ALTERNATIVE FINANCING OPTIONS FOR INFRASTRUCTURE

DEVELOPMENT

Albert Amos The World Bank

October 5, 2018

INFRASTRUCTURE INVESTMENT GAP• USD 14.9 billion gap

from 2015 to 2040, globally

• Approximately USD 600 million/year

• Reliance has been on bank lending

• Alternative financing instruments needed to reduce investment financing gap

FUNDING AND FINANCING SOURCES, 2011 TO 2016

2011 2012 2013 2014 2015 2016

USD B % USD B %

USD

B % USD B % USD B % USD B %

IFI loans 74,8 14% 63,0 13% 62,6 11% 84,4 14% 54,4 8% 43,9 7%

Bank loans 240,4 45% 212,4 42%

274,

3 47% 290,6 47% 345,5 52% 266,5 41%

Bonds 19,2 4% 20,1 4% 38,4 7% 58,7 10% 72,2 11% 115,6 18%

Equity 200,3 37% 205,8 41%

214,

3 36% 179,2 29% 186,5 28% 228,3 35%

Total 534,8 100% 501,3 100%

589,

4 100% 612,9 100% 658,6 100% 654,4 100%

Transactions 1,048 937 990 1,341 1,573 1,542Source: IJGlobal

INFRASTRUCTURE INVESTMENT GAP

GENERAL FINANCING CHALLENGESExternal Factors Internal Factors

Macroeconomic Risks• Currency mismatches• Interest rate mismatches• External shocks

Macroeconomic Risks• Lack of long-term currency hedging

mechanisms• Lack of long-term interest rate hedging

mechanisms• Susceptibility and impact of external shocks• Public debt levels

Banking Sector Risks• Basel III• Exposures to infrastructure sector

Banking Sector Risks• Basel III• Exposures to infrastructure sector

Corporate Risks• Leverage levels of foreign

concessionaires

Corporate Risks• Leverage levels of domestic concessionaires

Market and Liquidity Risks Market and Liquidity Risks

Political Risks• Competing fiscal priorities

TAXONOMY OF FINANCIAL INSTRUMENTS AND MARKET VEHICLESModes Infrastructure Finance Instruments Market Vehicles

Asset Category Instruments Infrastructure Projects

Corporate Balance

Sheet / Other

Entities

Capital Pool

Fixed Income

Bond

Project BondsCorporate Bonds,

Green BondsBond Indices, Bond

Funds, ETFs

Municipal, sub-sovereign

bonds

Sukuks Subordinated Bonds

Loans

Direct/Co-Investment

lending to Infrastructure

Project. Syndicated Project

Loan

Direct/Co-

Investment lending

to Infrastructure

corporate

Debt Funds (GPs)

Syndicated Loans,

Securitized Loans

(ABS), CLOs

Loan Indices, Loan

Funds

Mixed HybridSubordinated Loans/

Bonds, Mezzanine Finance

Subordinated Bonds,

Convertible Bonds,

Preferred Stock

Debt Funds, Hybrid

Debt Funds

Equity

Listed YieldCos

Listed Infrastructure

& utilities stocks.

Closed end funds,

REITs, IITs, MLPs

Listed

Infrastructure

Equity Funds,

Indices, trust, ETFs

Direct/Co-Investment in Direct/Co-

Source: OECD, Infrastructure Financing and Instruments, OECD, 2015

FIXED INCOME INSTRUMENTS

PROJECT BONDSElazig Hospital Project Bonds• Privately placed bond • 450 basis points over Euribor• 3 tranches, 18-20 year

maturities• EBRD liquidity facility• Moody's rating of Baa2• Local banks primary

purchasers

• Local and foreign currency bonds• USD: $272 million, BBB-• COP: $635 million, BBB-

/AA+• 3 tranches, 18-20 year

maturities• FDN credit enhancement

facility• Local banks primary

purchasers • Debt funds and intl. banks

purchased bonds

Pacifico Tres, Colombia

SUKUKS• Islamic Finance is $2

trillion dollar market (2016)

