ALTERNATIVE FINANCING OPTIONS FOR INFRASTRUCTURE DEVELOPMENT

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Julianna Rogers
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1 ALTERNATIVE FINANCING OPTIONS FOR INFRASTRUCTURE DEVELOPMENT Albert Amos The World Bank October 5, 2018

2 INFRASTRUC TURE INVESTMENT GAP USD 14.9 billion gap from 2015 to 2040, globally Approximately USD 600 million/year Reliance has been on bank lending Alternative financing instruments needed to reduce investment financing gap

3 FUNDING AND FINANCING SOURCES, 2011 TO USD B % USD B % USD B % USD B % USD B % USD B % IFI loans 74,8 14% 63,0 13% 62,6 11% 84,4 14% 54,4 8% 43,9 7% 274, Bank loans 240,4 45% 212,4 42% 3 47% 290,6 47% 345,5 52% 266,5 41% Bonds 19,2 4% 20,1 4% 38,4 7% 58,7 10% 72,2 11% 115,6 18% 214, Equity 200,3 37% 205,8 41% 3 36% 179,2 29% 186,5 28% 228,3 35% Total 534,8 100% 501,3 100% 589, 4 100% 612,9 100% 658,6 100% 654,4 100% Transactions 1, ,341 1,573 1,542 Source: IJGlobal

4 INFRASTRUCTURE INVESTMENT GAP

5 GENERAL FINANCING CHALLENGES External Factors Internal Factors Macroeconomic Risks Currency mismatches Interest rate mismatches External shocks Banking Sector Risks Basel III Exposures to infrastructure sector Corporate Risks Leverage levels of foreign concessionaires Market and Liquidity Risks Macroeconomic Risks Lack of long-term currency hedging mechanisms Lack of long-term interest rate hedging mechanisms Susceptibility and impact of external shocks Public debt levels Banking Sector Risks Basel III Exposures to infrastructure sector Corporate Risks Leverage levels of domestic concessionaires Market and Liquidity Risks Political Risks Competing fiscal priorities

6 TAXONOMY OF FINANCIAL INSTRUMENTS AND MARKET VEHICLES Modes Infrastructure Finance Instruments Market Vehicles Asset Category Instruments Infrastructure Projects Fixed Income Mixed Bond Loans Hybrid Listed Source: OECD, Infrastructure Financing and Instruments, OECD, 2015 Project Bonds Municipal, sub-sovereign bonds Sukuks Direct/Co-Investment lending to Infrastructure Project. Syndicated Project Loan Subordinated Loans/ Bonds, Mezzanine Finance YieldCos Corporate Balance Sheet / Other Entities Corporate Bonds, Green Bonds Subordinated Bonds Direct/Co- Investment lending to Infrastructure corporate Syndicated Loans, Securitized Loans (ABS), CLOs Subordinated Bonds, Convertible Bonds, Preferred Stock Listed Infrastructure & utilities stocks. Closed end funds, REITs, IITs, MLPs Capital Pool Bond Indices, Bond Funds, ETFs Debt Funds (GPs) Loan Indices, Loan Funds Debt Funds, Hybrid Debt Funds Listed Infrastructure Equity Funds, Indices, trust, ETFs

7 FIXED INCOME INSTRUMENTS

Pacifico Tres, Colombia Local and foreign currency bonds USD: $272 million,

credit enhancement facility Local banks primary purchasers Debt funds and

Privately placed bond 450 basis points over Euribor 3 tranches, 18-20 year

8 Pacifico Tres, Colombia Local and foreign currency bonds USD: $272 million, BBB- COP: $635 million, BBB- /AA+ 3 tranches, year maturities FDN credit enhancement facility Local banks primary purchasers Debt funds and intl. banks purchased bonds PROJECT BONDS Elazig Hospital Project Bonds Privately placed bond 450 basis points over Euribor 3 tranches, year maturities EBRD liquidity facility Moody's rating of Baa2 Local banks primary purchasers

