91307 March 2014 Institutional Investment in Infrastructure in Emerging Markets and Developing Economies By Georg Inderst and Fiona Stewart © 2014 Public-Private Infrastructure Advisory Facility (PPIAF) 1818 H Street, NW Washington, DC 20433 www.ppiaf.org E-mail: ppiaf@ppiaf.org The findings, interpretations, and conclusions expressed in this report are entirely those of the authors and should not be attributed in any manner to the Public-Private Infrastructure Advisory Facility (PPIAF) or to The World Bank Group, to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. Neither PPIAF nor The World Bank Group guarantees the accuracy of the data included in this publication or accepts responsibility for any consequence of their use. The boundaries, colors, denominations, and other information shown on any map in this report do not imply on the part of PPIAF or The World Bank Group any judgment on the legal status of any territory or the endorsement or acceptance of such boundaries. For questions about this publication or information about ordering more copies, please refer to the PPIAF website or contact PPIAF by email at the address above. Rights and Permissions The material in this work is subject to copyright. Because PPIAF and The World Bank Group encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes, as long as full attribution to this work is given. Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street, NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org. Cover photo: Jonathan Ernst / World Bank Cover design: TM Design, Inc. SECTION TITLE TABLE OF CONTENTS Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii Abstract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv 1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv 2. Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2.1 Infrastructure Financing Needs in Emerging Markets and Developing Economies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2.2 Sources of Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 3. Institutional Investors and Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3.1 Risks and Barriers to Institutional Investment in Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 3.2 Infrastructure Investment in EMDEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 4. International investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 4.1 Infrastructure Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 4.2 Multilateral and National Development Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 5. Domestic Investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 5.1 Pension Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 5.2 Insurance Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 5.3 Sovereign Wealth Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 6. The Potential for Institutional Investment in EMDE Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 7. Examples of Institutional Infrastructure Investments in EMDEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 8. Models of Infrastructure Investing in Developing Economies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 8.1 Background Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 8.2 Decision Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 8.3 Leadership Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 9. Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Appendices Appendix 1: Emerging Market Infrastructure Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Appendix 2: Pension Fund Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Appendix 3: EMDE Countries by Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Appendix 4: Examples of Institutional Investor Involvement in Emerging Market Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 Boxes Box 1: Examples of “North-South” Pension Fund Investment in Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Box 2: Role of MDBs in Supporting Infrastructure Investment in Developing Economies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Box 3: Potential Investment in Long-Term and Green Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Box 4: How Infrastructure can be Financed Using Private-Sector Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Figures Figure 1: Estimated Infrastructure Investments in Developing Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Figure 2: Existing Infrastructure Financing in Developing Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Figure 3: Private-Sector Involvement in Developing Countries' Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Figure 4: Infrastructure Financing and Investment Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Figure 5: Types of Infrastructure Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Figure 6: Infrastructure Investor Intentions by Region . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Figure 7: Pension Assets in Developing Economies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Figure 8: National Public Pension Funds—Assets Under Management in 2006 (as percent of GDP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Figure 9: Total Assets of Insurance Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Figure 10: Insurance Sector Penetration (percentages in 2009) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 TABLE OF CONTENTS i TABLE OF CONTENTS Figure 11: SWF Assets Under Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Figure 12: SWF Investment in Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Figure 13: Infrastructure Investment Approaches . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Figure 14: Examples of Institutional Investor Involvement in Infrastructure Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Figure 15: Examples of Institutional Investor Involvement in Infrastructure Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Figure 16: Considerations for Institutional Infrastructure Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Figure 17: Country Assessment for Institutional Infrastructure Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Tables Table 1: Infrastructure Expenditure Needs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Table 2: Barriers to Institutional Investors' Infrastructure Allocations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Table 3: Constraints to Emerging Market Infrastructure Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Table 4: Public-Sector Financial Tools . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Table 5: Infrastructure Funds Targeting Emerging Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Table 6: Total Assets Under Management for Institutional Investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Table 7: International Exposure of BRIC Investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Table 8: Pension Funds' Investment in Infrastructure Projects (2010) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Table 9: Latin American Pension Funds and Infrastructure Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Table 10: Pension Fund Asset Allocation to Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Table 11: SWF Asset Allocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Table 12: 10 Largest SWFs and Main Infrastructure Project Investments (2010) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Table 13: Current and Potential Allocations of Institutional Investors to EMDE Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Table 14: Environment for Institutional Infrastucture Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Table 15: Capital Market Development and Institutional Infrastructure Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 ii TABLE OF CONTENTS ABBREVIATIONS AUM Assets under management DC Defined contribution EMDE Emerging markets and developing economies IFC International Finance Corporation LDI Liability-driven investment MDB Multilateral development bank MIGA Multilateral Investment Guarantee Agency NPPF National public pension fund OECD Organization for Economic Co-operation and Development PAYG Pay as you go PPP Public-private partnership PPRF Public pension reserve fund SPFR Sovereign pension reserve fund SSRF Social security reserve fund SWF Sovereign wealth fund ABBREVIATIONS iii 1 ABSTRACT & INTRODUCTION Abstract This study discusses the role of institutional investors in financing infrastructure in emerging markets and developing economies (EMDEs). It analyzes the present level of involvement as well as the future investment potential of new financing sources such as public and private pension funds, insurance