Myths vs. realities: Infrastructure finance (transmission, storage, water) — what the evidence actually supports

Global infrastructure investment needs for energy transmission, storage, and water systems will reach $94 trillion by 2040, according to the Global Infrastructure Hub's 2025 forecast, yet annual capital deployment currently covers only 57% of what is required. This gap, roughly $3.7 trillion per year, persists despite record levels of institutional capital seeking infrastructure allocations. The disconnect between available capital and deployed investment is driven partly by genuine structural barriers and partly by persistent myths about how infrastructure finance works in emerging markets. For executives evaluating infrastructure investments across transmission, storage, and water, separating evidence from narrative is essential for capital allocation decisions that actually deliver returns and climate impact.

Why It Matters

Infrastructure finance sits at the intersection of climate policy, economic development, and institutional investment. The International Energy Agency's World Energy Investment 2025 report identified transmission and distribution networks as the single largest bottleneck to renewable energy deployment globally, with over 3,000 GW of renewable capacity waiting in interconnection queues worldwide (IEA, 2025). Energy storage investment reached $52 billion in 2025, up from $20 billion in 2022, but remains concentrated in a handful of markets. Water infrastructure, often overlooked in climate finance discussions, requires an estimated $1.7 trillion in annual investment through 2030 to achieve universal access to safely managed water and sanitation services (World Bank, 2025).

Emerging markets account for roughly 65% of projected infrastructure investment needs but attract only 20% of private infrastructure capital flows. Myths about risk, return, and bankability shape capital allocation decisions in ways that systematically disadvantage projects in these markets, even when the underlying economics are competitive. Understanding where conventional wisdom aligns with evidence and where it diverges is a prerequisite for closing the infrastructure finance gap.

Myth 1: Infrastructure Projects in Emerging Markets Are Too Risky for Institutional Capital

The claim: Political instability, currency volatility, and weak regulatory frameworks make infrastructure investments in emerging markets fundamentally unsuitable for pension funds, insurance companies, and sovereign wealth funds.

What the evidence shows: The IFC's Emerging Market Infrastructure Fund database, tracking 2,847 infrastructure transactions across 78 countries from 2005 to 2025, reports a realized default rate of 4.2% for project-financed infrastructure in emerging markets, compared to 3.8% for equivalent investments in OECD countries. Recovery rates following default averaged 72% in emerging markets versus 78% in OECD economies (IFC, 2025). The difference is material but far smaller than the perceived risk premium suggests.

Currency risk, often cited as the primary barrier, is real but manageable. The Currency Exchange Fund (TCX), which provides local currency hedging for development finance institutions, has facilitated $12 billion in hedged transactions since inception. TCX data shows that the median cost of currency hedging for a 10-year infrastructure loan in Sub-Saharan Africa is 3.2% annually, roughly half the risk premium that most institutional investors apply when pricing emerging market infrastructure debt (TCX, 2025). The Multilateral Investment Guarantee Agency (MIGA) has provided $7.5 billion in political risk insurance for infrastructure projects since 2020, with a claims ratio of less than 0.3%.

Kenya's Lake Turkana Wind Power project illustrates the gap between perceived and actual risk. Commissioned in 2019 as Africa's largest wind farm at 310 MW, the project attracted commercial debt at 9.5% despite initial market perceptions that placed required returns above 15%. After five years of operation, the project has met or exceeded its P50 generation forecasts in every year, delivered debt service coverage ratios averaging 1.45x, and generated realized equity returns of approximately 14% (Lake Turkana Wind Power, 2025).

Myth 2: Transmission Investment Always Requires Government Guarantees to Attract Private Capital

The claim: High-voltage transmission lines are natural monopolies that can only be financed through sovereign balance sheets or with sovereign guarantees, because regulated tariffs cannot provide adequate returns for private investors.

