Wednesday, March 19, 2014

Infrastructure Investing. It matters. – Swiss Re and the IIF are “building a robust infrastructure debt market“.

The insurer Swiss Re and the Institute of International Finance have written a report about infrastructure finance. They explain that we need to fill, in the near future, an important infrastructure financing gap by diversifying sources of funding.

Long-term investment acts as a financial market stabilizer.“

We need additional infrastructure investing.

Global annual infrastructure spending requirements will increase from USD 2.6 trn today to around USD 4 trn by 2030. In times of economic stagnation, this is good news; not only because investing as such stimulates the economy but also because good infrastructure increases the production capacity of an economy and raises its productivity.

Infrastructure benefits people? - Extract of Swiss Re / IIF Report

The bad news is that Swiss Re and the IIF believe that traditional finance will not meet this demand: European banks are deleveraging and will have to deal with higher regulatory capital charges for long-term assets. In emerging markets, private capital markets are still in their infancy.

More diversity in sources of funding for the real economy is essential.”

Today, banks dominate infrastructure financing. However, infrastructure investment means long-term investment with an asset life spanning 25 – 60 years. That is why long-term investors such as pension funds, insurance companies, mutual funds, sovereign wealth funds, endowments and foundations should come into play.

The obstacle for these investors is that they don’t simply buy assets to hold to maturity. They need to be able to adjust their portfolios if necessary. Today, they cannot do so because there is no liquid infrastructure debt market.

The need for diversification of funding sources is stronger in Europe than in the U.S., as bank financing plays a much greater role in Europe, compared to the U.S.

In Europe, lack of diversity in intermediation represents a major impediment to the financing of the real economy.”

We need a robust infrastructure debt market.

To create an infrastructure debt market, Swiss Re and IIF have established a “wish list”:

  • Create a global, transparent, harmonized, and accessible infrastructure asset class
  • Promote information sharing and disclosure
  • Reduce regulatory policy uncertainty
  • Mitigate the pro-cyclicality of regulatory changes
  • Harmonize legislation for infrastructure investments
  • Review Solvency II and other regulatory capital charges on the insurance industry for long-term investments
  • Strengthen investors’ rights in cases of sovereign debt restructuring and facilitate the restructuring process
  • Develop best practices for bond documentations (aligned contractual terms such as applicable law and reporting requirements) and due diligence by international financial institutions and multilateral development banks

Pooling infrastructure assets.

A major idea put forward in the report is pooling infrastructure assets in a securitization-like structure. More specifically, infrastructure debt could be sold to a special purpose vehicle that issues asset-backed notes to long-term investors in a second step. Development banks and institutions as well as commercial re-insurers could enhance these notes.

This structure would have the advantage to allow a flexible handling of different projects inside the investment pool.

The idea to boost infrastructure financing by diversifying funding sources is certainly not new. Nevertheless, the report is still interesting as it gives a good overview about the topic and current initiatives.


Additional information from Swiss Re is available here.