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Published on Getting Infrastructure Finance Right

​Is infrastructure in emerging markets a good investment?

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ImageThere’s a lot of discussion about attracting more investors to invest in infrastructure in emerging markets. This will be one of the themes of the Financing for Development Conference next week. Last month the PPI Database’s 2014 full year update showed that total investment in infrastructure commitments in emerging markets for projects with private participation in the energy, transport and water and sanitation sectors increased six percent to US$107.5 billion in 2014, compared to 2013.  
 
But what does the evidence tell us about how good those investments might be for investors?
 
One interesting source comes from a Moody’s study based on the performance of over 5,300 projects. This data represents more than 60 percent of all project finance transactions worldwide over 1983-2013. It is broadly representative of worldwide project finance activity by year, industry sector and regional concentration. The data shows that:
  • 10-year cumulative default rates are consistent with those of corporate issuers of low investment grade (Baa) credit quality; 
  • Marginal annual default rates (the likelihood that a performing obligor at the start of a year will default in that year) trend towards levels consistent with single-A ratings or better by year 10 from financial close;
  • Default rates in the Infrastructure industry sector are noticeably lower than in other sectors (and default rates for PPPs are even lower);
  • Ultimate recovery rates are high, averaging 80 percent for the study data set as a whole and are slightly higher for PPPs; 
  • Unsurprisingly, projects face significant incremental risk during the construction phase and/or the commencement and ramp-up of operations; and
  • Project finance transactions in emerging markets demonstrate resilient credit strength. In particular, average ultimate recovery rates for OECD/non-OECD projects are similar.  
This information suggests that infrastructure is indeed a good investment. It is perhaps not surprising that more potential investors, including institutional investors, are seeking bankable projects. The challenge appears to remain the supply of well-structured bankable infrastructure programs.
 
The Moody’s study can be downloaded by non-subscribers (following registration) from the following link: http://www.moodys.com/Pages/PFSplashPage.aspx. Questions about the report can be directed to andrew.davison@moodys.com and/or kevin.kelhoffer@moodys.com.

Authors

Laurence Carter

Senior Director, Public-Private Partnerships Group

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John Giles
The RIF approach is indeed useful for a number of applications that we may care about. In this particular application, it is important to recognize that the authors are not using hourly earnings, but either monthly or annual (it isn't clear), and that by 2004, 10 percent of women in the sample were self-employed (Table 1). Before making too much out of the results, one must recognize that many low-skilled self-employed women are choosing their hours and thus also their earnings. So is a larger gender earnings gap at low wages driven by discrimination? Or labor supply decisions?

The RIF approach is indeed useful for a number of applications that we may care about. In this particular application, it is important to recognize that the authors are not using hourly earnings, but either monthly or annual (it isn't clear), and that by 2004, 10 percent of women in the sample were self-employed (Table 1). Before making too much out of the results, one must recognize that many low-skilled...

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Jed Friedman
...I was fairly agnostic in this blog about Bao and Li's interpretation of their results since the post was meant to highlight the method, but you are absolutely correct to raise this issue - thanks for the contribution, and please contribute more!

...I was fairly agnostic in this blog about Bao and Li's interpretation of their results since the post was meant to highlight the method, but you are absolutely correct to raise this issue - thanks for the contribution, and please contribute more!

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