companies, and sovereign wealth funds. Current investment volumes are still low, but interesting, practical examples can be found in a range of countries and projects. International and domestic investors apply a variety of investment approaches in developing countries, using different equity, debt and fund instruments. This overview can yield some lessons for policy makers and investors. There are (more or less) favorable pre-conditions for successful private-investor involvement, and different models work in different situations, depending on the development stage and the institutional environment. Four types of “leadership models” are therefore described for international and/or domestic investors seeking to spearhead infrastructure investment in EMDEs. Introduction There are huge infrastructure investment needs worldwide, but particularly so in developing countries. Given current constraints on traditional sources of public and private financing, institutional investors are increasingly being considered as sources of financing for infrastructure project development and maintenance. At the same time, investors have started to look at infrastructure as an interesting investment opportunity for their own reasons—including low interest rates in many developed economies, and the search for non-correlated assets in the wake of the global financial crisis. Furthermore, many pension funds and insurance companies are looking for longer-term assets, new sources of income, and better diversification in their asset allocations. The match is (in theory at least) a good one: Infrastructure can potentially provide a predictable (and often inflation-linked) cash flow and a low correlation to other asset classes. However, institutional investors have their own objectives and regulations, and there are barriers on both the supply side (e.g. the lack of investable projects) and the demand side, e.g. a lack of scale and capacity. Such issues are particularly serious in developing countries. This report provides a framework for the analysis of a wide and complex field. It also reviews the literature and data sources on the subject, explores key concepts, and adds new research and insights. Institutional investment is first placed in the context of the overall demand and supply of infrastructure finance in emerging markets. Chapter 2 provides background information on EMDE countries’ infrastructure financing needs and financing sources. Chapter 3 presents a brief review of institutional investing in infrastructure in general, followed by the barriers and risks specific to emerging markets. This is followed by an overview of the landscape of international investors (Chapter 4), and their size and involvement in EMDE infrastructure, which is primarily indirect, via infrastructure funds rather than directly into projects. Multilateral development banks (MDBs) play a multi-faceted role in this process. Domestic investors in EMDEs are the focus of Chapter 5, which analyzes different groups of pension funds, social security reserve funds (SSRFs) and public pension reserve funds (PPRFs), insurance companies, sovereign wealth funds (SWFs) and others. There is great variation in their activities across countries, sectors and investor groups. Chapter 6 discusses the future investment potential of institutional investors. Unsurprisingly, the information available on this topic is particularly sketchy, and any estimates are very tentative at this stage. In practice, one can find a range of different approaches to institutional investment in infrastructure. Existing examples in developing countries are found in Chapter 7, grouped by investment vehicle (equity, debt, and fund instruments). Based on the evidence to date, it makes sense to draw some initial conclusions. The analysis leads to the discussion of “models” of institutional infrastructure investing in developing countries (Chapter 8). There are more or less favorable “pre-conditions” for institutional infrastructure investing, and there are crucial decisions for governments trying to mobilize private finance. Four different “leadership models” are presented that describe how international and/or domestic institutions can spearhead institutional infrastructure investment in EMDEs. Conclusions are summarized in Chapter 9. This field is still very much under-researched, although some work has been undertaken in recent years, especially on a regional level. This paper should iv lay the groundwork for the discussion of important questions, and set some milestones for further analysis. INTRODUCTION BACKGROUND 2 Background 2.1 INFRASTRUCTURE FINANCING NEEDS IN EMERGING MARKETS AND DEVELOPING ECONOMIES Infrastructure, or the lack thereof, is deeply interconnected with both economic growth and social progress. Indeed the links between infrastructure and development are well established. For example, Bhattacharya et al. (2012) state that: • Infrastructure can drive growth through higher employment—a USD 100 million investment can generate up to 50,000 annualized direct and indirect jobs; • Higher costs due to transport and logistics now account for a higher share of the cost of trade than policies (e.g., tariffs, duties and quotas); and • Improved infrastructure can lead to better health outcomes—a lack of rural roads correlates with maternal mortality, and a lack of comprehensive road safety policies kills 1.2 million people and injures 50 million per year, 90 percent of them in the developing world. It is estimated that each one percent of GDP growth requires that one percent of GDP be invested in infrastructure (telecommunications, energy, transport and water).1 A study by Calderon (2009) found that if all African countries had the same stock and quality of infrastructure as Mauritius (the region’s leader in infrastructure), their GDP could grow by an average of 2.2 percent more per year. Weak infrastructure can slow a country’s growth and competitiveness; it can also cause loss of lives, disease, and diminish the overall quality of life. A recent study (Delmon and Delmon, 2011) on public-private partnerships (PPPs)2 argues that it “raises infrastructure services from a good investment to a moral and economic imperative.” It stands to reason that much development literature is devoted to understanding what prevents capital investments that can increase access to good-quality, affordable infrastructure. Over the last 20 years, 3.8 percent of world GDP has been spent on (economic) infrastructure. Annual infrastructure spending has been trending down in advanced economies, from 3.6 percent of GDP in 1980 to 2.8 percent in 2008, but has been rising in emerging market economies, from 3.5 percent to 5.7 percent. The latter figure is driven by particularly high fixed-capital investment in Asia, especially China (McKinsey, 2010). Investment needs are immense, and the scale of the challenge is biggest for developing economies. However, infrastructure investment needs are not easily quantifiable. In 2006, the Organization for Economic Co-operation and Development (OECD) estimated that global demand in five key infrastructure sectors would require USD 53 trillion worth of investment, or an annual 2.5 percent of global GDP until 2030. The inclusion of other infrastructure sectors raises the figures to more than USD 80 trillion, i.e., about USD 3 trillion per annum, or more than four percent of world GDP (OECD, 2012; McKinsey, 2013; and WEF, 2012). By including “green infrastructure needs”,” estimates rise even more, to USD 3.5 to 5 trillion per year globally (WEF 2013a). 1 Cited by Bhattacharya, A., Romania, M., Stern, N. (2012). 