Where is the money? Finding ways to increase the pipeline of investable projects

Transcription

1 Where is the money? Finding ways to increase the pipeline of investable projects Building Bridges: Innovations in Infrastructure Finance and Investment Washington, DC Nov 06, 2015 Michael Drexler Head of Investors Industries Member of the Executive Committee World Economic Forum Note: This presentation was given in an off-the-record context and a private capacity. It forms only one part of the event (the spoken word and discussion being the others), and is therefore incomplete. It does not in any way reflect the institutional views of the World Economic Forum or its constituents. It is not intended for distribution beyond the attendees of the event. 1

2 Infrastructure at the World Economic Forum Strategic Infrastructure Infrastructure planning & project prioritization Preparation of Public-Private Partnerships Operations & Maintenance of existing assets Accelerating infrastructure delivery: New evidence from IFIs Mitigation of political & regulatory risk in infrastructure B20 Input to Cannes recommendations Consultation on St. Petersburg recommendations Coordination of Infrastructure Network G20 engagement African Infrastructure Prioritization of PIDA PAP 1 projects Project preparation funding & transnational Infrastructure programme management Project Overview: Accelerating infrastructure development in Africa Project preparation funding Infrastructure Finance Session on infrastructure finance at AM Davos Infrastructure finance policy blueprint & risk mitigation instruments Global Infrastructure Investors Summit at AM Davos 1. Programme for Infrastructure Development in Africa Priority Action Plan 2

3 The global infrastructure challenge Exploring the space for solutions Examples of innovation Outlook and conclusion 3

4 Why this is a big deal Forecast global infrastructure investment need $tr, constant 2010 dollars This means: $3.4tr p.a. or 3.5% of global GDP 4

5 Current capital sources are liable to headwinds Equity Distribution of global asset ownership by investor type, 2011 Debt Global project finance by funding institution,

6 which are even worse in emerging markets Existing infrastructure financing in developing countries Total spend: $1tr p.a. Total need $2tr p.a. Gap: $1tr p.a. Attracting Private Finance will be key to closing the gap 6

7 Investor Preferences vs Government Supply PERCEIVED LEVEL OF RISK Infrastructure Debt Brownfield Equity Greenfield Equity Insurers ($25tr AUM) Investor Demand Pension Funds ($30tr AUM) Sovereign Wealth Funds ($5tr), Endowments, Family Offices ($1tr) Private Equity ($3tr) Government supply Investor demand > Government supply Government supply > Investor demand Dark shading indicates higher level of interest Light shading indicates lower level interest 7

8 When is long-term not long-term? Key risks Bidding & Development Macro & political Technical risks to project viability Environmental and Planning Construction period Macro & political Construction risks (e.g. overrun; delay) Brownfield phase Macro & political & environmental Demand / traffic; Operating Risks Policy risks (e.g. traffic changes) Key financing moments Once project is bankable, developer will seek equity and debt investors Once construction completes, project can be refinanced to reflect reduced risk and incoming cash flows As project develops track record and demand risk drops, project can be further refinanced. Environmental risk can become a key consideration. Cash flows (Ilustrative) Time Risk level (Ilustrative) Time Bidding and development Construction period Ramp-up period Operation period 2 to 5+ years 0 to 3 years Usually more than 15 years Greenfield Brownfield 8

9 Reality check where do institutional investors put their money? Infrastructure allocation of pension funds as % of AUM, 2013 Sample of 35 funds participating in OECD Large Pension Fund Survey that are active in infrastructure 100% = $2.4tr Capital is unlikely to be the issue many larger funds allocate 5-10% of their funds to infrastructure (and almost none have reached their allocation targets) Unlisted equity dominates listed equity illiquidity premium and sharper risk profile Debt, despite having preferable risk characteristics at face value, gets only 1/7 th of the allocation to unlisted equity Source: OECD Annual Survey of Large Pension Funds and Public Pension Reserve Funds,

