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Symposium 2011

Proposal - How to foster infrastructure investment for current and future generations?

The Challenge

The world may be on the cusp of an era of enormous capital investments. This boom will be driven by growth in emerging markets as well as the need to replace and repair part of the capital stock in de ...

The world may be on the cusp of an era of enormous capital investments. This boom will be driven by growth in emerging markets as well as the need to replace and repair part of the capital stock in developed economies. Demand for sustainable infrastructure in the broadest sense will be particularly high and it will come at a time when strained public balance sheets call for austerity, leaving little room for public investment programs.

I. Align financial regulation with infrastructure development policy objectives to foster investment for current and future generations

Demographic changes and the growth in retirement savings have provided an opportunity to utilize retirement funds for productive long-term investment in assets that are intended to be less volatile than traditional public equities. Infrastructure investment creates a positive cycle of growth, providing essential networks and services for today’s generations, stimulating economic growth and improving the standard of living for current and future generations

‘Natural’ long-term investors seek to match their liabilities to long term assets. For instance, pension funds start collecting contributions when individuals enter the workforce and pay benefits with the assets accumulated thirty to forty years later. Life insurers or sovereign wealth funds also clearly belong to this category of investors.

Such investors should be encouraged by a carefully designed policy framework to take advantage of long-term investments such as infrastructure that can notably provide inflation-linked and stable cash flows. The implementation of such a strategic framework could generate a ‘double benefit’ for governments, fostering financial stability for retirement savings systems, which would rely more on ‘tangible’ assets, and enabling the development of strategic infrastructure projects contributing to long term growth. Indeed a virtuous circle could be created whereby investments are made by local pension funds into infrastructure that would benefit the community, and at the same time generate returns that will fund the pension payments of future generations.

However, financial regulatory frameworks, often designed without taking into account the specificities of the infrastructure sector, prevent this theoretical match from being realized in practice. OCDE countries experience could to that respect prove useful, to identify best practices as well as sensible improvements:

  • In several OECD countries, quantitative constraints on asset allocation of institutional investors are in place. For example, a strict limit of 5% on illiquid assets (regardless of the class) applies to national pension plans in Sweden. Liquidity requirements for institutional investors’ assets often exclude or limit assets that are not listed and traded on an organized security exchange. Such constraints clearly disfavor infrastructure assets, which are robust and resilient but generally illiquid.
  • the financial regulation of several OECD countries, notably in continental Europe, does not provide for capital investment vehicles with a sufficient lifetime to implement long-term equity investment in infrastructure projects with a tenor superior to 20 years.


II. Create a stable but demanding regulatory framework for infrastructure project procurement that takes in account optimum risk transfer and availability of funding

Due to the duration of the underlying assets, infrastructure investments require long term policy planning. Stable and accessible programmes of infrastructure projects and public-private partnerships (PPPs) are notably key in attracting private sector investors who must invest development funds up front in order to secure such projects and can make informed choices about the geography of the projects they choose to follow.

Development of national long-term strategic policy frameworks for key infrastructure sectors, whose duration shall exceed political cycles, building, when possible, on wide political consensus, is highly desirable. This environment should be stable to maintain a high level of credibility of government commitments and build investors’ confidence.

Such long term and stable framework does not mean that the participation of the private sector cannot be optimized through adequate regulation to ensure that a true partnership is established; this could currently be the case in the UK. Consideration could be notably given to the introduction of lock-up periods for equity providers in infrastructure projects to enable stable companies to be created by committed investors and strengthen the alignment of interest with public partners.

Due to the current debt crisis, long term investors can be a solution to the gradual demise of commercial banks, in support of EIB and EBRD. New instruments, including some initiatives like the Europe 2020 Project Bond Initiative can contribute to stimulate, notably in Eastern Europe, capital markets financing of infrastructure projects. It is indeed critical, from both an infrastructure policy and a global financial stability point of view, to bridge the current gap between capital markets and project bonds, whose financial features are to a large extent comparable to fixed-income assets ones.

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