2 PPPs are a form of project finance that involves a contract between a public-sector authority and a private party to provide a public project or service. BACKGROUND 1 2 BACKGROUND Infrastructure investment needs have been estimated at 6.6 percent of GDP on average in developing countries (Fay et al., 2011). However, there are wide differences depending on income levels (Table 1). Table 1: Infrastructure Expenditure Needs (%GDP) Country Income Investment Maintenance Total Low-income 7.0 5.5 12.5 Lower-middle-income 4.9 3.3 8.2 Upper-middle-income 1.3 1.0 2.3 Total developing 2.7 4.3 6.6 Source: Yepes (2008) (quoted in Fay et al. 2011) Note: Figures reflect estimated expenditures needed to respond to increase demand for infrastructure services associated with projected income increases. Infrastructure includes water, sanitation, transport, and telecommunications. Expenditure percentages are calculations of average infrastructure spending needed over 2008–15 as a percentage. Infrastructure demand for the 20 years to 2030 is expected to rise to USD 19.2 trillion, with Asia needing USD 15.8 trillion, emerging Europe needing USD 1.3 trillion, Latin America needing USD 1.2 trillion, Africa needing USD 0.7 trillion, and the Middle East needing USD 0.2 trillion (RBS, 2011). The investment requirements of African countries such as Nigeria, Angola and Kenya are growing particularly fast. In terms of the sector breakdown, RBS (2011) expect more than half of all spending needs to be related to electricity generation (USD 12.7 trillion), followed by roads (USD 4.2 trillion), mobile telecommunications (USD 2.0 trillion), fixed phone lines (USD 0.2 trillion) and rail (USD 0.2 trillion). A number of regional studies have also tried to estimate future infrastructure investment requirements and gaps. There is a wide disparity among developing economies across regions. Latin America has invested little, with infrastructure investment comprising less than two percent of GDP from 1990 to 2010 (McKinsey, 2013). It would be necessary in the short to medium term to have a minimum investment of four percent of annual GDP in the main Latin American economies to maintain economic growth levels (BBVA, 2010). India’s Planning Commission has projected that infrastructure investment will almost double to USD 1 trillion in the 12th Five-Year Plan, which runs from 2012 to 2017, amounting to an annual investment amount of about USD 200 billion in just one major Asian country (Sinha et al., 2012). Bhattacharya (2012) finds that 32 developing economies in Asia will need infrastructure investment of USD 8.2 trillion (in 2008 prices) over the course of 2011 to 2020. This breaks down to an annual USD 776 billion worth of national investments (estimated in a top-down approach) and an annual USD 29 billion worth for regional infrastructure (estimated with a bottom-up approach).3 Two thirds is needed for new capacity and one third for maintenance and replacement of existing assets. About half of this should go toward energy, about one third for transport and the rest for telecommunications (13 percent) and water (five percent). In terms of countries, China needs more than half, and India more than a quarter of the estimated sums, followed by Indonesia (five percent). In 2009, Africa’s infrastructure needs were estimated at USD 93 billion annually by the World Bank’s Africa Infrastructure Country Diagnostic. This is about twice as much as current spending. About two thirds of that is needed for new infrastructure. To take just one country as an example, Kenya’s infrastructure needs are estimated at USD 4 billion, or 20 percent of GDP (AICD, 2010). 3 There are two basic approaches: top-down and bottom-up. The first is based on the development of macro-statistics such as GDP, capital stock and investment. The second is based on micro-economic information, such as regional and sectoral case studies, planning documents from local entities, or experts’ assessments. 2 BACKGROUND BACKGROUND 2 Physical shortcomings in infrastructure are evident everywhere. This paper’s focus, however, is on the financial aspect. An “infrastructure financing gap” can be defined as the difference between investment needs and resources, or the funds needed to maintain economic growth and available funds. If infrastructure investment needs are difficult to estimate, infrastructure financing gaps are even more so. It should be kept in mind that such estimates are typically “baseline figures” needed to keep pace with anticipated economic growth, rather than any “social optimum”. They are, of course, highly difficult and uncertain, and subject to qualifications and criticism (e.g., Gramlich, 1994, and Dethier and Moore, 2012). The WEF (2012) estimates a global infrastructure gap of about USD 1 trillion per annum (1.25 percent of GDP). This is the difference between expected investment needs of USD 3.55 trillion and actual spending of USD 2.5 trillion. Bhattacharya et al. (2012) produce some estimates for the infrastructure financing gap in developing countries. In their analysis, some USD 800 to 900 billion is currently being invested in infrastructure every year. To meet demand, developing economies will need to increase spending to about USD 1.8 to 2.3 trillion per year by 2020, or from about three percent of GDP to six to eight percent of GDP. In other words, a spending gap of approximately USD 1 trillion per annum is projected for developing economies only. This is needed just to keep pace with the demands of rapid urbanization and growth (at four percent, in line with the experiences of fast-growing developing economies over the past 25 years). Additionally, it is estimated that ensuring that infrastructure investments are low emitting and climate resilient would require an additional USD 200 to 300 billion per year. Electricity, water (upstream and downstream) and transport are expected to account for the bulk of the spending needs (Figure 1). Figure 1: Estimated Infrastructure Investments in Developing Countries Source: Bhattacharya et al. (2012) 4 4 Slide taken from presentation made by Amar Bhattacharya and Mattia Romani to G-24 Technical Group Meeting, 21st March 2013, Washington D.C. “Meeting the Infrastructure Challenge: The Case for New Development Bank.” (EAP is East Asia Pacific; ECA is Europe and Central Asia; LAC is Latin America and Caribbean; MENA is Middle East and Northern Africa; SA is South Asia; and SSA is Sub-Saharan Africa.) BACKGROUND 3 2 BACKGROUND To conclude, infrastructure investment has historically been uneven across EMDE regions and countries at different development levels, with spending in East Asia well above that of other regions. Future investment requirements are generally seen to be even higher, with projections up to six to eight percent of GDP on average in EMDEs (or about USD 2 trillion per annum), i.e., exceeding both the world average of 3.5 to 4.5 percent and the current spending levels in most developing countries. 2.2. SOURCES OF FINANCING The public sector has traditionally been central to the ownership, financing and delivery of infrastructure services, including in emerging markets. Public funding of infrastructure—through budget allotments and retained earnings of state-owned enterprises—in developing economies accounts for about 70 percent of total infrastructure expenditures. Approximately 20 percent is financed by private sources, and the rest (about 10 percent) by multilateral and bilateral development agencies (Delmon and Delmon, 2011). A similar breakdown is reported by Bhattacharya et al. (2012). (See Figure 2.) Yet the traditional sources of financing are being squeezed. Government budgets in many countries are strained following the global financial crisis, and looking forward, the demands of fiscal consolidation suggest pressures will not abate any time soon. At the same time, funding from Multilateral Development Banks (MDBs) and other donor funding is unlikely to be able to fill this gap. Figure 2: Existing Infrastructure Financing in Developing Countries Current Annual Spending: USD 0.8–0.9 trillion NDBs USD 70–100 billion Private Finance USD 150–250 billion Other Developing Country Finance USD 10 trillion) Medium (USD 3–10 trillion) Small ( 10% 1-5% Minimal Dominant social Number of pension funds 10s or 100s A few main funds security fund Quality of pension system (e.g., Mercer Global D C E Pensions Index) Insurance penetration (% GDP) High Medium Minimal SWF Yes Yes No Development Fund or Bank Yes No Yes Level financial sector - Bank assets (% GDP), Medium Low Fledgling - Private credit (% GDP) Level capital market High Medium Low - Stock market cap (% GDP) Business conditions (e.g., IFC Doing Business Good Average Difficult ranking) Infrastructure investment conditions (e.g., EC Harris Global Infrastructure Investment Index, Good Average Poor or Nabarro Infrastructure Index25) Source: Authors INFRA LEAD MDB? BONDS? INVESTOR? 25 There are also regional infrastructure indices, e.g., the sub-index of Mo Ibrahim’s Index of African Governance (IIAG). 