10 Lack of bankable/investable projects What makes a project investable? 1. Accessibility and scale Is the project in a geography the investor can access? Is the investor allowed to hold the financial instruments (e.g., unrated loans)? Is the ticket size in line with what the investor can hold (not too large, not too small)? 2. Risk profile Are the risks in line with what investors can tolerate? Can the unsuitable risks be hedged out? Note: most institutional investors will not be comfortable with political or currency risk 3. (Financial) return profile Do the cash flows match the investors needs in both size and timing? Are the returns adequate given the risk profile? Is the risk-return profile attractive when viewed against global alternatives (for investors with a global outlook)? Many projects already fail on accessibility and scale The second hurdle is often due to a disconnect in approach: Investors think in financial terms and global optionality. Governments think in terms of local necessity and minimizing bid/build costs. 10

11 The global infrastructure challenge Exploring the space for solutions Examples of innovation Outlook and conclusion 11

12 Bridging the gap shared language 12

13 Regulatory/political risk legal systems as first line of defense Familiar issues Re-negotiation risk Expropriation Change in policies affecting the asset (direct and indirect) Land rights...and many more! Source: World Economic Forum International arbitration still remains a major gap in the system 13

14 FX risk the final frontier Hedge this! Top of range = 4x bottom Volatility > 50% in any 5-year period In many emerging markets, currency fluctuations dwarf project economics. International investors have no way to hedge this risk in capital markets. National governments are the natural counterparty to mitigate this risk (where project value is small compared to GDP) but they are often unwilling/unable to acknowledge this. MDBs could help in theory but in practice need diversified/balanced portfolio to avoid concentration risk, which is hard to do. Source: OANDA For small development projects, foundations/odas could help with insurance of FX risk (rather than grants). Development of deep local capital markets is the best long-term solution. 14

15 Expanding the toolkit impact investment example Problem: Use of paraffin lamps for indoor lighting in rural India - Respiratory health issues - Bad lighting quality leads to eye problems - Stunts productivity/economic development Solution: Not bad, but: Improve the lamps (LED/solar) - Hard to monetize social entrepreneurship or reliant on NGO work - Isolated solution Solution: Advantages: Think big de-centralized solar power plus telecoms infrastructure (the lamps become a side benefit) - Solves not just the lighting problem, but also communication/commerce - Creates an economic ecosystem, which makes monetization easier - Scalable solution that can attract interest from bigger commercial players - NGO/Foundations can still contribute (e.g., through first-loss tranches, where they become insurers rather than grant givers, better leveraging their balance sheets) Impact investment angle: By creating economic welfare for the community (and increasing their wealth), the investors benefit directly a virtuous economic circle 15

16 Finding ecosystem synergies in infrastructure Activity Social infrastructure Travel Payments Economic infrastructure Logistics Roads Airports Rail Agriculture Law enforcement Prisons Schools Energy Telecom Ports Water Public services Universities Hospitals Stadiums Research Trade Retailing Education Healthcare Services Manufacturing Sports/entertainment Four ways to finance a road (out of many!) Disbursement of public funds Purely private model (toll road) or infrastructure bond with coupons financed out of increased tax take from local industry or give investor concession to benefit from land value increase around the road (HK Metro model) 16

17 The global infrastructure challenge Exploring the space for solutions Examples of innovation Outlook and conclusion 17

18 Emergence of knowledge sharing platforms Lack of shared knowledge and coordination has been identified as a key gap by the Australian G20 presidency resulting in the establishment of the G20 Global Infrastructure Hub (GIH). The World Bank has started a Global Infrastructure Facility (GIF) to evolve deal structures. In the project preparation space, the International Infrastructure Support System (IISS) allows for structured Q&A between the public sector and interested private sector actors allowing proposals to be sharpened before they go out to bid. The World Economic Forum, together with the OECD, ODAs and private sector players, has launched the Sustainable Development Investment Partnership (SDIP) to allow the creation of blended finance structures for infrastructure in developing nations. Many other platforms are likely to emerge in the next year(s), leveraging new technology. These platforms are very useful, and will bring much needed transparency. However, it will be key to avoid fragmentation the GIH will likely play a leading role as an aggregator. 18

