Can blended-finance approaches fund distributed infrastructure in conflict zones?
Note: this article was selected as a Top 100 contribution to the St Gallen Symposium Leaders of Tomorrow essay competition in 2019, responding to the theme, “Capital for Purpose”.
Conflict is everyone’s problem and we need to think differently about how we use capital to alleviate and prevent it. In the 25 years from 1992 to 2017, over 3 million people died violently in conflict globally[1][2], and by the end of 2017, over 60 million people were displaced due to violence[3]. Beyond the sheer number of deaths and displaced individuals, the international community also bears the costs of conflict through international terrorism and the refugee crisis. Currently the international community supports those affected by conflict through publicly financed humanitarian relief, but this usually is in the form of health, food and refugee support. In contrast, the rapid reconstruction of critical infrastructure has received comparatively little attention by donors, despite recent efforts in countries like Afghanistan.
The expeditious deployment of distributed infrastructure such as electricity or agricultural technology is as an attractive alternative use of public capital in conflict or post-conflict scenarios. This approach would leverage recent private sector developments in technology cost reductions and project finance instruments to alleviate the symptoms of conflict and prevent further violence.
The problem with conflict and infrastructure damage
Large infrastructure including powerlines, generation stations and pipelines, are high profile targets for armed groups and highly disruptive to the local economy. In addition, the destruction of homes, health centres, roads and schools has a critical impact on the social fabric of a society. It is estimated that a one percent increase in infrastructure stock is associated with one percent increase in GDP[4]. It is therefore essential to ensure that conflict-affected countries can redevelop infrastructure quickly.
Conflict has a devastating effect on the economy of a country, in part because of the significant damage to infrastructure needed to support growth. Damage to infrastructure has an impact on both the affordability of basic utilities for civilians, but also on the ability of the private sector to flourish[5]. In Syria, the World Bank estimated that the cumulative cost to GDP since the conflict began is as high as $226 billion[6], with damage to infrastructure in three major cities estimated to be up to $9.4 billion[7]. After Liberia’s civil war in the early 2000s, almost all electricity generation infrastructure in the country was destroyed[8]. Yemen’s ongoing civil war had racked up $7 billion in damages even by 2016 with an additional $7 billion in economic costs[9].
Infrastructure investment is difficult at the best of times. Infrastructure assets tend to have longer investment horizons and lower rates of return for investors, which is why a significant portion of infrastructure investment is publicly funded. Returns for infrastructure funds have fallen in recent years from 14% to 10%[10], and the world still runs an infrastructure deficit each year[11]. Of the Public Private Investments recorded by the World Bank PPI database in emerging markets, 32% of infrastructure finance in 2018 was from non-private sources, and this database excludes purely public infrastructure investments[12].
In conflict situations, the risks from low returns coupled with long investment horizons are amplified. Emerging markets already pay a premium to investors due to perceived higher risk[13] (e.g. credit risk or currency volatility) with Foreign Direct Investment (FDI) in conflict-affected states currently representing only 1% of global FDI across all sectors in 2017[14]. Investing in infrastructure is even more difficult due to uncertainty around asset security and payment for use and poor legal frameworks to enforce contracts. This reduces the potential return for private infrastructure investors and discourages public investment due to the high risk associated with damage to such projects.
Despite these challenges, the need for investment infrastructure in post-conflict states cannot be ignored. Conflict assistance funding has been concentrated on short term ‘fixes’ such as the provision of food, healthcare and shelter which are insufficient to help an economy to recover longer term. Deployment of capital in new infrastructure has occurred within several years after the end of a conflict, except for telecommunications infrastructure where capital mobilisation has been much faster[15][16]. Between 1990 and 2008, for public-private infrastructure projects built within five years before and thirteen years after the end of a conflict, only 20% of projects were financed within three years of the conflict ending[17].
This could be accelerated, and the risks reduced, through innovations in distributed technology and project financing to conflict-damaged areas.