40 MODELS OF INFRASTRUCTURE INVESTING IN DEVELOPING ECONOMIES MODELS OF INFRASTRUCTURE INVESTING 8 Consequently, policy makers can follow a “decision tree” to establish the type of investment model that may best fit the specific situation of their country. Table 15 summarizes some options available to EMDE countries, relating to the stage of development of their capital markets. Table 15: Capital Market Development and Institutional Infrastructure Investment Emerging Markets With More Developed Capital Markets Quoted Stock In a country with well-developed capital markets, the issuance and investment in quoted stocks and corporate bonds of infrastructure companies is relatively straightforward, as for example in South Africa or several Asian countries. Local investors normally can invest in them according to their prudent investment policies. Infrastructure Project Finance Countries with longer experience in infrastructure project finance may be able to offer longer-term investment opportunities to institutional investors, instead of relying heavily on bank finance. There is even a chance to develop a working project bond market over time. Debt Finance Some debt structures may be more feasible in countries with better credit ratings. Such was the case in Chile, where monoline insurance was able to move infrastructure bond ratings up to investment grade. Trust Structure In order to use trust structures and products, financial companies and capital markets must already be operational in some form, as was the case in Mexico. Frontier Markets With Less Developed Capital Markets Government Bonds If there are any many smaller institutions (such as small pension funds) in place, government-issued infrastructure bonds may be the most appropriate investment vehicle for them. MDB In frontier markets, where both local and international investors lack experience, the involvement of governments and/or multilateral development banks may be necessary. Lead Investor Local investors can profit from co-investing alongside international pension funds and asset managers, by learning international best practices in infrastructure investing. Exposing yourself to international competition can also have a positive disciplinary function for national governance systems. If there is a large social security fund, this institution could possibly act as a lead investor, setting up an infrastructure fund for others to join. Regional Funds Investors in small countries may be particularly interested in regional funds but may be prohibited or discouraged from using them. Source: Authors 8.3. LEADERSHIP MODELS The preliminary analysis of EMDE countries suggests a range of “leadership models,” i.e., of spearheading forces in institutional involvement in infrastructure in developing economies. The leading PPRF / SSRF Many EMDEs have a leading social security or public pension reserve fund. Some of them have in the past been involved in domestic, regional or international infrastructure investments. There are examples in Asia (such as Malaysia) and Africa (such as South Africa, Botswana and Ghana). MODELS OF INFRASTRUCTURE INVESTING IN DEVELOPING ECONOMIES 41 MODELS OF 8 INFRASTRUCTURE INVESTING The primary objective of such funds is typically the provision of pensions and social security for their members. However, given their size and importance, they sometimes also have additional (implicit or explicit) objectives, such as the contribution to economic or capital market development. There is often political pressure on the board and managers of such funds. The innovative private-sector investor Leadership can also be provided by a private-sector institutional investor, e.g., a progressive corporate pension plan or a private wealth fund. Managers within such organizations may look at examples in other countries and find new investment routes for their own funds. Examples can be found, such as in a number of Latin American countries. Frequent problems in this respect are investment constraints and other prohibitive regulations that hinder (smaller) private-sector funds from progressing with innovative investment ideas. Many pension funds are simply too small to be able to dedicate significant resources to private or alternative investments. The new capital market instrument In some countries, the introduction of a new financial instrument enabled institutional investors to invest in infrastructure projects directly or indirectly, or facilitate an allocation of such investments. This is often led by the financial industry, but requires close co-operation with the governments. Examples include trust structures in Mexico and Peru, and infrastructure bonds in Kenya. The introduction of new capital market instruments can be slow and insufficient. The pension and insurance regulators need to keep pace with such developments too. There are also educational issues with more complex structures. The regional fund model The establishment of a regional infrastructure fund can be of great help to investors, especially in smaller countries. It enables them to participate alongside other (often more experienced) investors. It can also be an effective tool for the international diversification of assets. Regional or international development institutions often initiate such funds, co-invest, and/or provide expertise and capital. However, there are also pure commercial funds at work in single countries or regions. Such fund solutions require a high degree of communication and trust between participants and across borders. Again, regulation and politics may stand in the way of investment. In summary, these four leadership models cover a broad range of experiences in EMDE countries up to now. These stylized models are not necessarily exhaustive and exclusive. Some of them may be at work simultaneously with different degrees of relevance across countries. 42 MODELS OF INFRASTRUCTURE INVESTING IN DEVELOPING ECONOMIES CONCLUSIONS 9 Conclusions The issue of how to encourage further private-sector investment in infrastructure is currently at the top of many policy-makers’ agendas. Given the constraints on traditional sources of public and private (banks) finance for long-term infrastructure, the potential to tap institutional investors has been widely discussed in recent times. However, the debate has so far focused mainly on developing countries, both in terms of potential investments and investors. This paper moves this discussion into the arena of developing economies, which have the greatest infrastructure and development needs. Infrastructure investment has historically been uneven across EMDE regions and countries at different development levels, with spending in East Asia well above other regions. Future investment requirements are projected to be six to eight percent of GDP on average in EMDEs, exceeding both the world average (3.5 to 4.5 percent) and the current spending levels (estimated at USD 800 to 900 billion per annum) in most developing countries. However, there are barriers and risks to infrastructure investing, and even more so in EMDEs. Nonetheless, some USD 50 billion of capital has been channelled to emerging markets to date, primarily via infrastructure funds. There are also some early examples of direct investments by international investors, such as large pension funds and SWFs. Domestic institutional investors are another potentially important source of capital in emerging economies. The local asset base, estimated at roughly USD 2.5 billion for both the pensions and insurance sectors, is still relatively small, but expected to grow substantially. However, there have already been some allocations to infrastructure in some Latin American countries, as well as in South Africa and other places. In Asia and Africa, retirement assets are often concentrated in large social security and PPRFs. Given their size, they can be of strategic importance, but also come with concerns about good governance and investment practices. SWFs are different, not only in that the majority of assets are controlled outside OECD countries, but also in that they often have specific infrastructure-related objectives, with an even bigger political component. If the information about the current investment activity in EMDE infrastructure is sketchy, projections about the future potential allocation of institutional investors are even more speculative. Some simple calculations produce a rough estimate of USD 350 to 700 billion, or USD 30 to 60 billion per annum, if institutional investors (both international and domestic) undertake significant asset allocation shifts over the next 10 years. This could cover up to 10 percent of infrastructure investment needs, and it could be more if conditions were right and institutional assets grew strongly. The theoretical asset potential is one thing, but the “how” and “where” of investing in practice is another thing. This study explains different investment approaches and lists examples of equity, debt and fund instruments used by institutional investors in developing countries, and sums them up in some “stylized facts.” CONCLUSIONS 43 9 CONCLUSIONS The institutional, economic and capital market environments for infrastructure investment are very diverse across countries, and they are rarely perfect, even in advanced countries. There are a number of key pre-conditions for institutional infrastructure involvement in EMDEs that need to be met or addressed with appropriate reform policies. The interesting question of the “models” of institutional infrastructure investing in EMDEs arises. Governments have used four different ways of mobilizing private finance in the past. Different models work in different places, depending on the development stage and the institutional environment of a country/region. In this paper, four “leadership models” are presented of how international and/or domestic institutions can spearhead infrastructure investment in EMDEs. This field is still very much under-researched, although some work has been undertaken in recent years, especially on a regional level. Data is still scarce and transparency is low. There are important points that will need to be investigated in more detail. This paper should provide a framework for the discussion of important questions, and set some milestones for further analysis, opening up some important questions for both investors and governments. 