Building Tomorrow: Advancing Infrastructure in Developing Countries

Published by BSAI on 18 January 2024

In the realm of both economic and social progress, infrastructure serves as the vital foundation that supports the functioning of a country or region. It encompasses various crucial systems and facilities, including but not limited to transportation networks, energy systems, clean water supply mechanisms, and telecommunications infrastructure. These components are essential for facilitating economic activities, enhancing the overall quality of life, and ensuring the efficient provision of indispensable services. Infrastructure in developing nations encompasses various components that are crucial for both economic and social development. A strong transportation system facilitates trade and connectivity, while energy infrastructure is essential for powering industries and households. Additionally, access to clean water is critical for maintaining good health and sanitation, and robust telecommunications infrastructure is necessary for global information exchange and connectivity. The objective of this article is to provide an extensive analysis of the development and potential of infrastructure in developing nations. It will delve into the current state of such infrastructure, into the significant role it plays in fostering development, and into the specific challenges and opportunities that these nations encounter as they strive to transition towards a more sustainable future.

Infrastructure as driving component in Developing Countries...

Developing countries face a significant deficit in their infrastructure, particularly in the energy and transportation sectors. According to a report from the World Bank, the majority of rural African regions lack access to a road that can be used throughout the year, creating a major obstacle for market access, economic integration, and mobility. In terms of energy, reliable and affordable access remains a distant dream for rural areas. The International Energy Agency reveals that as of 2019, approximately 770 million people worldwide, mostly in sub-Saharan Africa, do not have access to electricity. This energy deficit not only hampers economic development but also has a negative impact on people's basic quality of life. There is a significant digital divide when it comes to telecommunications infrastructure, which is essential for modern communication and information exchange. The International Telecommunication Union reports that about 37% of the world population has never used the internet, with the majority of these individuals residing in less developed regions. The final critical issue is water infrastructure. The United Nations has highlighted that 2.2 billion people globally do not have access to safe drinking water services, having adverse effects on health, agriculture, and industrial development.

As evident, the current state of infrastructure in developing countries is characterized by significant gaps and inefficiencies. The Asian Development Bank estimates that there is an annual investment gap of $459 billion in Asia alone, assuming business continues as usual, until 2030. This gap not only hinders economic growth but also has a negative impact on people's quality of life. The challenges faced in infrastructure development are complex and multifaceted. Financial constraints pose a primary barrier, as many countries lack the necessary funds for large-scale infrastructure projects. Additionally, technical and administrative capacity issues, political instability, and geographical challenges further complicate the situation. In order to achieve long-term economic stability and growth, sustainable development in infrastructure is crucial. Indeed, the Global Infrastructure Hub suggests that well-managed infrastructure projects can increase GDP by 5-15% over the long term. And as highlighted by the World Bank's "Scaling Up to Phase Down" report, to spur growth and bridge the infrastructure gap, there is a need for increased capital flows. The African Development Bank outlines the effectiveness of Infrastructure to boost growth: each 1% increase in infrastructure stock equals a 1% increase in GDP.

How Does Infrastructure in Developing Nations specifically lead to growth?

Above the financial opportunities infrastructure investments offer, if infrastructure in developing nations is closely looked at, it is indeed due to the opportunities and advantages that are derived from it. As mentioned, today, roughly 663 million people lack access to clean water and almost 16 percent of the world’s population still don’t have access to electricity. These are commodities that modern society takes for granted. It is investments in infrastructure that can have a definitive impact in the diminishing of these issues for less economically developed countries, playing a vital role in their structural transformation and advance.

Infrastructure development plays an important role in bridging the gap of inequalities between the rich and the poor. In fact, it can help to reduce poverty by providing communities with access to essential services, such as clean water, sanitation, and electricity. Research and evidence showed that irrigation significantly contributed to farm productivity and wages, reducing poverty and income inequality in developing countries such as India and Philippines (Bhattarai et al. 2002). A more recent example of such is the African Development Bank Group approving a loan of $196.43 million for Namibia to modernize its railway system on the 31st of October 2023 as a commitment towards reducing inequalities in the region. When effective investments are made in pivotal locations, these projects can truly trigger poverty reduction integrating parts of marginalized society.