What the evidence shows: Brazil's transmission auction model has attracted $48 billion in private investment since 2000, financing over 180,000 km of new transmission lines without sovereign guarantees. The model uses 30-year concession contracts with annual revenue payments (Receita Anual Permitida) indexed to inflation, providing long-duration, inflation-linked cash flows that match institutional investor liability profiles. Average winning bid IRRs have ranged from 8 to 12% in BRL terms, attracting participation from CDPQ (Canada), State Grid Corporation of China, ISA (Colombia), and multiple Brazilian pension funds (ANEEL, 2025).

India's interstate transmission system has similarly mobilized $15 billion in private capital through competitive bidding, with Sterlite Power, Adani Transmission, and other developers financing projects on a non-recourse basis using tariff-based competitive bidding. The Central Electricity Regulatory Commission's transmission tariff framework provides cost-plus returns with 15.5% post-tax equity return on a normative 30% equity base, creating predictable cash flows that have supported investment-grade credit ratings for several transmission companies (CERC, 2024).

The key enabler is not government guarantees but regulatory design: long-duration contracts, inflation indexation, independent regulatory oversight, and standardized project documentation that reduces transaction costs. Where these elements are present, private capital flows to transmission without sovereign credit support.

Myth 3: Battery Storage Is Too Expensive for Emerging Markets

The claim: Lithium-ion battery storage costs, while declining in developed markets, remain prohibitively expensive for emerging market grids that have lower electricity prices and weaker currencies.

What the evidence shows: Battery storage costs have fallen to $115 to $140 per kWh (installed, utility-scale) globally as of early 2026, driven by Chinese manufacturing scale and LFP chemistry adoption (BloombergNEF, 2026). This cost level makes 4-hour battery storage economically competitive with gas peaker plants at electricity prices above $60 per MWh, a threshold that most emerging market grids now exceed due to diesel and heavy fuel oil generation costs.

South Africa's Battery Energy Storage Systems procurement program awarded 513 MW / 2,052 MWh of battery storage in 2024 at average prices of $142 per kWh installed, only 8% above the global average. The projects, developed by BioTherm Energy, Enel Green Power, and ACWA Power, were financed with 70:30 debt-to-equity structures using local currency loans from South African commercial banks at rates of 11 to 12.5% (DMRE, 2025). Bankability was enabled by 20-year power purchase agreements with Eskom that included capacity payment structures guaranteeing minimum revenue regardless of dispatch.

The Philippines deployed 1,200 MW of battery storage by end of 2025, largely financed by local conglomerates (SMC Global Power, Aboitiz Power) using corporate balance sheets. The business case was straightforward: ancillary services revenues of $80 to $120 per kW per year in the Wholesale Electricity Spot Market provided payback periods of 5 to 7 years at installed costs of $130 to $155 per kWh (Philippine DOE, 2025).

Myth 4: Water Infrastructure Cannot Generate Commercial Returns

The claim: Water is a public good with politically suppressed tariffs, making private water infrastructure investment inherently unviable without ongoing subsidies.

What the evidence shows: The global water utility sector generated $310 billion in revenue in 2025, with operating margins averaging 25 to 35% for well-managed utilities. Private water operators serve over 1 billion people worldwide, with Veolia, SUEZ (now part of Veolia), Sabesp, and Manila Water demonstrating commercially sustainable models across diverse regulatory environments (Global Water Intelligence, 2025).

Sabesp's 2024 privatization in Sao Paulo, the largest water utility IPO in history at $7.4 billion, attracted global institutional investors including Equatorial Energia as the reference shareholder, GIC (Singapore), and ADIA (Abu Dhabi). The investment thesis was based on Sabesp's existing EBITDA margins of 42%, tariff structures indexed to the IGP-M inflation index, and regulatory frameworks that allow cost pass-through within efficiency benchmarks. Post-privatization, Sabesp committed to achieving universal water supply coverage by 2029 and universal sewage treatment by 2033 (Sabesp, 2025).

Manila Water, serving the east zone of Metro Manila since 1997 under a 25-year concession (extended to 2037), has achieved full cost recovery while reducing non-revenue water from 63% to 11% and expanding coverage from 26% to 99% of its service area. Total private investment has exceeded $3 billion, financed through a combination of project bonds, commercial bank debt, and retained earnings. The model demonstrates that when tariff structures allow cost recovery and regulatory frameworks are transparent, water infrastructure generates stable, inflation-linked returns competitive with other infrastructure asset classes.