44 CONCLUSIONS REFERENCES AICD (2010), “Kenya’s Infrastructure: A Continental Perspective,” Africa Infrastructure Country Diagnostic. Barbary, V. (2013), “Sovereign Fund Investment in Infrastructure,” Investments & Wealth Monitor, January/February 2013, pp. 32-40. BBVA, (2010), “A Balance and Projections of the Experience in Infrastructure Funds of Pension Funds in Latin America,” BBVA Research. BBVA (2011), “A Review of Recent Infrastructure in Latin America and the Role of Private Pension Funds,” Working Papers No. 11/37, BBVA Research. BCG (2013a), “Capitalizing on the Recover. Global Asset Management 2013,” Boston Consulting Group. BCG (2013b), “Maintaining Momentum in a Complex World. Global Wealth 2013,” Boston Consulting Group. Bhattacharya, A., Romania, M., and Stern, N., (2012), “Infrastructure for development: Meeting the challenge,” CCCEP, LSE, G24. Bhattacharyay, B. N. (2012), “Estimating demand for infrastructure 2010-2010,” In: Bhattacharyay, B. N., Kawai, M., and Nag, R., Infrastructure for Asian Connectivity, ADBI and ADB, Edward Elgar, pp. 19-79. Blommestein, H. (1997), “Institutional Investors, Pension Reform and Emerging Securities Markets,” Inter-American Development Bank, Working Paper 359. Blundel-Wignall, A., Hu, Y., and Yermo, J. (2008), “Sovereign Wealth and Pension Fund Issues,” OECD Working Papers on Insurance and Private Pensions, No. 14. Brown, J. and Jacobs, M. (2011), “Leveraging private investment: the role of public sector climate finance,” Overseas Development Institute, April 2011. Calderon, C., (2009), “Infrastructure and Growth in Africa,” World Bank Policy Research Working Paper 4914. Cheikhrouhou, H., Gwinner, W., Pollner, J., Salinas, E., Sirtaine, S., and Vittas, D.(2007), “Structured Finance in Latin America : Channeling Pension Funds to Housing, Infrastructure, and Small Businesses,” World Bank. Chelsky, J., Morel, C., and Kabir, M., (2013), “Investment Financing in the Wake of the Crisis: The Role of Multilateral Development Banks,” World Bank Economic Premise No. 121. Chuckun, V.S., (2010), “Using Pension Funds for Infrastructure Finance in Africa: The Case of NEPAD Proejcts,” University of Stellenbosch. City of London (2011), “Insurance companies and pension funds as institutional investors: global investment patterns,” Trusted Sources, November 2011. REFERENCES 45 REFERENCES City of London (2013), “Institutional Investment in the UK from Emerging Markets.” Climate Policy Initiative (2013), “The Challenge of Institutional Investment in Renewable Energy,” CPI Report, March 2013. Coletta, M. and Zinni, B. (2013), “Insurance corporations and pension funds in OECD countries,” Banca d’Italia, Questioni di Economia e Finanza, Occasional Papers, Nr. 165, June 2013. Della Croce, R. (2011), “Pension Funds Investment in Infrastructure: Policy Actions,” OECD Working Papers on Finance, Insurance and Private Pensions, No. 13, OECD Publishing. Delmon, J. and Delmon, V. (2011), “International Project Finance and PPPs: A Legal Guide to Key Growth Markets,”.Wolters Kluwer International. Delmon, J., Jett, A., Wolf, G., and Kacaniku, T. (2012), “Infrastructure Finance Intermediary Survey,” World Bank. Dethier, J. and Moore, A. (2012), “Infrastructure in developing countries: an overview of some economic issues,” ZEF-Discussion Papers on Development Policy, No. 165, April 2012. Eberhard, A. (2007), “Infrastructure Regulation in Developing Countries,” PPIAF Working Paper, No. 4. England, A. and Blas, J. (2014), “South Africa rising,” Financial Times, 12 February 2014. Fay, M. and Yepes, T. (2003), “Investing in Infrastructure. What is needed from 2000 to 2010?” World Bank Policy Research Working Paper 3102, July 2003. Fay, M., Toman, M., Benitez, D., and Csordas, S. (2011), “Infrastructure and Sustainable Development,” In: Fardoust, S., Yongbeom, K., and Sepúlveda, C. (Ed.), “Post-Crisis Growth and Development,” World Bank. Ferreira, D. and Khatami, K. (1996), “Financing Private Infrastructure in Developing Countries,” World Bank Discussion Paper, No. 343. G20 (2013), “Long-term Investment Financing for Growth and Development,” Umbrella Paper prepared by World Bank. Gramlich, E. (1994), “Infrastructure Investment; A Review Essay,” Journal of Economic Literature, Vol. XXXII, September 1994, pp. 1176-1196. Hall, D., (2009), “Infrastructure, the Crisis and Pension Funds,” PSIRU, December 2009. Hanson, T., (2008), “Financing Transportation Infrastructure Investment in Colombia with Pension Savings.” Hess, D. and Impavido, G. (2004), “Governance of Public Pension Funds: Lessons from Corporate Governance and International Evidence.” Hinojosa, S. A. (2011), “Enhancing Public Private Partnerships through Guarantees: Selected Latin American Cases and Conceptual Issues,” 46 REFERENCES REFERENCES presentation made at PPIAF/ World Bank conference on Financing Public-Private Partnerships in Latin America, Washington D.C., May 2011. Iglesias, A. and Palacios, R. (2000), “Managing Public Pension Reserves Part I: Evidence from International Experience.” Inderst, G. (2009), “Pension Fund Investment in Infrastructure,” OECD Working Paper on Insurance and Private Pensions No. 32. Inderst, G. (2010), “Infrastructure as an asset class,” EIB Papers, Vol. 15, No. 1. Inderst (2013), “Private Infrastructure Finance and Investment in Europe,” EIB Working Papers 2013/02. Inderst G. and Della Croce, R. (2013), “Pension Fund Investment in Infrastructure: A Comparison between Australia and Canada,” OECD Working Papers on Finance, Insurance and Private Pensions, No. 32, OECD Publishing. IOPS (2011), “Pension Fund Use of Alternative Investments and Derivatives: Regulation, Industry Practice and Implementation Issues,” IOPS Working Papers on Effective Pension Supervision No. 13. IOSCO (2012), “Development and Regulation of Institutional Investors in Emerging Markets.” IPE and Sterling (2013), Institutional Infrastructure Survey, IPE and Stirling Capital Partners. Irving, J. and Manroth, A. (2009), “Local Sources of Financing for Infrastructure in Africa,” World Bank. Kalter, E. (2012), SWF Asset Allocation after the Financial Crisis, Presentation, March 2012. Kalter, E. (2010), “Sovereign Wealth Funds. Public Policy and Asset Allocation After the Financial Crisis,” The Fletcher School, Tufts University, Presentation October 2010. Kerf, M. and Smith, W. (1996), “Privatizing Africa’s Infrastructure,” World Bank Technical Paper No. 337. Kravets, O. (2013), “Infrastructure Investments in Eastern Neighbours and Central Asia (ENCA),” EIB Working Papers 2013/01. Kumar, A., Gray, D., Hoskote, M., Klaudy, S., and Ruster, J. (1997), “Mobilizing Domestic Capital Markets for Infrastructure Financing,” World Bank Discussion Paper, No. 377. Lin, J. and Doemeland, D. (2012), “Beyond Keynesianism: Global Infrastructure Investment in Times of Crisis,” World Bank Policy Research Working Paper 5940. Mbeng Mezui, C. A. (2012), “Accessing Local Markets for Infrastructure: Lessons for Africa,” African Development Bank Working Paper Series No. 153. Mbeng Mezui, C.A. and Hundal, B. (2013), “Structured Finance: Conditions for Infrastructure Bonds in African Markets,” African REFERENCES 47 REFERENCES Development Bank, NEPAD. McKinsey (2010), “Farewell to cheap capital? The implications of long-term shifts in global investment and saving,” McKinsey Global Institute, December 2010. McKinsey (2011), “The emerging equity gap: Growth and stability in the new investor landscape.” McKinsey (2013), “Infrastructure productivity: How to save $1 trillion a year,” McKinsey Global Institute, January 2013. Musalem, A.,R. and