Infrastructure Seminar Series

Infrastructure Investment in Emerging Markets: Trends, Structures, and Challenges

September 26, 2018
Jordan Schwartz (World Bank)

Jordan Schwartz There are large infrastructure needs in low and middle-income countries. In any given year, total expenditure in infrastructure is about USD 1.5 trillion, with about USD 60-100 billion coming from Multilateral Development Banks (MDBs), and total private participation around USD 100-180 billion. But the infrastructure spending gap is estimated to be about another USD 1 trillion. To fill this gap, mobilizing domestic revenues will not be sufficient. While there is wide interest around the world on how to bring private financing into infrastructure, there is no single way to match capital looking for high yields and demand for financing for infrastructure. To attract private capital a stronger infrastructure governance is called for. Indeed, there is evidence of a strong correlation between sovereign risk and private participation in infrastructure (PPI) compared to FDI overall. PPI increases with freedom from corruption, rule of law, quality of regulation, third party oversight. Development Finance Institutions (DFIs) and MDBs can play a catalytic role. Even as DFI contribution have dropped from 30 to 19 percent of debt, share of DFI involvement has continued to rise sharply as a share of number of PPI projects, from less than 1 in 5 three years ago to nearly half of all projects in the first half year of 2018. Moreover, MDBs involvement contributes to decreases likelihood of cancelation, through guarantees, insurance products, and direct financing.

Financing Infrastructure: An Unfinished Agenda

June 27, 2018
Amadou Sy (IMF African Department)

A. SyInvestment in infrastructure is a priority for African and global policymakers. Yet Africa’s infrastructure gap remains large, amounting to about $170 billion per year over the next decade (AfDB). The recent rise in debt vulnerabilities in most African countries, highlights the need to sustainably broaden the sources of infrastructure financing. Several initiatives to finance infrastructure investment in Africa are under way such as the Joint MDB Statement of Ambitions for Crowding in Private Finance. Other financing options could help close Africa’s infrastructure gap. Many African countries have pension funds with sizeable resources (e.g., South Africa ($322 billion), Namibia ($10 billion)), which could be leveraged to finance infrastructure development. Infrastructure investment could also be increased through better governance, which boosts domestic revenue mobilization, although the effects on external financing is mixed. Effort to attract private investors to Africa could be improved by considering infrastructure projects’ stages (planning, construction, early exploitation) and type of risks to create simple and standardized deals. Overall, there is a need to better measure and manage the risks involved in project finance and other instruments. Fund staff could integrate project finance analysis in its Debt Sustainability Analysis.

Infrastructure as an Asset Class

March 12, 2018
Donald Kaberuka (former President, AfDB)

D. KaberukaInvestment on infrastructure offers unique opportunities and, in recent years, has grown in appeal with institutional and private investors alike. Yet, long-term investment in infrastructure remain relatively limited. This is partly because identifying, quantifying, and pricing the risks associated with infrastructure projects present challenges for institutional investors who wish to invest in emerging market infrastructure, and for secondary market participants who wish to buy and sell infrastructure-related securities. Developing infrastructure as an asset class could remove most of these constraints. This seminar highlights the challenges of developing infrastructure as an asset class and suggests ways forward.

China's Infrastructure Experience and Its Applicability to the Belt and Road Initiative.

January 17, 2018
Ted Chu (International Finance Corporation)

T. ChuChina’s growth model over the past four decades has not solely been state led. Also central were collaborative and competitive relationships among administrative regions and private sector actors. Cities competed for resources to climb-up the tier-ladder, for recognition and investment. Through this process, strategic infrastructure development was key to the success of this growth model and evolved over three phases. The first phase focused on providing infrastructure sufficient to relocate the rural poor to coastal industrial hubs. Income growth spurred urbanization into the hinterland and with it emerged a construction boom in the second phase. This also meant differential growth of cities and regions (e.g. those with rough terrain and no industrial-base developed much later when technological development lowered costs). Today, rising land and labor costs are opportunities to chart a new course of infrastructure development towards smart cities. The BRI is intended to promote China’s own city-led growth model to a large group of emerging market economies by buoying competition, advancing trade ties and catalyzing innovation. The initiative has the potential to be the largest platform for collaboration over the next 25 years. Thus, the role of IFIs should be to encourage this coordinated effort to develop infrastructure over many EMs rather than leave such development to occur at different speeds or not occur at all.

Mobilizing Private Investment for Infrastructure Development in Emerging Markets & Developing Economies

September 8, 2017
Laurence Carter and Neil Gregory (International Finance Corporation)

L. CarterAttaining the Sustainable Goals will require a major increase in infrastructure investment. With public resources strained, attention has increasingly turned to mobilizing private investment in infrastructure. The presentation highlighted some of the obstacles private investment and ways to overcome those obstacles. Specifically, joint MDB commitments to strengthen the governance of infrastructure planning, budgeting and disclose plays a key role to crowd in private finance for infrastructure. On its part the IFC continues to provide access to its Managed Co-Lending Portfolio Program (MCPP) in a bid to mitigate lack of investor capability or expertise in the infrastructure sector. This process is a co-investment platform that requires an IFC investment on the same terms as the investor. IFC engagement extends to providing improved access to data on infrastructure asset performance including credit default rates, rating migration and recovery rates of defaulted projects. The GEM database is composed of over 7000 counterparts that mostly participate in the private sector across a wide industry group. It is a key risk mitigation mechanism intended to remove the gap between perceived risk and real risks of infrastructure investment. The seminar highlighted a broad range of forward looking ways of catalyzing the market and unlocking investment for private sector projects.

Infrastructure in Africa: Lesson for Future Development

July 26, 2017
Mthuli Ncube (University of Oxford)

M. NcubeThe seminar presented a discussion of the current state of infrastructure in Africa. The discussion included economic and political aspects of infrastructure development, financing and the mobilization of domestic resources, and the potential for social inclusion. More specifically, it recommended tapping into non-traditional forms of financing infrastructure projects. One such approach is using infrastructure assets that are increasingly being viewed by investors as sources of reliable long-term cash flow, often with some form of inflation protection. Innovative financing need not be limited to accessing Sovereign Wealth Funds or expanding PPPs, but should also consider the use of 'soft MDB windows', and new bilateral and multilateral windows such as the 'China Silk Road' and G20's compact with Africa. MDBs and the IMF should consider introducing an Infrastructure Assessment Program  (IAP) to assess infrastructure resource needs and efficient deployment of PPP capacity and regulatory reforms. Listen to podcast.

How Effective is Chinese Development Finance? Evidence from a New Dataset

November 22, 2017
Bradley Parks (AIDDATA)

B. ParksThe seminar introduced a new dataset of official financing from China to 140 countries between 2000 and 2014. The same data was used to investigate whether and to what extent Chinese aid affects the economic growth of recipient countries. The results showed that Chinese official development assistance, i.e., aid in the strict sense, boosts economic growth in recipient countries. For the average recipient country, one additional Chinese aid project produced a 0.7-1.1 percentage point increase in economic growth two years after the project is committed. As a second step the study benchmarked the effectiveness of Chinese aid vis-à-vis the World Bank, the United States, and all members of the OECD’s Development Assistance Committee (DAC). Our results indicate that Chinese, US and OECD-DAC aid yield similar economic growth impacts. By contrast, we find no robust evidence that World Bank aid promotes growth. We also find that, irrespective of the funding source, less concessional and more commercially-oriented types of official finance do not boost economic growth. Finally, we test the popular claim that significant financial support from China impairs the effectiveness of grants and loans from Western donors and lenders. Our results do not support this claim.