Myth 5: Blended Finance Is Just a Subsidy by Another Name

The claim: Development finance institution (DFI) participation in infrastructure deals through concessional loans, first-loss guarantees, and subordinated equity simply subsidizes returns for private investors without addressing fundamental bankability constraints.

What the evidence shows: Blended finance has mobilized $185 billion in private capital for infrastructure in emerging markets between 2015 and 2025, with an average mobilization ratio of 4.1x (every dollar of concessional capital catalyzed $4.10 of commercial investment). Critically, 62% of blended finance transactions in infrastructure involved instruments that address specific market failures rather than subsidizing returns: political risk insurance, local currency hedging, standardized contract templates, and project preparation funding (Convergence, 2025).

The Africa50 Infrastructure Fund, capitalized at $3 billion by African sovereign shareholders and DFIs, has invested in 15 infrastructure projects across 10 countries with a portfolio IRR of 12.4% in USD terms. The fund's project development arm spends $2 to $5 million per project on feasibility studies, environmental assessments, and transaction structuring, costs that would otherwise fall on project developers and create a barrier to entry in markets with limited development capital. This project preparation function, rather than concessional pricing, is the primary value-add that unlocks commercial investment (Africa50, 2025).

The Climate Finance Leadership Initiative's Emerging Markets Investment Accelerator has demonstrated that standardized documentation alone can reduce transaction costs by 30 to 40% for infrastructure deals in emerging markets, compressing timelines from 24 to 36 months down to 12 to 18 months. This efficiency gain, worth $5 to $15 million per transaction in advisory and legal costs, often exceeds the value of any concessional pricing element.

What's Working

Regulatory frameworks that provide long-term revenue certainty through inflation-indexed contracts, independent oversight, and standardized bidding processes have been the single most effective tool for attracting private infrastructure capital. Brazil's transmission auctions, India's tariff-based competitive bidding, and South Africa's Renewable Energy Independent Power Producer Procurement Programme (REIPPPP) collectively mobilized over $80 billion in private investment without sovereign guarantees.

Local currency financing is expanding. Green bond issuance in local currencies across emerging markets reached $28 billion in 2025, up from $4 billion in 2020, reducing currency mismatch risk for infrastructure projects. The African Development Bank's Room2Run synthetic securitization transferred $2 billion of infrastructure loan exposure to private credit investors, demonstrating that emerging market infrastructure debt can be packaged for institutional buyers.

What's Not Working

Project preparation remains severely underfunded. The G20 Infrastructure Working Group estimates that only 10% of the $8 billion needed annually for infrastructure project preparation in emerging markets is currently being deployed. This bottleneck means that many commercially viable projects never reach financial close because sponsors cannot absorb the $3 to $10 million in upfront development costs required to bring a project to bankable status.

Water sector governance continues to constrain private investment. Despite successful models in Brazil, the Philippines, and elsewhere, political resistance to cost-reflective tariffs and private participation in water services limits the investable universe. In Sub-Saharan Africa, average water tariffs cover only 30 to 50% of operating costs, creating a structural gap that neither subsidies nor blended finance instruments can sustainably bridge without tariff reform.

Key Players

Established: Brookfield Asset Management (infrastructure AUM of $188 billion globally), Macquarie Asset Management (infrastructure specialist with $220 billion AUM), IFC (largest multilateral investor in emerging market infrastructure), African Development Bank (continental infrastructure finance leader)

Startups: Africa50 (pan-African infrastructure investment platform), InfraCo Africa (early-stage infrastructure developer backed by PIDG), Gridworks (transmission and distribution developer focused on Africa and South Asia)

Investors: GIC (Singapore sovereign wealth fund with $30 billion infrastructure portfolio), CDPQ (Canadian pension fund with extensive emerging market transmission investments), Allianz Global Investors (insurance-backed infrastructure debt specialist)

