Global lessons on financing infrastructure Infrastructure round table Lagos, August 5, 2013 CONFIDENTIAL AND PROPRIETARY Any use of this material without specific permission of McKinsey & Company is strictly prohibited
� “A multi-trillion dollar game” : We estimate infrastructure investment requirements (to both cover current gaps and keep up with growth) of ~$60 trillion between now and 2030 – More than estimated value of today’s infrastructure � “Funding facing strong headwinds”: Current funding context is difficult, with tight lending capacity and increasing fiscal constraints, but still many options exist to overcome them � “Money is not the (main) problem”: Lack of funding and financing for infrastructure is a symptom of deeper problems that require action at other, more transformational, levels – Improve infrastructure portfolio/ project selection – Streamlining delivery – Making the most of existing infrastructure McKinsey & Company | 2 SOURCE: McKinsey
Three different methods point to infrastructure investment needs globally of $60 trillion through 2030 Estimates of needed core infrastructure investments, 2013–30 Roads Water $ trillion, constant 2010 dollars Other transport Telecom Power 64 59 55 Projection based on Projection based on Projection based on historical spending ratio of infrastructure external estimates stock to GDP SOURCE: Organisation for Economic Co-Operation and Development (OECD); International Energy Agency (IEA), 2011; McKinsey & Company | 3 International Transport Forum (ITF); Global Water Intelligence (GWI); McKinsey Global Institute analysis
Infrastructure investment needs to rise to 4.1 percent of GDP on average worldwide and much more in most developing countries Actual spend 2 Spending in core infrastructure (to ensure 70% of GDP in 2030) % of GDP Estimated need China is a Most developing countries require significant step-up clear outlier 8.5 7.0 6.9 6.4 5.1 4.9 4.7 4.1 4.0 3.8 3.4 3.4 2.5 1.5 World South Africa India Russia Brazil Nigeria China 1 Estimated need based on projected growth, 2013–30 2 Weighted average annual expenditure over years of available data, 1992–2011 McKinsey & Company | 4 SOURCE: ITF; GWI; IHS Global Insight; Perpetual inventory method , OECD, 1998; McKinsey Global Institute analysis
� “A multi-trillion dollar game” : We estimate infrastructure investment requirements (to both cover current gaps and keep up with growth) of ~$60 trillion between now and 2030 – More than estimated value of today’s infrastructure � “Funding facing strong headwinds”: Current funding context is difficult, with tight lending capacity and increasing fiscal constraints, but still many options exist to overcome them � “Money is not the (main) problem”: Lack of funding and financing for infrastructure is a symptom of deeper problems that require action at other, more transformational, levels – Improve infrastructure portfolio/ project selection – Streamlining delivery – Making the most of existing infrastructure McKinsey & Company | 5 SOURCE: McKinsey
Context for infrastructure funding is very challenging Average interest margins Basis points, transport infrastructure Long-term debt 280 financing is becoming +107% increasingly costly 135 and difficult to attain Difficult funding context 2007 2010 Public budgets are tightening up No improvement expected (particularly in the � Basel III rules “developed” world) which affects � Banks exiting the infrastructure infrastructure spend business (e.g., BNP Paribas, more than West LB) proportionately McKinsey & Company | 6
Increase in interest rate spreads have particularly hurt developing countries Loan interest rate spreads 1 bps Brazil, Chile, India, Mexico, Nigeria, Peru’, Thailand Australia, Canada, USA, UK 600 600 500 500 400 400 300 300 200 200 100 100 0 0 2004 05 06 07 08 09 10 11 12 2013 2005 06 07 08 09 10 11 12 2013 1 Spread over 6month-LIBOR McKinsey & Company | 7 SOURCE: Public Works Financing database, McKinsey Global Institute
