Infrastructure Financing in Emerging Markets

Developing countries will require over $2 trillion U.S. dollars of infrastructure spending per year over the next 15 years. It appears highly unlikely that governments in the emerging markets will be able to raise enough funds to meet their infrastructure needs with existing tax revenue.

Many nations in Latin America had considerable success in building infrastructure through alternative arrangements with private investors. Among other benefits, public-private partnerships (PPPs) can provide a solution to the problem of the second-best when it is politically impossible to fund new infrastructure through taxation alone.

Providing Guarantees and Incentives for Investment

Guarantees and incentives are straightforward steps that can increase private infrastructure investment. Obtaining credit is often an issue for emerging market infrastructure funding. However, governments of developing countries have revenues from state-owned enterprises and extensive natural resources that can be used as collateral to guarantee investments. It may also be beneficial to set foreign investment limits for some infrastructure projects.

The need to obtain domestic financing creates incentives for foreign investors to draw in local investment, which can increase the total amount invested in some cases. Investments by domestic pension funds and regional banks also provide political support for infrastructure projects. Emerging economies can emulate developed countries by offering tax exemptions for certain infrastructure investments. The National Highway Authority of India has already successfully used tax-exempt bonds to build roads throughout the country.

Scaling to Appeal to Investors

One of the most innovative ideas in private infrastructure funding is to scale and package financing in ways that appeal to investors. For example, bonds dependent on revenue from a single toll bridge in a developing country have far too much idiosyncratic risk for most investors. Furthermore, many smaller proposed infrastructure projects in the emerging markets were not large enough to attract any funding at all outside their local markets. By aggregating private infrastructure financing, governments can reduce risk, increase visibility, and ultimately raise more revenue for infrastructure. 

Packaging for Investors

Properly packaging infrastructure investments can be just as essential as scaling them. For example, the Inter-American Development Bank reported that there would be an energy infrastructure investment gap of over $500 billion each year in developing nations between 2015 and 2030. At the same time, there are many investment funds designed to act as a hedge against a weak U.S. dollar.

Energy prices and emerging market currencies are both negatively correlated with the dollar. It follows that emerging market energy infrastructure revenues could be able to provide an appropriate hedge, and perhaps higher returns as well. The key to winning these investors might be packaging. Packaging could be even more crucial for renewable energy projects and other environmental, social, and governance (ESG) investments.

Building Credibility with Institutions

ESG proponents are not the only investors who are interested in institutions. Independent institutions help to build confidence among potential investors. A dedicated public-private partnership unit that promotes transparency and cuts through red tape provides substantial benefits. Such an organization can establish a record of successful projects that attracts additional investments. Infrastructure banks, delivery companies, and funds also help to build credibility.

International Growth

Ultimately, there are enormous opportunities to create international partnerships. For example, Africa50 is an investment platform established by the African Development Bank that focuses on building critical water, energy, transportation, and information infrastructure throughout Africa. International public-private partnerships have two significant advantages for investors. They provide international diversification so that political risks are far lower than they would be for any single country. By generating value through international infrastructure investment, we can generate alpha for our investors at Ashton Global. 

 

Please contact us at +1 212 514 8953 or email investor@ashtonglobal.com to learn more.