI infrastructure build-out targets would be clearly specified in the SIF bond prospectus, as would the role of the German international development agency, GIZ. All major spending decisions would have to be co-authorized by GIZ and the Xanadu infrastructure development authority identified in the bond prospectus. As co-guarantors of the relevant SIF bond issue, both sovereigns would have an interest in the success of the projects financed using these SIF bonds (doubly so in the case of the Xanadu government, which would benefit from the boost to economic development resulting from increasing the country’s supply of affordable electricity).
Note that SIF bonds are not sovereign bonds, even though these bonds would be issued by a Sustainable Infrastructure Fund for the benefit of a specific LMIC. Each SIF can be set up as a type of special purpose vehicle (SPV) set up and managed by an agency of the donor HDC or by a multilateral development bank (MDB) as a Financial Intermediary Fund. The creditworthiness of this SPV would be co-guaranteed by the host-country sovereign and at least one major HDC sovereign, which is why it would gain (let’s say) an AA rating (or some other category of strong credit rating that an LMIC could not attain on its own). LMIC beneficiary countries will have to meet a set of policy and regulatory conditions negotiated with the partner HDC and the advising MDB to qualify for participation in a SIF. On-lending to infrastructure projects would be accompanied, advised, and co-authorized by MDB staff seconded to the SIF as well as the HDC development agency (in the example above, Germany’s GIZ), which would improve the likelihood that the financed projects will prove successful.
Institutional investors such as HDC pension funds normally want to buy very safe assets. A SIF bond structure can be designed to provide a fixed coupon rate for investors, whilst requiring extra spending from the LMIC host country sovereign on KPI-relevant development priorities if KPI targets are not met, with the details specified in the bond prospectus and SIF charter. Conversely, the SIF bond prospectus can specify that success in meeting KPIs will automatically qualify the LMIC host country for further SIF bond financing at concessional interest rates, providing a long-term infrastructure financing path for countries that meet agreed KPI targets specified in a SIF bond prospectus. This arrangement provides strong incentives to LMICs for meeting KPI targets and active HDC and MDB support in LMICs’ efforts to meet them.
Let’s consider the case in which a host country fails to meet KPI targets. A useful approach is to set up a corrective feedback loop, specified in the SIF bond prospectus, in which failure to meet agreed KPI targets automatically triggers increased provision of funds to pay for enhanced efforts to meet those targets. For example, the bond prospectus could specify a surcharge of one per cent of the value of the SIF bond – or more, e.g., two per cent, if the KPIs are missed by a large margin. The surcharge could be paid into a trust fund controlled by the trusted development partner agency (in the example above, GIZ), which would be required to spend the additional money in ways intended to get the LMIC partner back on track toward achieving the agreed KPI targets.
The foregoing is a better way of linking sustainability outcomes to effective interest rates than under a conventional variable-rate sustainability-linked bond (SLB), in which a bond issuer’s missing sustainability targets results in a larger payout to bondholders. SLBs are intended to provide the bond issuer with a financial disincentive against missing KPI targets. However, such SLBs fail to establish a corrective mechanism, and they give bondholders an unearned benefit. We therefore propose that SIF bond coupon rates should be fixed, not variable. Financial penalties for missing KPI targets would not go to bondholders. Instead, they would go directly toward helping the host LMIC improve its development outcomes.
An MDB such as the AfDB, EIB, IDB, or World Bank, could draft model SIF bond prospectus formats, set up the financial machinery (FIF structures) for issuing SIF bonds, and convene willing development partners (HDC and LMIC sovereigns) to consider SIF agreements aimed at putting LMICs firmly on a green, low-carbon development path – especially SDG7: Affordable, modern clean energy abundance.
To qualify for a SIF program, each LMIC would have to agree to set up a suitable regulatory regime designed to support the long-term technical and financial viability of the green infrastructure that is developed with money raised through SIF bond sale. In the case of renewable electricity, for example, this will likely require beneficiary LMICs to pass legislation establishing long-term power purchase agreements (PPAs) as a standard mechanism for ensuring the financial viability of green power projects. International development agencies, working in collaboration with national agencies and co-advised by an MDB, can help develop model regulatory regimes for this purpose.
