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 Infrastructure debt bank finance provides … 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 Infrastructure debt funds offer … finance desires … Large, institutional base Large volume of funds Long maturity Long maturity Low/moderate risk-taking Capacity to take on credit capacity 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. Chicago, Illinois Louisville, Kentucky New York City, New York Elizabeth, New Jersey and Riverwalk Expansion/Wacker Ohio River Bridges Downtown Staten Island Ferries and Staten Island, New York Drive Reconstruction Project Crossing ($452M) Terminals ($159M) Goethals Bridge Replacement ($99M) Ohio River Bridges East End New NY Bridge (Tappan Zee ($474M) Washington Chicago O'Hare International Crossing ($162M) Bridge Replacement) ($1,600M) SR 520 Floating Bridge ($300M) Airport Consolidated Joint Use Rhode Island Facility Project ($288M) Interlink (formerly Warwick Ohio Intermodal Station) ($42M) Boulder and Denver, Colorado Southern Ohio Veterans Memorial Highway ($209M) U.S. 36 Managed Lane/Bus Rapid Washington, DC Metro, Maryland & Transit Project: Phase 1 ($54M) Northern Virginia U.S. 36 Managed Lane/Bus Rapid Intercounty Connector ($516M) Transit Project: Phase 2 ($60M) I-95 HOV/HOT Lanes ($300M) I-495 Capital Beltway HOT Lanes ($589M) San Francisco, California Richmond, Virginia Presidio Parkway ($150M) Pocahontas Parkway / Richmond Airport Connector* ($150M) Los Angeles, California Gerald Desmond Bridge Norfolk and Portsmouth, Virginia Replacement Project ($325M) Downtown Tunnel / Midtown Tunnel / MLK Extension ($422M) Riverside County, California SR 91 Corridor Improvement Raleigh-Durham, North Project ($421M) South Carolina Carolina Cooper River Bridge Triangle Expressway ($387M) Replacement* ($215M) San Diego, California Charlotte, North South Bay Expressway (formerly Georgia Carolina SR 125 South Toll Road) ($140M) I-77 HOT Lanes ($189M) Northwest Corridor ($275M) Dallas, Texas IH 635 Managed Lanes ($850M) Orlando, Florida Louisiana North Tarrant Express Segments 1 and 2A ($650M) I-4 Ultimate ($949M) North Tarrant Express Segments 3A and 3B ($531M) LA 1 Improvements Wekiva Parkway ($194 M) ($122M) Austin, Texas Houston, Texas Miami, Florida Broward County, Florida Central Texas Turnpike System * ($900M) Grand Parkway (SH 99) Segments D-G ($84M) Port of Miami Tunnel ($342M) I-595 Corridor Roadway SH 130 (Segments 5-6) ($430M) Miami Intermodal Center ($270M) Improvements ($603M) President George Bush Turnpike Western 183-A Turnpike* ($66M) Extension (SH 161) ($418M) * Retired Source: http://www.fhwa.dot.gov/ipd/tifia/
Europe: Project Bond Credit Enhancement PBCE is a subordinated instrument – either a loan or 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 overall 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 Infrastructure equity equity investments finance requires … offer … 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 Comfort with political political exposure 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 Manager Pension Total Rank AuM AuM USD bn 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 outsource 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 on 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.
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