The advancement of infrastructure in these regions acts as a catalyst for employment, generating new job opportunities for local communities. It directly creates jobs in the construction and maintenance of infrastructure projects provoking a multiplier fiscal effect in the region. An indirect effect which occurs is the increased use of local resources (materials and labor) which further stimulates the local economy through the involvement of other sectors, such as transportation, logistics or tourism. An article by the International Labor Organization (ILO) demonstrates that up to 2200 workdays can be created per kilometer of district road rehabilitation.

But infrastructure investments also affect “non-income” aspects of poverty, contributing to improvements in access to health or education for local populations. By facilitating access to educational centers and healthcare facilities, these investments can significantly increase the quality of life for individuals and communities. Indeed, the improved medical infrastructures and the facilitated access ease the delivery of essential medical services and enhance disease prevention measures, which is particularly important in these vulnerable regions, leading to better health outcomes at the society level. Similarly, the increased connectiveness of these areas can promote the development of skilled workforces, essential for the future development of developing countries. This is a vital long-term effect of infrastructure which builds on the productivity and the factors of production of a region.

The mentioned effects derived from improved infrastructure in low and middle-income regions consistently promote economic growth. This is precisely why the UN considered enhancing infrastructure as a key element of its 2030 Development Agenda, mentioning infrastructure explicitly in three of the seventeen Sustainable Development Goals (SDGs 6, 7 and 9). Investments in infrastructure boost national employment, increase productivity, and contribute to an overall raise in national income. Such investments encourage the international integration of countries, leading to increased trade affairs at both the national and international levels.  As we will investigate further in the report, a key example of such is the Belt and Road Initiative by China: a massive infrastructure project primarily conducted in Asia and Africa which has provided opportunities of economic growth to LEDCs.

Innovative components of Infrastructure for LEDCs

Moving forwards from how infrastructure can lead to growth, it is of value to explore more in detail the current sectors which allow this change in developing countries. Indeed, investors are increasingly targeting innovative and sustainable projects to address the growing demand for infrastructure in these areas. This change led to an increase in consideration for projects which don’t only meet basic needs anymore, but also implement new technologies to promote an efficient and sustainable development of these newly integrated economies.

Over the past two decades local authorities and investors showed an increased commitment in developing smart cities, particularly because of the enhanced contribution of digitalization in multiples spheres of our lives. The private sector, acting as both an advocate and a primary investor, has been a key driver in these initiatives. In a paper on the topic of smart cities, the OECD defines the latter as “initiatives or approaches that effectively leverage digitalisation to boost citizens’ well-being and deliver more efficient, sustainable and inclusive urban services and environments”. These cities are concrete examples of how advanced technologies nowadays play a determining role in the shaping of the future of urban areas and their management. They allow an accelerated implementation of diverse types of infrastructures such as smart grids for energy consumption, smart meters, and pipes for the tracking of water quality and the detection of leaks.

Taking Pune in India under examination, it has embarked on a journey to transform itself in a smart city. Relying on smart mobility, the city now uses an Adaptive Traffic Management System, which consists in the installation intelligent traffic signals and sensors. Even a small change in technology like such, but towards efficiency, creates an impact on transportation and hence productivity of the region.

Indeed, developing nations can unlock these new opportunities for economic and sustainable growth through digital infrastructure. Investments in the latter represent an alternative to a traditional development pathway for these emergent countries. It allows regions to capitalize on the digital era we are currently in, adapting their remote territories to technology of today, starting from zero. No past constructions potentially acting as barriers, serves as an advantage, providing the opportunity to rapidly move beyond lacks in development of the past. For example, in recent years, Rwanda has made significant efforts to expand rural Fiber networks, aiming at boosting connectivity and communication to remote areas. Indeed, this digital infrastructure, and implementation of networks, effectively helps bridge the gap of connectivity in rural areas. In the developed world these past innovations took longer to establish and to some extent, are structural components which challenge the implementation of future technology. This is less of an obstacle, but instead a strength, for regions of developing nations.