• Banking sector comprises approximately 80%

• Sukuks • Second largest

segment• 12% average annual

growth in 5 years• Distribution by region:

GCC: 42%, Middle East and North Africa” 30%, Asia: 22%

Source: Islamic Finance Service Board

Islamic Finance

Sukuks

Gulf Corporation Council

SUKUKS

Source: The World Bank “Mobilizing Islamic Finance for Infrastructure Private Partnerships, 2017

• Returns linked to profits of the enterprise

• Financiers are partners in the project and responsible for asset delivery • Procurement• Release of funding

• SPV repays the financier on a deferred payment basis

• SPV role varies depending on structure• Ijarah: Lessee• Murabahah: Customer• Istişna: Client• Asset is delivered to SPV when

construction has been completed• Payment price includes profit for

extending financing• Examples

• Doreleh Container Terminal, Diibouti

• Karachi Thatta Dual Carriageway, Pakistan

• Konya Hospital, Turkey

MUNICIPAL FINANCEChallenges • High investment needs • Few local governments have credit

ratings• Limited own revenues• Reliance on government transfers• Few local governments generate

operating surpluses• Limited experience and technical

capacity• Maturity and currency mismatches • Public debt limits

ARGENTINA LOCAL BOND ISSUESLocal Government Moody’s Rating USD ($M) Coupon Maturity

Buenos Aires, Municipality B3 Stable 890 7.60% 11.0

Cordoba, Municipality B3 Positive 150 N/A 8.0

Buenos Aires Province B3 Stable 500 5.87% 3.0

500 7.87% 9.25

250 4.50% 3.0

500 7.375% 10.0

750 6.60% 5.0

750 8.10% 10.0

Chaco Province Caa1 250 9.37% 8.0

Chubut Province Caa1 650 7.75% 10.0

Cordoba Province B3 Stable 725 7.15% 5.0

Entre Rios Province B3 350 8.75% 8.0

La Rioja Province B3 Positive 200 9.75% 6.5

Mendoza Province B3 Stable 500 8.37% 8.0

Neuquén Province1 CCC+ 235 8.625% 12.0

Salta Province1 CCC+ 300 9.10% 7.0

Santa Fe Province B3 Positive 250 6.90% 10.0

GREEN BONDSType Proceeds Debt Recourse Example

Use of

Proceeds

Bond

Earmarked for

green projects

Standard/full re-

course to the issuer

with same credit

rating as issuer

EIB “Climate

Awareness Bond”

(backed by EIB)

Use of

Proceeds

Revenue

Bond

Earmarked for

green projects

Issuer’s revenue

stream is from fees

and taxes which are

used to secure debt

Hawaii State (backed

by a fee on electricity

bills collected by

state utilities)

Project

Bond

Ring-fenced for

specific green

projects

Recourse is only to

the project assets

Alta Wind Holdings

LLC (backed by wind

project) in California

Green

Securitized

Bond

Can be earmarked

for green projects

or directly finance

green projects

Recourse is to a

group of projects

that have been

grouped

Northland Power

(backed by solar

farms) or Solar City

(backed by residential

leases)

CREDIT GUARANTEESFeature Full Guarantee Partial Guarantee

Covers interest

and principal

Yes Yes

Irrevocable Yes Yes

Unconditional Yes Up to maximum limit

Coverage limit of

credit

enhancement

None Limit determined

according to the number

of notches of credit

enhancement required

Complexity Simple and

standardized

More complex to

administer. Investors

need to understand the

risk profile of each

project and guarantee

Maximum Credit

Enhancement

Equivalent to up

to 10 notches

Normally not more than

5 notches

Administration

costs

1% of the

guaranteed

amount

2% of the guaranteed

amount

Source: Based on The World Bank Institute, “Best Practices in Public-Private Partnership Financing in Latin America: The Role of Guarantees, 2011