Second largest segment 12% average annual growth in 5 years Distribution by region:

9 SUKUKS Islamic Finance Sukuks Gulf Corpora tion Council Islamic Finance is $2 trillion dollar market (2016) Banking sector comprises approximately 80% Sukuks Second largest segment 12% average annual growth in 5 years Distribution by region: GCC: 42%, Middle East and North Africa 30%, Asia: 22% Source: Islamic Finance Service Board

SUKUKS Returns linked to profits of the enterprise Financiers are partners in the project and responsible for asset delivery Procurement Release of funding SPV repays the financier on a deferred

10 SUKUKS Returns linked to profits of the enterprise Financiers are partners in the project and responsible for asset delivery Procurement Release of funding SPV repays the financier on a deferred payment basis SPV role varies depending on structure Ijarah: Lessee Murabahah: Customer Istişna: Client Asset is delivered to SPV when construction has been completed Payment price includes profit for extending financing Examples Doreleh Container Terminal, Diibouti Karachi Thatta Dual Carriageway, Pakistan Source: The World Bank Mobilizing Islamic Finance for Infrastructure Private Partnerships, 2017

MUNICIPAL FINANCE Challenges High investment

Limited own revenues Reliance on government

operating surpluses Limited experience and

11 MUNICIPAL FINANCE Challenges High investment needs Few local governments have credit ratings Limited own revenues Reliance on government transfers Few local governments generate operating surpluses Limited experience and technical capacity Maturity and currency mismatches Public debt limits

12 ARGENTINA LOCAL BOND ISSUES Local Government Moody s Rating USD ($M) Coupon Maturity Buenos Aires, Municipality B3 Stable % 11.0 Cordoba, Municipality B3 Positive 150 N/A 8.0 Buenos Aires Province B3 Stable % % % % % % 10.0 Chaco Province Caa % 8.0 Chubut Province Caa % 10.0 Cordoba Province B3 Stable % 5.0 Entre Rios Province B % 8.0 La Rioja Province B3 Positive % 6.5 Mendoza Province B3 Stable % 8.0 Neuquén Province 1 CCC % 12.0 Salta Province 1 CCC % 7.0 Santa Fe Province B3 Positive % 10.0

GREEN BONDS Type Proceeds Debt Recourse Example Use of Proceeds Bond Use of Proceeds Revenue Bond Earmarked for green projects Earmarked for green projects Standard/full recourse to the issuer with

13 GREEN BONDS Type Proceeds Debt Recourse Example Use of Proceeds Bond Use of Proceeds Revenue Bond Earmarked for green projects Earmarked for green projects Standard/full recourse to the issuer with same credit rating as issuer Issuer s revenue stream is from fees and taxes which are used to secure debt EIB Climate Awareness Bond (backed by EIB) Hawaii State (backed by a fee on electricity bills collected by state utilities) Project Bond Ring-fenced for specific green projects Recourse is only to the project assets Alta Wind Holdings LLC (backed by wind project) in California Green Securitized Bond Can be earmarked for green projects or directly finance green projects Recourse is to a group of projects that have been grouped Northland Power (backed by solar farms) or Solar City (backed by residential leases)

14 CREDIT GUARANTEES Feature Full Guarantee Partial Guarantee Covers interest Yes Yes and principal Irrevocable Yes Yes Unconditional Yes Up to maximum limit Coverage limit of credit enhancement None Limit determined according to the number of notches of credit Complexity Maximum Credit Enhancement Administration costs Simple and standardized Equivalent to up to 10 notches 1% of the guaranteed amount enhancement required More complex to administer. Investors need to understand the risk profile of each project and guarantee Normally not more than 5 notches 2% of the guaranteed amount Source: Based on The World Bank Institute, Best Practices in Public-Private Partnership Financing in Latin America: The Role of Guarantees, 2011 Key Issues Crowd-in private financing Increased investor comfort Coverage by phase Avoid extensive coverage Appropriately priced Fees