Beyond the potential for smart cities in rural areas, infrastructure development is essential also in addressing the climate crisis and promoting a sustainable development long term. By adopting eco-friendly practices, infrastructure projects can both actively contribute to mitigate the severe consequences of climate change and adapt to these effects through the development of resilient infrastructure projects.

In this context, developing countries are key in achieving global green growth for two major reasons. Firstly, although today most developing nations contribute with minor shares to greenhouse gas emissions, they would dramatically increase their emissions if they were to follow traditional economic growth patterns of already developed countries. Secondly, the potential impact of environmental degradation is particularly important for developing areas as they are the most vulnerable to climate change. They face severe threats from energy, water, and food insecurity. That is why it is imperative to increase investments into climate-resilient infrastructure in LEDCs, developing a resilient network ensuring continuity. For example, Ethiopia, frequently affected by droughts and other impacts of climate change, launched, in 2021 the Resilient Transport Sector Strategy, which demonstrates the government’s commitment to build a sustainable future relying on resilient transportation infrastructures. It is important to become proactive in handling the unreversible damage which society has imposed on the climate, beginning to adapt regions’ infrastructure to deal with effects which will be incurred.

And the concept of green infrastructure is ideal, standing in contrast to traditional grey infrastructure, which relies on energy-intensive and environmentally damaging methods. Green infrastructure is defined as a network that provides the “ingredients” for solving climatic challenges by building with nature. In recent years, a variety of green infrastructure is being developed, including urban forests, green roofs, and rain gardens. For instance, a wetland restoration project, partly funded by the World Bank, has been carried out in Rwanda’s capital city Kigali, playing a crucial role in the mitigation of flood risks. As nations begin relying on strategies comprising low carbon technologies that decouple economic development from emissions, developing green infrastructure at a primordial stage becomes crucial and an advantage for LEDCs, with the potential of also spurring growth.

Challenges in Infrastructure Development

The benefits and advantages of advancing infrastructure in developing regions do however come with great obstacles and challenges. Financial, regulatory, technological, social, and environmental issues are the main problems developers face in infrastructure development. In mitigating these issues, projects require major resources and are still sometimes forced to halt completely.

These infrastructure projects are immense and require great financial resources. Limitations in such resources are a major area of consideration for developers, where the return, the risk, and the obtaining of investments are major aspects considered. Every for-profit organization involved in a project is interested in the potential return. So, if the project does not seem profitable, most parties will prefer not to turn it into a reality. In addition, risk is a vital financial factor as well. Although it can be minimized using insurance, risky projects mean higher insurance premiums and lower profits. Subsequently, a risky project, such as building a bridge in an earthquake zone or any infrastructure in war zones is generally avoided. This is often the case in developing countries, where the territory is unsafe due to unideal natural landscapes or conflictual societal factors. The uncertainty of projects’ completion or even just the risk of damage tends to bring fear to investors, pushing them away from investments in developing nations. These are areas which are also often less susceptible to rules and procedures, subsequently more complicated for investors to contribute to. The acquiring of financial resources is the third major issue for investors. Large infrastructure projects are generally funded by equity, bank loans, and corporate bonds. If the required budget of financial resources is not obtained, the project cannot be completed. However, obtaining these resources is often a long process and investors are less prone to investing in areas where there is great uncertainty, no fixed definite return rate, and a relatively high risk. So, for an infrastructure project to effectively be concluded it must hold a reliable projected rate of return, a relatively low risk, and investors willing to provide the financial resources required. It is complicated to have such a combination and that is the reason behind why private investments in developing nations are much less heard of.

