PRIVATE SECTOR IN INFRASTRUCTURE FUNDING/FINANCING MODELS AND ROLE OF INSTITUTIONAL INVESTORS 1 March 2016, OECD Paris Raffaele DELLA CROCE Lead Manager, LTI Project, Financial Affairs Division - OECD [email protected]Dejan MAKOVSEK Economist Investment Division/ ITF - OECD [email protected]
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Private sector in infrastructure funding/financing models and role of institutional investors - Raffaele Della Croce, Dejan Makovsek, OECD
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1. Private Investment in Infrastructure: a typology
2. Financing structures for infrastructure and Role of
Institutional Investors
3. OECD relevant work
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Outline
PRIVATE INVESTMENT IN
INFRASTRUCTURE: A TYPOLOGY
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• What is infrastructure in the context of private investment:
– Is it the physical structures or operations (services that run on them)?
• Why would such a split be relevant:
– The characteristics of infrastructure and operations are different.
– Infrastructure has inherent characteristics that make private investment difficult. Operations less so. Though it is the contract that primarily defines risk exposure.
• What’s the difference between private participation and private investment in infrastructure
– There are many forms of private participation in infrastructure, but only a few actually involve significant private investment.
Defining the subject of analysis and understanding the
problem
Private investment in infrastructure: A typology (I)
• What basic types of infrastructure are there?
– Economic/Social ; Networks (discrete sections only have value if connected to other sections)/Node (no such link necessary)
• What are the challenges to private investment in infrastructure?
– By it’s nature, the infrastructure is a service. It only has value if there is a need for that service (there is no intrinsic value/only the contract).
– Infrastructure affects third parties (externalities) and in some cases full cost recovery is not even possible from the users directly. Involvement and commitment of the state is necessary.
– The primary challenge is cost recovery. It comes from the nexus of infrastructure characteristics/market failures (sunk cost, long-life…) and the challenge of the government to commit (government failures).
Private investment in infrastructure: A typology (II)
• What forms of private investment actually involve significant private investment?
Characteristics
Forms of PSP
Service contract
(outsourcing)
Management
contract
Lease/
Affermage
BOT and
variants
Concession Divestitures
(privatisation)
What PPPs
encompass
Scope (discrete
piece or
network)
Discrete existing
assets and
network
Normally
discrete
existing assets
Discrete
existing assets
(e.g. port
terminal) and
networks (e.g.
water)
Discrete new
assets or
refurbishment
Existing
networks and
normally
existing point
infrastructure
(e.g. sea/
airports)
Existing
network and
point
infrastructure
(e.g. sea/
airports)
Contract
duration
1-3 years 2-5 years 10-20 years 25-30 years 25-30 years Perpetual/
subject to
licence
Commercial risk
for the private
party
None None Yes Both options
(yes or no)
Both options
(yes or no)
Both options
(yes or no)
Money at risk ex
ante
No No No Yes Yes Yes
Provider of service or management Private Private Private Private Private Private
PPP contract
Bidder 3
Bidder 2
Bidder 1
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Economic regulator
Infrastructure manager
[regulatory
contract]
Stick
Duty to finance
Carrot
Monitoring
Budgeting, Time inconsistency…
The vehicles of private participation in
infrastructure
FINANCING STRUCTURE FOR INFRASTRUCTURE AND ROLE OF INSTITUTIONAL INVESTORS
• High Level Principles for Institutional Investors and LTI (2013)
• the G20/OECD Task Force on Long-term Investment Financing by Institutional Investors
• the OECD has developed a large amount of work with the Turkish presidency of the G20 and
is working on next year deliverables with the Chinese presidency
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Recent OECD work on long-term investment The OECD has been developing a vast program of work on LTI for the G20
“The draft [Addis Ababa Accord] stresses the important role of private investment. Investment in sustainable infrastructure for example is recognised as a major cross-cutting driver that can contribute to achieving all the SDGs. In this regard, I welcome the work of the OECD and the G20 on High-level Principles of Long-term Investment Financing by Institutional Investors." UN Secretary-General Ban Ki-moon Keynote address at the OECD - 28 April 2015