private sector in infrastructure funding/financing models and role of institutional investors -...
TRANSCRIPT
PRIVATE SECTOR IN INFRASTRUCTURE:
FUNDING/FINANCING MODELS AND
ROLE OF INSTITUTIONAL INVESTORS
1 March 2016, OECD Paris
Raffaele DELLA CROCE
Lead Manager, LTI Project,
Financial Affairs Division - OECD
Dejan MAKOVSEK
Economist
Investment Division/ ITF - OECD
1. Private Investment in Infrastructure: a typology
2. Financing structures for infrastructure and Role of
Institutional Investors
3. OECD relevant work
2
Outline
PRIVATE INVESTMENT IN
INFRASTRUCTURE: A TYPOLOGY
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• What is infrastructure in the context of private investment:
– Is it the physical structures or operations (services that run on them)?
• Why would such a split be relevant:
– The characteristics of infrastructure and operations are different.
– Infrastructure has inherent characteristics that make private investment difficult. Operations less so. Though it is the contract that primarily defines risk exposure.
• What’s the difference between private participation and private investment in infrastructure
– There are many forms of private participation in infrastructure, but only a few actually involve significant private investment.
Defining the subject of analysis and understanding the
problem
Private investment in infrastructure: A typology (I)
• What basic types of infrastructure are there?
– Economic/Social ; Networks (discrete sections only have value if connected to other sections)/Node (no such link necessary)
• What are the challenges to private investment in infrastructure?
– By it’s nature, the infrastructure is a service. It only has value if there is a need for that service (there is no intrinsic value/only the contract).
– Infrastructure affects third parties (externalities) and in some cases full cost recovery is not even possible from the users directly. Involvement and commitment of the state is necessary.
– The primary challenge is cost recovery. It comes from the nexus of infrastructure characteristics/market failures (sunk cost, long-life…) and the challenge of the government to commit (government failures).
Private investment in infrastructure: A typology (II)
• What forms of private investment actually involve significant private investment?
Characteristics
Forms of PSP
Service contract
(outsourcing)
Management
contract
Lease/
Affermage
BOT and
variants
Concession Divestitures
(privatisation)
What PPPs
encompass
Scope (discrete
piece or
network)
Discrete existing
assets and
network
Normally
discrete
existing assets
Discrete
existing assets
(e.g. port
terminal) and
networks (e.g.
water)
Discrete new
assets or
refurbishment
Existing
networks and
normally
existing point
infrastructure
(e.g. sea/
airports)
Existing
network and
point
infrastructure
(e.g. sea/
airports)
Contract
duration
1-3 years 2-5 years 10-20 years 25-30 years 25-30 years Perpetual/
subject to
licence
Commercial risk
for the private
party
None None Yes Both options
(yes or no)
Both options
(yes or no)
Both options
(yes or no)
Money at risk ex
ante
No No No Yes Yes Yes
Provider of service or management Private Private Private Private Private Private
PPP contract
Bidder 3
Bidder 2
Bidder 1
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Economic regulator
Infrastructure manager
[regulatory
contract]
Stick
Duty to finance
Carrot
Monitoring
Budgeting, Time inconsistency…
The vehicles of private participation in
infrastructure
FINANCING STRUCTURE FOR INFRASTRUCTURE AND ROLE OF INSTITUTIONAL INVESTORS
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Financial structure: A Taxonomy of
Instruments
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Modes Infrastructure Finance Instruments Market Vehicles
Asset Category Instrument Infrastructure
Project
Corporate Balance
Sheet /
Other Entities
Capital Pool
Fixed Income
Bonds
Project Bonds Corporate Bonds,
Green Bonds
Bond Indices, Bond
Funds, ETFs
Municipal, Sub-
sovereign bonds
Green Bonds,
Sukuk
Subordinated
Bonds
Loans
Direct/Co-
Investment lending
to Infrastructure
project, Syndicated
Project Loans
Direct/Co-
investment lending
to infrastructure
corporate
Debt Funds (GPs)
Syndicated Loans,
Securitized Loans
(ABS), CLOs
Loan Indices, Loan
Funds
Mixed Hybrid
Subordinated
Loans/Bonds,
Mezzanine Finance
Subordinated
Bonds, Convertible
Bonds, Preferred
Stock
Mezzanine Debt Funds
(GPs), Hybrid Debt
Funds
Equity
Listed YieldCos
Listed infrastructure
& utilities stocks,
Closed-end Funds,
REITs, IITs, MLPs
Listed Infrastructure
Equity Funds, Indices,
trusts, ETFs
Unlisted
Direct/Co-
Investment in
infrastructure
project equity, PPP
Direct/Co-
Investment in
infrastructure
corporate equity
Unlisted Infrastructure
Funds