A secondary element which poses a challenge to infrastructure projects, especially in developing nations, are the political and regulatory hurdles which pose obstacles to investors. Elements of specific legislation can pose quite significant impact, where strict regulations can increase costs and political issues may require lobbying efforts. Changes in regulations and state management can also create problems, where projects may have to be redesigned to comply with new regulations. Political and legislative barriers are often perceived by the construction side of development. Such stakeholders must be carefully considered for successful projects. The correct constructors should be chosen in a fair way following an established procedure avoiding a waste of economic resources. The firm to which the project is assigned to, should be able to manage all logistical and operational factors. Any logistical barrier or technological restriction could create problems along the process impeding development.

Although developed nations have significant regulations regarding social and environmental issues, other nations have what are called “grey areas” where regulations are not precise and infrastructure developers can navigate their way through these areas. However, these areas create a lot of uncertainty. Even if the project is sound from a legal perspective, the social and environmental impact may anger the population. This can create protests which may become increasingly dangerous. The parties involved in the project may be a target of widespread public hate and this may lead to several risk factors: company assets could be attacked, and company officials could be at risk if public anger intensifies.

Overcoming Challenges Through Public-Private Partnerships

The countless issues that surrounding infrastructure development can be solved using cooperation methods such as PPP, or Public-Private Partnerships. This method allows the private sector to work jointly with the state, mitigating many risks and creating many advantages.  The main advantages of PPPs are an increased efficiency, a wider risk distribution, more financial capital, and a longer term of responsibility for developers. Private sector involvement in projects implies that higher funds can be obtained, and due to the profit maximizing nature of the private sector, development processes would be faster and more efficient than a project entirely owned by the state. In addition, compared to other projects where private parties have no responsibility, after the completion of the project, PPPs ensure that the private firms involved have responsibility over the lifetime of the project. This consequently implies that they are also involved in the maintenance matters afterwards, ensuring effectively run operations.

However, on the other hand, this type of partnership comes with several challenges, with the main factor being the profit maximizing element for private companies. A profit maximization strategy puts the project at risk, where the partners from the private sector may prioritize profits over public interest causing significant problems, and possibly a lower-quality outcome. Moreover, private sector and state partnerships often involve complex political problems, where corruption sometimes comes into play again potentially damaging the outcome. To avoid having legal problems, both parties should follow a careful path, ensuring that corruption is not involved.

International Collaboration and Local Communities

An important element to consider when looking at development in LEDCs is the role of collaboration in-between countries and international organizations cooperate with each other to overcome the complex technical and financial struggles.  PPPs often occur when nations form partnerships with each other dividing responsibility for the aid of developing countries. Especially for funding matters, the World Bank, and the IMF play an important role adequately allocating resources to infrastructure projects. Through initiatives nations and organizations together go forward in the development of infrastructure for LEDCs. The main example of this is China’s BRI (Belt and Road Initiative).

Vulnerable nations have many infrastructure needs and international collaboration is vital to address these needs. This collaboration and aid could be achieved via programs where the necessities are directly provided by donors. On the other hand, capacity and financial aid help the country to solve matters on its own, acting as an investment for the future compared to direct aid. The capabilities of these nations are strengthened with these programs and ensure sustainable development. Overall, international aid is incumbent for these countries where local communities can thrive with new infrastructure.

Infrastructure projects highly affect local communities, where the population needs to be educated to benefit from the project. To have the support of local communities, the people should be engaged in the project. This can be done through decision-making processes such as elections, or campaigns that actively communicate the goals of the project. Selected people can also be trained to be active participants in the project.

Successful Models and Case Studies

After having analysed and evaluated the strengths of Infrastructure for Developing Nations it is relevant and of value to observe both a past and current example of Infrastructure’s success in developing nations: Singapore and China’s Belt and Road Initiative.

Singapore is a world leader in shipping, air transport, and oil refining and since its independence it has gone from being a low-income to a high-income economy, but none of this would have been achieved if it were not for its focus on infrastructure development. Formerly a part of the British Empire and subsequently the Federation of Malaysia, Singapore became independent in 1965 and throughout the rest of the 20th Century it saw sustained economic growth, becoming one of the “Four Tigers” of Asian economic prosperity. Since then, the city-state has continued to flourish, and its infrastructure feat offers insights to other developing countries.