• Key Issues• Crowd-in private

financing• Increased investor

comfort• Coverage by phase• Avoid extensive

coverage • Appropriately priced• Fees

UNITED KINGDOM GUARANTEE SCHEME (UKGS)Eligibility Criteria

• Nationally significant project• Start construction within 12

months• Borrower credit quality• Project dependent on a

credit guarantee to be financially viable

• Value to the taxpayerProjects• 39 projects eligible• 10 projects with guarantees

Project Guarantee Sector

Drax Power - conversion from coal to

biomass

£75mn

(bond)Energy

Sustainable Development Capital Limited £9mn (loan) Energy

Northern Line Extension

£750mn

(standby

liquid facility)

Transport

Mersey Gateway Bridge PPP£257mn

(bond)Transport

Ineos Grangemouth - Shale gas import

and storage facilities

€285mn

(bond)Energy

Speyside CHP plant£48mn

(bond)Energy

University of Northampton - relocation

of campus

£292mn

(bond)University

Countesswells - 3,000-unit housing

development£86mn (loan) Housing

University of Gloucestershire - Pittville

Student Village

£39mn

(bond)University

Hinkley Point C £2bn (bond) Energy

MIXED AND EQUITY INSTRUMENTS

GLOBAL INSTITUTIONAL INVESTOR PARTICIPATION IN INFRASTRUCTURE AND PPPS

Factors impacting institutional investment include: • Size and viability of PPP

pipeline• Project Risk Profile• Returns during

Construction (J-Curve)• Procuring agency

experience• Limited resources to

conduct project due diligence

• Pension reforms

INITIAL PUBLIC OFFERING• Brownfield vs. greenfield assets• Improves contractor financial

flexibility• Typical lock-in period of 2-5

years post-construction• Tradability • New investors• Subject to market fluctuations• “Buy and hold” tendencies

REAL ESTATE INVESTMENT TRUSTS• Asset pooling reduces

volatility • Potential tax advantages• Potential higher yields• Tradable on stock market• Increased liquidity• Tied to value capture

strategies

REAL ESTATE INVESTMENT TRUSTS, MEXICO• USD 300 million to USD 18 billion

in 5 years

• Investment in hotels, industrial zones, and office buildings

• Shares can be publicly traded

• 70% percent invested in domestic real estate

• 30% in Federal government or mutual funds

• Minimum 4 year holding period

• Deferral of 5% of taxable income

• Expansion to infrastructure projects

CLOSED END MUTUAL FUNDSClosed End Fund Investors Investments AUM USD

($M)

Investment Dates &

Duration

Infraestructura

Brookfield

Colombia

Brookfield Colombia only.

Roads, energy, ports,

airports, gas

pipelines.

228 September 2009-

13: 12 years

Fondo de Capital

Privado Nexus

Infraestructura I-

FCP

Nexus Capital

Partners

Multi-Country;

Greenfield and

brownfield roads,

airports, and energy

72 October 2009-13;

10 years

FINTRA Darby Private

Equity, Franklin

Templeton, and

Colpatria

Multi-country. Roads,

energy, ports,

airports, urban

transport.

83 August 2010-14;

20 years

CFC-SK El

Dorado LATAM

Fund

Corficolombia and

SK Group

Multi-country; Energy

and infrastructure

500 February 2015-20;

10-years

FCP 4G |

Credicorp Capital

– Sura Asset

Management,

Private Debt

Fund

Creditcorp Capital

and Sura Asset

Management

Colombia only. Debt

fund for 4G roads

320 November 2015-18;

23 years

Nova Renewable

Energy Latin

America LP

Novare Colombia, Peru, and

Chile. Renewable

energy generation

350 March 2016-21;

10-years

Ashmore CAF Ashmore Group Colombia only. 450 Pending

Key issues• Asset

diversification • Single or multi-

sector• New investors• Increased

liquidity• New investors• Longer-term,

defined investment period

Colombia• Change in

legislation

PUBLIC PRIVATE PARTNERSHIPSKey issues

• Legal and regulatory framework

• Risk sharing

• Contingent liabilities

• Project pipeline

• Due Diligence

• Diversification of financing sources

QUESTIONS AND

ANSWERS