Chapter 1. Recommendations for developing robust project pipelines in support of long-term climate objectives

1.1. Project pipelines and meeting climate objectives: Context

Pipelines of infrastructure projects – or simply “project pipelines” for the purposes here – are a common concept in infrastructure planning and investment discussions. The term “pipelines” is often used to emphasise specific, upcoming investment opportunities, such as low-carbon infrastructure projects to develop renewable energy over the next decade. As such, project pipelines have become a key focal point in countries’ efforts to implement their climate and development commitments, including the Nationally Determined Contributions (NDCs).

Meeting global climate mitigation objectives requires pipelines of many thousands if not millions of low-carbon infrastructure projects and substantial investment in these projects. The latest global estimates of infrastructure investment needs may differ, but they all point to a financing gap of trillions of dollars per year until at least the year 2030. Public finance on its own will be insufficient. The private sector, therefore, will need to invest, build and support the development, operation and maintenance of those projects in the pipelines, as well as the retrofit or decommissioning of existing infrastructure to align it with mitigation and other sustainability objectives.

Climate mitigation discussions frequently highlight that the investment gap is not a result of a lack of capital.1 Rather, there are not enough identifiable, investment-ready and bankable projects to which private sector investors and project developers can commit time, effort and funding. To address this, governments can take concrete actions to develop robust infrastructure project pipelines, including the provision of effective policy tools and institutional support to the projects that constitute these pipelines.

This report focuses on these concrete actions. Chapter 1 provides an integrated overview of the project pipeline report and is structured around the following questions: what is meant by project pipelines in light of climate objectives? (section 1.2); what concrete actions can governments take to build robust pipelines? (section 1.3); what factors can governments consider when building such pipelines? (section 1.4); and finally, what are emerging good project pipeline practices from case studies and next steps in terms of research considerations and applications of the work? (section 1.5). Section 1.6 outlines the structure of the remainder of the report.

1.2. What is meant by project pipelines?

No formal definition of a project pipeline has been agreed for infrastructure projects generally, let alone one which is aligned to meeting long-term climate objectives. However, use of the term project pipelines is widespread in literature on infrastructure investment (see Chapter 2). These discussions often recommend that governments develop and manage project pipelines as a means to improve transparency and offer long-term credibility, predictability and vision.

Based on expert interviews, discussions and review of literature, the predominant view amongst governments and the investment community appears to be that a project pipeline is manifested in the form of a list of projects at an advanced stage in the development process, and that it should be published or communicated publicly in some way. Based on this common view, a low-carbon and climate-aligned project pipeline could be described as “a set of infrastructure projects and assets (accounting for the existing stock of assets), and future assets in early development and construction stages prior to project commissioning, typically presented as a sequence of proposed investment opportunities over time that align with and are supportive of long-term climate and development objectives.”

Despite the absence of a commonly used formal definition, examples of project pipelines from governments, development banks and international initiatives have tended to be fairly consistent with the description of pipelines provided above. These public institutions invariably aim to generate lists of tangible, future assets that will be added to or replace the existing infrastructure stock. Box 1.1 provides some examples of these efforts from the analysis in Chapter 3.

1.3. What can countries do to attract investors and improve the bankability of projects?

Actions to clearly describe and promote project pipelines can greatly enhance investors’ abilities to identify and assess low-carbon infrastructure investment opportunities and encourage actual investment. Investors often look to compare and evaluate investment options across countries and sectors to find suitable opportunities, yet interviews and discussions with experts undertaken for this report suggest that project pipeline approaches, as implemented to date, vary in their use and application. In addition, the lack of clarity in pipeline development practices hampers investors’ efforts to identify such opportunities.

A recent review of government infrastructure planning practices in the Group of 20 countries revealed inconsistencies across countries by sector and by level of detail in the project pipeline (according to infrastructure budgets, plans and targets) (OECD, 2017[1]). The report warned that “[project pipelines] that are inaccessible, incomplete or poorly aligned with long-term climate mitigation and adaptation goals are likely to hinder the flow of infrastructure investment in support of climate goals”.

Governments as a whole, and specific public agencies and institutions, can develop project pipelines to highlight the scale and scope of investment opportunities and communicate the available tools and policies. These public actors strongly influence the development of domestic project pipelines and have a suite of available tools and levers to involve themselves in infrastructure investments, including: funding projects directly from public budgets; leading public-private partnerships; employing risk mitigants like public guarantees; or setting policy incentives on specific sectors or technologies.

Investors (and project developers) want to identify and source investment opportunities that match their needs from the available options which are usually driven by government policies and goals. They have at their disposal numerous channels through which to invest and assess projects, take positions and secure attractive returns. Long-term investors, like pension funds or insurance companies for instance, are typically less interested in one-off investments than in the possibility of an attractive, enduring portfolio of bankable projects with the right risk-return profile and track record of various actors involved.

A recommendation often made to governments is to overcome the dearth in bankable projects by having “better pipelines”. Such advice fails to consider that there is a lack of easily identifiable, bankable projects at the volumes, scales and risk-return profiles that interest investors. The notion of having better pipelines should account for these demands and other country needs, which make the task of developing and delivering better pipelines, and the associated projects, much more complex than the simple phrase (“better pipelines”) would suggest.