In addition to national SIFs, or as an alternative to these, a Global Sustainable Infrastructure Fund could provide low interest loans to private and state-owned-enterprise (SOE) project developers and to LMIC sovereigns.
The previous scenario envisioned special purpose vehicles (SPVs) set up for bilateral agreements between one HDC and one LMIC to co-guarantee a particular series of national sustainable infrastructure fund (SIF) bonds, intermediated by an MDB, with deployment of the money in that one LMIC, and deployment technically accompanied by the HDC’s international development agency. Alternatively, or additionally, a MDB could set up a Global Sustainable Infrastructure Fund (GSIF), managed as a Financial Intermediary Fund, whose bond issuances would be co-guaranteed by several HDC sovereigns jointly (e.g. Japan, Germany, France, Sweden, Australia, Canada, etc.)
LMIC governments could apply to GSIF for low-interest loans, again with target KPIs specified clearly in the loan agreement. Failure to meet the KPI targets would result in automatic triggering of a suitably large, fit-for-purpose payout by the LMIC government to a trusted development partner agency (whose identity will be specified in each individual loan agreement) to pay for enhanced efforts to get the country on track to meeting its KPI targets. Success in meeting KPI targets would qualify the LMIC for a further round of funding.
A Global Sustainable Infrastructure Fund could be used as a mechanism for channeling low-interest loans directly to private-sector sustainable infrastructure project developers (e.g. solar and wind power project developers) or state-owned enterprises, rather than to LMIC government agencies that in turn disburse money to private or state-owned infrastructure developers.
Motivations for HDC sovereigns to back GSIF bond issuances will include reducing climate risk by advancing net-zero-emissions LMIC development pathways, accelerating LMIC economic development to enhance global productivity, and reducing migration pressures.
A Global Sustainable Infrastructure Fund could make equity investments in revenue-generating sustainable infrastructure. GSIF need not limit its activities to on-lending money (at a small markup, e.g. 1.5% over its own bonds’ coupon rate), whether to LMIC sovereigns or to private or SOE infrastructure development businesses. GSIF could use some of the money it raises to make equity investments in clean energy infrastructure, or other revenue-generating infrastructure, e.g. solar-powered seawater desalination plants for provision of clean freshwater for agriculture or for urban populations.
GSIF could make equity investments directly in renewable electricity power generation projects in qualifying LMIC jurisdictions that have agreed on suitable financial and regulatory regimes, including long-term power purchase agreement frameworks. Once the projects in which it owns equity have been built and grid-connected, GSIF could either retain ownership (thus collecting net revenues), or on-sell these new power-generating assets to private investors. In either case, GSIF could recycle the net income it earns into further sustainable infrastructure projects.
One way to test the hypothesis that a GSIF could find backing would be to convene an iterative series of stakeholder co-design workshops. Such workshops can be the next step in the evolution of Sustainable Infrastructure Funds along the lines of the model outlined here.
Dr Marcello Estevão
Marcello Estevão is Senior Economic Adviser in the World Bank Group’s Equitable Growth, Finance, and Institutions Vice Presidency, where he leads work on Macroeconomics, Public Debt, and Fiscal Policy. Previously, he was Global Director of the WBG’s Macroeconomics, Trade, and Investment Practice. He was Deputy Minister of Finance in Brazil and G20 Deputy; Chairman of the Board of Directors of the New Development Bank; Chief Economist at Tudor Investment Corporation; Member of the Board of Directors of a large pension fund; researcher, manager, and mission chief at the IMF; and a researcher and economist at the Federal Reserve Board. He holds a PhD from MIT and has published widely in refereed journals, books, print media, and blogs.
Nils Burkhard Zimmermann
Nils Zimmermann is a Consultant on climate policy and clean energy finance solutions for the World Bank in Washington DC, specialising in the techno-economic assessment of green technologies. Nils has a Master's degree in natural resources management from Simon Fraser University.