Souto, P. (2012), “Assessing the Governance and Transparency of National Public Pension Funds,” Review of European Studies, Vol. 4, No. 2, June 2012. Mutero, J. (2010), “Mobilising pension assets for housing finance needs in Africa – Experiences and prospects in East Africa,” Centre for Affordable Housing Finance in Africa. Muzenda, D. (2009), “Increasing Private Investment in African Energy Infrastructure,” Background Paper, NEPAD-OECD Expert Africa Investment Initiative. OECD, (2006), “Infrastructure to 2030: Telecom, Land Transport, Water and Electricity.” OECD (2012), “Strategic Transport Infrastructure Needs to 2030.” OECD (2013a), “Annual Survey of Large Pension Funds and Public Reserve Pension Funds.” OECD (2013b), “Pension at a Glance 2013: OECD and G20 Indicators.” OECD (2013c), “Annual Survey of Investment Regulation of Pension Funds.” OECD (2013d), “Pension Markets in Focus.” OECD (2013e), “Institutional Investor Statistics 2005-2012,” OECD Publishing. OECD (2014 – forthcoming), “Government and Market-based Instruments and Incentives to Stimulate Long-term Investment Finance in Infrastructure.” Orr., R.,J. and Kennedy, J., R. (2008), “Highlights of Recent Trends in Global Infrastructure: New Players and Revised Game Rule.” Palacios, R. (2002), “Managing Public Pension Reserves Part II: Lessons from Five Recent OECD Initiatives,” World Bank Social Protection Discussion Paper Series 33407. Platz, D. (2009), “Infrastructure Financing in Developing Economies: The Potential of Sub-Sovereign Bonds.” 48 REFERENCES REFERENCES Preqin (2013), “Global Alternatives Report.” Preqin (various dates, from 2012 to 2014), “Infrastructure Spotlight.” RBS (2011), “The Roots of Growth. Projecting EM infrastructure demand to 2030,” Emerging Markets Strategy, Royal Bank of Scotland. Sawant (2010), “Infrastructure Investing: Managing the Risks and Rewards for Pensions, Insurance Companies and Endowments,” Wiley & Sons, New York, NY, United States. Sinha, P., Arya, D., and Singh, S., “Evolution of Financing Needs in India Infrastructure,” MPRA, 13 April 2012. Shendy, R., Kaplan, Z., and Mousley, P. (2011), “Towards Better Infrastructure,” World Bank Study 63433. Schwartz, J., Ruiz-Nunez, F., and Chelsky, J. (2014), “Closing the Infrastructure Finance Gap: Addressing Risk,” http://www.rba.gov.au/ publications/confs/2014/pdf/schwartz-ruiz-nunez-chelsky.pdf. Stewart, F. and J. Yermo (2009), “Pensions in Africa,” OECD Working Papers on Insurance and Private Pensions, No. 30, OECD Publishing. Stewart, F. and J. Yermo (2012), “Infrastructure Investment in New Markets: Challenges and Opportunities for Pension Funds,” OECD Working Papers on Finance, Insurance and Private Pensions, No. 26, OECD Publishing. TheCityUK (2013), “Sovereign Wealth Funds,” Financial Markets Series, March 2013. TUAC (2012), “What role for pension funds in financing climate change policies?” The Trade Union Advisory Committee (TUAC) to the OECD, 23 May 2012. Vives, A. (1999). “Pension Funds in Infrastructure Project Finance: Regulations and Instrument Design,” The Journal of Structured Finance, (5:2), pp. 37-52. Walsh, J., Park and Ch., Yu, J. (2011), “Financing Infrastructure in India: Macroeconomic Lessons and Emerging Market,” Case Studies. IMF Working Paper WP/11/181. WEF (2011), “The Future of Long-term Investing,” World Economic Forum. WEF (2012), “Strategic Infrastructure,” World Economic Forum. WEF (2013a), “The Green Investment Report,” World Economic Forum. WEF (2013b), “Strategic Infrastructure in Africa. A business approach to project acceleration,” May 2013. World Bank (2012a), “Patterns of International Pension Provision.” REFERENCES 49 REFERENCES World Bank (2012b), “Best Practices in Public-Private Partnerships in Latin America: the role of innovative approaches,” Washington, DC. Wright, G., Stevens, D., and de Ferranti, D. (2011), “Tapping into $1.1 trillion of Domestic Development Aid Funding,” Results for Development. Yepes, T., (2008), “Investment Needs for Infrastructure in Developing Countries 2008–15”, World Bank, Washington DC 50 REFERENCES APPENDIX 1 Appendix 1: Emerging Market Infrastructure Funds 10 Largest Unlisted Infrastructure Funds Open for Investment with a Primary Focus on Asia and Rest of World, May 2013 Fund Manager Target Size (mn) Main Fund Focus Manager Location Urban infrastructure Construction Industrial All-China Federation Industrial 10,000 CNY Asia China Investment Fund Funds BTG Pactual Brazil Infrastructure Fund II BTG Pactual 1,500 USD Latin America Brazil Pan African Infrastructure Development Fund II Harith 1,200 USD Africa South Africa Arab Financing Facility for Infrastructure IFC Asset Management Company 1,000 USD MENA US BTG Pactual Africa Fund BTG Pactual 1,000 USD Africa Brazil Cordiant Emerging Loan Fund IV (CELF IV) Cordiant Capital 1,000 USD Emerging Markets Canada IFC Global Infrastructure Fund IFC Asset Management Company 1,000 USD Emerging Markets US JPMorgan Asin Infrastructure & Related JPMorgan – Infrastructure 1,000 USD Asia US Resources Opportuinity Fund II Investments Group Macquarie Infrastructure and Real LAC-China Infrastructure Fund 1,000 USD Latin America Australia Assests (MIRA) Macquarie Everbright Greater China Macquarie Infrastructure and Real 1,000 USD Asia Australia Infrastructure Fund Assests (MIRA) 10 Largest Africa-Focused Unlisted Infrastructure Funds Closed, All Time Fund Target Size Final Close Final Close Manager Fund Manager Vintage (mn) Size (mn) Date Location United Arab Abraaj Infrastructure and Growth Capital Fund Abraaj Capital 2007 2,000 USD 2,000 USD 12/31/2007 Emirates Actis Infrastructure Fund II Actis 2008 1,000 USD 752 USD 09/30/2009 UK IDB Infrastructure Fund EMP Bahrain 2001 1,000 USD 731 USD 12/01/2006 Bahrain Macquarie Infrastructure ADCB Macquarie Infrastructure Fund 2008 1,000 USD 630 USD 12/15/2008 UK and Real Assets (MIRA) Pan African Infrastructure Investment Fund II Harith 2007 1,000 USD 630 USD 03/31/2009 South Africa African Infrastructure African Infrastructure Investment Fund II 2011 1,000 USD 500 USD 10/13/2011 South Africa Investment Managers InfraMed Infrastructure InfraMed Management 2010 1,000 EUR 385 EUR 05/21/2013 France Mubadala Infrastructure United Arab Mubadala Infrastructure Partners Fund 2010 300 USD 425 USD 03/31/2011 Partners Emirates United Arab Alcazar Capital Partners Fund I Alcazar Capital 2007 300 USD 300 USD 06/15/2008 Emirates GCC Energy Fund United Arab GCC Energy Fund 2005 300 USD 300 USD 09/01/2006 Managers Emirates Top Five South America-Focused Unlisted Infrastructure Funds by Final Close Size Final Close Fund Manager Year of Fund Fund Manager Size (mn) Location Final Close Transelec Transmission Brookfield Asset Management USD 1,368 Canada 2006 P2Brasil Patria Investmentos USD 1,155 Brazil 2011 Pinebridge-GE Capital Latin American Infrastructure Pinebridge Investments – Infrastructure USD 1,013 US 1997 Partners FIP Brasil Energia BTG Pactual BRL 1,200 Brazil 2005 InfraBrasil Fundo de Investimento em Participações Mantiq Investments BRL 1,000 Brazil 2006 Source: Top Chart – Preqin Investor Network; Middle and bottom charts – Prequin Infrastructure Online APPENDIX 1: EMERGING MARKET INFRASTRUCTURE FUNDS 51 APPENDIX 2 Appendix 2: Pension Fund Assets 2011 Pension Fund Assets as Percentage of GDP in Selected OECD Countries South Africa (1) 82.0 Namibia 78.2 Hong Kong (China) 34.3 33.0 Weighted average 28.9 El Salvador (2) 27.7 Bolivia (2,3) 22.1 Jamaica 19.4 Uruguay (2) 18.4 18.2 Peru 17.1 Colombia 16.2 Kenya 15.1 Croatia (4) 14.7 13.3 Kazawa 12.6 Brazil 9.8 Simple average 8.4 Lesotho 7.8 7.7 Costa Rica 7.4 Malta 6.6 Vietnam 6.2 NIgeria 4.6 3.5 Bulgaria 1.8 Dominican Republic (2) 1.8 Thailand 1.7 Macedonia, The Former Yug. Rep. of 1.7 Russian Federation (5) 0.9 0.9 Indonesia (1) 0.7 Mauritius 0.5 Romania 0.3 Gibraltar(1) 0.1 0.0 China (5) 0.0 Latvia 0.0 Panama (1,2) Samoa India Ukraine (1) Albania Netherlands Pakistan Iceland Argentina Switzerland (1) United Kingdom (2) Australia (3) Finland Weighted average United States Source: OECD (2013) Canada Chile Israel Denmark Ireland (4) Simple average Japan (5) Poland New Zealand (3) Mexico Slovak Republic Sweden Portugal Estonia Spain Norway 52 Czech Republic APPENDIX 2: PENSION FUND ASSETS Germany Costa Rica 7.4 Malta 6.6 Vietnam 6.2 NIgeria 4.6 3.5 Bulgaria 1.8 Republic (2) Thailand 1.8 1.7 APPENDIX 2 r Yug. Rep. of 1.7 ederation (5) 0.9 0.9 ndonesia (1) 0.7 Mauritius 0.5 Romania 0.3 Gibraltar(1) 0.1 0.0 China (5) 0.0 Appendix 2: Pension Fund Assets (continued) Latvia 0.0 Panama (1,2) Samoa 2011 Pension Fund Assets as Percentage of GDP in Selected Non-OECD Countries India Ukraine (1) Albania Netherlands Pakistan Iceland Argentina