BU data snapshot: Global infrastructure finance trends
Using Berne Union data, we investigate the transformative trends in infrastructure finance. Who is doing business in covering infrastructure finance, where in the world, and what are the risks going forward?
The international infrastructure investment landscape is undergoing a transformation. Growing populations, digitalisation, and decarbonisation are only increasing the world’s demand for new infrastructure – from efficient transportation networks to clean water facilities and reliable power transmission. However, financing these projects is met with challenges, with estimated annual demand soaring to $3.9 trillion1. Navigating the inherent risks further complicates the picture.
Governments globally, especially in emerging markets and developing economies, are actively seeking to bridge the infrastructure gap. This is where insurance can be used as a vital tool. It acts as a shield against risks, freeing capital flows into these markets and attracting much-needed private sector investment. With government purses tightening, collaboration between multilateral development banks, international financial institutions, and private finance holds the key to paving the way for a more prosperous and sustainable future.
Who’s doing business in infrastructure?
Since the harmonious decline of new medium/long term (MLT) commitments issued by Berne Union members across sectors following the pandemic, the infrastructure sector has seen annualised growth rates of 42%, reaching $14.2 billion as of 2022. This growth is surpassed only by the manufacturing sector ($20 billion, +52%). In the first half of 2023, the most recent data from the Berne Union, new commitments totalled $11.3 billion. This marks the first time a sector other than transportation* has led the market within a half-year period. If new commitment levels in the second half of 2023 follow suit, it is plausible that new commitments will reach $20 billion for the year, doubling pre-pandemic levels.
There has also been a commensurate increase in the volume of transactions. Using the number of members providing cover in the sector, as well as the number of countries with exposure, as proxies for deal frequency, we can see that appetite for infrastructure projects is only expanding. Over half (46) of Berne Union members now have exposure in the infrastructure sector, up from 28 in 2019, positioning it as the most popular sector ahead of manufacturing (42) and transportation (41). It also boasts the highest increase in member participation (+18) since 2019. Similarly, no sector had more members providing new cover (34) in 2022.
Dissecting the data, we see increased private investment driving the sector's expansion. This is evident in the growth in new commitments to private obligors, including corporates, project financings, and banks. In 2019, when we began collecting sectoral data, the majority of new commitments ($6.5 billion, 64% share), went to public entities (sovereign and non-sovereign) seeking cover for their public infrastructure investment.
However, since then, new commitments issued to private obligors have grown steadily, climbing from $3.7 billion in 2019 to $8.4 billion in 2022, and free of the typical pandemic contraction. By contrast, public entities, who suffered a sharp drop during the pandemic as governments reprioritised fiscal spending, have only surpassed pre-pandemic commitment levels as of 2023 H1, with an anomalous rise to $9.2 billion in the half-year period. Interestingly, new commitments to private obligors have dramatically slowed in the same period, to $1.9 billion, perhaps due to the pressures of high interest rates.
The influx of private investment coincides with a rise in private insurer involvement. Our private members have increased their share in the total of new commitments in the sector from 8% in 2019 to 16% in 2022, reaching $2.2 billion. If 2023 H1 figures ($1.4 billion, up 77% year on year) are indicative, this growth is likely to continue in 2023. From being the penultimate sector in new commitments issued by private insurers in 2020 ($508 million), it has now grown to be the largest sector for the private market ($2.2 billion), ahead of energy ($1.8 billion) and transportation ($1.3 billion).
The involvement of private insurers is primarily concentrated in advanced economies like Europe and the US. Europe has consistently been the largest destination market, accounting for a 50% share of new commitments in 2022, while the US has increased from $90 million in 2019 to $379 million in 2022, and $435 million in 2023 H1. The same holds for private obligors, with the addition of East APAC.
Looking at the sector as a whole, sub-Saharan Africa is the only region demonstrating consistent growth and is by far the largest destination market for Berne Union members, with average yearly new commitments of $3.5 billion. Notably, four of the top five countries by total exposure are located in the region – Angola ($9.2 billion), Côte d’Ivoire ($5.8 billion), Ghana ($5.5 billion), and Kenya ($5.3 billion). While ECAs have traditionally provided support in this region, multilaterals are increasingly filling the financing gap, with a 26% share of new commitments in 2022 and a 63% share in the first half of 2023.
