World Bank President Robert Zoellick will discuss topics other than gold while in Asia this week, in case you’re wondering.
One of those topics is infrastructure, which—to denizens in the developing world who struggle to move goods and people, drink clean water, and keep the lights on—may be more precious than any metal.
On Wednesday Zoellick was in Singapore for a prominent infrastructure conference, where he underlined that a focus on infrastructure is a key part of the solid growth agenda the G-20 is trying to tackle. He also noted some important facts. First, infrastructure investment represents two-thirds of growth increase in East Asia and about half of the growth increase in Africa. Second, the World Bank estimates the need for infrastructure investment and maintenance in developing countries will amount to about $900 billion a year.
Despite this robust demand, developing countries face significant difficulty in attracting more private investment in all the subsectors of infrastructure to meet the enormous shortfall that governments alone cannot fill. Compounding the challenge, the global financial crisis has had major repercussions on the infrastructure development plans of many of these countries. And while MIGA saw an uptick in infrastructure sector activity in fiscal year 2010 that suggests a small recovery, the sheer size of infrastructure deficits in the developing world is daunting.
MIGA offers political risk insurance in order to attract investors and private insurers into difficult operating environments, and certainly many infrastructure projects in the developing world can fall into this category. The infrastructure industry is uniquely vulnerable to political risk due to its huge upfront costs and capital investment, longer timeframes, and reliance on future cash flows to meet financial obligations and provide reasonable returns.
MIGA’s experience in underwriting infrastructure investments in the developing world is extensive. Since its inception in 1988, we have issued more than $5.6 billion in guarantees for infrastructure projects. MIGA’s coverage has ranged from large hydropower dams in sub-Saharan Africa, to toll roads in Latin America, to water supply and treatment plants in Asia. MIGA is able to support investments at the sub-sovereign level, an important advantage in this sector.
The Doraleh Container Terminal in Djibouti is a prime example of a complex MIGA-supported infrastructure project that is showing tangible impact today. In December 2007, we underwrote $427 million in guarantees for construction of the terminal. Just one year later, the new state-of-the-art container terminal, operated by DP World of Dubai, was already boasting impressive results. Now the terminal, located in one of the world’s poorest countries, is setting technical and efficiency standards for other port operations and serving as the backbone for the nation’s economy. Resultantly, Djibouti is emerging as a key trade gateway for the member nations of the Common Market for Eastern and Southern Africa.
Infrastructure investment in emerging markets is often risky, but from MIGA’s perspective, unequivocally crucial to moving developing countries’ development forward. From the perspective of investors, the opportunities for financial gain are substantial and growing.
Our hope is to provide insurance as part of well-conceived ventures that reap rewards for the investor and build a stronger base for development.