Pension, insurance and sovereign wealth funds are projected to grow significantly and show increasing appetite for infrastructure assets Global funds under management …and there is solid evidence that infrastructure expected to continue to grow … assets can capture some of that growth Investors who expect to Global pension, life insurance and Average infrastructure increase allocations to SWF assets under management allocations by fund type infrastructure US$ trillions Percent % of total respondents 28 Life 106 5% p.a. 1 insurance 83 12 66 6% p.a. Pension 3 52 fund 41 32 22 Public Private 7 SWF infra- infra- structure structure 2000 05 10 15 20 25 2030 McKinsey & Company | 8 SOURCE: McKinsey Global Banking Pools; McKinsey Global Insurance Pools; SWF Institute; TheCity UK; Preqin
These funds typically prefer less risky assets, but shift towards greenfield projects may signal increasing “aggressiveness” Greenfield Breakdown of funds projects and deals Infrastructure fund scope 4 in infrastructure. Share of total Mature 1 Total funds final size, USD bn, Estimates 100%= Infrastructure USD 99 bn 65 fund deals 2005-10 35 190 Non-OECD 8 (average p.a.) Projects 2005-10 42 58 711 (average p.a.) 91 OECD Projects since 72 2 28 3 175 2010 1 Includes Secondary stage and Brownfield 2 Includes Greenfield (112) and Expansion (12) 3 Includes Asset Acquisition, M&A, Brownfield, Privatisation 4 Includes all unlisted funds active since 2002. Includes equity invested outside OECD by funds with global scope McKinsey & Company | 9 SOURCE: Preqin; Infrastructure Journal; Public Works Financing; Infrastructure Investor; Global Insight; McKinsey
PPPs can make up 20-25% of infrastructure spend, in both developed and developing countries Public Percentage. $ billion Public-private partnership (PPP) Private Planned public, PPP, and private investment in core infrastructure Ratio per sector United Kingdom 35 58 7 89 Transport 13% 2011–15 100% = $257 billion (33) 100 118 Energy 23% 90 10 20 Communications 64% (59) (164) 76 11 13 4 Waste 100 21 Water India 56 156 Electricity 44 2007–11 17% 100% = $485 billion 84 Roads 16 66 (82) 19% 18 82 4 81 Telecom 64% (92) (310) 96 47 Rail 100 Water 26 20 52 Ports 28 10 36 64 9 Airports McKinsey & Company | 10 SOURCE: HM Treasury, United Kingdom; Planning Commission, India; McKinsey Global Institute analysis
While public purses are tight, there are several funding alternatives available to governments, with some representing unexploited potential Detail on following pages Public capital It includes structured instruments Underlying revenue sources to like bonds and loans or plain fund the financial instruments vanilla like simple cash flows Financial 1 instruments Public cash flow sources Alternative Tax User charge funding sources Property value Capital 2 capture recycling Other financial Divesture Lease schemes McKinsey & Company | 11 SOURCE: McKinsey Global Institute
1 Financial instruments: long-term public debt financing can take different forms Financial instrument Examples Limited non-system bonds: backed New York City MTA: 1998’s $396 million issue by revenues not originated by the supported by the state’s petroleum business tax funded infra system SFO link: A $500 million issue of grant anticipation bonds to help connect San Francisco to the airport., Revenue backed by ability to issue sales tax bonds bond 1 System revenue bonds: Backed NYMTA: In December 1998, issued $317 million in partially or totally by system user principal amount of Transit Facilities Revenue Bonds charges General GO bonds: backed by the full faith San Francisco BART: $ 413 million general obligation obligation and credit of taxing authorities bonds at ‘AA+’ (secured by an unlimited ad valorem tax bond levied on all taxable property within the BART counties) Commercial Bank Loans: backed by Ghana Shared Growth Development Agenda public entity credit capacity + (GSGDA): US$3 billion loan from China Development (collateral for secured loans) Bank to finance infrastructure projects Secured and Direct loans from Government Missouri Transportation Finance Corporation un-secured loan agree- Capital providers: backed by public [MTFC]: Backed by the Missouri Dept Of Transport, entity credit capacity aims at providing financial assistance to accelerate or ments add projects for the State’s transportation system N/A Loans from construction firms 1 Can be issued with tax-exempt feature McKinsey & Company | 12 SOURCE: Moody’s Investors Service, Transportation research board, McKinsey Global Institute
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