Small States and Large Private Sector Investments in Infrastructure in Emerging Market Economies in Partnership with International Financial Institutions

Abstract

A few decades ago most of Iceland’s energy needs came from fossil fuel, coal and oil. A fundamental transformation has taken place in recent decades and electricity production and space heating is now primarily based on clean energy. Given this successful transformation experience, engagement in the energy sector in emerging market economies could potentially be a growth area for a small country like Iceland, both in providing know-how to other countries and by engaging in cross-border energy investments. Utilisation of green energy resources are also part of the fight against climate change since green energy resources are to a large extent located in emerging market economies and most of the growth in energy demand, including electricity, is also likely to come from those economies. High risks in emerging markets and lack of funding and risk mitigation instruments could prevent future investments in the energy sector. This chapter analyses the situation when a company from a small country with innovative technology attempts to invest in a larger emerging market country. The chapter concludes that innovative partnerships supported by international financial institutions (IFIs) can make projects possible that otherwise would not materialise. For that to happen IFIs need to provide more innovative risk mitigation instruments that are flexible and more cost effective for the private sector and with shorter processing time. The paper is based on a review of theoretical literature, secondary data, interviews and the author’s experience of working for the World Bank Group for 12 years on three continents.