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The $3 Trillion Annual Funding Gap: Financing the World’s New Sustainable Development Goals
In July of 2015, in preparation for the
September UNGA gathering, the UN hosted its
Third International Conference on Financing for
Development (FfD3) in Addis Ababa, Ethiopia
to discuss how the world will finance its new
global development agenda. Going into the
Financing for Development (FfD3) meetings
there was a realization that the SDG agenda was
the most ambitious the world had ever seen;
leaders would have to think out of the box and
in partnership with the private sector to fund
its success.
The selection of Addis Ababa to discuss the
financial development challenge was somehow
perfectly appropriate for the occasion; the most
influential and powerful leaders on the planet
landed into a world of extraordinary poverty,
a country lacking in transport, communication
and power infrastructure. Of course, the
Ethiopians were extraordinarily gracious hosts,
and the glimmers of hope from the African
Development Bank and Chinese construction
companies were visible in the heart of Addis.
Yet the poverty challenge in the streets of
Addis was as palpable as the global financial
development effort was herculean. The tone
was set.
Knowing the price tag of his ambitious and
sweeping development objectives, Secretary
General Ban Ki-Moon ran an unprecedented
process in Addis of private sector inclusion. He
and his partner, Dr. Jim Yong Kim, President
of the World Bank, included the private sector
in the debate, design and process around
the funding challenges and opportunities in
a way not previously seen. The message was
clear: public financing alone is insufficient to
deliver against the 169 targets imbedded in the
17 different areas of the new SDGs. Leaders
recognized that filling a $3 Trillion gap annually
would require a partnership approach. Thus,
the public sector hand was extended and
the private sector waded into the enormity
of the development community’s financial
requirements.
Capital Markets and the SDGs
At the heart of new initiatives necessary to
fund the SDGs are capital markets. Regardless
of structure, theme and format, the capital
markets have the scale, depth and potential to
reach far beyond the current multi-billion dollar
funding levels. They represent the hope and the
teeth behind President Kim’s call for us to move
“from billions to trillions.”
2
Perhaps the most important example of
capital market potential is in the infrastructure
space. The world spends approximately $3.3
Trillion per year on infrastructure investment.
3
Governments struggle to fund the bulk of this
every year directly on their balance sheets, with
only approximately $400 billion done in the
project finance market annually.
4
Importantly,
with Basel III constraints and an inability of
governments to supply a sustainable pipeline
of bankable infrastructure projects to the
financial community, this predominantly bank-
dominated market will not grow; a critical part
of this equation will be creating solutions that
push more infrastructure financing into the
global and local capital markets. Currently,
only $30-50 billion of project bonds are
completed annually, which makes global
bond markets only a small fraction of current
infrastructure funding.
5
This has to change.
Pension and insurance companies are natural
investors in equity and debt infrastructure
projects, respectively, particularly projects with
established long-term predictable cash flows.
As a consistent global leader in the project
bond space, Citi is committed to the market’s
development. However, in order to achieve
explosive growth in the infrastructure project
bond market, governments and developmental
institutions will have to innovate new structures
with the private sector that dissect and
distribute risk differently. In particular, there
has to be an improved awareness in the EM
sovereign world that pensions and insurance
companies are not natural buyers of greenfield
project paper and understandably shun
construction and foreign currency risk.
2
World Bank Group President Jim Yong Kim’s Speech “Billions to Trillions: Ideas into Actions”
3
McKinsey Global Institute, “Infrastructure Productivity: How to Save $1 Trillion a Year”
4
Dealogic
5
Dealogic