INSTITUTIONAL INVESTORS + INFRASTRUCTURE FINANCING

Oxford Infrastructure Conference July 2, 2015

Fiona Stewart

ENHANCING INSTITUTIONAL INVESTORS ROLE IN INFRASTRUCTURE

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• 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

• 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

KEY BARRIERS HOW WBG CAN ADDRESS?

WBG teams can collaborate to improve the enabling environment for Institutional Investors to invest in infrastructure

ESTIMATED POTENIAL INSTITUTIONAL INVESTOR FINANCING

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DOMESTIC EM PENSION FUND POTENTIAL

Source: Musalem and Souto (2010) Source: World Bank Pension Database

Source: Musalem and Souto (2010)

GOVERNANCE AND INVESTMENT ARE LINKED

Source: Musalem and Souto (2010)

INSTITUTIONAL INVESTOR INVOLVEMENT IN INFRASTRUCTURE DEBT: SOME EXAMPLES FROM DEVELOPING ECONOMIES

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INSTITUTIONAL INVESTOR INVOLVEMENT IN INFRASTRUCTURE FUNDS – SOME EXAMPLES FOR DEVELOPING ECONOMIES

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Pre-conditions for institutional infrastructure investment

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C) On-going work: Country Mapping vs. Investor Financing Vehicle

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Macro‐environment

Institutional investors

Investment constraints

Infrastructure assetsInfrastructure policy

Capital markets

Financial intermediation

Country A

Country B

On-going work: Country Mapping vs. Investor Financing Vehicle

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Potential Mapping Results

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LAC-pension funds

/ product development

most experience

AFR / MENA–large dom social security funds/

need opportunities / lack experience

EAC-OECD

investor potential/

EIB product development

Coordinated Engagement is Important

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Capital Markets Reform

Pension Reform

WBG Instruments and Products

PPP Frame work &

Projects

• Treasury products/solutions

• WBG – Risk Mitigation Instruments

• Infrastructure Project Bonds & Green Bonds

• Global Practices and CMU

• PPP CCSA and PPIAF

• Global Infrastructure Facility

• IFC Advisory and Investments

• Fin & Mkts – Capital Market policy and regulatory reform

• Fin & Mkts – Issuance Support

• Fin & Mkts – Engagement with Institutional Investors

• Fin & Mkts - Pension reforms

Capital Market Solutions – Local Currency Bond Market Asset Class Colombia FDN Project

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• 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

• 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

PROBLEM SOLUTIONS

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

Institutional Investor-Friendly PPP Frameworks?

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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

• Flexible for one-off or limited transactions• Liquidity and Pricing certainty• Traditional – Equity : Debt partnership

• Scale and certainty of investable pipeline• Liquidity risk provision & timing to be included• Early engagement and innovative partnerships

2. Project Preparation & Structuring• Risk Allocation• Payment Mechanism• Credit Quality Assessment

• Flexible on risks (patronage, inflation, fx, etc.)• From min. guarantee to performance based• Credit enhancement for targeted risks

• 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

Non-PPP Infrastructure Investments Opportunities

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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

WBG Coordination – Some Considerations

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• 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