Mr Bertrand Badre, Managing Director, World Bank Group
Excellencies
Distinguished guests
Ladies and gentlemen
Introduction – key issue is intermediation of available private capital into infrastructure
Welcome to the 5th World Bank-Singapore Infrastructure Finance Summit.
The topic of infrastructure development has been widely discussed recently. International fora like the G20 have made it a priority agenda topic this year. This is also a busy week in Singapore, as we are hosting several infrastructure-related meetings and events.
At the inaugural Summit in 2009, the possibility of a post-crisis financing gap dominated discussions then, arising from concerns that many international banks were deleveraging and pulling back from Asia. Since then, Asian project finance debt volumes have recovered to almost pre-crisis levels. Long-term investors like pension funds, sovereign wealth funds, insurance companies and endowments have projected asset growth of up to US$3trn annually by 2020. Our focus must now turn towards finding the best ways to harness this pool of institutional capital to support infrastructural needs of our region.
Reflecting the growing investor interest, various industry stakeholders have called for infrastructure financing to be looked upon as a standalone investment asset class, separate from traditional debt and equity investments. Singapore fully supports this vision. Today, I will speak about three ideas that we have been working on to bring this about:
i. Building a strong pipeline of bankable projects;
ii. Mainstreaming infrastructure assets for institutional investors; and
iii. Cultivating a specialist talent pool.
Building a strong pipeline of bankable projects
First, this “new asset class” requires a strong pipeline of bankable assets.
Asia’s infrastructure requirements have been projected at US$800bn annually until 2020. However, the proportion of projects that are bankable has been estimated to be as low as 10 per cent. This means that efforts must be made to enhance the bankability of Asian infrastructure projects, or we will lose the opportunity to bring in private sector capital, and the onus will fall on governments to provide the funding required.
End-to-end transaction support from MDBs
Multilateral development banks, or MDBs, can play a significant role in end-to-end transaction support to make a project bankable. Over the last 3 to 4 years, Singapore has collaborated closely with the World Bank Group and Asian Development Bank to develop such capabilities.
With Singapore being one of the few locations globally where we have the World Bank co-located with IFC and MIGA, the Bank Group here is uniquely placed to provide integrated services to governments and bring landmark deals to the market. A recent example is the work on Vietnam’s National Highway 20, in which the World Bank provided technical support and capacity building, while MIGA helped to mobilise commercial financing by providing a US$500m guarantee for a 15-year loan.
In addition, IE Singapore has announced a partnership with ADB to establish the Asian Infrastructure Centre of Excellence, or AICOE. The AICOE will work with governments to select infrastructure projects, get them to a bankable stage, and match these projects with private investors.
We have also seen growth in financing activity by MDBs here. MIGA’s Asia Hub, for example, signed a total of US$783m in guarantees with Asia investors or host countries in 2013, more than double the volume in 2012. This accounted for 28% of MIGA’s total new issuance in 2013.
Macro-level policy improvements
MDBs are also well placed to help governments with project prioritisation, given their expertise and experience across sectors and across geographies.
While many governments – particularly in emerging markets – have long lists of pipeline infrastructure projects, not all may be suited for private sector financing. It depends on the nature of project revenues. Also, potential investors need to be assured that projects have been evaluated objectively, and selected based on commercial viability and long-term economic benefits.
A sound project prioritisation framework can significantly enhance the growth and job creation benefits from infrastructure projects, and raise the return on limited fiscal resources. This is an area in which the World Bank has worked closely with governments in Southeast Asia.
In addition, given the long term and cross-border nature of many infrastructure investments, political risks need to be managed well. Public-private partnership frameworks, approval processes, and risk allocation between the private and public sectors must be conducive to investments.
Last year, the OECD released a set of High-level Principles for Long-term Investment Financing by Institutional Investors. The Principles provide clear and important pointers on improving the investment climate, which investors look out for when committing to long-term infrastructure investments.
Mainstreaming infrastructure assets for institutional investors
While we work to make projects more bankable, we must simultaneously enhance the financing ecosystem’s ability to match these projects with available capital. This involves “right-siting” capital and risk mitigation.
“Right-siting” capital
In Asia, banks have traditionally played a key role in infrastructure financing, particularly in construction-stage projects. This is expected to continue. However, tighter Net Stable Funding Ratio requirements under Basel III may constrain banks’ capacity to provide long-tenor loans in the future.
