SEATTLE — In a move that the World Bank hopes will be a win-win, the bank’s International Development Association (IDA) is brokering deals between emerging market infrastructure projects and pension funds from developed countries. The deals will help emerging nations make up a trillion-dollar funding gap for such projects and help pension funds achieve the kind of returns that will assure their long-term sustainability. For the poor in emerging countries, the investments in infrastructure will underpin economic growth.
The need for investment — and the opportunity for investors — is great. Growing populations in developing countries drive the need for infrastructure projects such as roads, bridges, communication, sewage, electricity and the like. In fact, the needs for infrastructure projects are not even being met for current populations.
For example, according to the U.S. Agency for International Development (USAID), 2.6 billion people in emerging countries are without access to electricity, 800 million cannot get safe water and 2.5 billion do not have basic sanitation. Moreover, as many as 1.5 billion do not have dependable phone service, and 20 percent of those in developing countries cannot get to the internet.
Without adequate infrastructure, developing countries will not realize economic growth, even as their populations are growing, hence the need for bringing together emerging market infrastructure projects and pension funds. With adequate infrastructure, the people of these countries can get access to the healthcare, education and markets that they need. In fact, infrastructure investments account for most of the financing needed by developing countries to meet the U.N.’s Sustainable Development Goals.
The need for infrastructure development is so great that meeting it financially exceeds the capacity of local governments, even with the help of foreign aid from public and multilateral sources. For that reason, institutions like the World Bank and USAID are now encouraging greater private investment in developing nations’ infrastructures.
Both USAID and the World Bank are especially looking to large pension funds in developed countries as a funding source. Pension funds are attractive because they are patient capital, investing for the long term. Pension funds are now likely to be attracted to developing countries’ infrastructure opportunities because of the need to increase their returns; they are now in a “low return environment” that is likely to last for a while. What pension funds need, in addition to higher returns, is a way to manage the risk of investing in developing countries.
To help bring together pension funds and developing countries with infrastructure investment opportunities, the IDA will raise funds from private investors by issuing low-risk bonds. Efforts like that will enable pension funds to “contribute to development even in challenging, fragile countries,” according to Joaquim Levy, Chief Financial Officer of the World Bank.
The potential for bringing together emerging market infrastructure projects and pension funds is great. As Levy points out, “pension funds represent a vast potential source of infrastructure funding, as the second-largest group of institutional investors, with global assets under management of about $26 trillion.” Bringing those resources to developing countries will represent a win-win-win for the pension funds, for developing countries, and for those who are poor in those countries.
– Robert Cornet