Project preparation facilities (PPFs) are one such tool to overcome the lack of government capacity to support the development of economically attractive investment opportunities. PPFs are increasingly offered by public institutions to assist the development of projects to reach investment-ready states (see Annex 2.F in Chapter 2 for more information on PPFs and project bankability). Increasing emphasis is being placed on these facilities, particularly in developing and emerging economies; the costs for global project preparation activities have been estimated at 2.5–10% of total infrastructure investment (GCEC, 2016[2]; Kortekaas, 2015[3]) or up to USD 690 billion per year to meet climate objectives.2

1.4. What effective actions can governments take to develop robust project pipelines?

A key motivation for examining project pipelines more comprehensively is the general lack of knowledge on what constitutes effective approaches and efforts to build project pipelines. Due to the lack of detailed infrastructure investment plans and poor integration of these plans into national policy contexts, it is not always clear what and where project investments are needed, when they should be built, or how to finance them, or if they are sufficient to meet long-term objectives.3 In this context, poorly defined infrastructure planning and lack of policy links could open the door to investments that should not be made and could hinder the flow of infrastructure investment.

There is no one-size-fits-all method to promote and build infrastructure project pipelines. Infrastructure planning efforts vary greatly in scope and scale and very much depend on specific country or regional contexts and their infrastructure “starting points” as discussed in Chapter 2. There is, however, significant potential for governments to share and learn from good practices and approaches taken to build project pipelines, as shown next.

Based on the findings in this report, including a review of existing pipeline practices, a project pipeline aligned to climate objectives can be developed. However, such a pipeline can only be as robust as the (investment-ready and bankable) projects that constitute it and as effective as the institutions that deliver it. In addition, such a pipeline will only be as ambitious as the government objective to which it is linked. In the context of low-carbon project pipelines, ambition can refer to the stringency of mitigation action implied in the NDCs and the way in which the target is expressed (e.g. absolute emissions reduction, renewable energy target and others).

1.5. Next steps: Future considerations on robust project pipelines

The findings from this report aim to stimulate thinking on what it means for governments to build robust project pipelines and what can be done to strengthen them. The findings are based on in-depth reviews of current approaches to build pipelines. The case studies highlight that while governments and public institutions are already taking actions to develop robust pipelines in a range of country settings, these efforts need to be strengthened significantly to meet long-term climate mitigation objectives. The factors given above were specifically chosen to be widely applicable beyond the country or region in question, giving an opportunity for governments to share lessons and bolster their own efforts by learning from the good practices of others.

The case studies (and other examples summarised throughout Chapter 3) offer lessons on what worked and what did not in terms of developing robust project pipelines, as well as pointing to good project pipeline practices. Beyond these examples of good practice, the case studies offer a possible approach for assessing the alignment of pipelines to long-term climate objectives; the pipeline factors in this report may be used as indicators to evaluate and compare government actions to develop robust project pipelines. The following important elements can also be considered:

• Establishing pipeline performance metrics. MDBs have extensive experience measuring and tracking project investment metrics and indicators and comparing results with institutional objectives (see, for instance, Boyd et al. (2017[4])). MDBs typically track indicators on a project-by-project basis, which is administratively burdensome over thousands of projects. A shift to programmatic approaches, as indicated by the Climate Investment Funds, could allow for wider assessments of investment portfolios as a whole.

• Translating long-term objectives into short-term sectoral emissions pathways. The United Kingdom has a comprehensive institutional arrangement whereby carbon budgets are set in five-year periods – aligned to the national 2050 emissions reduction target. The United Kingdom’s independent Committee on Climate Change sets these five-yearly carbon budgets at the sectoral level.

• Accounting for infrastructure interconnectivities, interlinkages and trade-offs. The focus of this report is on low-carbon infrastructure investment that will predominantly help countries meet climate mitigation objectives. However, as noted in the report, these infrastructure projects also provide many valuable co-benefits beyond reducing emissions like cleaner air or improving energy access. This infrastructure is also intimately linked to other sectors; for instance, solar thermal power plants require access to land and water, and will need to be resilient to future changes in environmental conditions. These issues will be country context dependent but merit discussions in countries’ approaches to infrastructure planning and investment to meet long-term climate and development objectives.

• Quantifying power infrastructure misalignments. One approach to quantify the global project pipeline in the power sector is explored in a forthcoming OECD paper (see also Box 2.2 in Chapter 2). This study compares global electricity generation capacity (under construction and planned over the next five years) against low-carbon scenarios to test for misalignment.

• Benchmarking good infrastructure practices. The World Bank, with others, has assessed and benchmarked regulatory frameworks in 135 countries against internationally recognised good practice in procuring infrastructure under public-private partnerships (World Bank Group, 2018[5]).

In addition to the outstanding research questions discussed in each case study, there is scope for further work in evaluating project pipelines. These areas include: undertaking more in-depth case studies of country infrastructure investment and planning practices and assessing them in the context of the wider investment enabling environment; understanding the significance of government project pipeline practices for specific classes of investors, specifically, but not limited to, project developers and equity investors; and benchmarking project pipeline approaches with a metric-based evaluation framework.

1.6. Structure of the report

The remaining chapters of the report will address the following topics:

• Chapter 2 explores the project pipeline concept in the context of climate objectives to scale-up investment in low-carbon infrastructure. It examines what is meant by project pipelines and related government processes to mobilise finance for low-carbon investment. Finally, it describes a set of effective factors that governments can consider when building robust project pipelines.

• Chapter 3 consists of five case studies, focusing on the role of specific pipeline factors in several approaches taken by governments and public institutions to build robust project pipelines. By looking at elements, attributes and important applications of the specific factor, the case studies provide models that other countries can consider for or adapt to their own pipeline development programmes.