19 Risk mitigation tools Volume of MDB non-trade guarantee commitments Source: Humphrey & Prizzon 2014 Good news: Volumes are increasing Better news: More diverse array of instruments available (e.g., MIGA starting to offer reg risk product). However: Volumes still small compared to overall market size, and uptake by institutional investors often marginal potentially an issue of awareness as well as product structure Private sector (insurance) starting to show interest in offering complementary products. Credit enhancement facilities growing strongly. Interest in reviving the monoline insurance concept. Work currently underway between G20 GIH and World Economic Forum to identify gaps in risk mitigation 19

20 Standardization of financial instruments and benchmarks In many ways, infrastructure today is similar to early derivatives markets highly fragmented, bilateral transactions, very idiosyncratic. Derivatives markets could only reach scale through standardization (namely, ISDA master agreement). Recent proposals aim to replicate this trajectory and make infrastructure more tractable as a potential asset class e.g., European Financial Services Roundtable (EFR) proposal Benchmarks are a necessary building block for institutional investors to integrate infrastructure into their portfolios. Recent initiatives and research include LTIIA (Long-Term Infrastructure Investors Association), providing both an industry forum and benchmarking work GIIA (Global Infrastructure Investor Association) to promote industry views and research for infrastructure equity investors CFA Institute research S&P research on rated infrastructure bonds (finding favorable default characteristics over similarly-rated corporate bonds) 20

21 New platforms for institutional investors Debt Co-investment with bank-led syndicates (e.g., partnership between Natixis and Ageas) ABS securitization model (e.g., 2015 $13bn BAA-Ferrovial refinancing) Creation of debt funds (e.g., Blackrock, Amundi, Macquarie MIDIS platform) Institutional investors building out direct inhouse investment capabilities (e.g., Allianz Global Investors) Equity Co-investment platforms (e.g., UK Pension Investment Platform, Canada Global Strategic Investment Alliance) Governments seeding funds (e.g., Pan African Infrastructure Development fund, European Marguerite fund) Institutional investors seeding third-party funds (e.g., Pension Danmark and Copenhagen Infrastructure Partners) Institutional investors building out direct inhouse investment capabilities (e.g., CPPIB, CDPQ) Institutional investors operating in direct partnership with local governments (e.g., CDPQ Infra) In addition, some governments (e.g., NSW Australia) are recycling brownfield assets via PPPs to create the funding for greenfield projects. While a promising approach, this will not work in every context relies on very specific context (legal framework, privatization appetite, capacity). Source: OECD, World Economic Forum 21

22 Green investments and sustainable infrastructure Long time horizons in brownfield infrastructure make long-term trends more relevant than for other investments e.g., urbanization, demographics, climate change. Three main effects of climate change on infrastructure Increased catastrophic risk to the asset Focus on sustainability of the asset (to comply with future regulations) Emergence of new green asset types Resilience as major consideration, with input from the private sector (insurance companies in particular) e.g., the World Economic Forum s Disaster Resource Partnership (DRP) Emergence of new standards and practice codes, particularly in construction (e.g., LEED) Interest in clean energy and green bonds (e.g., by Allianz, Aviva, Metlife, Munich Re, Prudential/M&G) as a way to capture future upside and diversification benefits However, all three aspects are still in early stages e.g., ca $40bn total volume of green bonds in 2014 (vs $1tr US corporate bonds) 22

23 The global infrastructure challenge Exploring the space for solutions Examples of innovation Outlook and conclusion 23

24 Making sense of it all This should be a golden age for infrastructure but fundamental work is needed to unlock the potential No single party (public or private) can fill the gap blended structures are the future Institutional investors have the capital but often can t access the deals Shared vocabulary is imperative for good public-private partnerships Promising innovations are in progress to improve access but early days Assets matter less than their impact monetizing impact can be more productive than monetizing the asset Improving the risk-return profile benefits of strong ecosystems 24