The gap between what is needed to provide world class infrastructure projects to the emerging world, and what is being committed by funds, institutional investors and global multilaterals is widening every year.
Experts warn that the problem is exacerbated by an increasing reticence among Western funds to sink long term capital into the increasingly troubled emerging world.
Dimitris Tsitsiragos, head of the International Finance Corporation’s (IFC) international investment operations and advisory services, said a key challenge faced by organisers of infrastructure projects such as toll roads, airports and power plants in the developing world, waslack of funding from the big commercial lenders.
“In the past, we would see big chunks of commercial lending accompany [the funding of major new projects]”, he said. Yet much of that funding has disappeared and is, he added, yet to be replaced.
An even bigger worry was the increasing lack of interest shown by many leading global funds, from insurance giants to major institutional investors, to sovereign wealth funds (SWFs), in big and at least partially privately financed emerging market infrastructure projects.
“There is less money being committed to these projects in the emerging world at precisely the moment when it is most needed,” Tsitsiragos said. “The deficit between what the funding that is needed and the funding that is available gets larger every year.
“It’s a big challenge and it’s getting harder — particularly when you are working in the sort of places that really need big new projects” such as power plants.
‘STEP FORWARD CREATIVELY’
Spencer Lake, head of global capital financing at HSBC, said that turning infrastructure bonds into an industrialised, liquid asset class had to be a top priority for governments and regulators around the world.
“Without this, it will be also difficult to get the green agenda on track,” he told Emerging Markets. “Once it happens, the buyside is extremely capable of financing infrastructure needs.”
Paul Tregidgo, vice chairman of DCM at Credit Suisse, said the “massive” need for infrastructure meant that even in times of volatility financial institutions needed to “step forward creatively” to seed financing structures that catalyse participation of new sources of private funds.
“No matter what happens with US rates in the short term, there is plenty of liquidity looking for long-term investments and infrastructure can surely offer that opportunity,” he said.
IFC, the private sector arm of the World Bank, continues to plough money into new infrastructure projects in the most embattled of frontier markets: Tsitsiragos highlighted new power plants in Iraq, Egypt, Côte d’Ivoire and Bangladesh, and a slew of landmark solar projects ranging from Honduras and Mexico, to Chile and Jordan.
Yet calls to the private sector to stump up capital for many of these new facilities have fallen on deaf ears, in large part because global funds.
“If you look at the commercial lending
side for instance, and even many of the SWFs, there is a traditional risk-to-reward mindset at work still, where expectations of returns have not changed. People still expect higher returns in a low return environment.”