Switzerland (1) United Kingdom (2) Australia (3) Finland Weighted average United States Canada Chile Israel Denmark Ireland (4) Simple average Japan (5) Poland New Zealand (3) Mexico Slovak Republic Sweden Portugal Estonia Spain Norway Czech Republic Germany Italy Korea Austria Belgium Turkey Slovenia Hungary (6) Luxembourg France (7) Greece Source: OECD (2013) APPENDIX 2: PENSION FUND ASSETS 53 1 LARGER SECTION APPENDIXTITLE 3 Appendix 3: EMDE Countries by Indicators National Income GNI/head* Latin America Africa Asia High > 12.6 Chile 14.3 Korea 22.7 Upper Middle < 12.6, > 4.1 Mexico 9.6, Colombia 7.0 Peru 6.1 South Africa 7.6 Malaysia 9.8 Lower Middle <4.1, > 1 Ghana 1.6, Nigeria 1.4 Indonesia 3.4, Philippines 2.5, India 1.6 Low <1 Kenya 0.9, Tanzania 0.6 Bangladesh 0.8 Source: World Bank, World Development Indicators (2013) * Gross national income per capita, Atlas method, in 1000 USD, 2012 Pension System Mercer Index* Latin America Africa Asia A B+ B Chile Singapore C+ C Brazil, Mexico D China, Korea, India, Indonesia E Source: Melbourne Mercer Global Pensions Index (2013) * Overall index grade, covering adequacy, sustainability, integrity Insurance Company Assets % of GDP Latin America Africa Asia Korea 46 Chile 20 South Africa 28 Malaysia 21 India 19 Kenya 9 Colombia 6 Phillipines 7 Peru, Mexico 4 Nigeria, Ghana 2 Indonesia 3 Source: World Bank, FRED (2010 figures) SWF Assets US$ bn Latin America Africa Asia Algeria 77, Libya 65 Korea 57 Malaysia 41 Chile 22 East Timor 15 Peru 7, Mexico 6 Botswana 7 Nigeria 1 Ghana 0.1 Indonesia 0.3 Source: SWF Institute (as of Feb 2014) Infrastructure Quality WEF Index* Quintile Latin America Africa Asia 1 Malaysia 2 Chile South Africa, Kenya 3 Mexico Botswana Indonesia, India 4 Peru, Colombia Ghana Philippines 5 Angola Nigeria Bangladesh Source: WEF Global Competitiveness Report 2013-14 (2013) * Quality of overall infrastructure 54 APPENDIX 3: EMDE COUNTRIES BY INDICATORS APPENDIX 3 Appendix 3: EMDE Countries by Indicators (continued) Business Conditions IFC Index* Quintile Latin America Africa Asia 1 Chile Korea, Malaysia, Thailand 2 Peru, Colombia, Mexico South Africa, Ghana 3 Costa Rica Zambia Vietnam 4 Brazil Kenya, Nigeria Indonesia, Bangladesh, India, Philippines Source: IFC Doing Business (2013) * IFC Rankings on the ease of doing business 2013 Pension Assets Pension funds % of GDP Latin America Africa Asia Chile 60 South Africa 82 Peru 18 Colombia 18 Kenya 17 Mexico 12 Nigeria 8 Thailand 6 Mauritius 2 Korea 5, Indonesia 2 India 0.3 Source: OECD, Towers Watson (2012 figures) Social Security/Public Pension Reserve Funds PPRF assets % of GDP Latin America Africa Asia Namibia 58 Fiji 59 Malaysia 51 South Africa 32 Jordan 38, Korea 28 Argentina 11 Ghana 10 India, Phillipines 6 Peru 3, Chile 2 Kenya 4 Mexico, Colombia 1 Source: Musalem and Souto (2012), OECD (2013b) Infrastructure: Investment Attractiveness EC Harris Index Quintile Latin America Africa Asia 1 Malaysia 2 Chile 3 South Africa Korea, India 4 Mexico, Colombia Indonesia, Philipp. 5 Argentina Nigeria Bangladesh Source: EC Harris Global Infrastructure Investment Index (2013) Infrastructure: Investment Conditions Nabarro Index Quintile 1 Latin America Africa Asia 1 2 Brazil China, India 3 South Africa 4 Malaysia 5 Egypt Indonesia, Philippines Source: Nabarro Infrastructure Index (2013) APPENDIX 3: EMDE COUNTRIES BY INDICATORS 55 APPENDIX 4 Appendix 4: Examples of Institutional Investor Involvement in Emerging Market Infrastructure Instrument Country Start year Description Examples PROJECT LOANS Social security fund invests in greenfield Employees Provident Fund debt of North-South Project finance Malaysia 1991 infrastructure project finance debt. Crucial release of Expressway; the Lumut power project; the YTL debt investment restrictions. power project; Kuala Lumpur Airport Project finance Capital market financing for infrastructure with Thailand Rayong Power Transaction debt involvement of local investors Project finance N3 toll road; N4 Maputo road between South Africa South Africa 1998 Several toll rtoads with institutional investor loans loan and Mozambique PROJECT BONDS Debt instruments issued by companies awarded infrastructure concessions, used to finance transport projects during construction phase. Investment Costannera Norte toll road infrastructure bond. grade bonds, up to 100 percent guaranteed by Greenfield investments by pension funds have Infrastructure monoline insurers (irrevocable and unconditional, been small; investment undertaken to date in such Chile 1998 bonds covered full payment of interest and principal, assets include the El Melon tunnel; the Camino de effectively transferred risk to insurance company; la Madera; Transportes Pacific; and Santiago-San this was critical for achieving minimum investment Antonio toll roads, along with the Iquique Airport. grade rating required by institutional investors; highly standardized framework) Infrastructure project bonds (CRPAO) are issued by the project operator as the project advances and Infrastructure carry a government certificate of completion of Peru 2006 IIRSA Highway (15years); ater bonds. bonds the stage of the project (Certificate of Recognition of Annual Payment for Works – Certificados de Reconocimiento del Pago Anual por Obras, CRPAOs) Infrastructure CRPI: debt instrument, 15 years, issued by investors. Peru 2009 bonds Government guarantees. Two types of infrastructure project bonds: assets Ruta del Sol highway project. Project was broken and securitization bonds. Ten-year minimum. into three parts; Sector 3 (revenues including tolls Infrastructure 2010, Government guarantee. Disposable Payment Colombia and government availability payments, structured as bonds 2012 Certificates. Highway bonds pilot project. Separation a variable-term concession with a max. of 25 years). of project into functional units. Conditional Consortium included a pension fund. payments. Mitigation of construction risk. Privileged tax rates for investors (e.g., income tax to of zero percent) for bonds of infrastructure Infrastructure companies and SPEs to finance infrastructure. Brazil 2010 Don Pedro Highway; offshore drilling vessels bonds Twenty-four energy and 6 transport projects were approved by Feb 2013. New infrastructure bonds launched in 2013. Project bonds Malaysia 1993 Infrastructure project bonds YTP Power generation. Senior secured, redeemable, zero-coupon, non- Refinancing North Karnataka Highway project. Issue sold on to India 2011 convertible debenture. Rated by Fitch. Ready to debentures Life Insurance Company of India. invest for insurance company. CO-INVESTMENT DEBT Infrastructure Debt Trust Fund. Created by the Pension Fund Association, with contributions from Investment trust Peru 2009 the four PFAs operating in the pension system – to invest in CRPAOs. 56 APPENDIX 4: EXAMPLES OF INSTITUTIONAL INVESTOR INVOLVEMENT IN EMERGING MARKET INFRASTRUCTURE APPENDIX 4 Appendix 4: Examples of Institutional Investor Involvement in Emerging Market Infrastructure (continued) Instrument Country Start year Description Examples CORPORATE BONDS Used in many countries. Some examples: Bonds of corporations in the power, transport, water Malaysia 1989 and telecommunications sectors. Bonds of corporations in the power, transport, water Korea and telecommunications sectors. Corporate bonds Local pension funds invest in bonds of infrastructure Kengon (electricity) and Safaricom Kenya companies. Tax concessions. (telecommunications). Cape Verde Electricity bond Uganda Bonds of telecommunications, and EADB Mozambique Bonds of telecommunications GOVERNMENT BONDS Kenya 2009 Earmarked for infrastructure. Some tax concessions. Senegal 2007 To finance road and rail transport infrastructure. Government bonds Eurobond on LSE. Earmarked for infrastructure Ghana 2008 financing. SUB-SOVEREIGN BONDS Some states issue bonds for infrastructure State bonds Nigeria 1986 investments. Municipal bonds. Some provinces issue bonds for Municipal bonds South Africa infrastructure investments. DIRECT EQUITY Direct equity “Canadian model” holdings CO-INVESTMENT EQUITY Tlalnepantla Hospital Project Mexico. This was Capital Development Certificates CKDs the first time Mexican pension funds invested in a (Certificados de Capital de Desarrollo) are trust Mexican PPP project from the outset, as opposed securities designed for the financing of one or to at the beginning of operations. Mexican pension more projects. CKDs can be used for investment in funds contributed to the equity of the project through Trust securities Mexico infrastructure, but also real estate and other private- an equity-structured note issued by Marhnos (the equity