Expert briefing: Closing the infra investment gap

Understanding the pre-requisites for successful infrastructure investment, and sharing best practices, is essential to unlock critical infrastructure projects in emerging markets of Middle East, Africa and Asia on which communities and businesses rely.

Balancing financial and social sustainability

Infrastructure projects are, by their nature, long, costly, complex and high profile. Failures or cancellations are often well-publicised, which can overshadow successes. Political instability can discourage private investment, and reduce the benefit of public spending. However, closing the infrastructure gap is essential to fuel sustainable development in many emerging markets and lift communities out of poverty. Public and private investment plays a major role in this.

One of the difficulties for private investors in particular is that traditional investment criteria and cost benefit tradeoffs may not apply to infrastructure investment. For example, from an equity investor perspective, investment criteria will inevitably vary, but projects must also be economically and commercially viable with risks allocated to the appropriate party. The creditworthiness of offtakers (which also includes the credit rating of the country), and bankability of the structure, are of particular concern. This can be difficult to forecast, given that some projects could have a lifetime of 30 years. Across this period, there will undoubtedly be crises and political shifts, so projects need to offer essential benefits and long-term value underpinned by bankable structures and proper risk allocation that can withstand political and economic vacillation. When projects get these fundamentals right, necessary capital often be found. 

However, even when projects get their fundamentals correct, financial return may not be sufficient. For example, infrastructure projects may have long gestation periods to break even and start earning returns for private sector investors which may not synchronize with their investment time horizons.  The value of social investment that directly benefit citizens and communities, such as healthcare, education and social housing may be transformative; however, the financial return on the investment in these infrastructure sectors may not be as compelling as that on power and utilities projects. 

One infrastructure sector that is currently lagging for reasons of financial return on investment is water and sanitation, with some exceptions, such as Brazil. Reliable access to clean water and sanitation must be a priority, not least as this is a key United Nations’ Sustainable Development Goal (SDGs). One of the difficulties in marrying investment need, and investment capacity, is that water is cheap to consumers. Water is often subsidised for all community groups, as opposed to only those least able to pay, which affects the returns and therefore bankability of these projects. Public transportation is another sector where this can be an obstacle. While governments may subsidise social investment projects, this tends to be for a limited period. Therefore, balance must be found between social need and financial return. 

Realising infrastructure investment opportunities

Governments play a significant role in creating the conditions for both domestic and international investors, both through government spending and guarantees, but also in creating a conducive regulatory and policy environment for other borrowers and lenders, including multinational non-government funding organisations, development finance institutions and export credit agencies. In Turkey, for example, the government has introduced regulations covering a variety of issues that are typically of concern to investors, such as guarantees, arbitration, FX protection and debt assumption, amongst others. This has led to considerable success in attracting foreign and domestic investment, such as in transportation and healthcare sectors, through public and private partnerships (PPP). Saudi Arabia and Abu Dhabi are also seeing substantial levels of investment, such as in traditional utilities as well relatively new (to the region) sectors such as education, transmission infrastructure and so on, including both PPP and non-PPP.

Infrastructure investment post-Covid

These challenges have become even more acute over the past twelve months. Covid-19 has severely damaged public finances across many parts of the world, and some investors may raise the credit bar in terms of the projects in which they invest; however, infrastructure spending has not stopped, and will not do so, as a result of the pandemic. In parts of Asia, such as India, Bangladesh and Indonesia, robust investment programmes were already in place before Covid-19 struck, and in general, these continue to move ahead. In countries such as India, infrastructure investment post Covid – 19 has been ramped up by more than 25% over the previous financial year as a part of the Covid stimulus measures.

However, although some countries, most notably China, are already emerging strongly from Covid-19, the challenge in many countries is how to sustain investment in infrastructure given fiscal stress, and high and increasing debt ratios. While government spending may be challenged, governments are aware of the multiplier effect of investment in infrastructure such as energy in terms of job creation and economic growth. 

Indeed, some sectors are likely to see greater investment as stakeholders across the investment community, including governments, review their investment priorities and their value assessment. For example, sectors such as renewable energy are gaining significant traction amongst both public and private investors, a trend that is likely to continue, particularly as new coal-fired power projects are no longer supported by international banks. To encourage investment, particularly given their own reduced investment capacity, governments need to create the conditions that will encourage and increase confidence amongst domestic and international investors, to facilitate the projects that will boost communities, economies and prosperity.