Infrastructure Bonds: Why do DMOs care? Heinz P. Rudolph Senior Financial Sector Specialist The World Bank

Size: px

Start display at page:

Download "Infrastructure Bonds: Why do DMOs care? Heinz P. Rudolph Senior Financial Sector Specialist The World Bank"

Edward Dixon
6 years ago
Views:

1 Infrastructure Bonds: Why do DMOs care? Heinz P. Rudolph Senior Financial Sector Specialist The World Bank

2 Areas of interest Provision of Public Guarantees: Concessions (PPP) are a substitute of debt financing Usually concessions contracts involve provision of public guarantees Badly designed PPP contracts have resulted in effective use of public guarantees Possibilities of rationalizing the use of guarantees Design of the yield curve Interest in minimizing the cost of financing Relevant benchmarks for infrastructure bonds.

3 What are infrastructure bonds? Bonds issued by the private sector with the purpose of financing infrastructure projects of public interest. Usually subject to concession contracts with the public sector (PPP) Financing is through Project Finance 1 Usually there are public guarantees involved 1 Narrow Definition

4 Why infrastructure bonds are scarce? Project Finance (PF) is relatively new Poor design of concession contracts. Level of development of the capital market

5 Concessions is More an Art than a Science Basic Principle Risk should be allocated to the party better able to manage it

6 Risk allocation on concessions Construction cost risk. Demand risk Inflation risk Exchange rate Policy Risk

7 Experience with Concessions Somehow Mixed Successful cases: UK, Ireland, Chile, South Africa Tough learning curve in most of the other countries.

8 Top Five Major Mistakes State Guarantees. Initial optimism on expected demand. Little monitoring by the private sector Transparency. Projects not allocated in bidding processes. High costs. Incomplete contracts and incentives for renegotiation. Incentives for renegotiation (the issue is how to handle it) Need for independent supervision of contracts. Rome was not built during a weekend. In Chile, from inception to bidding, projects take 16 months. Weak legal framework. Promote adverse selection of concessionary companies (few engineers and multiple lawyers).

9 Incidence of Renegotiation of Infrastructure Concessions in Latin America and Average Time to Renegotiation (updates to 2005 annoted) Renegotiated Concession All Sectors 42% (59%) Electricity 10 % (21%) Transport 57% (67%) Water 75% (82%) Average Time to Renegotiation 2.1 years (2.7) 2.3 years 3.1 years 1.7 years Source: Guasch (2004)

10 What can debt managers do about concessions? Promote good practices on the provision of concessions: Strengthening of institutional framework Competitive bidding Guarantees provided by the concessionary company Franchise holder must retain certain equity participation Help to rationalize the use of public guarantees. Valuation of Guarantees (B&S models) Promote PVR models Promote development of relevant benchmarks

11 Valuation of Guarantees Some DMO explicitly value public sector guarantees. Sweden Colombia In some cases it is possible to request collaterals (writing an option) to align incentives

12 Present-Value-of Revenue (PVR) Auction Regulator sets tariff & discount rate Firms bid the present value of toll revenue Winner Least PVR Concession last until the winner collects winning bid

13 PVR: Strengths Reduction in demand risk: -Term expands when demand is lower than expected and shortens when is higher than expected Consequently -Lowers the risk premium: 30% (JPE) -Reduces the demand for government guarantees -Mitigates the winner s curse

14 PVR: Strengths Better risk allocation: -Franchise holder does not bear (short term) demand risk. Fair compensation can be easily defined Less scope for opportunistic renegotiations: -Easier to estimate wealth loss if franchise holder expropriated

15 Promote relevant benchmarks: long term inflation-indexed government bonds

16 Relevant Benchmarks Concessionaries usually requires long term financing Concession tariffs usually have some sort of indexation to inflation (i.e. toll roads) Concessionaries may hedge inflation risk by issuing inflation index instruments. The loan market is not the most appropriate for these projects

17 Relevant Benchmarks When domestic capital market is not deep enough, some government have provided long term currency hedges (it may be expensive). Spreads of infrastructure bonds would be tighter if there is liquidity in the relevant part of the yield curve (i.e. Chile).

18 Infrastructure Bonds: Why do DMOs care? Heinz P. Rudolph Senior Financial Sector Specialist The World Bank

Private Financing of Public Infrastructure through PPPs in Latin America and the Caribbean

Private Financing of Public Infrastructure through PPPs in Latin America and the Caribbean Executive Summary Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public