Synergies between Public Infrastructure and Private Investments

This post describes an hypotetical financing solution that could help reduce a common problem of mismatching between public and private investments, by using an IDA Private Sector Window to create incentives for the private sector to follow the lead of the public infrastructure investments. The result would be better synergies between public and private resource allocations, and thus an increase in the benefit for both sectors, and for the general public.This financing solution is an idea that could be offered by multilateral development banks and be implemented in conjunction with national, regional, o local governments depending on the scale of the funds and the confidence of the rule of law in the particular geographical area to be implemented. Although I think this solution could be applicable to many developing countries, this example is created with Mexico in mind.

Mexico is the 13th biggest country in terms of area and home to a wide diversity of ecosystems. Furthermore, it has access to both the Pacific and the Atlantic Oceans through a long coast on the east and west sides. This size and diversity provide a lot of opportunities for development. However, the diversity also makes it hard for the national government to establish clear priorities that can benefit the whole country at once. This requires smaller regional plans that focus the national, statal, and local efforts to develop one region, and then use this economic growth either to expand the benefits or to replicate the process somewhere else.

However, the private sector and even different government levels can have different incentives that make them focus their priorities on different areas. My financial solution seems to make the biggest investment (public investment in big infrastructure projects) the guide to pull other smaller investments in the same direction. This comes from the assumption that bigger investment projects are subject to more detailed feasibility plans and are included in broader development plans.

The key financial solution is to tie preferential loans for the private sector with the bigger infrastructure public loans by joining funds from the IDA Private Sector Window with the normal funds used to make government loans for infrastructure. The condition for the private sector to get the loans is that the private projects are aligned and complements the infrastructure investment. The synergies will promote a faster use of the infrastructure and a faster economic growth that will, in turn, reduce the time to get the return of the investment from the infrastructure and improve the conditions for the private projects.

As an example, if the government gets funded to develop or improve a commercial port, the complementary preferential loan for the private sector can be targeted to small and medium companies that complement the port such as logistic companies, import-export companies, transportation companies, etc. By synchronizing the loan with the calendar for the port project, the companies can be ready to use the port when it´s finished reducing its time to become fully operational.