In a post-COVID world, the future is digital

The COVID-19 pandemic boosted investors’ interest in digital infrastructure and digital services. Policymakers have an opportunity to amplify these effects by accelerating market reforms

Since the pandemic began, digital connectivity[1] and digital services (i.e. all services delivered over the internet) have been vital in helping maintain continuity in business activity, employment, education, and the provision of basic citizens’ services. While disruptive digital services were accelerating before the pandemic, they are now increasingly central to economic and social activity and, consequently, their demand has boomed. Nevertheless, more than half of the developing world remains digitally unconnected with consumers and businesses lacking access to high quality, affordable, safe, and reliable internet, or the right digital skills, proper digital identifications, and access to a variety of digital services.

At IFC, we have seen an increase in demand for digital connectivity and an unprecedented interest from investors. The Global Infrastructure Hub’s Infrastructure Monitor 2021 reports that private investment in telecommunications projects almost doubled in 2020.  In addition, IFC estimates (based on data from the Global Private Capital Association and Pitchbook) suggest that Venture Capital investments across emerging markets have seen an unprecedented rise recently, with 2021 volumes growing 100 percent and deals rising 55 percent compared to 2020.

There is now momentum to accelerate digital transformation, with numerous factors suggesting that investment in digital infrastructure and digital services in emerging markets will remain on an upward trend. Investment is needed to strengthen and upgrade the foundational digital infrastructure that supports the digital economy (e.g. broadband and data infrastructure) and to expand digital platforms (e.g. fintech, e-commerce, logistics, digital identity) to enable the digital transformation of traditional businesses.

For both areas, the private sector is likely to increase its share of financing, and governments will have an opportunity to drive an investment multiplier effect if they implement the right policies.

The digital infrastructure space, which is foundational to delivering affordable connectivity and hosting digital services, will see increased investor interest in international connectivity, data infrastructure and shared infrastructure

A number of private sector investment initiatives are already improving international connectivity: in Africa, two consortia are investing in high-capacity cables with multiple landing sites on the continent, and new submarine cables are planned from India to Europe crossing the Arabian Peninsula. For these initiatives to unlock cheaper consumer connectivity in the last mile, where service affordability is proving a huge barrier to internet adoption, market liberalization reforms become more pressing. These include reducing the high entry barriers to competition, for example by allowing new market entrants to leverage existing public sector fiber assets and unused government-owned telecom infrastructure, and by accelerating the securing of rights of way over network assets. Adopting the global free trade agreement in IT equipment, especially if coupled with reductions on import duties, could speed up investment while reducing service and smartphone costs.

The global cloud computing market is becoming essential to power the digital economy, and is expected to grow from around USD500 billion in 2021 to almost USD1 trillion by 2026. The majority of developing countries now lack adequate infrastructure and are forced to send their data overseas, typically incurring very high costs. This creates investment opportunities, including the development of regional hubs in small countries that do not have the scale economies to develop such infrastructure.

An additional effect of increasing digitalization is the growing energy footprint of digital infrastructure, with digital economy emissions expected to grow. This challenge will drive investment opportunities to green infrastructure and minimize or even reduce emissions per megabyte of new and existing assets. Investment in shared digital infrastructure (e.g. assets like mobile towers and fiber-optic cables that are used by multiple service providers) reduces physical investment, avoids asset duplication, and leads to emissions savings; while sustainable data centers increase energy efficiency.

Investment in digital platforms will continue to grow, driven by fintech, digital adoption by businesses and by the rise of the digital urban consumer

The post-COVID world has witnessed a global surge in investment in startups, with venture funding worldwide reaching over USD600 billion in 2021. Emerging markets are now getting a bigger slice of this: over USD20 billion of Venture Capital went into Latin America in 2021 (nearly four times as much as in 2019) and African startups raised over USD4 billion in 2021 (2.5 times more than in the previous year).

The demand for business models that expand access, bring down prices and respond to new challenges will only increase as the economy moves away from the post Covid era. Greater levels of tech absorption as companies seek to digitize certain parts of their operations will also spur new business solutions. Digital financial services will continue to establish themselves as central to a functioning digital economy, and fintech investment will accelerate.

Governments can play a key role in boosting investment in digital platforms. Creating ‘digital stacks’ that connect digital identity to financial transaction can unlock e-commerce and e-services. Open data access policies together with the standardization and interoperability of data platforms can accelerate cloud services. Supporting local digital entrepreneurship can drive more investment to local tech solutions. For example, matching private sector financing with government funds and leveraging local pension funds can create a local venture capital ecosystem.

In a post-Covid world, there is an immense opportunity for private investors to capitalize on the momentum towards digital connectivity and for governments to enable and support these investments through the right mix of market reforms, such as addressing existing bottlenecks and ensuring that the business environment is conducive to private investment. Together, they can help deliver better and more affordable digital infrastructure to the developing world.

About the Author

Davide Strusani – Principal economist, TMT, Disruptive Technology and Funds, International Finance Corporation. At the IFC, Davide leads the economics team that focuses on telecoms, technology, digital services, venture and equity fund investing. As part of its role, Davide’s team assesses the development impacts of investments made by IFC in these industries and undertakes economic research to inform the development of private sector market in developing economies.