Rapid economic growth in middle- and low-income countries after the global financial crisis in 2007 fuelled the demand for infrastructure to support economic development. Yet, middle- and low-income countries represented only a quarter of the total global private investment in infrastructure projects in 2020.
The risks and associated costs faced by private infrastructure investors are particularly high in most of these countries, where macroeconomic and financial conditions may be less stable and susceptible to global shocks. Non-private financiers like multilateral development banks, national development banks, export credit agencies, and governments help minimise these risk exposures and provide a supportive enabling environment using funding, financing instruments, and other assets. Sustained co-financing has helped mobilise private investments into infrastructure in these countries over the past decade, in 2020 they garnered 75% of private investment in middle- and low-income countries compared to just 46% in high-income countries.
Due to COVID-19’s global economic impact, private co-financing in middle- and low-income countries was at a decade-low in 2020 with 41% of the private investments supported by just one non-private financier type - the remaining 34% involved two or more non-private financier types. The disruption caused by the global pandemic has not affected the longer-term trend of non-private financiers deploying private investments to infrastructure in middle- and low-income countries.
Compared with high-income countries, transactions in middle- and low-income countries are more likely to see the private sector finance alongside two or more institution types, most commonly with national development banks and the public sector, which accounted for around a third of private co-financing per annum since 2010. While the public sector was involved in most private co-financing transactions at the start of the decade, their role has notably declined over time, with the private sector increasingly co-financing alongside national development banks. This shift is primarily due to increased fiscal constraints on the public sector, and increased collaboration between private financiers and national development banks to mobilise private capital for middle- and low-income countries.
Non-private co-financing provides additional benefits to private sector investments, particularly in middle- and low-income countries, it provides financial or non-financial input through a development finance intervention that would not have materialised without it. Another benefit is concessionality - a part of an infrastructure finance transaction based on the rationale that it is required to overcome market failures and catalyse commercial finance that would otherwise not be forthcoming.
In addition to channelling increased funding towards development outcomes, public sector engagement can improve the sustainability of infrastructure investments by catalysing co-financing that can be scaled and replicated even after the exit of initial private capital. It also helps create commercial markets in the long-term through accompanying measures alongside a private primary infrastructure investment transaction at country, sector, market, and stakeholder level.
Source: Global Infrastructure Hub based on IJGlobal data.