Fresh Ideas about Business in Emerging Markets                                                                                     Note 5 | April 2016


INFRASTRUCTURE FINANCING TRENDS
What are the Current Trends in Emerging Market Infrastructure Spending?

Emerging markets need twice the infrastructure investment they now receive. East Asia has the
greatest needs, while Africa’s requirements are large in comparison to its economic size; power
generation accounts for more than half of needed investment. There is great potential for increasing
participation by institutional investors in developing-country infrastructure: Insurance companies,
asset managers, pension funds and sovereign wealth funds are increasingly aware of the manifold
benefits that infrastructure investments offer.
Emerging markets can absorb an estimated $2 trillion per year in
infrastructure spending, about half of which currently goes unmet. And              Total Annual Infrastructure Estimates in EM
the gap will only grow, as infrastructure investment needs in emerging                                        (US $billion, 2013)
economies are expected to double annually over the next decade.


Government budgets are the biggest source of funds, accounting for about
three of every four infrastructure dollars, while the private sector provides
the rest. Yet in the aftermath of the financial crisis, governments have
seen their fiscal deficits grow and their budgets shrink, increasing the
need for private funding. However, most private funding flows to upper-
middle-income countries.


Going forward, East Asia including China will require the majority of
infrastructure investment; Sub-Saharan Africa’s needs are substantial
relative to the size of the region’s economies. In terms of sectors1,
electricity will require over half of all infrastructure spending. That
includes power generation, capacity, and transmission and distribution
networks. And preparation costs, including design and arranging financial       Bhattacharya and Romani, "Meeting the Infrastructure Challenge" (2013)

support, are not insignificant—they can constitute up to 10 percent of
overall project costs.


Debt represents about three-quarters of total private financing for infrastructure, with loans about 1.5 times the size of bonds. Before 2008,
international loans had been the main infrastructure funding source. Since then international lending has slowed and local loans and bonds have filled

1Infrastructure sectors covered: energy, water and sanitation, transport, and telecom. Estimates were conducted using various sources, including
PPIAF, Dealogic, and Project Finance Review. Source for spending data: Bhattacharya and Romani, “Meeting the Infrastructure Challenge, 2013.
the gap. International instruments rebounded in 2013, though primarily due to a few large transactions in limited sectors in Mexico, China, and
Brazil.


                                                             Annual Infrastructure Investment Needs by Region, Sector and
PRIVATE PARTICIPATION                                                                 Project Phase
Private participation in emerging-market                                   (US$ trillion, Constant 2008 US$, Capital Investments Only)
infrastructure hit a high in 2012. The Latin
                                                                                 Total $1.8 - $2.3 trillion Needed Annually
America/Caribbean region was the largest
recipient, while South Asia and East and Central
Asia have tended to be high volume destinations
as well. At a country level there is a concentration
in the BRICs—Brazil, Russia, India, and China—
plus Turkey and Mexico. Between 2000 and 2013
some 38 percent of private flows went to Brazil
and India. Still, despite the increase in private
investment in infrastructure since 2008, most of
the gains flowed to upper-middle income
countries, while flows to lower-middle and low-
income countries fell by 37 percent and 68
percent, respectively, between 2007 and 2013. At
a sector level, private investment is concentrated
in the energy and information technology sectors.


                                                        SSA – Sub-Saharan Africa; SA – South Asia; MENA – Middle East/North Africa; LAC – Latin America/Caribbean;
                                                        ECA – Europe/Central Asia; EAP – East Asia/Pacific



INSTITUTIONAL INVESTORS                                                           Type of Institutional Investors in Infrastructure
Insurance companies, asset managers, pension funds, and                                 (By Type and Aggregated Assets Under Management)
sovereign wealth funds are all attracted to infrastructure
because it offers diversification potential and inflation and
interest rate protection—and it contributes to public goals. As a
result, and despite the current small allocation to infrastructure
by these market participants, private infrastructure investments
are increasingly attracting interest from institutional investors.
In addition, more investors are entering the space via debt, co-
investments and secondaries, and less through direct
investment. 



Tomoko Suzuki (Tsuzuki@ifc.org), Senior Portfolio Officer; Keita
Miyaki (Kmiyaki@worldbank.org), Research Assistant; IFC
Research/Global Markets. Jordan Townswick Pace
(Jpace1@ifc.org), Research Assistant, Office of the Chief
Economist – Thought Leadership.