Institutional investors essential to closing the infrastructure funding gap

It is often reported that institutional investors hold the keys to unlocking the infrastructure financing gap in low- and middle-income countries. In 2021, global assets under management reached more than USD 112 trillion^[1], yet in the same period institutional investors contributed just 0.2 percent to private participation in infrastructure projects in low- and middle-income countries.^[2]

The World Bank reports that Asia and Africa will see the fastest growth in the number of urban dwellers as well as in urbanisation globally during the period 2018 – 2050 with demographic trends, including younger populations, intrinsically linked to these projections^[3]. The scale of the infrastructure funding required to meet these demands is huge and the annual funding gap – estimated in 2020 in the range of USD 67.6 billion to USD 107.5 billion in Africa and at USD 136 billion in Asia (excluding India) ^[4] – presents a large opportunity for institutional investors, especially when investments can be de-risked through blended finance structures.

Infrastructure projects offer institutional investors, such as insurance companies, endowment funds and pension funds, an attractive proposition of long term, stable, annuity like returns that allow effective balance sheet management. In low- and middle-income markets across Africa and Asia, GuarantCo’s guarantees can de-risk investments for institutional investors by enhancing the credit ratings of investment vehicles such as infrastructure bonds and green bonds thanks to our high international credit ratings from Fitch (AA-) and Moody’s (A1) whilst simultaneously opening the door for new funding to flow into sustainable infrastructure projects.

For example, in 2019, GuarantCo, part of the Private Infrastructure Development Group, provided a VND 1,150 billion (circa USD 50 million) guarantee in support of the first 10-year bond issued by Ho Chi Minh Infrastructure Investments JSC (CII) in Vietnam. GuarantCo’s 100 percent guarantee catalysed investment by domestic institutional investors, Manulife, AIA and Generali, enabling CII, a prominent local infrastructure developer, to access private sector funding for the construction of the 51 kilometer Trung Luong My Thuan expressway. The project’s aim is to ease congestion, improve safety, and promote economic development between the hubs of Ho Chi Minh City and the Mekong Delta.

Investing in infrastructure using blended finance structures also presents an opportunity for institutional investors to drive real progress in the global push towards net zero in 2050. For institutional investors, this can mean mobilising investment in green and/or sustainable energy sources to bring power to people and societies, requiring investments to be resilient to physical climate risks by design. This helps create sustainable cities and transportation systems that move people and goods with considerably lower emissions using green supply chains and enhancing trade flows.

GuarantCo’s reach into our countries of operation in Africa and Asia can provide opportunities to invest in infrastructure projects with a strong development impact and alignment with net zero commitments that would otherwise be missed. Cambodia’s first infrastructure bond, issued in 2022 by Royal Railway, was subscribed to by institutional investors, Manulife, Prudential and Cargill, under the cover of a USD 24 million 100 percent GuarantCo guarantee. The proceeds of the bond, which received a rating of AAA by Ratings Agency (of Cambodia) Plc, will fund new trains as well as upgrades to the country’s railway network. This added capacity will help Royal Railway meet large unmet demand for freight and public services in Cambodia with potential to deepen cross border trade in the region. Train transport is also far more climate friendly compared to other modes of land transport, thus expansion of freight services on the railway also helps minimise the carbon footprint of such activities in the country.

The Royal Railway transaction was executed swiftly in seven months allowing the institutional investors that GuarantCo worked with to deploy their funds quickly. GuarantCo’s expertise in structuring transactions and project management was critical in delivering this timeline. In our experience, institutional investors value partners who recognise the need to execute quickly and seek to collaborate on transactions with a strong credit story and  appropriate risk/reward allocations.

Local capital markets that provide enabling environments are also essential to facilitate the participation of institutional investors and blended finance structures. The Capital Markets Regulator in Cambodia was another key driver in the speed of execution of the Royal Railway transaction. The bond listing was a smooth and straightforward process which was further enhanced by quick decision making by the regulator. By contrast, regulatory regimes with a protracted approval process or which introduce significant framework changes, such as restricting the investment activities of insurance companies or pension funds, or altering pricing frameworks for market participants, without consulting widely on their impacts, can create restrictive environments and damage investor confidence. Local capital markets provide an important platform to crowd in institutional investors who in turn can bring in liquidity to help bridge the infrastructure gap in low- and middle-income countries.  Therefore, creating the right conditions for investment is a key step local regulators can take to help unlock these crucial sources of funds.

Institutional investors are severely under-represented in the infrastructure financing landscape in low- and middle-income countries across Asia and Africa, despite projections of rapid urbanisation and growth in these regions. Bridging the infrastructure financing gap requires ambition and confidence from all involved: from regulators who create enabling environments to crowd in long term investors to credit solution providers such as GuarantCo that can help unlock liquidity.  Blended finance structures, including GuarantCo’s guarantees, play a key role in catalysing institutional investors participation in these markets by offering a pathway to de-risk investments, opening up opportunities to invest in projects with strong development impact and alignment with net zero commitments that would otherwise be missed.

^[1] Global Asset Management 2022—20th Edition From Tailwinds to Turbulence (https://web-assets.bcg.com/c8/5a/2f2f5d784302b945ba1f3276abbc/global-asset-management-2022-from-tailwinds-to-turbulence-may-2022.pdf)
^[2] https://ppi.worldbank.org/content/dam/PPI/documents/PPI-2021-Annual-Report.pdf
^[3] https://documents1.worldbank.org/curated/en/260581617988607640/pdf/Demographic-Trends-and-Urbanization.pdf
^[4] Global Infrastructure Hub, https://outlook.gihub.org/