One of the key aspects to take away from Singapore’s success is how it established itself as an extremely business-friendly regulatory environment for foreign investment as well as for its own entrepreneurs. Low levels of corruption have been central to build this environment and gain support from not only lenders like the World Bank but also private investors. Political stability has too been a part of creating this reputation, with an especially dominant party in the People’s Action Party (PAP), in power since the country’s independence. Long-term infrastructure projects have thrived because of the uninterrupted state intervention that is present in Singapore.

Investments in their infrastructure have had 3 main sources of funding, Government Investments (Including investment funds owned by Singapore, e.g. Temasek Holdings), World Bank loans, and global partnerships, like Infrastructure Asia. More importantly however, is how these resources were allocated, with focus on every area from the city’s water supply to digital infrastructure:

A)   Singapore ranks best in Asia for ICT infrastructure and currently counts with 95% 5G coverage nationwide.

B)   Changi Airport has consistently been hailed as one of the best airports in the world, with 1.85 million tonnes of air freight in 2022.

C)   They have one of the most reliable supplies of electricity in the world after liberalising their electricity market, allowing citizens to pick their retailer without fear.

D)  Historically a trading outpost, Singapore has remained one of the busiest port hubs in the world, with 615 million tonnes of cargo handled in 2022 and its fully automated port (Tuas Port), the world’s largest once completed, began operations in the same year.

This is exemplary of how investment into Infrastructure, both local and FDI, lays strong foundations for a flourishing economy, has the potential to spur economic growth consequently shifting what was a developing nation forward.

A more recent and ongoing example would be China’s Belt and Road Initiative (BRI). This is a case of infrastructure development in emerging economies that has seen success but is also the source of controversy. Launched in 2013, the BRI sought to build trade routes and infrastructure networks to better connect China to the world. The Belt part refers to connecting Asia to Africa and Europe through what at one point was the ancient Silk Road and the Road refers to a Maritime Silk Road from the South China Sea into the Middle East and Europe.

The initiative has led to significant infrastructure projects for participant countries in the developing world, even expanding beyond the corridors that were the original target of the proposal. From the beginning of the initiative up until 2017, $85 billion was spent in development projects per year, but that number has become much lower in recent years. Among the reasons for the decrease are the Covid-19 pandemic and there have been struggles in implementation, in around 35% of the projects that were realized exclusively by Chinese corporations. Nevertheless, with over 155 countries involved, it is estimated that the value of the projects (1590+) exceeds $2 trillion, making China the world’s largest lender of development finance. As a direct result, China has considerably expanded its economic and political influence globally.

The initiative was critiqued because of an underwhelming approach to environmental goals for sustainable development as well as handing out loans of sizes larger than the receiving countries could handle, 42 countries had levels of public debt exposure to China greater than 10% of their GDP. In Africa, lending has decreased from a peak of $28.5 billion in 2016 to under $1 billion in 2022, one of the reasons being the mounting debt African countries have. Because of a lack of official information from Beijing it is also plausible that some developing countries have underreported their debt obligations to China. African experiences with the BRI vary significantly, while some face debt sustainability issues, others however have integrated Chinese loans into sound macroeconomic programs. Therefore, the BRI remains popular in Africa: the benefits filling infrastructure gaps and boosting economic growth are significant.

Though the participation of both authoritarian and more democratic African countries makes it difficult to generalize the BRI’s impact on the continent, the infrastructure built was positive for the development of the continent, bringing it an overall economic growth. Though also the overshadowing concerns about China’s authoritarian model, the projects financed by the BRI have already increased trade flows. It is estimated that it will have increased the world’s GDP by 7 trillion per year by 2040. The recent implementation of the EU’s counterstrategy, the ‘Global Gateway’, and the G7 initiative led by the US, ‘Partnership for Global Infrastructure and Investment’, are again evidence highlighting the success of BRI’s infrastructure network in developing countries. Though also being an attempt to balance the Western stance towards China’s growing influence, they are yet two significant initiatives of foreign aid towards LEDCs.

