Annus horribilis

A report released in June by the World Bank painted a bleak picture for infrastructure investment in the developing world in 2016, as investments in emerging markets dropped 37 percent from their 2015 totals.

Total investment dropped to its lowest level in a decade at $71 billion, down from $113.8 billion a year before. The shortfall was even more dramatic compared with the average of the previous five years, which stood at $121.4 billion.

These statistics come with some caveats. One 2015 deal – the $35.6 billion IGA Airport in Istanbul – accounted for most of the year-on-year plunge. More broadly, the report notes, the trend reflects downturns in three key markets: India, Turkey and Brazil.

Though India has seen six straight years of declining investment, its outlook appears the brightest of the three, with Prime Minister Narendra Modi beginning to push forward stalled projects. In Turkey, questions over political stability following a coup attempt a year ago remain, while Brazil still faces the fallout from an ongoing corruption scandal.

Still the top market for private sector participation in 2016, Brazil’s $15.2 billion total was less than half its previous five-year average. The country’s ‘Operation Car Wash’ – or Lava Jato – scandal has centred on state-run oil company Petrobras while also ensnaring construction companies such as Odebrecht. Sectors dependant on these companies, such as transportation, have suffered, with many projects stopped in their tracks.

“Frankly there were no other companies to take those projects ahead,” Bruno Pahl, a São Paulo-based director of global infrastructure and project finance for Fitch Ratings, tells Infrastructure Investor. “It led to a huge uncertainty in the market.”

Turkey has also seen its share of uncertainty. But Matthew Jordan-Tank, the head of infrastructure policy for the European Bank for Reconstruction and Development, says the country remains attractive for investors and notes that several hospital PPPs have reached financial close in the past year.

“Despite the political situation in Turkey in the past couple of years, they have been able to move forward with their PPP programme,” Jordan-Tank says. The size of the drop-off, he adds, simply reflects the unique scale of the IGA Airport deal.

Emerging-market investors also continue to sound optimistic notes about opportunities in the developing world. But the data cannot be completely written off as the result of one big deal. Not only did 2016 see investment drop to a 10-year low, but also the total number of projects reaching financial close fell to 242, down from 334 in 2015 and an average of 421 in the five preceding years.

The transportation sector – the largest in 2014 and 2015 – was the main culprit behind the disappointing numbers, attracting just $25.7 billion, less than half its previous five-year average. Energy, on the other hand, was a relative bright spot, totalling $43.8 billion in investment, an uptick of 11.5 percent from 2015. This was driven by renewables, which comprised 88 percent of the 144 energy generation projects that attracted private investment last year.

Regionally, East Asia and Latin America saw the highest levels of investment, with $33.2 billion and $24.8 billion respectively. East Asia was the only region with increased investment activity in 2016, due in part to the success of China’s recently launched PPP initiative.

Looking forward, Jordan-Tank sees much of the work done by multilateral development banks to promote PPPs paying off, though the bump may not be seen until after 2018.

“In three years’ time, you are going to see a real uplift in emerging-market infrastructure that was supported by the [international financial institutions],” Jordan-Tank predicts. “Given preparation timelines for these complex deals, people have to be a little bit patient to allow for projects to come through.”