Emerging nations need USD 851 billion for infrastructure annually to secure further growth – Private investors wanted
Munich, June 20, 2012
- There are 145 countries with low to moderate gross national incomes that need major investment in essential infrastructure projects to keep growing
- Electricity and water supply, transportation and telecom infrastructure in particular need USD 851 billion each year
- A lack of infrastructure means some countries are producing 45% less than they could
- Most private international investors, however, fear the risks involved in major infrastructure projects
- These risks are often misunderstood, and should be accorded a considerably lower interest rate risk surcharge than the norm
- These improperly assessed risks are costing Africa alone around USD 9 billion per year
Emerging and developing nations need modern, efficient infrastructure to keep growing. Whether for water or electricity supply, telecommunications or transportation: there are 145 countries with low to moderate gross national incomes that need to invest USD 851 billion annually to bring their infrastructure up to date. That's the only way their local economies can keep growing. For this reason, some countries today are only half as productive as they actually could be. Private international investors in particular could help, and boost their own businesses into the bargain, but they're holding back because of the risks. This fear is often unfounded, though, and is based on prejudice and failing to see the market properly: a misperception of local risks that is costing these countries a fortune and putting the brakes on their economic expansion. Africa alone lost around USD 9 billion as a result in 2011, for example. Private investors need to assess the risks involved more realistically to profit more from these countries' growth. These are the findings of the new Roland Berger publication in the think: act CONTENT series, "Profit through progress", which was presented exclusively at the G20 summit in Mexico.
"Private international investors have a duty to help modernize essential infrastructure in the emerging nations in Asia, Africa and Latin America," says Charles-Edouard Bouée, Partner and member of the global management of Roland Berger Strategy Consultants. "Not only can they help emerging nations grow, but they can also open up important areas of business in new markets for themselves. Because only growth generates more growth."
There are 145 countries in the world which need major infrastructure
Most of the growth of the past few years took place in emerging and developing countries. Between 2005 and 2010, Europe's gross domestic product (GDP) grew only 0.8% annually. By contrast, GDP in Asia grew by more than 5% annually over that same period. Africa, Middle East and Latin America saw annual growth of around 4%. But to keep growing, many countries today are dependent on the state of their infrastructure. The greatest demand comes from the 35 countries with low gross national incomes (USD 1,005 per capita or less) and the 110 with moderate gross national incomes (up to USD 12,275 per capita). They lack a total investment of USD 851 billion in essential infrastructure projects: to supply electricity (USD 317 billion), water supplies and drains (USD 199 billion), transportation (USD 163 billion), telecommunications (USD 81 billion) and irrigation (USD 38 billion).
Just 60% of the population in Africa has access to clean water, for example, compared with 88% of the population in Southeast Asia and 95% in Central Asia. Electricity supplies are also patchy: in sub-Saharan Africa, just 30% of the population has electricity, compared with 62% in Southeast Asia and 93% in Latin America. "Countries with such gaps in their infrastructure will come up against their limits to growth sooner or later," is how Roland Berger Partner Hakim El Karoui sees the situation. "If the necessary conditions like good power supplies or an efficient transportation and telecoms network are not in place, the local economy can't grow." Many emerging nations are already producing up to 45% less than they could because their infrastructure is poor.
Private investors wanted
Around 70-80% of major infrastructure projects worldwide are in the public sector. But governments are cash-strapped, which is putting the brakes on many capital-intensive projects: further development of the infrastructure is limping along, and national productivity is stagnating. Countries with low gross national incomes should be investing around 7.5% of their GDP in new infrastructure, but in reality they're investing only 2.5%.
"We urgently need international investors to be more involved in major infrastructure projects to ensure growth and prosperity for many countries," says Bouée. "Businesses should overcome their fear of major risks, which is totally unfounded in some cases."
Businesses need to assess risks correctly
Major projects call for large amounts of start-up capital, and what really worries private investors is the long-term planning involved, as market conditions often change over a project's life. Disproportionate costs and delays in implementing projects are also major hurdles. "More than the business risks, though, it's the country risks that play a major role here. Private investors often let themselves be spooked by ratings and market analyses that seriously underestimate emerging nations," says Hakim El Karoui.
Credit costs in Africa, for example, are calculated assuming 15% of loans will be non-performing, whereas in fact only 8% of loans default. This major difference in risk perception cost Africa around USD 9 billion in 2011. "Private investors should therefore check more that the actual risks involved in doing business in each region are assessed correctly. They need to think differently," Bouée concludes.
There are some relatively simple tools available that could help private investors invest safely in infrastructure projects. These include traditional risk management methods such as using insurance and other guarantees. Involving local partners and financial institutions can help businesses counteract political and currency risks. Specific-purpose bonds are also an optimal way to help fund such products. "The public-private partnership model is the best way for emerging nations to ensure essential investment in their infrastructure in future," El Karoui says. "Spreading the investment among more people can benefit the local population, local business and investors themselves."
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