Baker McKenzie A changing world: New trends in emerging market infrastructure finance

  1. How infrastructure finance is changing?

Status quo

  • Urgent need for infrastructure investment in emerging markets

Cf. McKinsey Global Institute: the world must invest 3.8% of GDP, or $3.3 trillion a year to 2030: emerging markets account for around 60% of this requirement.

Shifting balance and trends

  • Development finance institutions (DFIs)
  • Balance between multilateral and bilateral DFI lending is shifting. Bilateral lending, which it defines as DFI and ECA-backed cross-border deals where at least 50% of the lending group. In 2017 multilaterals represented just 22% of a $35 billion market. A total of 69% of survey respondents expect multilateral lending to decline relative to bilateral DFI and ECA lending as creditor governments become increasingly supportive of the latter and make more funding available;


  1. Realization by borrowers that DFI lending was cheaper and more efficient than lending from commercial banks;
  2. Growth in renewable projects, which are often supported by bilateral DFIs;
  3. Chinese outbound loans to lower and middle income countries has surged from 20 in 2008 to 44 last year while China Development Bank and China Exim ranked first and second for bilateral DFI lending in 2017;
  4. China’s ambitious plans (e.g. China’s commitment to the Paris Agreement, investments in SSA) have spurred greater activity by other countries (e.g. US, Japan).

2. Focus: Sub-Saharan Africa (SSA)

Status quo

  • SSA suffers from massive under investment – the World Bank estimates an infrastructure financing gap of $93 billion a year;
  • DFIs are the most important infrastructure players in SSA because of risk-averse private investors and a shortage of government firepower.

Shifting balances and trends

  • China has targeted SSA: its banks loaned $19 billion to energy and infrastructure projects in the region from 2014-2017, almost half of which in 2017;
  • China’s Exim Bank has been the largest policy lender in the period 2008-2017;

US and European presence in SSA

  • US decision to turn the Overseas Private Investment Corporation (OPIC) into the International Development Finance Corporation and double its lending ceiling to $60 billion is seen as a counter to Chinese largesse in Africa and other emerging markets;
  • The heightened focus on the region by China, the US, Europe and other countries will increase the flow of finance to the region. It should provide a timely boost to infrastructure activity in the region, benefiting its businesses and citizens.

3. China as new force in infrastructure finance

Status quo

Looking at emerging markets, Chinese outbound lending jumped from 20 to 44 transactions between 2008 and 2017: Indonesia, Brazil, Mexico, Vietnam and Pakistan have benefited most from Chinese outbound lending.

Shifting balances and trends

  • Policy changes or increased competition from other lending nations are cited most often by those expecting a fall in lending by China;
  • Outbound investment from China moved from natural resources to infrastructure;
  • Concerns in some countries about the scale of Chinese financing.

Focus Belt and Road Initiative

  • China does not view the BRI as a China-only initiative: The ADB, the AIIB, the EBRD, the EIB and the World Bank signed an agreement with China’s ministry of finance on BRI last year;
  • The long-term impact of China’s greater involvement in emerging market infrastructure investment is still largely unknown. Chinese investment is no longer just about commodities and infrastructure but includes technology, retail etc.


  • The way that DFIs, ECAs and commercial banks fit together is shifting. This is as a result of short-term changes in risk appetite by commercial banks and in borrower countries themselves, and longer-term strategic changes such as BRI and the growing importance of sustainability;
  • China’s activity in Africa and the audacity of the BRI mean there is a clear pre- and post-China period for many emerging market countries’ infrastructure development;
  • China’s ascendancy has injected welcome competition into the DFI world. All major institutions have been prompted to reassess their activities and strategies;
  • Much multilateral or bilateral policy investment increases, but it will never be enough. Other sources of funding are needed. The ratio of DFI lending to private capital is currently approximately 10:1 although it needs to switch to 1:10.

Critical Review

  • Need of a better estimation of the infrastructure gap that is the subject of various divergent estimates;
  • Develop a realistic estimate of the private financing that can actually be mobilized, assuming full use of improvements in financial instruments, in particular the various forms of guarantees offered by MDBs/DFIs/ECAs;
  • Need to assess the actual impact of the Internal Rate of Return (IRR) expectations;
  • Need to assess the consequences of the Liability Gap’s increase (Mc Kinsey “The rise and the rise of the Private Equity 2017).
  • Analyze the risk reduction actions to be undertaken for an improved, credible and realistic risk allocation;
  • Develop proposals on the revision of the principles and rules of the budget and public accounting for a differentiated consideration of public financing;
  • Analyze the impact of the New MDBs as AIIB or NDB realistically.

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