Because of its role as an important driver of both economic and productivity growth, development and maintenance of infrastructure network are usually a major concern to political agenda. Nevertheless, there is a widespread agreement that the current investment trend may not be sufficient to meet a constantly growing demand for infrastructures, driven by the rapid development among emerging markets. Estimates by Oxford Economics point to a structural gap that, from its 2016 level of USD 372 bln, will face an yearly average growth of 3.2% until 2040. The weight of investments in infrastructure, currently representing roughly 3% of world GDP, may further decrease in the forthcoming years (Fig. 1), as the public investment component will continue its downward trend (Fig. 2). In such a context of chronic capital deficiencies and often opaque regulatory frameworks, local and international businesses are called to provide a substational contribution to fill the gap.
Fig. 1: Investment in infrastructure as a share of world GDP, 2007-2023
Data source: SACE Research Office on Global Infrastructure Hub (Oxford Economics) and IMF data. Note: estimates for 2016-2023 are represented by a dash line
Fig. 2: Public/private investment shares in the BMI Key Infra-structure Pojects by year of implementation, 2006-2019.
Data source: SACE Research Office on Fitch Solutions/BMI data. Values in USD bln. Note: private share includes PPP.
In addition to the inherent engineering complexity – with consequences in terms of investment indivisibility and length of payback periods – it is political instability that often provides a strong disincentive for investments in long-term projects. Changes of political agenda and the consequent uncertainty regarding the regulatory framework, often unpredictable even for the most prudent investors, are not a problem confined to emerging economies, but involve all the countries: Brexit is the most resounding case, but certainly not the only one.
The sources of risk attributable to this type of investment and stemming from the involvement of public actors are different and specific to the different implementation moments. In the financing phase, aspects linked to monetary policy are identifiable, directly affecting the cost of capital; fiscal policy is also a factor, as its scope may be limited by unsustainable trajectories of government debt, with consequences in terms of financing cost for private investors. Particularly relevant at this stage are the prudential regulation and supervision of the banking sector. These determine the availability of loan capital; the variety of financial instruments that allow for better matching with investors’ risk profiles; the share of nonperforming loans and the consequent need for budgetary consolidation. The presence of barriers limiting the operation of the subjects involved and the availability of regional development funds that guarantee advantageous credit conditions for key infrastructural projects may play a significant role. Procurement and construction phases present other risks related to public management, concerning tender participation requirements, selection procedures and the actual subsistence of a level playing field – a particularly delicate issue as the participation of Chinese state-owned enterprises have often raised the question of more or less blatant state aids harming the competition. Compliance with contractual constraints by the public authority is often the crucial node, due to the duration of infrastructure investments. The World Bank provides an aggregate index measuring the efficiency and the quality of commercial dispute resolution, including the time required for resolving a commercial dispute, the associated cost and the use of practices promoting judicial efficiency. Fiscal policy is fundamental at this stage in determining, on the one hand, the levels of labour market flexibility and wages; on the other hand, it affects both supply and prices of other inputs. Finally, revenues from operational management is threatened by factors linked to political instability: different governments can re-discuss the terms of the agreements, undermine the continuity of supplies, and divert resources to other projects. The extreme case concerns the expropriation of the infrastructure – a rare possibility that should not be underestimated in such a strategic sector. An additional risk, common in some developing countries where the investment gap is particularly severe, is the restriction on capital movements and dividend repatriation. In the case of foreign currency needs, the authorities may declare the local currency inconvertible, thus preventing domestic firms to pay their foreign suppliers and contractors.
The infrastructural sector will therefore continue to be pivotal to the political agenda – for better or for worse – of different economies, with a still largely unexpressed demand by the emerging ones, where the political risk is higher and where the raising of commercial barriers, even in different geographies, can produce dramatic effects. A careful investment planning is therefore crucial, while relying on competent partners to seize opportunities offered by one of the most attractive markets.
