Meridiam contribution to the Green Paper Long-Term Financing of the European Economy

This contribution to the European Green Paper on Long Term Financing of the European Economy builds on Meridiam’s1 experience as a long term investor in infrastructure globally and in the European Union in particular. As a consequence, it only focuses on Meridiam’s main areas of expertise and responds accordingly to the relevant questions raised by the Green Paper.

Q1: Do you agree with the analysis set out above regarding the supply and characteristics of long term financing?

Meridiam agrees with the analysis of the European Commission from a macro-financial standpoint.

European households will, directly and indirectly, remain the main source of savings to be mobilized across the European Union to fund long term investment. The high level of savings achieved by European countries is a strong opportunity and differentiating factor that could boost European economies.

This is in particular demonstrated by the Meridiam investor base for its European funds that is mainly composed of European insurers, pension funds interested in investing for the long term in infrastructure. Meridiam was also originally enabled through core investments from development banks including EIB, Caisse des Dépôts et Consignations, Development bank of Japan and EBRD. Such investors rely on contributions either directly from individuals or from employers to secure funds for investment. This long term appetite (25 years) has translated into a strong investment proposition through public/private partnerships featuring contracted cash flows. Meridiam has also been in a position to secure significant commitments from non-EU investors attracted to the perceived stability of the European Infrastructure sector, in particular from a regulatory standpoint.

Governments, either directly or through public development banks, can indeed play a key role in addressing market failures by acting as a facilitator and supporting fund credibility. Meridiam’s capacity

1 Meridiam Infrastructure is a long-term independent investment firm founded in 2005. It specializes in the development, financing, and management of public/private partnership (“PPP”) infrastructure projects through their 25-year duration institutionally-backed funds. With more than 100 investment professionals and asset managers across offices in Paris, New York and Toronto, Meridiam is the leading fund investor in public infrastructures in Europe and North America. With nearly €2.8 billion ($3.5 billion) of assets under its management, the firm has to date invested in 25 projects and received the 2012 Global Infrastructure Fund of the Year award and the 2011 and 2012 European Infrastructure fund of the Year awards. Meridiam obtained an ISO 9001-certification for its responsible investment process in January 2012.

to raise funds from pension funds and insurers has clearly been enabled for instance by the early support of the European Investment Banks (EIB).

Meridiam supports the European Commission statement that the main challenge of the European Union from an economic standpoint will be to channel such savings into productive savings at a time of an ageing European population. These savings are indeed to a large extent the heritage of decades of accumulated demographic and economic growth2.

The increase of workforce linked to a robust demographic work and the massive entry of women in labor markets has created a first demographic dividend, which has been substantial but transitory in Europe.

A second and sustainable dividend is possible due to increased accumulation of physical or human capital should savings be channeled into productive investment. This second dividend is also the key to social cohesion over the long term, as it implies mobilizing long-term savings held by the elderly to the benefits of the whole society, creating thus enhanced intergenerational solidarity. However, in order to attract these savers into productive and long term investment, the proposition must be sufficiently financial attractive and secured.

Q2: Do you have a view on the most appropriate definition of long-term financing?

It is difficult to define precisely what is long-term financing with a focus only on instruments (equity / bond) and maturities of the instruments. It is Meridiam’s belief however that a key criterion should be the minimal holding period of investors in the asset as (a) it compares to the underlying asset economic life and (b) provides sufficient long term benefits the end user of the underlying asset and; more widely the investors’ investment strategy.

Given the lengthy useful lifetime of infrastructure assets – often between twenty and fifty years and possibly above, in comparison long term financing within the infrastructure sector equates to financing in excess of ten years and often twenty five years. Some infrastructure assets, such as broadband, will have a far shorter useful lifetime and therefore long term financing of broadband might be in the region of seven to ten years. These comparisons illustrate therefore that in infrastructure long term financing relates to the period of time for which stable financing will remain in place in relation to the useful lifetime of the asset. Stability of financing provides the potential of long term certainty and security for investors.

Therefore, the concept of long term financing equates to a large extent to the one of patient capital, i.e. capital for which returns are constituted over the long term. To provide a concrete example, Meridiam has a hold-to-maturity strategy (from development phase to the end of the Public Private Partnership (PPP) contract) and does not rely on early capital gains. It means in practice that the internal rate of return of Meridiam’s investments is built over 25 years and with a strong level of certainty as to out-turn return due to the contracted nature of the cash flows, payback being in general reached after at least 10 years. This approach, when discussing with institutional investors of all regions (Europe, North America or Asia) is clearly viewed as a long term and patient commitment to the asset class and very different

2 See for instance Ogawa and alii, Japan’s Unprecedented Aging and Changing Intergenerational Transfers, 2010.

from other fund managers who have more a shorter term/buy-and-sell approach related far more closely to financial trading as opposed to providing financing relating to the needs of the development of the asset.