The benefits of distributed models and positive trends in infrastructure costs and financing techniques
From a cost and speed perspective, distributed infrastructure is a particularly attractive candidate for conflict situations. In the electricity sector, small community-scale solar installations cost between $500 — $2,000 per connection, inclusive of generation and distribution costs[18]. This cost has fallen significantly in the past 5 years due to steep declines in solar costs[19] and through experimentation with off-grid business models in Africa and Asia.
Declining solar costs are also leading to an increase in low cost agricultural infrastructure such as solar powered irrigation pumps and village freezer units to store produce[20][21]. Even distributed piped water solutions are being made possible through solar, with one company in Ethiopia offering a piped water solution for just $1 per month[22]. Solar technologies like mini-grids can be deployed quickly and cheaply, in as little as 4 months, and will last for 10–15 years[23]. The distributed nature of this infrastructure also reduces its likelihood of being targeted in an attack and reduces the number of people dependent on any one facility.
Financing distributed infrastructure is usually difficult because of the relatively small cost of each installation. Investors with significant capital (including governments) do not have the capacity to conduct due diligence on small projects of less than $100,000 in value. Organisations that do invest or offer grants at this scale often cannot offer very many of them, and face risks if any of the investments fail.
This issue, too, is mitigated through the use of project finance instruments that aggregate smaller projects into a diversified portfolio of investments. Project finance typically involves investing in a stand-alone project that will return its own cash flows to the investor over time. Many infrastructure investments are project finance investments given the independent and up-front nature of costs and the steady cashflows that accrue from use of the infrastructure over its lifetime.
CrossBoundary, a frontier markets investment firm, recently launched a mini-grid investment facility. This takes the project finance instrument one step further by aggregating very small investments into a diversified project finance portfolio in order to attract larger investors to the market. The $16 million facility finances portfolios of mini-grids in several countries using a mix of concessional funding from the Rockefeller Foundation and private funding from the private equity firm, Ceniarth[24]. This allows projects as small as $100,000 to receive investment attention from large financiers by aggregating several projects into multiple country portfolios.
A new solution: Publicly financed distributed infrastructure investment platform in conflict zones
In a similar approach to CrossBoundary’s model, distributed infrastructure lends itself to project financing, as well as aggregation into a larger portfolio of investments in order to attract capital. The model could be adapted for stabilized and post-conflict situations by leveraging a higher portion of the investment from the public sector to support establishment of a Distributed Infrastructure Public Private Investment Platform for conflict zones. The risk from this kind of platform would best suit capital from public sources such as a consortium of donors, governments or development finance institutions with relevant experience in conflict situations that enables them to evaluate and manage project risks effectively.
Structuring the capital injection as a long-term investment with repayment requirements instead of a one-off grant also necessitates the creation of local management of the infrastructure assets to collect payments and conduct maintenance and ensures that capital can be recycled for other investments. This could help to avoid some of the problems faced by road rehabilitation projects in Afghanistan, which were not maintained by local authorities after further damage[25].
There are also reasons to be optimistic about involving the private sector in this platform. The Democratic Republic of Congo (DRC) represents a significant opportunity for private companies due to a high ability for customers in dense urban areas to pay for services like electricity, and very poor local infrastructure to meet that demand[26]. A private British company, Bboxx, was recently contracted by the DRC government to electrify 2.5 million people over the coming years[27], signalling an opportunity for other private companies to work with public funding in conflict zones. Similarly, investment climates in countries like Afghanistan are improving. Afghanistan’s government has improved the ease of doing business by increasing the protections for minority shareholders and improving the insolvency framework for investors[28]. These developments hint at the growing potential for public and private involvement in a conflict zone investment platform which would enhance the availability and impact of funding.
The platform could also be expanded across industries and countries to diversify risks. Including asset types beyond distributed electricity, such as irrigation services, agricultural storage units and water delivery systems, would diversify risk further by reducing seasonal variation in cash flows. Diversifying assets also has an economic benefit, for example by facilitating the redevelopment of the agricultural sector and improving health outcomes through higher use of clean water. Diversifying across countries would also mitigate against political difficulties that may arise and allow countries with very recent ceasefires to be counterbalanced by peaceful countries that still have not economically recovered from conflict. For example, Liberia still has a significant infrastructure deficit, despite being at peace for over 15 years[29].