15 UNITED KINGDOM GUARANTEE SCHEME (UKGS) Eligibility Criteria Nationally significant project Start construction within 12 months Borrower credit quality Project dependent on a credit guarantee to be financially viable Value to the taxpayer Projects 39 projects eligible 10 projects with guarantees Project Guarantee Sector Drax Power - conversion from coal to 75mn biomass (bond) Energy Sustainable Development Capital Limited 9mn (loan) Energy Northern Line Extension 750mn (standby Transport liquid facility) Mersey Gateway Bridge PPP 257mn (bond) Transport Ineos Grangemouth - Shale gas import 285mn and storage facilities (bond) Energy Speyside CHP plant 48mn (bond) Energy University of Northampton - relocation 292mn of campus (bond) University Countesswells - 3,000-unit housing development 86mn (loan) Housing University of Gloucestershire - Pittville 39mn Student Village (bond) University Hinkley Point C 2bn (bond) Energy

16 MIXED AND EQUITY INSTRUMENTS

17 GLOBAL INSTITUTIONAL INVESTOR PARTICIPATION IN INFRASTRUCTURE AND PPPS Factors impacting institutional investment include: Size and viability of PPP pipeline Project Risk Profile Returns during Construction (J-Curve) Procuring agency experience Limited resources to conduct project due diligence Pension reforms

18 INITIAL PUBLIC OFFERING Brownfield vs. greenfield assets Improves contractor financial flexibility Typical lock-in period of 2-5 years post-construction Tradability New investors Subject to market fluctuations Buy and hold tendencies

19 REAL ESTATE INVESTMENT TRUSTS Asset pooling reduces volatility Potential tax advantages Potential higher yields Tradable on stock market Increased liquidity Tied to value capture strategies

REAL ESTATE INVESTMENT TRUSTS, MEXICO USD 300 million to USD 18 billion in 5 years Investment in hotels, industrial zones, and office buildings Shares can be publicly traded 70%

20 REAL ESTATE INVESTMENT TRUSTS, MEXICO USD 300 million to USD 18 billion in 5 years Investment in hotels, industrial zones, and office buildings Shares can be publicly traded 70% percent invested in domestic real estate 30% in Federal government or mutual funds Minimum 4 year holding period Deferral of 5% of taxable income Expansion to infrastructure projects

21 CLOSED END MUTUAL FUNDS Closed End Fund Investors Investments AUM USD Infraestructura Brookfield Colombia Fondo de Capital Privado Nexus Infraestructura I- FCP FINTRA CFC-SK El Dorado LATAM Fund FCP 4G Credicorp Capital Sura Asset Management, Private Debt Fund Nova Renewable Energy Latin America LP Brookfield Nexus Capital Partners Darby Private Equity, Franklin Templeton, and Colpatria Corficolombia and SK Group Creditcorp Capital and Sura Asset Management Novare Colombia only. Roads, energy, ports, airports, gas pipelines. Multi-Country; Greenfield and brownfield roads, airports, and energy Multi-country. Roads, energy, ports, airports, urban transport. Multi-country; Energy and infrastructure Colombia only. Debt fund for 4G roads Colombia, Peru, and Chile. Renewable energy generation ($M) Investment Dates & Duration 228 September : 12 years 72 October ; 10 years 83 August ; 20 years 500 February ; 10-years 320 November ; 23 years 350 March ; 10-years Key issues Asset diversification Single or multisector New investors Increased liquidity New investors Longer-term, defined investment period Colombia Change in

22 PUBLIC PRIVATE PARTNERSHIPS Key issues Legal and regulatory framework Risk sharing Contingent liabilities Project pipeline Due Diligence Diversification of financing sources

23 QUESTIONS AND ANSWERS

FINANCING INFRASTRUCTURE

FINANCING INFRASTRUCTURE Session 2: Mapping Financing Channels in Infrastructure Workshop on Data Collection for Long-term Investment Wednesday 10 May 2017 Raffaele Della Croce Lead Manager - Long Term