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.
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| 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.
Resource:
Additional
information from Swiss Re is available here.