Conclusion
Despite the major risks involved in investing in conflict zones, the benefits of a distributed infrastructure investment platform could be game-changing. This investment would significantly hasten the redevelopment of critical infrastructure such as electricity to power hospitals, schools and businesses. It would also increase the local private sector’s ability to create employment opportunities, potentially reducing the risk of relapsing into conflict. Costs of building this infrastructure would be lowered, as the projects are significantly smaller in scale than traditional infrastructure while still delivering equivalent benefits. Risk of asset destruction is also mitigated by smaller target sizes and wider distribution of assets across a country. Diversifying the portfolio across multiple conflict zones and asset types would potentially smooth the cash flow profile of investments as well as mitigate negative political developments in any one region or country.
Funding infrastructure rehabilitation after a conflict is not easy. The long-term benefits of rapidly deploying distributed infrastructure, however, could be enormous. Public and private sector collaboration to fund and manage this infrastructure in emerging and resolved conflict situations is a worthwhile investment in the safety of vulnerable people and ultimately in preserving global stability.
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[1] Uppsala Conflict Data Program, “Violent Deaths in Conflicts and One Sided Violence.”
[2] Peace Research Institute Oslo, “Battle Deaths Data Set.”
[3] UNHCR, “UNHCR: Global Trends in Forced Displacement 2017.”
[4] Raffi Christopher Mardirosian, “Infrastructure Development in the Shadow of Conflict: Aligning Incentives and Attracting Investment.”
[5] Raffi Christopher Mardirosian.
[6] Economic Times India, “War Has Cost $226 Billion to Syria Economy: World Bank.”
[7] Raja Arshad and Joy Aoun, “Syria Damage Assessment.”
[8] Mount Coffee Project Implementation Unit, “Overview — Mt. Coffee PIU.”
[9] “Exclusive: Civil War Costs Yemen $14 Billion in Damage and Economic Losses — Report | Reuters.”
[10] Price Waterhouse Coopers, “Global Infrastructure Investment: The Role of Private Capital in the Delivery of Essential Assets and Services.”
[11] G20 Initiative, “Global Infrastructure Outlook.”
[12] The World Bank Group, “Private Participation in Infrastructure H1 2018.”
[13] Aswath Damodaran, “Country Default Spread and Risk Premiums.”
[14] Alexandros Ragoussis and Heba Shams, “FDI in Fragile and Conflict-Affected Situations.”
[15] Jordan Schwartz, Shelly Hahn, and Ian Bannon, “The Private Sector’s Role in the Provision of Infrastructure in Post-Conflict Countries.”
[16] Raffi Christopher Mardirosian, “Infrastructure Development in the Shadow of Conflict: Aligning Incentives and Attracting Investment.”
[17] Raffi Christopher Mardirosian.
[18] Matthew Tilleard, Gabriel Davies, and Lucy Shaw, “Minigrids Are the Cheapest Way to Bring Electricity to 100 Million Africans Today.”
[19] Geuss, “How the Falling Cost of Solar Panels Can Teach Us to Make New Tech Affordable.”
[20] Tom Jackson, “Kenya’s FreshBox Pioneers Solar-Powered Refrigeration in East Africa.”
[21] Miriam Otoo and Petra Schmitter, “Opinion.”
[22] “3BL Enterprises and Flowius Executive Summary.”
[23] Power For All, “Decentralized Renewables: The Fast Track to Universal Energy Access.”
[24] “CrossBoundary Mini-Grid Facility Announces First Close with The Rockefeller Foundation and Ceniarth.”
[25] Cunningham, “The U.S. Spent Billions Building Roads in Afghanistan. Now Many of Them Are beyond Repair.”
[26] “DRC Mini-Grid Market.”
[27] “DR Congo Contracts BBOXX to Provide Off-Grid Solar to 2.5 Million People.”
[28] “Doing Business Report.”
[29] IMF, “Liberia: Debt Sustainability Analysis; IMF Country Report №18/172, May 24, 2018.”
