Aid & development, explained.
Global markets are systematically mispricing infrastructure risk in developing economies (Abadjayé Justin Sodogandji/Hans Lucas via AFP)
Investors assume developing economies are risky, but evidence shows the opposite.
Subscribe to The Informer for monthly expert analysis, and to Events for advance notice of visiting world leaders and distinguished guests.
You may unsubscribe from Lowy Institute newsletters at any time. For information on our privacy practices and how to unsubscribe, see our Privacy Policy.
Markets have the money, developing countries need the projects – what’s stopping them?Markets have the money, developing countries need the projects – what’s stopping them?
The statistics are sobering. Developing economies need to invest US$1.5 trillion a year just to maintain essential infrastructure, yet they are allocating only around US$1.1 trillion. By 2040, that shortfall is projected to exceed US$6 trillion, widening deficits that already hold back economic growth and human potential for billions of people around the world.
But these figures obscure a surprising reality. Last year, private investors held more than US$2.5 trillion in undeployed commitments, about US$400 billion of which was earmarked specifically for infrastructure.
When the volume of available capital almost exactly mirrors the size of the annual infrastructure financing gap, it’s worth asking why so little of it reaches the countries that need it most.
The standard explanation is that developing economies carry outsized default risks. Yet the evidence points in the opposite direction. From 1983 to 2018, African infrastructure loans defaulted at an average of just 1.9%, compared with 6.6% in North America and 4.6% in Western Europe.
It’s a pattern that should give us pause, and one that leads to an unsettling conclusion: global markets are systematically mispricing infrastructure risk in developing economies, with profound implications for the governments and communities that can least afford it.
Delays act like a “development tax”, pushing up borrowing costs and narrowing the pipeline of viable projects.
Consider the broader data. Statistics covering more than 10,000 developing market credit exposures between 1994-2024 indicate average expected losses of around 1% of all invested private principal, and under 0.4% for public lending. Likewise, World Bank data suggests typical emerging-market infrastructure investment losses average about half a per cent.
These are outcomes that place this credit squarely in investment-grade territory. Yet sovereign borrowers in these same markets can face risk premiums of above 10% for infrastructure loans, far higher than anything the real anticipated loss rates can justify.
The explanation lies in a distinction that is rarely made explicit, the difference between project risk and sovereign risk. Most large infrastructure projects, be they power plants, water treatment facilities, or transport corridors, are built around long-term contracts, defined revenue streams, and multilateral development bank safeguards. Their risks are specific and often well-managed.
But the cost of borrowing reflects something else entirely: the host country’s macroeconomic volatility. A solar farm with a 20-year power-purchase agreement may still be priced as if it must absorb every inflation shock, currency swing, and bout of political uncertainty that may occur over its lifespan. But in reality, well-structured projects are insulated from many of these risks through long-term contracts and multilateral support, even when the host sovereign is not.
This distortion is compounded by other dynamics, too. Investors frequently rely on sovereign credit ratings instead of the long-term Multilateral Development Banks (MDBs) and Development Finance Institutions (DFI) data that demonstrate low loss rates. Infrastructure debt in emerging markets is also assumed to be illiquid, prompting lenders to demand premiums that make this debt harder, not easier, to trade. And assessors routinely enforce “sovereign ceilings,” that cap project credit ratings below that of their host government’s, even when contractual protections make them far safer than the sovereign’s own balance sheet.
The cumulative effect is a market that bears little resemblance to the underlying evidence, and swathes of investment grade infrastructure that’s priced like distressed debt.
Concessional finance can and should do far more to address this. Its job isn’t to patch the infrastructure financing gap at the edges, but to fix the distortions that keep private capital on the sidelines. And this means working to reduce the uncertainty that’s keeping markets conservative.
A particularly effective approach is performance-linked concessionality, where sovereign donors like Australia could choose to reduce a project’s interest rate once it meets independently verified targets, whether that be cutting emissions, improving accessibility, or increasing equitable employment. This gives governments a direct financial reward for real performance, and gives investors what they rarely have in emerging markets: clear, credible information about how a project is tracking, making future risk easier to judge and pricing more accurate.
Donors could also reinforce these gains by making greater use of first-loss positions and partial credit guarantees, which allow ODA to absorb a small portion of any potential loss and give private lenders the confidence to extend longer and cheaper finance. ODA could likewise strengthen the market infrastructure that shapes risk pricing by funding credit registries and independent evaluations, alongside supporting liquidity reserves or foreign-exchange buffers that prevent short-term volatility from cascading into defaults.
None of this is experimental. The tools are well understood and ready to deploy, but what’s missing is ambition and speed. A first-loss guarantee that takes seven years to negotiate isn’t innovative, it’s irrelevant, because the opportunity it was meant to support will have vanished long before the paperwork is complete. These delays act like a “development tax”, pushing up borrowing costs and narrowing the pipeline of viable projects. Yet another hidden cost of persistent mispricing.
In a region grappling with climate shocks, rising debt pressures, falling aid spending, and intensifying strategic competition, it’s clear that closing the infrastructure gap will depend as much on correcting risk pricing as on increasing the supply of finance.
That’s all the more true because the infrastructure financing gap isn’t a funding failure. It’s a signalling failure we can fix right now.
About the author
Natalia Beghin
Natalia Beghin is a development specialist with extensive experience shaping infrastructure and economic development reform priorities across Southeast Asia and the Pacific.
The most-pressing world events explained by Lowy Institute experts and global contributors, in your inbox, every Thursday.
You may unsubscribe from The Interpreter at any time. For information on our privacy practices and how to unsubscribe, see our Privacy Policy.
