The world economy – and emerging market and developing economies in particular – display a gap between their infrastructure needs and the available finance. On the one hand, infrastructure investment has fallen far short from of what would be required to support potential growth. On the other, abundant financial resources in world markets have been facing very low and decreasing interest rates, whereas opportunities of higher return from potential infrastructure assets are missed. We approach here how a better match between private sector finance and infrastructure can be obtained if properly structured projects are developed, with risks and returns distributed in accordance with different incentives of stakeholders.
The world needs to invest an average $3.3 trillion, and emerging markets $1-1.5 trillion, annually just to meet currently expected rates of growth. The world currently spends about $2.5 trillion a year on infrastructure, and it is estimated that it needs to invest an average of $3.3 trillion annually just to support currently expected rates of growth (McKinsey, 2016) – with power requiring the largest amount (figure 1).
Current infrastructure investment, including IFIs, public investment, and PPPs, amounts around $1.7 trillion leaving a gap of more than $1 trillion. Institutional investors and other private sector players could increase allocations under appropriate conditions.
“The world needs to invest an average $3.3 trillion, and emerging markets $1-1.5 trillion, annually just to meet currently expected rates of growth.”
Operational commitments of major international financial institutions (IFIs) total around $80-90 billion annually – less than 10% of the infrastructure financing gap for emerging markets (World Economic Forum, 2016) – and they are declining. Annual public investment in infrastructure stands at about $1.5 trillion and is also decreasing due to fiscal deficits and increased public…