Policy Briefs

Bridging the Gap: Coordinated Finance and Infrastructure Policies for Access and Climate Resilience

The global economy is faced with rising population and intensified climate change which reflect the need to craft finance strategies for climate change adaptation and developing infrastructure that supports net-zero transition and climate resilience. The present gap in financing mechanisms across the world strongly implies a need for stronger collaboration between the public and private sectors and quicker introduction of strategies that foster innovation. The B20 Brasil Policy Paper on Finance and Infrastructure deliberates upon ideas for promoting efficient allocation of capital, boosting infrastructure development, and promoting participation of micro, small and medium enterprises (MSME) in Global Value Chains (GVCs).

To promote efficient allocation of capital, there is a need to address the significant annual funding gap of USD 4 trillion in energy and infrastructure. For Emerging Market and Developing Economies (EMDEs), significant investments in the range of USD 200 and USD 400 billion per year are needed to foster energy adaptation. Further, the infrastructure investment gap is projected to reach USD 15 trillion by 2040 which reflects the persistent underinvestment in many G20 economies. MSMEs also face significant barriers in terms of lack of access to finance, complex regulatory requirements, and skill shortages, among others, restricting their participation in GVCs.

The policy paper addresses the above challenges by providing 3 recommendations with 6 policy actions and 19 policy sub actions.

Review of public sector development finance and refining the role of regulatory capital and rating agency policies

According to the Joint Report on MDBs Climate Finance, multilateral development banks (MDBs) committed USD 60.70 billion in low-income and middle-income economies in 2022 which exceeded the expectation of an annual USD 50 billion announced during the MDB High Level Statement of 2019. Such significant investments still represent only a fraction of the amount needed to transition to a climate resilient economy. The Bridgetown 2.0 agenda has set an ambitious goal to mobilize USD 1.5 trillion in private capital to support sustainable development. Keeping this in perspective, the following two recommendations have been outlined to address the significant investment gap.

First, there is a need to review public sector development finance, namely, MDBs, Development Finance Institutions (DFI), and Official Development Assistance (ODA). The focus of MDBs, FDIs, and ODA should shift from asset deployment to crowding in private investments not only in the initial phase but also in the subsequent stages of the project. In addition to proposing an increase in the budget of such institutions, the recommendation also emphasizes the need to invest in projects where the investment from the private sector remains inadequate.

Further, MDBs and DFI can potentially work towards a Private Capital Mobilisation (PCM) target of 5:1 where each dollar of public sector capital mobilises private investments worth USD 5. Such measures assess the effectiveness of crowding-in investments via co-investment, concessionary capital, and de-risking strategies.

Second, the recommendation also offers solutions to mitigate barriers in private investment. By reducing the disparities in transaction treatment across jurisdictions and standardising regulatory capital requirements, the attractiveness of EMDEs increases, leading to greater cross border flow of capital.

Streamlining the permitting process to promote climate resilience and net zero transition

In addition to significant investment gaps, infrastructure imbalance also persists across the G20 economies in sectors such as logistics, transport, and IT. Such gaps impede the growth and sustainable development process as many countries suffer from traditional outdated infrastructure which also reflects their need to transition towards a digital and sustainable future. However, inefficiencies exist because of complex approval processes especially for infrastructure projects that support climate resilience and net zero transition.

The lengthy processes coupled with excessive paperwork leads to delays and wastage of valuable government resources. For example, present requirements for authorization of energy infrastructure imposes an inordinate burden on private investors which leads to lack of investments needed for net-zero transition. To surmount such formalities, the B20 Brasil Policy Paper provides the following two recommendations that aim to simplify bureaucratic procedures and streamline regulatory requirements, both locally and globally.

First, all G20 countries can come together under a single platform to not only create their own integrated permitting ecosystem but also evolve an integrated approval hub for infrastructure projects pertaining to net-zero transition. In other words, there is a need for a “One Stop Shop” requirement where necessary approvals at local, subnational, and national level can be acquired along with specifying maximum timelines for permit issuance. Additionally, dedicated national agencies can be created to provide assistance in the form of a pre-assessment analysis which can provide insights into the potential impact of a particular application.

G20 countries can also make data relevant to the project publicly available via Geographic Information System (GIS) that can provide pivotal information such as administrative systems and environmental assessments. The B20 Policy Paper also recommends that the permitting system should be such that minor or non-critical requirements do not interrupt the approval process. Specific research on swift legal procedures for infrastructure projects can also be introduced.

Second, to facilitate the development of climate resilient infrastructure, interoperability in the form of global collaboration can smoothen the permitting process through sharing of best practices and technology transfer. G20 nations can also support the emerging countries that are not in G20 through knowledge transfer and technological solutions, enabling such countries to surmount the administrative burden and augment net-zero infrastructure.

Enhancing MSME participation in GVCs through financial and regulatory support

MSMEs are the backbone of an economy as they comprise 90% of business and employ 50% of the global workforce and in emerging markets, they contribute 40% to GDP while formally employing 75% of their workforce. MSMEs play a pivotal role in economic development and yet they face substantial barriers in their quest for access to finance and augmenting technological capabilities. In developing countries, formal SMEs face annually USD 5.2 trillion of unmet financing needs which translates into lower productivity, especially in EMDEs.

Integration of MSMEs in GVCs is the need of the hour as GVCs can enhance the access of such enterprises to international markets, foreign investments, and advanced technologies. However, MSMEs face several challenges some of which are highlighted in the following figure.

Figure: Reasons for Rejecting Trade Finance Applications in 2022 (% of bank responses)

Source: 2023 Trade Finance Gaps, Growth, and Jobs Survey. ADB, 2023. Available at & https://www.adb.org/publications/2023-trade-finance-gaps-growth-jobs-survey> Accessed on: 11 November 2024.

In addition to access to finance, MSMEs also face working capital gaps due to recent challenges such as inflation, mounting energy prices, and diversion of available financial resources towards day-to-day expenses hindering their transition to net- zero manufacturing. This recommendation not only identifies several hardships in facilitating the MSME ecosystem for B20 nations but also discusses ways to promote fair net-zero transition and bolster the resilience of GVCs.

First, it is important to foster cross border inter-operability and streamline regulatory frameworks that impact the accessibility of MSMEs to trade and climate finance. The paper specifically concentrates on internal factors such as improving financial literacy of MSMEs and their skills in drafting appropriate financial proposal for investors. It focuses on making processes such as due diligence and Anti-Money Laundering (AML) more efficient. In addition to adopting digital tools to foster administrative processes, MSMEs can also partner with international regulatory organizations to review and improve macroprudential policy, alleviating regulatory burdens and expanding access to credit, trade finance, and climate finance for MSMEs.

Second, the GVC ecosystem can be strengthened by enhancing financial productivity, access to finance, and working capital management for all MSMEs. In this regard, small and medium enterprises can collaborate with fintech companies to advance digital payment platforms and facilitate seamless transactions by allowing for interoperability across financial institutions.

To sum up, this recommendation fosters robust MSME participation in the GVCs and addresses financial and technological barriers by advocating internal efficiencies within the organization, developing digital payment platforms, and engaging with financial institutions to enhance availability of strategies such as microloans and lines of credit.

Read the full paper here.