Financing infrastructure – International trends - …

1 OECD Journal: Financial Market TrendsVolume 2014/1 OECD 2014123 Financing infrastructure International trendsbyRaffaele Della Croce and Stefano Gatti*The infrastructure Financing market has gone through a process of radicaltransformation starting from the mid-2000s. Different reasons including achanged macroeconomic environment, more stringent regulations on financialintermediaries, and a modified appetite for long-term asset investments have ledto a reallocation of flows from the banking sector to the institutional investorssector.

2 This article provides an overview of International trends in infrastructurefinance. It proposes a map of the different investment channels that privateinvestors can use to access the infrastructure investment on the equity and debtside, highlighting the historical evolution of these segments in the past few designed financial structures, such as different forms of partnershipbetween banks and institutional investors, securitisation models and debt/creditfund vehicles, are also taken into classification: E2, G1, G11, G2, G3, H44, H54, H81 Keywords.

3 infrastructure Financing , long-term investment, institutional investors,public-private partnerships, bank institutional investors partnerships, syndicated loans,project bonds, securitisation, debt/credit fund vehicles, financial market regulation* Raffaele Della Croce is the Lead Manager for the Project on Institutional Investors and Long-TermInvestment ( ) in the OECD Directorate of Financial and Enterprise Gatti is Director of the Bachelor Programme in International Economics and Finance (BIEF)and Associate Professor of Banking and Finance at Bocconi University, Milan, Italy.

4 This paper is partof the OECD Project on Institutional Investors and Long-Term Investment and is based on researchproduced for the G20. An extended version of this paper will be published as a chapter in S. Caselli,G. Corbetta and V. Vecchi, Public Private Partnerships for infrastructure and Enterprise Funding: Principles,Practices and Perspectives, Palgrave, New York, scheduled for publication in 2015. The authors aresolely responsible for any remaining errors. This work is published on the responsibility of theSecretary-General of the OECD.

5 The opinions expressed and arguments employed herein do notnecessarily reflect the official views of OECD member countries. This document and any mapincluded herein are without prejudice to the status of or sovereignty over any territory, to thedelimitation of International frontiers and boundaries and to the name of any territory, city or infrastructure International TRENDSOECD JOURNAL: FINANCIAL MARKET trends VOLUME 2014/1 OECD 20141241. IntroductionThe problem of public Financing of infrastructure is a topic on top of policymakers agendas worldwide.

6 Budget constraints, past experiments of poor public spending andinefficiencies in managing infrastructure on the public side have led to a reconsiderationof the need to shift the investment effort to the private sector and to the development ofPublic Private Partnerships (PPPs). However, the gap to be filled is remarkable. The McKinsey Global Institute (2013) estimates an accumulated infrastructureinvestment need up to the year 2030 of between USD 57 tn and USD 67 tn, excluding theneeds for social infrastructure . In the Western Economies, the European Commission(2011) estimates that, by 2020, Europe will need between EUR tn and EUR 2 tn ofinfrastructure investments.

7 In the United States, the American Society of Civil Engineers (2013) quantifies a totalcurrent infrastructure investment gap of USD tn and a need for additional investmentsof about USD tn by the end of situation of emerging markets is similar, although the room for additional publicspending is higher than in Western Europe and in the United States due to lower publicdebt over GDP ratios. The McKinsey Global Institute (2013) indicates that from 2008 to 2017, infrastructure spending is expected to be USD 9 tn in China, USD tn in India, USD 2 tnin Russia and USD 1tn in infrastructure Financing from the public to the private sector poses importantchallenges.

8 First, the amount of money needed to fill the infrastructure gap is far frombeing negligible. Second, financial markets and intermediaries are required to play animportant role in shaping financial contracts and financial solutions able to attract thehighest number of investors. In order to play this role, policy makers should betterunderstand who these investors are and which are the most suitable financial solutionsthat can be tailored to accommodate their investment is now widely agreed that large institutional investors such as pension funds,sovereign wealth funds and insurance companies with long-term liabilities and a low riskappetite seem well-suited to invest in infrastructure assets with a low risk profile.

9 Despitethe theoretically ideal match between a large source of capital and an asset class in needof investment, the uptake of institutional investors has been slow. In addition to the lack ofa transparent and stable regulatory framework this has been inter alia due to negativeexperiences with earlier investments, discontent with the vehicles used to accessinfrastructure assets, and a lack of government objective of this article is to provide an overview of International trends ininfrastructure finance. As we will show, the infrastructure Financing market has gonethrough a process of radical transformation starting from the mid-2000s.

10 Different reasons a changed macroeconomic environment, more stringent regulations on financialFINANCING infrastructure International TRENDSOECD JOURNAL: FINANCIAL MARKET trends VOLUME 2014/1 OECD 2014125intermediaries, a modified appetite for long-term asset investments have led to areallocation of flows from the banking sector to the institutional investors sector. Webelieve that this trend will be confirmed in the years to rest of the article is organised as follows. Section 2 presents an overview of thedifferent channels that the private sector can use to invest money in infrastructure .