Action Checklist

• Assess actual historical default and recovery data for target markets rather than relying on sovereign credit ratings as proxies for project risk
• Evaluate currency hedging costs through TCX or commercial providers before applying blanket risk premiums that overstate currency exposure
• Structure investments around inflation-indexed, long-duration revenue contracts that match institutional liability profiles
• Allocate 2 to 5% of fund capital to project preparation activities that create bankable pipelines rather than competing for the limited supply of shovel-ready deals
• Engage with standardized documentation initiatives (FAST Standard, MDBs' Upstream platform) to reduce transaction costs and timelines
• Consider blended finance structures for first-mover transactions in new markets, with a clear plan to transition to fully commercial terms as track records develop
• Separate water sector opportunities by regulatory maturity: prioritize markets with independent regulators and cost-reflective tariff frameworks

FAQ

Q: What is the typical return profile for private infrastructure investment in emerging markets? A: Realized returns vary significantly by subsector and market. Transmission concessions in Brazil and India have delivered equity IRRs of 10 to 15% in local currency terms. Renewable energy projects with PPAs typically achieve 8 to 14% USD returns depending on country risk. Battery storage projects in markets with ancillary services markets generate 12 to 18% equity returns. Water concessions in well-regulated markets produce stable 10 to 14% equity returns with lower volatility than energy infrastructure. These returns generally carry a 200 to 400 basis point premium over equivalent OECD infrastructure investments, reflecting genuine (though often overstated) incremental risk.

Q: How do I evaluate whether a blended finance structure is genuinely catalytic or simply subsidizing returns? A: Catalytic blended finance addresses specific, identifiable market failures: currency mismatch, political risk, project preparation costs, or information asymmetries. If removing the concessional element would make the project unfinanceable at any commercial price, the structure is addressing a market failure. If removing the concessional element would simply reduce investor returns from attractive to acceptable, the subsidy is unnecessary. Look for structures where the concessional element is time-limited and designed to build a track record that enables fully commercial follow-on investment.

Q: What regulatory indicators should I look for when evaluating infrastructure investability in a new market? A: The strongest indicators are: existence of an independent regulatory body with a track record of honoring tariff determinations, inflation-indexation mechanisms in tariff or concession structures, standardized competitive procurement processes, enforceability of contracts (investment treaty protections or credible local courts), and historical precedent of private infrastructure investment reaching commercial operation. Markets that score well on these indicators but have limited private investment represent the highest-potential opportunities, because the gap is driven by information asymmetry rather than structural barriers.

Q: Is there a minimum deal size that makes emerging market infrastructure finance workable? A: Transaction costs for project-financed infrastructure in emerging markets typically run $3 to $10 million regardless of project size, creating a practical floor around $50 to $100 million for individual project finance transactions. Below this threshold, aggregation vehicles (pooled funds, platforms like Africa50 or InfraCredit in Nigeria) are more efficient. Portfolio approaches that standardize due diligence and documentation across multiple similar projects can reduce per-project transaction costs by 30 to 50%, making smaller projects viable.

Sources

• International Energy Agency. (2025). World Energy Investment 2025. Paris: IEA.
• IFC. (2025). Emerging Market Infrastructure Investment: 20-Year Performance Review. Washington, DC: International Finance Corporation.
• BloombergNEF. (2026). Energy Storage Market Outlook: 1H 2026. London: BNEF.
• Global Water Intelligence. (2025). Global Water Market 2026: Meeting the World's Water and Wastewater Needs. Oxford: GWI.
• Convergence. (2025). State of Blended Finance 2025. Toronto: Convergence Blended Finance.
• World Bank. (2025). Infrastructure Finance in Emerging Markets and Developing Economies: Investment Needs and Financing Gaps. Washington, DC: World Bank Group.
• ANEEL. (2025). Transmission Auction Results and Private Investment Analysis: 2000-2025. Brasilia: Agencia Nacional de Energia Eletrica.
• Africa50. (2025). Annual Report 2024: Infrastructure Investment and Development Impact. Casablanca: Africa50.
• TCX. (2025). Local Currency Solutions for Infrastructure Finance: Market Report. Amsterdam: The Currency Exchange Fund.