Predicting success for infrastructure in emerging markets: Moving from art to science


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with research contributions from Zichao Wei

At conferences, in meetings, and even during casual work conversations, I am asked the same two questions:  “Which countries are ideal for investments in infrastructure?  Where should the investors invest and what new opportunities should they look toward?” 

While sitting in the World Bank gives us a bird’s-eye view of emerging markets and developing economies (EMDEs), it doesn’t offer the up-close-and-personal perspective that investors demand in order to answer these questions in a succinct way.  Not that there’s any shortage of synoptic responses. Any number of “market gurus” can assess projects in a second, gathering all the low hanging fruits which are out there in EMDEs.  If there is a private deal to be made, then the deal is already done.

Assessing investment possibilities becomes complicated where there is a third party involved. I live and breathe this challenge because I work in the world of public-private partnerships (PPPs) – developing infrastructure finance – where the deal is tough to come by. In the PPP universe, the government is not only the grantor but also the procurer of goods and services, policy maker, regulator, supplier, and buyer or off -taker of the outputs.  And this is a universe where the 10,000-foot view of infrastructure in emerging markets is a useful perspective from which to examine the global infrastructure investment landscape.

Getting the lay of the land
Before looking at the global infrastructure investment landscape, it is important to know which regions have the greatest needs. A recent World Bank study[1] shows South Asia ranking at the top (see the graph below) in terms of both annual infrastructure investment requirement as percentage of GDP (15%) and absolute terms of investment amount ($300 billion). What does this number mean? In order to keep up with the regional predicted GDP growth rate of 6%, the South Asia region countries need to invest nearly 15% of their GDP in new infrastructure and to maintain existing infrastructure.

Notwithstanding these findings, an examination of the Private Participation in Infrastructure (PPI) database shows that the top destinations for private sector investment continue to be Brazil, China, India, Mexico, and Turkey.   These five countries accounted for 73% of investments and 63% of all projects in 2014. 

So what happens to the rest of EMDEs?  These overlooked countries, working toward PPI maturity, truly fit the definition of “emerging economies.” I’ve broken down this concept so we can quantify these nations’ potential for private investment in infrastructure, and the graph below depicts how a country can be considered an investment destination.

I define PPI maturity to be a function of understanding, willingness, and commitment toward PPI under the current circumstances.  Maturity could range from high to low (Y axis). PPI maturity looks specifically at private sector participation in public infrastructure and will require different levels of government support depending on country’s capacity (Z axis).  PPI maturity could be different at a given time and for a given country.
There are further considerations. On the graph, the X axis shows areas or phases which, in my experience, weigh heavily on a project’s chances of success. These include:

  1. Whether the project will even have access to long term financing from either domestic or foreign source?
  2. If there is availability of this long term financing to public infrastructure?
  3. Have any of the high priority projects closed, and at the same time, are state-owned enterprises beginning to see the value of PPI? and
  4. Are sub-nationals entering the PPI market? (For those that experienced the first generation of PPPs, are they bearing lessons and putting more emphasis on contract management?) 
Government support as shown in the Z axis will range from full support (direct financial, indirect guarantee, and regulatory) to minimal (regulatory) as country matures in PPI.  Throughout the phases, the country maturity levels can go up and down depending on whether it continues to learn and improve.   

Charting a course
This last point – whether a country continues to learn and improve – is key. There are many countries that are making the effort to be PPI mature and market ready.  Some are clarifying their PPP legal framework, some are professionalizing their financial and local capital markets, and some are already launching pilot projects.  Several countries have progressed to a second generation of PPPs, building on the lessons from the first wave or going back to the drawing board. 

There’s no right answer to the two questions that keep coming my way, and which are certainly directed at countless other infrastructure finance professionals around the world. Not only is there no right way, but if there’s an approach that works one day, the next day will be different. Successful PPP deal-making will keep changing according to the circumstance, government support, and level of PPI maturity.   Charting these elements, as in the graph above, is the first step toward mapping out a future for infrastructure finance possibilities in EMDEs.
[1] Source: Ruiz Nunez, Fernanda and Wei, Zichao, Infrastructure Investment Demands in Emerging Markets and Developing Economies (2015). World Bank Policy Research Working Paper No. 7414.


