BEIJING, November 25, 2022
Narrowing the Digital Divide: Innovations in Digital Infrastructure Financing
During the 4th G20 Finance Ministers and Central Bank Governors (FMCBG) meeting in Washington, DC on October 12-13, 2022, the G20 endorsed the publication Digital Infrastructure Finance: Issues, Practices and Innovations—G20 Compendium of Case Studies.
The compendium was produced by the Asian Infrastructure Investment Bank (AIIB) upon the request of the G20 Indonesia Presidency to share the Bank’s expertise on what constitutes innovation in digital infrastructure finance. AIIB launched the report during the 4th Infrastructure Working Group Meeting on September 15, 2022.
During the FMCBG meeting, chair Minister Sri Mulyani highlighted how the compendium is a valuable tool for the G20 in developing future investment on digital infrastructure.
As an institution established in the digital era, AIIB plans to play a major role in supporting clients transform their infrastructure sectors, including health and education infrastructure, by digital means and through technological applications. We sat down with the AIIB team that spearheaded the production of the compendium to talk more about the key findings of the analysis of the compiled case studies.
Q: What is the digital infrastructure context?
A: Over the past 20 years, market dynamics have shifted radically with a rebalancing of the roles between the public and the private sectors. The infrastructure supply now responds directly to technological advances in the mobile handset market, and not overly to the universal access objectives of governments. This situation has led governments to address complex market failures, with limited public resources. This change of context has led developers and investors to rely on different financing tools. We’ve seen how important digital infrastructure is during the coronavirus disease (COVID-19) crisis. Demand soared across the world, and regions where there was poor digital infrastructure were left vulnerable. We found out that in 2021, up to 40 percent of the global population was unconnected. As the world slowly emerges from this global crisis, it has become undeniable that digital infrastructure is not only critical to the resilience of the global economy and a major driver of growth across the world, but even more importantly, a provider of social equity in the future.
Q: What does this compendium hope to achieve?
A: This compendium sampled case studies from multilateral development banks, including AIIB, international organizations (e.g., the European Commission), from governments and from the private sector to better understand developments in the financing mechanisms used for digital infrastructure. We hope that this compendium becomes a resource for those seeking ideas on how to facilitate the financing and development of cost-efficient and better-quality digital infrastructure and ultimately, help the G20 in narrowing the digital divide.
Q: The case studies you compiled cover a diverse range of regions, instruments, and objectives. How did you bring them together to come up with your key findings?
A: In this compendium, we wanted to highlight the current issues, practices and innovations in digital infrastructure. Each of the 10 cases we featured have their own context but we made sure to focus on elements that have the potential to be replicated even beyond their regional or project context. So, we identified those aspects of the cases, as well as some considerations when they will be replicated. We have also analyzed the common themes that we found in these cases.
Q: What are the key findings of the compendium?
A: These are the main issues that we found on digital infrastructure finance:
- Critical factors influencing digital infrastructure finance. The level of innovation in transactions fundamentally depends on some critical factors, including (i) the implementation status of a country’s universal coverage strategy, (ii) a well-established and transparent regulatory regime and (iii) the legacy and status of the network structure.
- Innovation in financing. Governments show a striking innovation level in their use of financial tools. Governments who are facing a shrinking fiscal space and ambitious universal coverage targets have had to develop a variety of financing mechanisms to grow this sector. Some examples of innovative finance used by the public sector include debt guarantees, demand stimulus vouchers, universal funds payments or guarantees, lowest subsidy auctions, etc. By comparison, the private sector toolkit remained quite static and appears similar to the ones already being done in the early 2000s. We believe this gap needs to be understood so that we can facilitate more private sector investment on digital infrastructure.
- Subsidies. The appropriate level and direction of subsidies remain critical questions. The question of how much should be subsidized or regulated requires careful calibration in each context. Our analysis did not allow clear demonstrations that the subsidy levels were optimal. There were simply so many things to consider and we feel that a systematic use of economic return analysis in digital infrastructure projects would enable governments to calibrate its support to the private sector and achieve their development objectives.
- Synergies enable savings. Another thing that became evident in our analysis was how digital infrastructure financing can be much more efficient when combined with other forms of infrastructure, other services. Sharing capital expenditures between two or among multiple projects, facilitate financial savings. There are also gains in the environmental aspect—lowering both the environmental impact of the infrastructure and the associated costs for impact assessments and mitigation plans.
- Institutional arrangements. Our analysis revealed that institutional arrangements remain critical to the success of projects. Digital infrastructure projects can be quite complex and demand robust institutional capacity for them to be implemented successfully. The level of capacity displayed by agencies also influences the choice of financing instruments as well as the allocation of resources regionally (for example, some regions in Asia get more resources than others because of the differences in perception of the capacity of the government or its private sector counterpart).
Q: What can be done about these findings?
A: The dissemination of the compendium will allow knowledge sharing on which financing techniques are used in successful projects and how resources can be best leveraged from public to private sources. Many of the financing features in the case studies are replicable beyond their regional or project context. We think that aside from governments and the private sector, multilateral banks play a critical role in helping achieve this. Banks like AIIB can use their capacity to promote financial innovation and mobilize more resources to the digital infrastructure sector.
Download the report here: Digital Infrastructure Finance: Issues, Practices and Innovations—G20 Compendium of Case Studies.
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