Market health: Risk and recovery
While the infrastructure sector is witnessing exciting growth, rising claims and arrears paint a picture of a heightened risk environment. Claims paid have climbed from $343 million in 2019 to $633 million in 2022, averaging $472 million across the four-year period, while being the only sector to see higher claims year on year. Since 2021, losses related to the sovereign defaults of Zambia and Sri Lanka, for which $585 million and $229 million have been paid respectively, have buoyed claims. Excluding transportation, which faced disproportionate pandemic-related losses due to travel restrictions, infrastructure has been the largest source of claims for members' MLT business in both 2021 ($556 million) and 2022 ($633 million). This trend continued in the first half of 2023, with claims reaching $777 million, making it the costliest sector despite being the fastest growing.
Contextualising these claims using the claims ratio paints a similar picture. While the three year average claims ratio for infrastructure sits at 0.62%, only two basis points above the sectoral average, there has been an upward trend from 0.47% to 0.66% and now 0.73% in 2022 (second only to transportation at 0.91%) over the past three years. This is particularly true in regions like LATAM & Caribbean and Europe, where the three year average claims ratio is 1.75% and 1.32%, respectively.
It is noteworthy that sub-Saharan Africa appears to carry less risk, with a three year average claims ratio of 0.42%, 18 basis points below the overall sector average, suggesting the general risk perception of the region is a little unjust when we look at the real transactions. Politically related issues are the primary driver of total infrastructure claims, accounting for at least 63% of total claims every year since 2019, except for 2022 when a surge in commercial claims ($320 million) led to a 50/50 split.
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Table 1: Claims ratio of MLT business by sector (%) |
||||
|
2020 |
2021 |
2022 |
3-year average |
|
|
Energy |
0.65% |
0.39% |
0.41% |
0.48% |
|
Infrastructure |
0.47% |
0.66% |
0.73% |
0.62% |
|
Manufacturing |
1.55% |
0.75% |
0.71% |
1.01% |
|
Natural resources |
0.38% |
0.33% |
0.37% |
0.36% |
|
Nonspecific |
1.98% |
0.42% |
0.60% |
1.00% |
|
Other/Multiple |
0.08% |
0.23% |
0.28% |
0.19% |
|
Renewable Energy |
0.07% |
0.16% |
0.06% |
0.10% |
|
Transportation |
0.88% |
1.28% |
0.91% |
1.02% |
Despite these concerns, members show relative success in recovering funds within the sector. The four year recovery ratio stands at 45%, surpassed only by the renewable energy sector (74%), which has witnessed minimal claims since 2019.
Looking ahead: Potential for more credit issues
On the horizon may be more non-payment issues. Arrears within the infrastructure sector are steeply rising, reaching $1.9 billion in 2022 (a 132% increase compared to 2019), and may yet feed into claims. Amounts overdue are mostly in emerging markets and developing economies, but what’s concerning is the exposure in markets facing precarious macroeconomic situations. Alongside Angola, Côte d’Ivoire, Ghana, and Kenya – members also have significant exposure in Egypt ($7.9 billion), and with the exception of Côte d’Ivoire, are all grappling with their own macroeconomic challenges.
However, there is promising news. Ghana, which defaulted in December 2022, recently reached a restructuring deal with its official creditors, while Angola, Egypt, and Kenya have now seen their borrowing spread fall below the debt distress threshold**, granting them access to international bond markets2. This opens the door for them to refinance existing debt with fresh borrowings, potentially avoiding defaults like many have done in the past few years and easing their overall debt burden. This points to robust health in the sector through the cycle.
*Other/multiple sector has been omitted
** dollar-borrowing costs more than 10 percentage points higher than US Treasuries
1 European International Contractors, Global Infrastructure Outlook to 2040, 17 Nov. 2017: https://www.eic-federation.eu/industry/global-infrastructure-outlook-2040.
2 https://www.ft.com/content/c2572557-f8c8-4653-afda-bf922e4e1694
