Title: Capital Markets Group Making Capital Markets Work for Infrastructure Finance
1Capital Markets Group Making Capital
Markets Work for Infrastructure Finance
- Presentation to Finance Forum 2004Prepared by
- Varsha Marathe, Michel Noel and Sophie Sirtaine
2Making Capital Markets Work for Infrastructure
Finance, a Pressing Need in LDCs
- Infrastructure investments needs remain enormous
in LDCs in all regions - Yet
- public funds available for infrastructure
financing remain limited - private funds invested in infrastructure in LDCs
have shrunk significantly since 1997 - and, institutional investors (on the capital
markets) have never shown much interest in
infrastructure financing - Therefore, mechanisms to re-attract more private
funds, including from capital market
participants, are crucially needed
1
3Infrastructure Investment Needs in Developing
Countries are Enormous
Total estimated needs over 20052010 about 500
bn
2
4The Traditional Public Financing Model Requires
Room for New Public Debt
Public Finance Model
- Borrowing by sovereign and sub-sovereign on own
account - Part of general government debt
- Headroom for general government borrowing
varies greatly across countries, but is generally
limited
3
5 But, Public Finances in LDCs are often under
Strict Constraints
Total Public Debt as of GDP in Selected
Emerging Markets Worldwide
Source IMF Art. 4 and IMF International
Financial Statistics Denotes 2002 data
4
6PPP Models Present an Interesting Alternative
Public-Private Partnership Model
- Structures
- Concessions, BOOs and BOTs special-purpose
company responsible for investment and operations - Divestiture privatization of existing
infrastructure company - Financing
- If private sector gt50 of special purpose or
existing company, debt no longer part of general
government debt - Private investor finances investments and opex
with equity and debt
5
7However, Private Investments in Infrastructure in
LDCs have Shrunk Sharply
- Evolution of Annual Investment in Projects with
Private Participation in Developing Countries
6
8 and Capital Market Funding has Continued to Shy
Away from Infrastructure
- Only 200 bond issues worldwide in 2001 by
infrastructure entities - Nearly 50 of them in telecom
- Only 20 of them in LDCs (mostly in Asia and
Eastern Europe), of which about 33 by public
companies - Therefore, only about 30 private issues in
LDCs, of which about 15 by telecom companies - Most with strict covenants and other
protections against project risks (guarantees,
insurance, etc)
7
9There are Various Impediments to Capital Market
Financing of Infrastructure in LDCs
- In General
- Deficiencies in bond market infrastructure
- Un-developed institutional investors with
regulatory constraints for investment - For sovereigns
- Lack of strategy to develop money market and
long-term government bond - For sub-sovereigns
- Deficiencies in legal and regulatory framework
for borrowing (soft budget) - Market segmentation
- Lack of credit enhancement instruments
- For PPP issues
- Inadequate tariff policies affecting cash flow
level and variability - Weakness of contractual environment
- Lack of political/regulatory risk mitigation
instruments - Lack of exit opportunities for equity investors
8
10Removing Impediments to Domestic Capital Market
Financing of Infrastructure Investments How the
World Bank Group can help
Public Finance Model
Capital market adjustment loans/TA
Development of money markets and government bond
market
Development of legal and regulatory framework in
loans/TA
Development of securities market infrastructure
Capital market adjustment loans/TA
Development of legal and regulatory framework for
sub-sovereign borrowing
PCG Facility for sub-sovereign bonds
Enhancing sub-sovereign bonds
9
11Removing Impediments to Domestic Capital Market
Financing of Infrastructure InvestmentsHow the
World Bank Group can help
PPP Model
PPP framework adjustment loan/TA
Strengthening regulatory framework for PPPs
OBS Budget loan/TA
Supporting transition to cost-recovery tariffs
- World Bank Infrastructure Fund
- First round Private Equity Fund
- Second round Local
- Infrastructure Investment Trust
Mobilizing equity for PPP transactions
MIGA PRI facilities IBRD PRG facility
Mitigating political risks
10
12 Innovative Capital Market Products for
Infrastructure Finance
- PCG facility for sub-sovereign bonds
Public Finance Model
PPP Model
11
13The PCG Facility for Sub-Sovereign Bonds Concept
Under study in Russia
- Market failure to be resolved lack of access by
regions to long-term financing in local currency
at acceptable rates - Proposed solution a IBRD partial credit
guarantee facility to cover bonds issued by
regions for infrastructure programs financing - Key issues for feasibility studies
- 1. Facility with or without sovereign
counter-guarantee - 2. Risk management
- 3. Market test
12
14The PCG Facility for Sub-Sovereign
Bonds Alternative Structure
13
15The PCG Facility for Sub-Sovereign
Bonds Structure with Sub-Sovereign
Counter-Guarantee
14
16The PCG Facility for Sub-Sovereign Bonds
Expected Impact
- Reduced spread
- Increased maturity
- Improved market discipline
- Improved capacity for investment
programming/project selection at regional level
15
17World Bank Infrastructure Fund Concept
Used frequently by investment banks
- Market failure to be resolved inadequate
climate, legal and regulatory framework for PPI - Proposed solution a fund which provides an
interim solution to attract PPI while legal and
regulatory framework matures - Key issues and challenges
- 1. Equity investment by the Bank
- 2. Requires strong project appraisal
skills locally, including in - environmental and social matters
- 3. Board reluctant to delegate decision
making power.
16
18World Bank Infrastructure Fund Structure
Assumptions Project is financed through 100 mm
debt and 200 mm equity
Management contract to private project sponsor
Infrastructure Project
World Bank (IFC or IBRD)
Inv.Loan 50 mm.
