However, particularly in emerging economies, there is a chronic shortage of necessary investment to build transport, communications, energy and water infrastructure. In the Middle East, Africa and South Asia (MEASA) region, the funding deficit amounts to over US$500bn annually.
Domestic sources of capital—the mainstay of infrastructure development in emerging markets—fall short, owing to fiscal pressures from the chronic deficits run by many countries in the MEASA region, or because of the risk of overindebtedness arising from excessive borrowing. Similarly, funding from multilateral development banks (such as the World Bank), regional development banks (such as the Africa Development Bank and India’s Infrastructure Development Finance Company) and country donor partners (notably China) cannot hope to close the investment gap completely. Fresh sources of funding and new funding mechanisms will be essential if governments are to make progress in addressing their countries’ infrastructure needs by building roads, connecting populations to power, and providing clean drinking water and sanitation.
In the MEASA region, when infrastructure is not paid for directly by governments themselves, it is primarily financed by banks, rather than through capital markets or public-private partnerships (PPPs). “But we think that those conditions are changing and that the region will be less reliant on bank financing for infrastructure in the future,” says Michael Grifferty, president of the Gulf Bond and Sukuk Association. He cites several reasons for this. Among them is the mismatch of timelines between infrastructure projects and banks: banks prefer shorter-term debt to meet short-term obligations. In addition to this, regulatory changes such as concentration limits and those stemming from Basel III, such as increasing minimum capital-adequacy ratios, may constrain growth in banks’ balance sheets. “Enforcement of banking regulation will inadvertently result in pushing some financing towards capital markets,” says Mr Grifferty. Such shifts will create an opportunity for greater use of PPPs, capital markets, and alternative sources of finance such as pension funds and insurance companies that value predictable long-term income.
