Moving Forward
Developing countries need investment in transport in order to thrive

By Robin Carruthers, principal transport economist, World Bank

With rates of growth averaging more than 7% in 2005 and 2006, the economies of low- and low to middle-income countries are now growing more than twice as fast as the 2.7% of high-income countries. But their investment in transport infrastructure, averaging less than 2% of GDP, is lagging far behind. A country experiencing economic growth of 7% per year needs to invest about the same figure, 7%, of its GDP in transport just to stop the congestion and bottlenecks from getting any worse. And this figure doesn’t take into account the lack of investment in recent decades in these countries, often since they became independent. As a result, their transport infrastructure is now a barrier to their continued high rates of economic growth.

One of the main reasons why transport investment is lagging is the shortage of finance. Although they are growing rapidly, the absolute size of their economies is rarely large enough to generate the public funds needed to finance and maintain the necessary infrastructure. Nearly all of them are seeking private investment to overcome this predicament. The private funding currently being made in transport infrastructure in low- and middle-income countries is already about U$40 billion per year, more than double that from official development aid. Since 2002 there have been more than 800 recorded public-private investment projects in transport, and most low-income countries see this form of funding as the best way forward.

Benefits of transport
Existing transport networks, such as roads and railways, and facilities such as ports and airports, can offer many of the investment characteristics sought by institutional investors such as pension funds. They can provide secure revenues, invariably with government guarantees, and predictable operating and investment costs. Few greenfield projects that are 100% privately funded fall into this category, but many joint public-private ventures that are concessions of existing facilities or even new projects are now attracting institutional investors. Pension funds are more likely to invest in companies that have already won concessions and are negotiating for more, rather than seeking the concessions themselves. But even this is changing, with a major Canadian pension fund now reported as being a prime participant in a bid for a large airport concession.

Ports were among the first transport infrastructure assets to be concessioned or sold outright. A few successful operators making acceptable long-term returns now dominate the market, with more than 250 container and other terminals. While toll roads have been oversold as sound long-term investments, much has been learned by both issuers and bidders and many recently concessioned toll roads appear to be much more secure long-term investments. Most of the developing world’s railways were concessioned in the 1990s, with very mixed outcomes. However, much has been learned by both sides of the concession agreements, and many of the restructured railway concessions are now proving their long-term worth. Airports were the last category of transport infrastructure to be concessioned or sold, but they are turning out to be just as sound long-term investments as the others.

The long period before acceptable rates of return are earned and the political and exchange rate risks over this time are often seen as insurmountable obstacles to secure investment. But most concession agreements can be negotiated to include acceptable revenue or rate of return guarantees, and it is possible to insure against long-term political and exchange rate risk, and even breach of contract by the concessioning agency, at relatively low costs for well-structured projects in many low-income countries.1

It is not only the infrastructure investments themselves that are creating interest for institutional investors, the transport service suppliers and equipment providers are also attracting more attention. There is currently a three-year minimum wait to lease a container ship and the major shipyards have full order books for about the same period. The two major aircraft manufacturers are locked in competition to provide all the new aircraft that will be needed in the next decade, with orders now being taken for delivery as far ahead as 2015. There is still over-supply in the railway manufacturing industry, but the three or four leading locomotive manufacturers are subcontracting much of their production to their client countries. A similar phenomenon is now apparent in the road-building equipment industry, with manufacturing plants operating at capacity and contracts set to keep them at that level for the next several years at least. So with order books full for the foreseeable future, providers of major transport equipment are also becoming attractive to institutional investors.

Within the wide range of investment opportunities in transport infrastructure and related services and equipment, Canadian pension fund managers should be able to find many niches where the opportunities in terms of long-term security and rates of return are compatible with their own interests of diversification with security.

1 www.miga.org

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