projects. The principal of the CKD is protected privately held developer). The project represents by a debt instrument, whereas the income depends the first equity investments in a greenfield social on the performance of the underlying project. These infrastructure by pension funds using a CKD. IFC- securities are quoted on listed exchanges. supported public-private partnership project (IFC serving as financial advisor). Real Estate Investment Trusts FIBRAS are securities issued by trusts dedicated to investments in real REITs Mexico 2008 estate and infrastructure. Pension funds can invest up to 10 percent in FIBRAS. APPENDIX 4: EXAMPLES OF INSTITUTIONAL INVESTOR INVOLVEMENT IN EMERGING MARKET INFRASTRUCTURE 57 APPENDIX 4 Appendix 4: Examples of Institutional Investor Involvement in Emerging Market Infrastructure (continued) Instrument Country Start year Description Examples LISTED EQUITY Used in many countries. Some examples: A second large part of domestic capital market instruments in infrastructure consists of equity shares of divested public utilities. The divestiture program of 1985-90, which included an enterprise Privatized Chile 1985 in telecommunications (CTC), electricity (Chilectra companies and Endesa), and water and sewage services was a major source of impetus for development of the domestic capital market for investments in infrastructure. Invepar is an infrastructure company owned by the Company holdings Brazil Investment in listed infrastructure companies. three largest pension funds Social security funds invest in infrastructure Shares in Light & Power Holdings companies. National Insurance Board of Barbados. Barbados, St Company holdings Social security funds invest in infrastructure Lucia companies. National Insurance Corporation of Shares in Saint Lucia Electricity Corp. Saint Lucia. Macquarie Korean Infrastructure Fund (KIF), 62 Listed funds Korea Listed private equity funds percent owned by institutional investors JOINTLY OWNED FUNDS Pan Africa Infrastructure Development Fund (PAIDF): South Africa’s Public Investment Commission (PIC) has created a multi-billion dollar, 25-year fund to mobilize local and international Infrastructure investment in infrastructure development in Africa. South Africa 2007 fund Investors in the fund inclu de the Government Employees Pension Fund, as well as insurance companies involved in managing pension funds, and the Ghanaian Social Security and National Insurance Trust (SSNIT) Corporation. Managed by the PIC, invests in “development Isibaya Fund South Africa investments,” including economic and social infrastructure. The Ghanaese Social Security Trust (SSNIT) invests Regional fund in a range of regional funds, e.g., PAIDF, AIG Africa Ghana Diversified fund investment. investment Infrastructure Fund, and Canadian Investment Fund for Africa. GOVERNMENT-SPONSORED FUNDS Several new Infrastructure Debt Funds (IDFs), launched as a mutual fund by the IIFCL, public-sector Infrastructure India 2013 banks and private-sector managers. Pension funds debt fund and insurers asked to invest in them but are subject to regulatory investment limits on unlisted assets. The Nigeria Infrastructure Fund (NIF) aims to invest Infrastructure in infrastructure projects in Nigeria that meet our Nigeria fund targeted financial returns and contribute to the development of essential infrastructure in Nigeria. 58 APPENDIX 4: EXAMPLES OF INSTITUTIONAL INVESTOR INVOLVEMENT IN EMERGING MARKET INFRASTRUCTURE APPENDIX 4 Appendix 4: Examples of Institutional Investor Involvement in Emerging Market Infrastructure (continued) Instrument Country Start year Description Examples MDA-SPONSORED FUNDS The ALAC Fund is a co-investment fund that invests alongside IFC in equity investments in Sub-Saharan Africa, Latin America, and the Caribbean, providing growth capital for private enterprises in these regions. Other anchor investors in the fund are Develop. PGGM, the Dutch pension fund manager; Korea countries Investment Corporation; State Oil Fund of the Republic of Azerbaijan; and a fund investor from Saudi Arabia. The fund provides an opportunity for sovereign and pension fund investors to co- invest for the first time with IFC in growth equity investments in developing countries. The Asean Infrastructure Fund is designed to boost Infrastructure public lending to fund the region’s infrastructure fund deficit. Funding will be provided by the ADB and Asean governments, with institutional investors invited to participate in hybrid securities (perpetual Regional 2012 bonds or non-voting preference shares). The ADB’s involvement means that a pre-vetted project pipeline will be provided, and gives AAA multilateral support. Starting in 2013, expected to provide loans up to USD 300 billion per annum. Regional 2012 Asian Infrastructure Fund. Emerging Africa Infrastructure Fund (EAIF), initiated by the Private Infrastructure Development Group, Regional whose founding members include government institutions from the United Kingdom, Netherlands, Switzerland and Sweden. COMMERCIAL FUNDS South Africa Infrastructure Fund (SAIF) targets Regional 1996 equity investments in Sub-Saharan Africa. Infrastructure Regional 2004 African Infrastructure Investment Facility (AIIF) fund Chile 2002 Transport sector Prime Infraestructura I, II Brazil Private equity funds (FIP). Fondo de Inversion en Infrastructure. AC Capitales. 2004. 30 years, USD 55 million. Solely for pension 2004, fund administrators Mutual Funds Peru 2009 Brookfield and AC Capitales. 2009. USD 500 milion. Created by the Ministry of the Economy. About 35 private equity funds. Example: The Ashmore Colombia Infrastructure Fund is a private equity fund making infrastructure investments Private equity in Colombia. The Government of Colombia was infrastructure Colombia instrumental in developing this investment vehicle funds together with IDB and CAF, as a means of attracting domestic institutional investors such as local pension funds, as well as international investors to financing infrastructure projects. APPENDIX 4: EXAMPLES OF INSTITUTIONAL INVESTOR INVOLVEMENT IN EMERGING MARKET INFRASTRUCTURE 59 APPENDIX 4 Appendix 4: Examples of Institutional Investor Involvement in Emerging Market Infrastructure (continued) Instrument Country Start year Description Examples Insurance funds allowed to invest indirectly in China 2006 National Social Security Fund. infrastructure equity funds Private equity infrastructure funds allowed to Korea 2008? support more private investment in infrastructure. Private equity Macquarie Renaissance Infrastructure Fund (MRIF), funds the first private equity infrastructure fund created in the region with the aim to invest directly in Russia / CIS 2010 infrastructure in Russia and other key CIS markets. Contributions from Vnesheconombank, the IFC, the EBRD, Eurasian Development Bank, Kazakh SWF and other investors. NATIONAL India Infrastructure Finance Company Limited (IIFCL) is a wholly owned government company that began operations in April 2006, with a mandate to play a catalytic role in developing the infrastructure sector in India by providing long-term debt financing to infrastructure projects. IIFCL sources capital from Public financing India 2006 the government, loans from multilateral institutions company (e.g., ADB, WB and KfW), and financial markets through local and international bond issuances; loans and debt issuances may be guaranteed by the government, which makes them attractive to institutional investors, such as pension funds and insurance companies. Infrastructure Bangladesh Investment Promotion and Financing Facility (IPFF) facility Infrastructure Indonesia Indonesian Infrastructure Finance Facility (IIFF) facility Guarantee fund Indonesia Indonesian Infrastructure Guarantee Fund (IIGF) National National Infrastructure Fund (FONADIN). Mexico 2008 infrastructure fund Subsidiary of the development bank BANOBRAS. Development bank Brazil Brazilian Development Bank (BNDES) REGIONAL Regional East African Development Bank (EADB) Regional African Development Bank (AfDB) Development bank Regional Asian Development Bank (ADB) Regional Inter-American Development Bank (IADB) Regional EBRD, EIB GLOBAL Development bank Global World Bank Group, IFC 60 APPENDIX 4: EXAMPLES OF INSTITUTIONAL INVESTOR INVOLVEMENT IN EMERGING MARKET INFRASTRUCTURE ENABLING PPIAF is a multi-donor trust fund that provides technical assistance to governments in developing countries to develop enabling environments and to INFRASTRUCTURE facilitate private investment in infrastructure. Our aim is to build transformational INVESTMENT partnerships to enable us to create a greater impact in achieving our goal.