AIIB AIF Report 2022 - Featured Articles

Enabling PPPs and the Private Sector for Net Zero

Transition to Net Zero will require a major contribution from the private sector, not just because of tighter fiscal constraints across most economies. The dynamism of the private sector, demonstrated through capital, skills, and innovative technology, will remain a critical complement for economies to reduce their carbon footprint. At the same time, the state will have to create an enabling environment to make private participation viable. Nowhere is the mutually reinforcing role of the state and private sector in bolstering the Net Zero transition more evident than in public-private partnerships (PPPs).

Mobilizing Development Finance and Investments through State-Owned Enterprises

As corporate entities with more market–based incentives and professional management, SOEs can be effective in investing and managing public assets. With the right governance, SOEs can tap private markets for equity, loans, and bonds, thereby becoming a conduit for private capital mobilization. This research identifies SOE financing transactions in the loan and bond markets, compares these with private sector financings, and finds a large SOE financing advantage. There is a great opportunity to direct this financing advantage towards the net zero transition.

State-Owned Financial Institutions and the Green Transition

Public banks will be an important climate policy tool for governments. Green transition cannot be left solely to the markets because of pervasive externalities, while sizeable resources must be deployed quickly. The advantage of public banks is their large size and public ownership, which allows governments to implement their climate preferences more directly implement their climate preferences. State banks are also reservoirs of state capacity that have not been fully tapped, and which is badly needed for the task.

Accelerating Innovation Capacity and Technology Adoption for Net Zero

Facilitating green technology innovation is key to successfully transitioning to a Net Zero world. This not only includes cost-reduction technological breakthroughs in renewables, but it also should involve innovations in fossil fuels that help this conventional energy industry adapt to the global carbon agenda. Innovations do not come in a linear process, nor with success guaranteed. It is also important to note that in most dimensions, innovation and scaling up of new technology also depend on many related innovations along complex supply chains.

Moonshots for the Emerging World

The net-zero transition, humanity’s biggest mission to date, will pose a great challenge to state capacity in advanced economies, emerging and developing economies alike. For EMDEs where state capacity is weaker, the challenge can seem daunting or even drag on economic development. It does not have to be. Instead, it is a historic opportunity to build sustainable economies with widespread benefits. With a bold vision, policymakers have a chance to organize moonshots for their economies and succeed.