Private sector participation in infrastructure in emerging market and developing economies: Evolution, constraints, and policies

Abstract

AbstractThe private sector can play important roles in closing the infrastructure investment gaps in emerging market and developing economies. However, private participation in emerging market and developing economies' infrastructure has declined over the past decade, reflecting persistent structural challenges and risks in the business environment. The decline was broad‐based and gained momentum following the 2013 taper tantrum and the end of the commodity super cycle. Incentivizing greater private sector participation in infrastructure will require policies to improve access to long‐term finance and to derisk the business environment. This will require efforts to strengthen the banking sector regulation and supervision, to improve the legal and contractual environment, and to limit information asymmetries. Deepening local financial and bond markets can make it possible for infrastructure bonds to be issued in local currencies and minimize potential currency mismatches. Improvements in the broader business environment can benefit from greater macroeconomic stability and stronger institutional frameworks. Policies that improve the quality of projects at entry, address currency risk, relax capital controls, and enable cost recovery pricing can unlock private sector participation in infrastructure financing. Strong government support, including ensuring regulatory quality, and providing well‐targeted guarantees and subsidies, can play a critical role.