Financing Infrastructure The Role of Institutional Investors AKASH - - PowerPoint PPT Presentation

Financing Infrastructure The Role of Institutional Investors

AKASH DEEP

Harvard University akash_deep@harvard.edu • +1 617 495 1340 Oxford International Infrastructure Conference Oxford, 1 July 2016

Outline

What kind of finance does infrastructure need? What kind of assets can pension and insurance funds finance? The nature of their liabilities What innovations and structures can bring them together? Some international examples

Outline

What kind of debt finance does infrastructure need? What kind of equity finance does infrastructure need? What kind of assets can pension and insurance funds finance? The nature of their liabilities What innovations and structures can bring them together? Some international examples Food for thought

Debt: What infrastructure asks for

Infrastructure debt finance desires… Large volume of funds Long maturity Capacity to take on credit risk: commercial, political Relatively illiquid Stable cost of finance Inflation-linked cost of funds

Debt: What banks offer

What deposit-based bank finance provides… Infrastructure debt finance desires… Constrained funding base Large volume of funds Short maturity Long maturity No risk taking capacity Capacity to take on credit risk: commercial, political Highly liquid Relatively illiquid Floating cost of funding Stable cost of funds Nominal rate of return Inflation-linked cost of funds

Debt: What Pension/Insurance funds offer

The Pension/Insurance funds offer… Infrastructure debt finance desires… Large, institutional base Large volume of funds Long maturity Long maturity Low/moderate risk-taking capacity Capacity to take on credit risk: commercial, political Illiquid Relatively illiquid Predictable long-term return Stable cost of finance Inflation-indexed return Inflation-linked cost of funds

According to Prequin, Pension and insurance funds made up 44% of all active investors globally in the infrastructure asset class in October 2013.

Innovations in debt finance for infrastructure

Objective: Credit enhancement

• 1. Direct credit

Partial “patient” credit: United States’ TIFIA

• 2. Cushions

Subordinated debt: Europe’s PBCE

• 3. Credit guarantees

Partial credit guarantees Full insurance wraps: Chile

• 4. Securitization

Pooling, and tranching: Infra Debt Funds

United States: TIFIA

(Transportation Infrastructure Finance and Innovation Act)

To leverage limited Federal resources and stimulate private capital investment in transportation infrastructure by providing credit assistance in the form of

• direct loans (up to 35 years and 49% of cost)
• loan guarantees
• standby lines of credit (up to 10 years and 33% of cost)

Be a flexible, "patient" investor willing to take on investor concerns about investment horizon, liquidity, and risk. Each $1 of Federal funds can provide up to $10 in TIFIA credit assistance, and leverage $30 in infrastructure investment.

1

TIFIA Projects in the U.S.

Los Angeles, California Gerald Desmond Bridge Replacement Project ($325M) San Francisco, California Presidio Parkway ($150M) Boulder and Denver, Colorado U.S. 36 Managed Lane/Bus Rapid Transit Project: Phase 1 ($54M) U.S. 36 Managed Lane/Bus Rapid Transit Project: Phase 2 ($60M) Richmond, Virginia Pocahontas Parkway / Richmond Airport Connector* ($150M) Broward County, Florida I-595 Corridor Roadway Improvements ($603M) Houston, Texas Grand Parkway (SH 99) Segments D-G ($84M) President George Bush Turnpike Western Extension (SH 161) ($418M) Riverside County, California SR 91 Corridor Improvement Project ($421M)

*Retired

Washington SR 520 Floating Bridge ($300M) Charlotte, North Carolina I-77 HOT Lanes ($189M) Orlando, Florida I-4 Ultimate ($949M) Wekiva Parkway ($194M) San Diego, California South Bay Expressway (formerly SR 125 South Toll Road) ($140M) Louisville, Kentucky Ohio River Bridges Downtown Crossing ($452M) Ohio River Bridges East End Crossing ($162M) Raleigh-Durham, North Carolina Triangle Expressway ($387M) Rhode Island Interlink (formerly Warwick Intermodal Station) ($42M) South Carolina Cooper River Bridge Replacement* ($215M) Austin, Texas Central Texas Turnpike System * ($900M) SH 130 (Segments 5-6) ($430M) 183-A Turnpike* ($66M) Miami, Florida Port of Miami Tunnel ($342M) Miami Intermodal Center ($270M) Chicago, Illinois Riverwalk Expansion/Wacker Drive Reconstruction Project ($99M) Chicago O'Hare International Airport Consolidated Joint Use Facility Project ($288M) Dallas, Texas IH 635 Managed Lanes ($850M) North Tarrant Express Segments 1 and 2A ($650M) North Tarrant Express Segments 3A and 3B ($531M) Louisiana LA 1 Improvements ($122M) Ohio Southern Ohio Veterans Memorial Highway ($209M) Washington, DC Metro, Maryland & Northern Virginia Intercounty Connector ($516M) I-95 HOV/HOT Lanes($300M) I-495 Capital Beltway HOT Lanes ($589M) New York City, New York Staten Island Ferries and Terminals ($159M) New NY Bridge (Tappan Zee Bridge Replacement) ($1,600M) Elizabeth, New Jersey and Staten Island, New York Goethals Bridge Replacement ($474M) Norfolk and Portsmouth, Virginia Downtown Tunnel / Midtown Tunnel / MLK Extension ($422M) Georgia Northwest Corridor ($275M)

