21 September 2021

Development finance - infrastructure financing with sustainability goals

Institutional investors are increasingly financing infrastructure projects in developing countries. "Development finance" involves investments that are partially secured, and deliver high returns and diversification.

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Financing of infrastructure: no longer just the task of governments

Three main factors have favoured the development of infrastructure financing (also known as "infrastructure debt") as an asset class since the outbreak of the global financial crisis in 2008:

       1. Falling investment from banks

The global financial crisis has led to the acceleration and intensification of banking regulation, prompting banks around the world to switch out of classic, very long-term project financing.

2. Dwindling state budgets

The sharp rise in government debt has reduced budgets for state-funded infrastructure and development aid projects, and caused many countries, particularly in the West, to look for new sources of financing.

3. Stagnating interest rates

The low interest rates that have followed in the wake of the global financial crisis have led to changes in the investment needs and behaviour of institutional investors.

The banks were subsequently joined by institutional investors such as insurance companies and pension funds, which were looking for investments that would offer a yield mark-up compared with government or corporate bonds, for example, as well as having terms that matched those of the liabilities of these two groups of investors.

Financing of essential infrastructure that is largely independent of demand, with public-sector operators with top-quality credit ratings (governments, cantons/federal states and other regional authorities or state-affiliated companies), has at least partially replaced other asset classes such as government or corporate bonds. Intermediaries with their own departments that structure project financing have become established partners of many large asset managers.

This trend has been further boosted in recent years by favourable regulatory treatment of this financing under the EU-wide regulatory standard Solvency II. However, this development has taken place mainly in OECD countries. For a very long time this financing was exclusively in the investment grade range, and it is only in the last few years that it has gradually begun to shift out of this range.


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Sam Berman
Director, UK Insurance
Tel: +44 20 3246 7241
E-Mail: Samuel.Berman@AllianzGI.com

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