1 global development bonds (gdbs) june 2005 briefing discussion john e. mullen, globalnet financial...
TRANSCRIPT
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Global Development Bonds (GDBs)
June 2005
BRIEFING DISCUSSION
John E. Mullen, GlobalNet Financial Solutions LLC202-429-2720
Michael Eckhart, Solar International Management, Inc.202-429-2030
Financing for Development InitiativeNew York, June 22-23,2005
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Contents
1. Sustainable development
2. Indicative financing trends to developing countries
3. The need for infrastructure funding
4. Global Development Bonds – a description
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Sustainable Development
"Development that meets the needs of the present without compromising the ability of future generations to meet their own needs”
World Commission on Environment and Development, 1987
Map of the World Proportional to Population
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Indicative Financing Trends
-40
-20
0
20
40
60
80
100
1996 1997 1998 1999 2000 2001 2002 2003 2004
Net Annual Volumes (in billions of US$)
Public Sector Private Sector
Debt Flows to Public-Sector and Private-Sector Borrowers in Developing Countries
0
10
20
30
40
50
60
70
80
90
1997 1998 1999 2000 2001 2002 2003
Total Infrastructure Finance(in billions of US$)
Infrastructure Finance
Infrastructure Finance: Total Debt and Equity
International Finance CorporationA Loan / B Loan Lending Program
0
20
40
60
80
100
120
140
160
1997 1998 1999 2000 2001 2002 2003 2004
Gross Annual Volumes (in billions of US$)
Bank Lending Capital Markets
International Commercial Bank Lending and Capital Markets Financing for Developing Countries
0
1000
2000
3000
4000
5000
FY 2000 FY 2001 FY 2002 FY 2003 FY 2004
A Loans B Loans
Source: J. Robert Sheppard, J.R. Sheppard & Company LLC, from World Bank, IFC, 20004 and 2005
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The Need for Infrastructure Funding – and Lack of Current Participation by US Institutional Investors
Lower
Upper Estimate Estimate
Estimated Annual FundingRequirement for Infrastructure:
• Electric Power: US$ 140 B US$ 160 B• Water US$ 111 B US$ 180 B• Transportation: US$ 125 B US$ 165 B• Telecommunications: US$ 58 B US$ 105 B
Total: US$ 434 B US$ 610 B
Current Sources:
• Current self-funding: US$ 200 B US$ 200 B• ODA: US$ 60 B US$ 60 B
Funding gap US$ 174 B US$ 350 B
• Private participation: US$ 50 B US$ 50 B
• Gap US$ 124 B US$ 300 B
Indicative information:
Current Capital Under Management (2004):
• US Pension fund assets US$ 7,775 B• US Life Insurance Companies US $ 4,160
B• US Mutual Funds US $ 963
B– Total US$12,898 B
Current Participation by US Institutional Investors:Estimated Foreign Securities Holdings (2004):
• Pension funds US$ 15 B
• Insurance companies US$ 92 B
• Mutual funds US$ 37 B• Banks & savings institutions US$ 30
B• All other US$ 48
B– Total US$ 222 B
Sources: Source: J. Robert Sheppard, J.R. Sheppard & Company LLCBased on (a) Estimates prepared by The World Bank and (b) calculations made from World Bank data, except upper estimate for water is from the Camdessus Report (telecommunications estimates for 2005 - 2010)
Sources: J. Robert Sheppard, J.R. Sheppard & Company LLC based on (a) Foreign securities holdings: calculated from Federal Reserve data and Merrill Lynch report on world bond market (b) total asset data: Watson Wyatt (pension);Insurance Information Institute (insurance); Investment Company Institute (mutual funds)
Observations:1 Infrastructure funding need is substantial2. US Institutional Investors are not participating at
scale today, and lack appropriate instruments
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Description:
Global Development BondsGDB Concept:
• A new asset class
• Objective: to mobilize capital from U.S. investors, especially institutional investors, for sustainable development
• Defining characteristics:– Qualifying Countries– Qualifying Uses– Qualifying Issuers / Managers
• License and Monitor (not case-by-case) by candidate participating agencies:
– OPIC– Export-Import Bank– Millennium Challenge Corporation– SEC
Implementation:
• Private sector credit enhancement:– Special purpose vehicles– Diversification: geographical, asset
type, originator diversity– Over-collateralization– Tranches -- 3 to 5 or more, e.g. highest
rated AAA, lowest = equity
• Government Enhancements to reach BBB:– Political risk insurance– Foreign exchange risk mitigation– Currency convertibility– Currency devaluation facilities
• Structural alternatives under consideration to reach AAA rating:
– Single purpose Surety Corp. (next page)
– Monoline insurers: BBB to a AAA (following page)