INSTITUTIONAL INVESTORS + INFRASTRUCTURE FINANCING Fiona Stewart Oxford Infrastructure Conference July 2, 2015
ENHANCING INSTITUTIONAL INVESTORS ROLE IN INFRASTRUCTURE KEY BARRIERS Country selection and suitability Lack of well-prepared projects Lack of understanding of asset class Policy, Regulatory and capital market constraints Inadequate institutional investor-friendly frameworks Lack of innovative vehicles and risk mitigation instruments for N-S and/or domestic investment HOW WBG CAN ADDRESS? Conduct country suitability assessment Preparation of high credit quality projects Provide targeted capacity building Pension and regulatory reform. Improve capital markets for infra bonds Develop institutional investor-friendly PPP Frameworks and Design and implement innovative instruments and vehicles Define role and products of (M)DBs WBG teams can collaborate to improve the enabling environment for Institutional Investors to invest in infrastructure 1
ESTIMATED POTENIAL INSTITUTIONAL INVESTOR FINANCING 2
DOMESTIC EM PENSION FUND POTENTIAL Source: Musalem and Souto (2010) Source: Musalem and Souto (2010) Source: World Bank Pension Database
GOVERNANCE AND INVESTMENT ARE LINKED Source: Musalem and Souto (2010)
INSTITUTIONAL INVESTOR INVOLVEMENT IN INFRASTRUCTURE DEBT: SOME EXAMPLES FROM DEVELOPING ECONOMIES 5
INSTITUTIONAL INVESTOR INVOLVEMENT IN INFRASTRUCTURE FUNDS SOME EXAMPLES FOR DEVELOPING ECONOMIES 6
Pre-conditions for institutional infrastructure investment 7
C) On-going work: Country Mapping vs. Investor Financing Vehicle Macro environment 1 Financial intermediation 2 3 Institutional investors 4 5 Country A Country B Capital markets Investment constraints Infrastructure policy Infrastructure assets 8
On-going work: Country Mapping vs. Investor Financing Vehicle 9
Potential Mapping Results EAC- OECD investor potential/ EIB product development LACpension funds / product development most experience 10 AFR / MENA large dom social security funds/ need opportunities / lack experience
Coordinated Engagement is Important Fin & Mkts Capital Market policy and regulatory reform Fin & Mkts Issuance Support Capital Markets Reform Global Practices and CMU PPP CCSA and PPIAF Global Infrastructure Facility IFC Advisory and Investments PPP Frame work & Projects Pension Reform Fin & Mkts Engagement with Institutional Investors Fin & Mkts - Pension reforms WBG Instruments and Products Treasury products/solutions WBG Risk Mitigation Instruments Infrastructure Project Bonds & Green Bonds 11
Capital Market Solutions Local Currency Bond Market Asset Class Colombia FDN Project PROBLEM A USD 26 bn pipeline of toll roads and other growing infrastructure needs Low exposure to foreign investors Insufficient /expensive funding local banks Incipient bond market: 5.6 % of GDP Large but very concentrated pension fund industry: USD 80 billion (20 % of GDP), 4 pension funds (2 hold 80 % of assets) - Exposure to infrastructure is minimal, in spite of strong interest - High risk aversion (AA+ or above) - Expected investments through a variety of instruments: infrastructure funds and project bonds SOLUTIONS Strong coordination policy/implementation: - MoF, National Infrastructure Agency (ANI) - Financial Sector Superintendency - National development bank with catalytic approach (FDN) Standardization of toll road project contracts FDN acting as champion of financial solutions Development of a variety of instruments with emphasis on project bonds: - Take out guarantees from loans-to-bonds - Day-zero project bonds with credit enhancements - Liquidity guarantees for bond servicing - Infrastructure bond funds Pension funds engagement and training Regulatory reforms fixed income / banking Broad engagement WBG teams: F&M building bond markets; PPIAF TA improve capacity of Institutional Investors; IFC investments in FDN; IFC Treasury possible bond guarantee; Transport Global Practice and CMU supporting project preparation activities 12
Institutional Investor-Friendly PPP Frameworks? PPP Framework Issues (examples) Existing Frameworks ( Source Neutral to Commercial Bank-Centric ) Modified Frameworks ( Institutional Investor- Friendly ) 1. Enabling Environment Project Pipeline Procurement Conditions Partnership 2. Project Preparation & Structuring Risk Allocation Payment Mechanism Credit Quality Assessment Flexible for one-off or limited transactions Liquidity and Pricing certainty Traditional Equity : Debt partnership Flexible on risks (patronage, inflation, fx, etc.) From min. guarantee to performance based Credit enhancement for targeted risks Scale and certainty of investable pipeline Liquidity risk provision & timing to be included Early engagement and innovative partnerships Limited risk appetite & benchmarked returns Split of investment from project performance Overall credit quality requirements 3. PPP Contract Provisions Pricing and Financial Close Refinancing provisions Termination Provisions Dispute Resolution Confirmed pricing at/before financial close Restricted provisions with in-built consents On wider grounds; pro-bank compensation Flexible mostly local and discretionary Negative carry, underwriting and pricing risks Flexibility based on liquidity and VfM Limited grounds; pro-bond compensation International and less discretionary 4. Contract and Asset Management Change Management Reporting and Asset Valuation Controlling creditor rights Flexible change management process Mostly private information and less reported Role of Agent bank & Direct Agreement Restrictive change management process Public trading; Standard for project reporting Separate Trust or third party control 13
Non-PPP Infrastructure Investments Opportunities Broad range of non-ppp infrastructure investment opportunities are available for IIs National and Sub-national infrastructure bonds issued by Govt. for capital investment programs (commonly used, sometimes with tax incentives) Bonds issues by Utilities/SoE - limited without sovereign or third party guarantees Regulated network assets exposure to regulatory stability, independence and credibility Macroeconomic, fiscal stability and sector reform are essential for attracting liquidity and keeping pricing advantage - a key challenge for many WBG Client countries Important to note: Private-to-Private (ports, oil & gas, etc.) deals continue based on corporate balance sheet Many emerging market ETFs and other listed funds (Macquarie, JPM, etc.) available for international investors 14
WBG Coordination Some Considerations Develop coordinated & comprehensive capacity building for IIs Facilitate Private Placements as a first step towards capital market issuance Develop Yield Curve for longer maturity and methodology for floor pricing Engage with Secondary Markets and Intermediaries (e.g., Asset managers, Funds) Develop targeted credit enhancement products bridge gaps in x-monoline market? Engage with international investors to assist in Country Selection (develop thresholds ) Target both Equity/Mezzanine and Debt market investors different approaches required Consider IIs as a potential financing source during project preparation (GIF, GPs) Define role and products for development banks 15