Jyoti Bisbey

Infrastructure Finance Specialist

Join the Conversation

Arvind Mayaram
April 30, 2016

Long term finance continues to be a challenge and so does affordability of infrastructure services for the poor. There was great hope when GIF was first discussed in the WB. Unfortunately, in its final shape it is almost non existent. Even though G20 put ambitious targets for global growth and infrastructure investment was identified as a key driver, on ground there has been little real movement. With IMF continuously revising global growth estimates, it is time that some serious attention is paid to this issue again.

Jason Lu
May 17, 2016

Indeed, long-term financing remains a major challenge for infrastructure development in developing countries. To address this challenge, the GIF was launched a year ago as a global open platform that facilitates the preparation and structuring of complex infrastructure projects to enable mobilization of private sector and institutional investor capital. During its three-year pilot phase, the GIF is working with major MDBs on project preparation to assist governments bring well-structured and well-prepared projects to the market. In addition, the GIF also plans to develop a downstream financing and credit enhancement window to provide additional direct support for long-term infrastructure financing in developing countries. Our objective remains to facilitate projects that will be more sustainable, bankable and attractive to the private sector for long-term financing. For more information, please visit our website.

May 01, 2016

I think you're very right in your research analysis here. To buttress the considerations you have stated above, the government policies in the south asian countries mentioned earlier on should support given PPI full pledge to operate by cutting down all obstacles that could hinder their prospects.

Hossein Nourzad
May 04, 2016

Thanks for sharing these thoughtful questions and research results with us.
While there are so many challenges toward developing infrastructures globally, at the same time, there are huge advantages in doing so! Therefore, despite all frustrating problems, we should keep focused and move forward. I believe the synergetic movement initiated by the Global Infrastructure Forum will work.
In response to your question, I would like to offer IRAN as one of the countries that has lots of potentials for investment. Of course, some major steps should be taken and in fact is being taken.

Richard Kupisz
May 04, 2016

For a minute there I thought you were going down the path of "greatest needs = greatest opportunities" but you deftly skipped away from that. There's a chicken & egg argument there - Sth Asia may have the greatest needs because it has the worst investment climate. I agree the way to go is to look where deals are actually being done. For some (Brazil, China, Mexico) the combination of size (= demand), growth prospects and a relatively open business climate help create the perfect storm. Not all EMDEs can provide these though all can make it easier for investors.
Of course the "elephant in the room" for EMDE PPPs is availability of financing, which has been in the doldrums since at least the financial crisis. Recent news (eg Barclays in Africa) suggests this is getting worse rather than better. At the same time, the efforts of the Bank and other IFIs to nudge governments towards PPP are increasingly coming to fruition, increasing demand for high risk project finance at the same time that supply is becoming more constrained. I think that funding is and will continue to be the single greatest strategic problem for PPPs in EMDE's - ironic since one of the standard arguments in persuading Governments to do them is "access to private sector capital".

Malcolm Morley
May 06, 2016

PPI Maturity is a key issue when the private sector considers investing in PPPs and the post above is a very useful illustration of its importance. PPI Maturity is a part of the risk assessment for investment and will also include issues such as perceptions about political stability and the willingness and ability to take/share on-going responsibility for financial risk. In more PPI Mature countries there is a perceived lower risk and greater willingness and ability from the private sector to accept risk transfer.  Emerging economies are likely to have to address this challenge by accepting less risk transfer and convince the private sector that future returns on investment are secure if they are to both attract investment and to obtain it at affordable prices. I totally agree that learning and the illustration of it through changing practice is of vital importance in addressing the challenges above.  The World Bank has an important role to play in knowledge transfer and supporting countries to develop the competencies, capabilities and capacity to tackle the challenges to obtaining investment and creating mutually beneficial PPPs that build long term relationships and transform the social and economic value equation.

Silas Macharia
May 11, 2016

Thanks for the article and questions asked earlier. I have two questions hopefully I will get my answer here.
1. In my country we have a framework for PPP but no law in place. How would you engage in a PPP
2.looking at it from technology perspective and assuming all factors are constant policy,stability etc. Would technology rating I.e.adoption best in class technology be a favourable feature or component influencing Long Term financing

Merciline Lina Amollo Oyier
May 19, 2016

I consider my country, a country with great potential to be comfortably treated as an emerging economy , however , the Governance issues in this country are making it difficult for private sector to warm up to the PPP approach. I also feel that a lot has to be done in preparing citizens to appreciate the value of services that are structured to regenerate resources as better bet for growth and sustainability for economies as opposed to social service that only serve to perpetuate dependencies and deepening vulnerabilities.