On June 6, GMF hosted Professor Keith Palmer, Founder and Chairman of Cambridge Economic Policy Associates and chairman of Infrastructure Investment Company (InfraCo Ltd.), who examined infrastructure investments in the developing world. This event marked the beginning of the GMF's Aid Innovation Series, which aims to promote a transatlantic dialogue on aid effectiveness, examine new aid delivery mechanisms, and foster a policy discussion on enhanced donor coordination, local ownership, and linking wider foreign policy goals with development priorities. Mr. Jim Kolbe, Senior Transatlantic Fellow at the German Marshall Fund moderated this presentation. 

To view Keith Palmer's paper on infrastructure investment, click on the link below:
Supporting Infrastructure Investment in Developing Countries (PDF-102KB)

Mr. Kolbe began the event by laying out the objective of the aid effectiveness program, explaining that the goal is not simply increasing the quantity of official development assistance (ODA) but increasing the quality, too. Given the demographic pressures in developed countries and other budget priorities, future ODA flows will likely come under additional constraints. Accordingly, improving the effectiveness of aid flows is even more critical. Donor harmonization and improving aid effectiveness are mandated by the 2005 Paris Declarations on Aid Effectiveness, to which OECD countries and donor recipient countries agreed to help reach the Millennium Development Goals by 2015.

Palmer asserted that the lack of finance is not the barrier to development. Rather, the problem lies in too few investment opportunities with expected returns high enough to justify the nature and magnitude of the risks involved. Infrastructure finance is already available; what we lack are mechanisms to channel current finance in ways that account for the risks involved, thus making more capital available for infrastructure. This is critical because enhanced infrastructure helps to facilitate trade, attract foreign direct investment, and achieve economic growth. The types of infrastructure Palmer emphasized as central to development were transport infrastructure; electricity generation, transmission, and distribution; telecommunications; water, and logistics. These are major factors impacting the overall business climate. Placing his discussion in an African context, Palmer stated that governments have failed to use resources effectively to build-up infrastructure, largely due to misallocation of capital, state monopoly, and an improper policy framework. Private investors have been reluctant to invest in large-scale infrastructure investments because of the risk posed by the region's unstable economic and political conditions.

InfraCo utilizes public sector donor money to finance a "private sector approach" to infrastructure development on the ground. It partners with the private sector, local governments, and/or public sector enterprise. It acts as the "principal" rather than the "advisor," establishing a subsidiary that owns development rights and takes on what Palmer calls the "front-end" infrastructure development. InfraCo performs the tasks of identifying the opportunity, conducting a feasibility analysis, structuring and licensing the project, as well as securing the financing for the project. The four main EU donors for its work are the Swedish (SIDA), Dutch (DGIS), Swiss (SECO), and British (DFID) development agencies, which together form the Private Infrastructure Development Group. By doing the "front-end" development, InfraCo mitigates the risk for the entity that will ultimately purchase the project. In addition, Guarantco, set-up in 2004 by the Private Infrastructure Development Group, helps by providing long term financing for infrastructure in local currency (which also mitigates currency risk).

"The lesson to be learned is that we need mechanisms to facilitate investment in infrastructure with high socio-economic net benefits even if the financial returns captured by the project entity in the short term are not sufficient to pay the cost of capital," says Palmer.