Commercial Bank
50 mm.
100 Equity
Guarantee
200 mm.
75 Equity
Host Government
World Bank Infrastructure Fund
Institutional Investors 100 mm. Project
Sponsors 50 mm
Bonds
150 mm.
150 mm.
Total Return Equity Swap
17
19World Bank Infrastructure Fund Expected Impact
- Structure highlights
- Project Sponsor participates as management and
debt holder - Government receives necessary financing and is
given time to develop stable regulatory framework - The Bank lends its balance sheet and AAA rating
to raise capital market financing for the project - Through a Total Return Equity Swap, fund only
takes credit risk on government, but no equity
risk on the project - The Bank intermediates potential conflicts
- Direct benefits
- Fund able to attract institutional investors,
including pension funds - Private investors do not need to invest equity
until environment is adequate for PPI - Increases local currency financing, thereby
reducing FX risk - Creates a commonality of interests so that
governments and private investors have both
interest in ensuring the company to be privatized
is doing well
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20Local Infrastructure Investment Fund Concept
Under discussion in ECA
- Market failure to be resolved lack of exit
opportunities for first-round private equity
funds in local infrastructure - Proposed solution a fund investing in equity
in infrastructure projects after first round
investors have turned company around (hence
providing a long-term low return investment) - Key issues for feasibility studies
- 1. Redemption requirements and fund
liquidity - 2. Investment focus
- 3. Legal/regulatory framework at fund and
project level
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21Local Infrastructure Investment Fund Structure
20
22Local Infrastructure Investment Fund Expected
Impact
- Improved exit opportunities for first round
infrastructure private equity funds - Long term private sector commitment to improved
management and operations - Diversification of quality securities available
for local and international institutional
investors
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23PRG Facility to Protect against Political and
Regulatory Risks Concept
Under preparation in Peru demand from several
countries in LAC
- Market failure to be resolved lack of
appropriate political/regulatory risk coverage
instrument resulting in heavy losses by private
investors despite contractual protection. - Proposed solution A 300mm facility entitled to
award IBRD partial risk guarantees to Perus
future infrastructure projects (approximately
1.5 bn project debt guaranteed against
government-related risks - Key issues and challenges
- 1. Requires strong project pipeline
- 2. Requires strong project appraisal
skills locally, including in - environmental and social matters
- 3. Board reluctant to delegate decision
making power.
22
24PRG Facility to Protect against Political and
Regulatory Risks Expected Impact
- Direct impact
- Improves the credit rating of projects by several
notches - Enables banks and pension funds to provide
project finance to non viable projects - Increases the volume and tenors of available
financing and decreases its cost. - Benefits for PPI
- Decreases required equity by increasing access to
bank and bond financing - Decreases exposure to foreign exchange risk by
increasing local currency financing - Eliminates exposure to government risk
- Long term benefits for Peru
- Increases the probability of success of the
government PPI program - Decreases cost for the government (lower
subsidies or higher price, resulting from lower
financing costs and increased bidding
competition) and tariffs for consumers - Enables pension funds to diversify away from
sovereign risk without increasing risk - Develops local capital market by extending
tenors.
23
25Partial Risk Guarantee Facility to Cover Against
Sub-Sovereign Breach of Contract Risk
Under study in Romania
- Market failure to be resolved reluctance of
private investors to invest in local utilities
due to high risk of breach of contract with local
governments and low possibility of contract
enforcement in judicial and extra-judicial
proceedings - Proposed solution a IBRD partial risk guarantee
facility to cover sub-sovereign breach of
contract risk - Key issues for feasibility studies
- 1. Legal and regulatory framework for PPP
transactions - 2. Risk management
- 3. Market test
24
26Partial risk guarantee Facility to Cover Against
Sub-Sovereign Breach of Contract Risk Structure
25
27Partial risk guarantee Facility to Cover Against
Sub-Sovereign Breach of Contract Risk Expected
Impact
- Reduced spread
- Maturity extension
- Improved market discipline
26
28The Investment Promotion Finance Facility,
Bangladesh Concept
Under preparation in Bangladesh
- Market failure to be resolved
- lack of access to long term finance and poor
infrastructure identified as two major hurdles to
private sector development. Bangladesh has one
of the lowest infrastructure indicators in the
world (Bangladesh Investment Climate Assessment). - Proposed solution
- Separation of IDA support into Capital Grant
Market Based funds to allow substantive
investment discretion for investment managers - Taka facility to finance smaller projects through
Credit line, partial credit Guarantee, Takeout
interest rate support (CGT) - Able to offer a wider range of support senior
subordinate debt, preferred stock, equity etc.
for large small projects - Allows private sector investment advisers to work
with promoters to develop private infrastructure
term capital investments
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29Investment Promotion Finance Facility, Bangladesh
AES Meghnaghat Reflow Income
Private Financial Institutions
Other Donors
IDA
Market Based Funding
Concessional Funding
Government of Bangladesh
Market Based Fund
Capital Grant Fund
Concessional Funding
Social Development Review
Market Based Funding
Infrastructure Project
Infrastructure Project
Potential Ownership
Promotion for Profit
Alternative Promotion
IDCOL or Swiss Challenge Arranger
Project Public/Private Arranger
Private Sector Promoters
28
30The Investment Promotion Finance Facility,
Bangladesh Expected Impact
- Provide long term finance to fill gap not
provided by local markets - Provide technical assistance to develop projects
establish governmental processes to support
public private partnerships - Build local private sector capacity for term
finance
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