Source: http://www.fhwa.dot.gov/ipd/tifia/

Europe: Project Bond Credit Enhancement

PBCE is a subordinated instrument – either a loan

• r contingent facility – to support senior project

bonds issued by a project company. Its main benefit is enhancement in the credit ratings of the senior bonds, thereby widening access to sources of finance and to minimize

• verall funding costs, whilst increasing the tenor

and liquidity of infrastructure finance The EIB calculates that €230 million of EU funds, acting as a first loss piece, could enable EIB to provide €750 million of PBCE. This could leverage financing to infrastructure projects worth more than €4 billion across transport, energy and IT.

Europe: Project Bond Credit Enhancement

Funded

Source: European Investment Bank, 2012, An outline guide to Project Bonds Credit Enhancement and the Project Bond Initiative

Europe: Project Bond Credit Enhancement

Unfunded

Source: European Investment Bank, 2012, An outline guide to Project Bonds Credit Enhancement and the Project Bond Initiative

Equity: What infrastructure asks for

Infrastructure equity finance requires… Large volume of equity Long-term engagement Active control, especially in the greenfield phase Appetite for commercial risk Comfort with political exposure Relatively illiquid

Equity: What Pension/Insurance funds offer

The Pension/Insurance equity investments

• ffer…

Infrastructure equity finance requires… Seek diversification Large volume of equity Long-term investment Long-term engagement Passive control Active control, especially in the greenfield phase Taste for commercial risk Appetite for commercial risk Awkward relationship with political exposure Comfort with political exposure Price discovery essential Relatively illiquid

Innovations in equity finance for infrastructure

Objectives: Diversification Active control Price Discovery Infrastructure Funds: Australia Listed, and Unlisted Direct investment in infrastructure: Canada REIT-style investments: Mexico’s FIBRA-E

Australian Infrastructure Fund Managers

Global Rank Manager Pension AuM USD bn Total AuM USD bn 1 Macquarie Group 59.1 101.6 2 Industry Funds Mgmt IFM 10.2 10.2 6 QIC 6.0 10.5 8 AMP 5.4 7.2 9 Hastings 3.7 6.3 11 Access Capital Advisers 3.2 3.2 12 Colonial First State 2.9 4.1 20 RARE Infrastructure 1.6 4.5 Total Australian in top 20 92.1 147.6 Total global top 20 136.3 220.5

Source: Towers Watson, 2012, Global Alternatives Study

Canada’s Direct investors “Maple Revolutionaries”

51% of Canadian infrastructure investors make direct investments. The top 10 Pension Plans

• utsource only about 20% of their assets. This

achieves:

• lower cost than external infrastructure funds
• prevents agency issues with fund managers
• direct control over assets (even entry and exit

decisions)

• long-term investment horizon to optimize value

and liability matching

• Governance: Strong governance models, based
• n independent and professional boards.
• Scale: Sizable funds, particularly important for

large-scale infrastructure projects.

Source: Inderst, 2014, Pension Fund Investment in Infrastructure: Lessons from Australia and Canada

Direct investments by top 10 Canadian Pension Funds

Source: BCG, 2015, Measuring Impact of Canadian Pension Funds

Mexico’s FIBRA-E

Publicly traded, tax-efficient investments (“pass through” vehicles for tax purposes) in developed energy and infrastructure assets that combine elements of the Mexican REIT and a US-style master limited partnership. FIBRA-Es are limited to certain investments in energy and infrastructure, and must hold those investments indirectly, though “qualified companies” that own and operate the assets. “Qualified companies” must derive 90 percent of their annual taxable income from the oil, natural gas, petrochemicals, electricity, telecommunications, public safety, or water and sewage sectors.