Classification of Risk
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Risk Categories Development Phase Construction Phase Operation Phase Termination
Phase
Political and regulatory
Environmental review
Cancellation of permits Change in tariff
regulation
Contract duration
Rise in pre-construction costs (longer permitting
process)
Contract renegotiation
Decommission
Asset transfer
Currency convertibility
Change in taxation
Social acceptance
Change in regulatory or legal environment
Enforceability of contracts, collateral and security
Macroeconomic and business
Prefunding Default of counterparty
Financing availability
Refinancing risk
Liquidity
Volatility of demand/market risk
Inflation
Real interest rates
Exchange rate fluctuation
Technical
Governance and management of the project
Termination value different from
expected
Environmental
Project feasibility Reliability of forecasts for construction costs and
delivery time
Qualitative deficit of the physical
structure/ service Archaeological
Technology and obsolescence
Force Majeure
Public
Sector
Private
Sector
Risks and Capital Structure over a
project lifecycle
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Source Reef
Alternative funding/financing models for
Infrastructure
• Risk/profit sharing models, new forms of PPPs, RAB
( i.e. USA, UK, Korea)
• Collaboration with Institutional Investors
– Equity/ Debt financing models (Debt partnership – Co
Investment model; Debt/credit funds; Direct Lending)
– Equity/Debt Vehicles (CKDs/Trusts; MLPs; Yieldcos)
– Securitization of MDBs BS (brownfield assets)
• Risk mitigation instruments
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Risk Mitigation Tools
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Focus on Market risks: Mapping risk mitigation instruments
Type of Measure Instrument
1. Guarantees, realised directly by Government or by its own controlled
agency or development bank
1. Minimum payment, paid by contracting authority
2. Guarantee in case of default
3. Guarantee in case of refinancing
4. Exchange rate guarantees
2. Insurance (private sector) 1. Wrap insurance, technology guarantees, warranties, commercial
and political risk insurance
3. Hedging (private sector) 1. Derivatives contracts such as swaps, forwards, options etc.
4. Contract design, paid by contracting authority 1. Availability payment mechanisms
2. Offtake contracts
5. Provision of capital, realised directly by Government or by its own
controlled agency or development bank
1. Subordinated (junior) debt
2. Debt:
2.1 at market condition
2.2 at lower interest rate
3. Equity:
3.1 at market conditions
3.2 at more advantageous conditions
6.Grants, generally delivered by contracting authority, even if some
dedicated fund at national level may exists. Tax incentives can be
delivered by national or local authorities
1. Lump sum capital grant
2. Revenue grant:
2.1 Periodic fixed amount (mitigating the demand risk)
2.2 Revenue integration (it leaves the demand risk on the private
player)
3. Grant on debt interests
4. Favourable taxation schemes for SPV
5. Favourable taxation schemes for equity investors
Appendix
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Infrastructure as An Asset Class: The
Research Question
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Expected Risk (Standard Deviation)
Expecte
d R
etu
rn
?
?
GMP
GMP with infrastructure
Does the addition of infrastructure
increase portfolio efficiency?
Source: Authors
Mapping the clean energy sector
16
Source IEA
and BNEF
Institutional investors and long-term investment project
www.oecd.org/finance/lti
• Focusing on “Patient”,“Engaged”,“Productive” capital
• Large Network of LTI Investors (>3,000 members)
G20-OECD work on long-term financing
http://www.oecd.org/finance/private-pensions/g20-oecd-long-term-financing.htm
• High Level Principles for Institutional Investors and LTI (2013)
• the G20/OECD Task Force on Long-term Investment Financing by Institutional Investors
• the OECD has developed a large amount of work with the Turkish presidency of the G20 and
is working on next year deliverables with the Chinese presidency
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Recent OECD work on long-term investment The OECD has been developing a vast program of work on LTI for the G20
“The draft [Addis Ababa Accord] stresses the important role of private investment. Investment in sustainable infrastructure for example is recognised as a major cross-cutting driver that can contribute to achieving all the SDGs. In this regard, I welcome the work of the OECD and the G20 on High-level Principles of Long-term Investment Financing by Institutional Investors." UN Secretary-General Ban Ki-moon Keynote address at the OECD - 28 April 2015