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The Challenge of Financing Infrastructure in Developing Countries

ESTABLISHING A SOUND FINANCING framework to meet developing countries’ growing infrastructure needs remains a key challenge for policymakers. Efficient transport, reliable energy, safe drinking water, and modern telecommunication systems are critical to attracting foreign direct investment, expanding international trade, and achieving long-term investment and growth. Worldwide, most future infrastructure demand is likely to come from the developing world (home to 85 percent of the world’s population), where access to infrastructure services falls well behind the levels in the developed world (box 6.1).1 Estimates by several international organizations and researchers point to the substantial investment required in developing countries, including an annual amount of $120 billion in the electricity sector from 2001 to 2010 (International Energy Agency 2003) and $49 billion for water and sanitation from 2001 to 2015 (Camdessus 2003). China’s infrastructure investment needs remain massive, estimated at about $2 trillion during the 2001–10 period (Asian Development Bank 2002). The rebuilding of Iraq’s civilian infrastructure likewise will require considerable capital. Global capital markets have the depth, maturity, size, and sophistication potentially to fund all viable investments and projects in developing countries’ infrastructure. That they have failed to do so, and that the flow of private finance to infrastructure has declined so dramatically in recent years, is a reflection of several factors—chief among them the impact of recent macroeconomic shocks, ongoing transformations in the global electricity and telecommunications industries, the weakness of local capital markets in most develop-