Role of International Organizations

International organizations play a major part in shaping global infrastructure, these entities include the World Bank, the IMF, the Asian Development Bank among others, all working in alignment with the UN’s Sustainable Development Goals (SDGs). The World Bank more specifically, has the task to bridge the financing gap present in developing and undeveloped countries. The bank provides loans, grants, and technical expertise to aid in the construction of energy projects, roads, bridges, and other infrastructure. The organization has shown a primary focus on green development, committing $13 billion to enable renewable generation and $5.5 billion to support energy efficiency over the past 5 years. The support provided goes beyond the financial and incorporates policy advice too, assuring projects are sustainable and efficient.

To secure funding from an international organization, there are rigorous standards and conditions attached that can pose an obstacle to some nations, particularly those with weaker governance structures. These conditions tend to include requirements for environmental sustainability, social inclusivity, and economic feasibility. Nevertheless, obtaining funding from these organizations is a chance to develop infrastructure that adheres to high standards, and the involvement of the World Bank for example, is an opportunity to attract additional investment from other sources.

The UN’s SDGs are a framework to address global challenges, and infrastructure development is central in achieving these goals. Sustainable infrastructure goes beyond mere construction. The purpose of this kind of development is not only to address current needs but to have infrastructure that serves against future problems, such as climate change, catalysing innovations in technology and other fields.

Conclusion

As we reflect on the insights gained from the writing progress of this article, it becomes clear that the journey towards improved infrastructure in developing nations is both complex and multi-faceted. This exploration has shown us the important role infrastructure plays in promoting economic growth, improving quality of life, and supporting sustainable development. As we address the current deficiencies, particularly in energy, transportation, water supply, and telecommunications, we have seen the significant impact infrastructure has on societal progress. The challenges faced by developing countries, including investment gaps and various obstacles, highlight the need for urgent collective and innovative action. Sustainable development is not just an environmental concern, but also a crucial factor for long-term economic and social resilience. We can learn valuable lessons from nations like Singapore and China's Belt and Road Initiative, which highlight the transformative power of strategic infrastructure development, as well as the complexities of financing, governance, and environmental stewardship. International organizations, in line with the United Nations' Sustainable Development Goals, play a vital role in bridging the infrastructure gap through their financial support, expertise, and policy guidance. However, the strict standards and conditions attached to their support, while aimed at ensuring sustainability and inclusivity, also pose challenges for nations with weaker governance structures. Looking to the future, the integration of emerging technologies such as the Internet of Things, Artificial Intelligence, 5G networks, and blockchain holds promise for a new era of smart, efficient, and sustainable infrastructure. These advancements, along with the global shift towards renewable energy and the growing importance of Infrastructure as a Service, are reshaping the landscape of infrastructure development. Nevertheless, moving forward requires more than just technological innovation. It calls for adaptable and comprehensive policy reforms that go beyond sectoral boundaries, balancing economic, social, and environmental goals. This approach requires a shift in decision-making processes, embracing interdisciplinary collaboration and the co-creation of policies across different sectors and stakeholders. In conclusion, the advancement of infrastructure in developing countries is not just about construction and finance. It is a journey towards creating resilient, sustainable, and inclusive societies. Achieving this goal requires a harmonious combination of financial expertise, policy knowledge, technological innovation, and a steadfast commitment to sustainable development. As we work towards achieving the 2030 Sustainable Development Goals, it is imperative to adopt a holistic approach to effectively address the intricate interplay of economic, social, and environmental factors. This will ensure that the infrastructure we construct today establishes the groundwork for a prosperous and sustainable future.

 

By Federico Galli, Riccardo De Nicola, Pablo De Atucha, Paul De Superville, Aral Mehmet


Sources