On the other hand, there is abundant capital from institutional investors; Singapore-based infrastructure fund managers alone have seen their assets under management grow 40% since 2009. A recent survey by Goldman Sachs Asset Management also found that 29% of surveyed insurers planned to increase their infrastructure debt allocations over the next 12 months.
Therefore, there is an opportunity to “right-site” capital. Transactions could be structured such that institutional investors take over the financing of projects from banks when the construction phase of the project is completed.
To enable institutional investors to participate, the industry could establish a set of guidelines for the structuring of project loans, such that the loans can be easily transferable between the bank and non-bank markets. These guidelines would aim to ensure that project loans have portable guarantees, readily available credit ratings, and standardised project finance terms and documentation.
Risk mitigation
Secondly, we need to consider investors’ risk perceptions.
Recent reports by Moody’s and S&P show that the infrastructure sector has historically been strongly creditworthy. S&P found that the average annual default rate for project finance debt since 1998 has been just 1.5%, below the 1.8% default rate for corporate issuers. According to Moody’s, ultimate recovery rates for project finance bank loans average 80%, and two-thirds of the time there is a 100% recovery rate, or no economic loss.
This suggests that the greater concern to potential investors in infrastructure is not project risk, but emerging market risk. Various financing structures have been used in advanced economies to enable institutional investors to participate in infrastructure financing, but investors remain concerned with perceived risks in emerging market infrastructure projects.
Therefore, risk mitigation tools must be adapted for these investors. For instance, the project bond market in Asia has been held back by projects with low standalone credit ratings and the high cost of credit enhancement, as well as a general paucity of credit enhancement products suitable for capital market instruments.
MDBs can take the lead in developing such products. I mentioned earlier the MIGA guarantee on a loan for Vietnam’s National Highway 20 – if such products could be extended to project bonds, for instance, infrastructure projects will be able to access a wider investor base.
Regulatory calibration
Third, it is important that financial regulations do not pose an obstacle to the participation of long-term investors in the infrastructure space.
For instance, for some time now, insurers have been concerned that Solvency 2 requirements may inhibit their ability to invest in infrastructure because of higher risk charges imposed on assets with lower credit ratings. Infrastructure assets provide a good match for insurers’ long-term liabilities; therefore, if their concerns can be addressed, we can boost the amount of capital available for infrastructure investment.
Cultivating a specialist talent pool
Lastly, let me talk about training for both public and private sector professionals. If infrastructure is to be defined as a new asset class, we need a talent pool with specialised knowledge in developing, managing and financing projects in this asset class.
MDBs have played an important role in building capability for governments through targeted education programmes and technical assistance programmes. Going forward, Singapore will look to play a complementary role in grooming private sector project development talent.
I am pleased to share that the Singapore Economic Development Board will be launching the Asia Leaders Programme in Infrastructure Excellence, or ALPINE in short. First of its kind in Asia, ALPINE will train mid-level executives from both governments and companies in the infrastructure value chain. The programme will start its inaugural run in October this year, and will be conducted by the Singapore Management University and the Lee Kuan Yew School of Public Policy.
IE Singapore has also launched an Infrastructure Development Internship Programme, in collaboration with the National University of Singapore and nine industry partners. This programme will expose students to infrastructure at a younger age, and help establish the foundation for future development.
These new initiatives will complement the growing base of companies with expertise in project development, engineering, and professional services that we have anchored in Singapore to serve Asia’s infrastructure needs.
Conclusion
Let me conclude. While bank lending has recovered considerably over the last 2 to 3 years, non-bank institutional capital will be needed to sufficiently finance Asia’s infrastructure requirements.
I have spoken about the necessary building blocks for developing infrastructure financing as an asset class – unlocking a pipeline of bankable projects, making infrastructure investments more accessible to long-term investors, and developing a deep talent pool. These measures will help to turn projects that are currently marginally bankable into bankable ones, and match these projects with private sector capital.
If we can achieve this, I believe that we will potentially unlock another US$300bn of infrastructure opportunity per annum, which will boost Asian GDP by 2.5% over 10 years.
Let us work towards this, to enable Asia to fulfil its development trajectory over the longer term. Thank you.