From a perceived risk perspective, investing in infrastructure in developing
countries can be a daunting task, which is why many institutional investors
resist doing so. Investing in infrastructure is, of course, a potentially risky
proposition in any country, but such variables as weak economies, political
risk, and underdeveloped infrastructure often prompt institutional investors to
consider investing in other places.
Less than 1 percent of institutional investors' assets are allocated to
infrastructure globally.1 But some investment
statistics can tell an entirely contrarian story. For example, a 2018
Moody's study2 of project default rates between
1983 and 2016 showed that rates of default for African infrastructure projects
were actually lower than Asia, Eastern Europe, Latin America, Oceania, and
North America and below the average for all regions of the world.
Why is that? The simple answer is that African infrastructure projects are
scrubbed so thoroughly that only the best projects usually get funded. Such
projects are often held to a higher standard than their developed country
counterparts. And project sponsors and lenders for such projects are often the
most experienced, out of necessity, so they know what they are doing. These
projects may also benefit from the participation of multilateral development
banks (MDBs) and other multilateral institutions, which adds an extra layer of
risk protection.
What Is the Risk?
The truth is a lot of sponsors may never have actually visited the
prospective host country where a project may be located and may brush it off
before taking the time to learn about or visit it. They may be scared off by
"headline" risk or simply decide that making such investments in
developing countries is not worth the headache. Among the risks that investors
regularly express concern about are political, economic, commercial/payment,
foreign exchange, security, corruption, regulatory, environmental, and joint
venture/partnership risks.
These risks exist for every type of infrastructure project, no matter where
it may be located, but a lot of investors believe (or presume) that the risks
are worse if they exist in a developing country—whether that is actually true
or not. The rule of law, governance issues, or the manner in which changes of
government occur—they can all coalesce to paint a challenging picture. But
there is a smart way to invest in infrastructure in the developing world—by
partnering with the MDBs.
The Role of MDBs
Most MDBs have political and credit risk guarantee programs, but in
addition, they have three other things that private sector insurance and
guarantee providers do not have.
- An AAA rating. This can provide an enhancement to the
rating of the project and should enable the acquisition of cheaper loan
acquisition costs.
- Preferred creditor status. The projects they are
involved in often receive preferential access to foreign exchange and senior
repayment status.
- Preferential recovery capabilities. MDBs'
relationship with host governments and the fact that MDB lending programs are
usually linked to host country portfolio performance (which includes
guaranteed investments) mean that projects with MDB participation generally
benefit from preferential recovery status.
A major reason MDBs exist is to incentivize investors to commit long-term
financial resources to the infrastructure sector in their developing member
countries. Partnering with them greatly increases the chances that a project
will not become the target of expropriation, currency inconvertibility, breach
of contract, or other forms of political risk. If government action does occur,
the chances of resolving a problem relatively quickly and more easily greatly
increase when an MDB is along for the ride. The same may be true for export
credit agencies and other development finance institutions, but their ability
to secure some of the same types of benefits may only be as good as the
bilateral relationship between the home and host country is cordial.
Conclusion
There is a USD $15 trillion projected shortfall in infrastructure financing
in developing countries, all of which are hungry for new infrastructure
projects.3 This presents a great opportunity for
lenders and investors who are prepared to roll up their sleeves, do their
homework, and commit to partnering with the MDBs. These institutions'
lending, investment, and guarantee programs await bankable projects. Some of
them—such as the Asian Infrastructure Investment Bank—have tens of billions of
dollars in new capital ready to be deployed.
The MDBs have taken a particular interest in catalyzing capital from
institutional investors, such as pension funds, sovereign wealth funds, and the
asset management side of insurance companies, which have previously not focused
on investing in infrastructure projects in developing countries. With
developing governments around the world having flung their doors wide open to
such investors, now is an excellent time to consider doing so.
Daniel Wagner is senior investment officer for guarantees and
syndications at the Asian Infrastructure Investment Bank in Beijing.