Infrastructure for development
by Georgina Baker
Emerging markets will require a significant increase in infrastructure investment in the coming years to facilitate economic growth and respond to demographic and urbanisation pressures. This investment is also necessary to meet the UN Sustainable Development Goals, which try to alleviate poverty by providing clean water, sanitation and electricity. Current infrastructure investment is around $1tn per year, a figure that will need to triple annually over the next decade to meet demand for power, water, transport and telecoms.
The global population will expand by almost 2bn people by 2040. Global investment in infrastructure will need to reach $94tn by 2040, particularly as urban populations rise. The shortfall is expected to be around $18tn, a gap that can only be met, while meeting the SDGs, by lifting spending as a proportion of global GDP from 3% to 3.7%.
Public finance remains a significant lending source for infrastructure, yet many governments are facing fiscal pressure and are looking to reduce their balance sheets. New liquidity rules and a narrower focus on core markets has led to a reduction in long-term lending from large international commercial banks. Capital markets face high costs of capital, limited scale and low financial depth. Consequently, there is a dwindling supply of financing to meet an ever-expanding demand for infrastructure.
One large, untapped source of debt financing for infrastructure investment in emerging markets is institutional investors, who control a deep and rapidly growing pool of assets. In Organisation for Economic Co-operation and Development countries, total assets under management by traditional institutional investors more than doubled between 2000 and 2011, to $73.4tn from $36tn.
Even though institutional investors are active in infrastructure financing in advanced economies, this has not translated to emerging markets. Regulatory uncertainty, project bankability, lack of asset performance data and the institutional capacity of procuring governments are constraints that, while complex, can be overcome with the right policies.
A steeper challenge is to convince investors to participate in a broad range of projects. The absence of a record makes it difficult for investors to decide on target return and asset allocation. The risk profile is usually sub-investment grade, and therefore outside the risk appetite that dominates the bulk of institutional balance sheets. In addition, the absence of local expertise in smaller markets makes individual credit review impossible or too onerous for projects outside a few large middle-income countries.
MCPP Infra is a platform developed in collaboration with leading insurance companies and other development partners. The approach builds on the original Managed Co-Lending Portfolio Program that was launched in 2013 with an investment from the People’s Bank of China.
The International Finance Corporation has entered into two partnerships, with investors from Allianz and Prudential, the insurers, mobilising $1.12bn. A third partnership for a further $500m is in final negotiations with Axa.
The MCPP platform provides investors with a portfolio of loans that mirrors the IFC’s diversification across countries and sectors. MCPP Infra adapts this model to the needs of institutional investors with an explicit interest in infrastructure. To provide investors with an investment-grade profile, the IFC provides credit-enhancement through a first-loss tranche.
MCPP is a $6bn platform with six global investors, with an additional $1bn in the pipeline. Collectively, the investors participating in the MCPP platform control over $3tn in assets under management.
The programme has demonstrated proof of concept and can be used as a reference point to support the standardisation of portfolio loan syndication platforms by other development finance institutions and international financial institutions. Exploring creative solutions to leverage private funding for investment in priority sectors like infrastructure is an urgent task. MCPP Infra is an important means of accomplishing that aim.
Georgina Baker is Regional Vice-President, Latin America and the Caribbean, Europe and Central Asia at International Finance Corporation. Back