Emerging economies need substantial investment in transport, energy, logistics and digital networks to support their rapid-growing economies. Yet strong demand does not automatically make an infrastructure project investable.
Why does infrastructure investment matter?
Infrastructure enables wider economic activity in domestic, emerging economies and considerable return opportunities for investors.
“Developing economies are often undervalued because investors focus too much on short-term uncertainty and not enough on long-term fundamentals,” said Rupin Banker, co-founder of Strategic Global Alliance in July. Banker’s firm connects institutional investors with public initiatives in India, Indonesia and South East Asia.
Reliable power supports manufacturing; transport connects businesses with customers and ports reduce trade costs. Digital networks allow companies to deliver services at scale.
For startups, these systems influence where companies can operate, expansion costs and supply-chain reliability. Infrastructure is therefore one of the foundations of private-sector growth.
Why can governments not fund everything themselves?
Infrastructure projects are expensive and take years to plan, build and operate. Governments must balance them against other public services and public finances alone are rarely sufficient.
Private investment can supplement public funding at a much faster, more effective rate, but investors require an appropriate return and a clear assessment of risk. Projects must meet public objectives while remaining commercially workable.
What makes an infrastructure project investable?
Investors examine how a project generates revenue, who pays for the service and whether those payments are dependable. They also consider approvals, land rights, construction costs, operating responsibilities and the legal framework.
Risk must be allocated to the party best placed to manage it – a contractor may assume construction and operational risk, while government retains certain regulatory or land-related responsibilities.
As Rupin Banker has observed, the right structure can make a difficult project financeable, while the wrong structure can undermine a fundamentally useful project.
How can private capital be attracted?
Governments can use public-private partnerships, project finance, development-bank support and blended-finance structures. Blended finance combines commercial capital with concessional or development funding to improve the risk profile of projects that may otherwise struggle to secure investment.
Guarantees and political-risk insurance can address defined risks, while development institutions can assist with feasibility studies, project preparation and procurement. These tools do not remove risk. Their purpose is to identify, allocate or mitigate it sufficiently for investment to proceed.
What are the principal risks?
Common concerns include:
- political and regulatory change
- currency movements
- construction delays
- uncertain demand
- the creditworthiness of public or private counterparties.
Investors will also assess environmental and social effects, governance and the ability of local partners to deliver.
Currency risk is particularly important where project revenue is earned locally but debt must be repaid in dollars or another international currency. A depreciation can substantially increase the real cost of repayment.
What does this mean for founders and businesses?
Infrastructure investment creates opportunities beyond construction. Projects need technology, engineering, financial services, logistics, maintenance, data systems and specialist suppliers.
Businesses entering these markets should identify where their product solves a defined delivery problem. They must also understand procurement rules, payment arrangements and the responsibilities they would assume.
The opportunity can be considerable, but infrastructure markets reward preparation and patience. Demand is only the starting point. Sustainable investment depends on credible projects, suitable financing and partners capable of delivering over the long term.