To a large extent, the Solvency II framework that incorporates the category of strategic participation, still under discussion (see below for further detail) could be an interesting starting point for a definition of long-term financing from a regulatory standpoint. The nature of such strategic participation will have to be demonstrated in particular by a long term contracted commitment such as a shareholders’ agreement or with the corresponding equivalent from investors including a commitment over a multi-annual horizon. Both sides – investors in the fund, and the fund as an investor in the asset, must engage in a long term approach to provide long term financing. As an example, investors in Meridiam funds are not given any contractual early redemption right before the end of the 25 years term, except in the case of insufficient performance to be assessed after 12 years.

Question 3: Given the evolving nature of the banking sector, going forward, what role do you see for banks in the channeling of financing to long term investments?

Prior to 2008, debt for long term projects was easily accessible in either the syndicated loan market or in the capital markets through public or private bond placements. Banks offered this long term finance often on an ‘unmatched’ basis – raising short term funding on their own balance sheets and rolling over this finance on an annual basis, relying on the availability and apparently stable cost of the wholesale market to continue to provide liquidity. Capital markets providers often purchased AAA rated ‘wrapped bonds’ insured by largely US insurers in respect of default ( an approach largely developed on the US muni market).

Following the global financial crisis, banks’ dramatically reduced access to the wholesale markets and significantly higher costs resulted in their adopting a more conservative approach to the provision of long term financing of projects. In addition, the introduction of more stringent regulations and the pressure to deleverage resulted in shrunken balance sheets, and a higher cost of scarcer capital for banks. This resulted in a lower bank underwriting capacity with far fewer participants leading to bank ‘club deals’ of loans of far shorter tenors, and a decreased ability to provide significant sums for infrastructure. Shorter tenors led to higher refinancing risk as such loans had in-built cost ratchets pushing borrowers to refinance early – ‘soft mini-perms’ or definitive short term dates for refinance – ‘hard mini- perms’ – both structured with the intention of reducing the risk for banks in respect of the cost and availability of the wholesale funding market. These ‘club deals’ typically involved between 10 and 15 institutions for large transactions, that committed to taking portions of the debt prior to financial close. Lending became therefore on a ‘take-and-hold’ basis with no or very limited syndication post financial close. This led to greater uncertainty in respect of financing projects, with reduced numbers of banks being able to fund.

The capital markets were similarly affected: the downgrading of the monoline insurers has restricted public capital markets issues in the UK and in Continental Europe, where this type of financing has in any case been rather limited even prior the global financial crisis.

Although some banks, particularly the Japanese banks, maintained their long term lending positions, starting in 2012, some commercial banks that had traditionally provided project finance started to reposition their offering with the strategy of working in partnership with institutional investors. As their capacity to take on long term debt on their balance sheet dwindled, they decided to move from a lender business model to that of an intermediary-oriented business model.

Banks are therefore offering expertise in assessing the risk and potential of long term investment to institutional lenders. In this respect, and more specifically for Public Private Partnership’s (PPPs) transactions, Natixis is for instance now levying upon a strategic alliance with a Belgian Insurance group (Ageas).

Similarly, banks have also looked to diversify from their wholesale market funding sources for long term finance to raising ‘debt funds’ from institutional investors, however there have not been hugely successful, as a lower potential for earnings have meant that the economics of raising a fund have not been feasible. Banks have however benefited recently from an enhanced access to funding from central banks, and are therefore starting to offer longer term loans. This may not be sustainable.

Of potential greater longevity, banks are now also looking to provide non funded risk instruments such as guarantees for institutional investors, particularly during the construction period, to assuage the concerns institutional investors about the issue of construction risk. In addition, banks retain their role in the infrastructure acquisition space where they can often provide ‘bridging’ finance prior to bonds being raised. The flexibility of banks in terms of risk analysis is likely to result in their retaining a meaningful role in providing shorter term risk products as part of an overall financing.

The changing role of banks coincides with the increasing appetite of institutional investors for long term investments, especially infrastructure. McKinsey Global Institute, a in a recent report3 , estimated that institutional investors allocated on average 3% of their assets to infrastructure investment and had a 6% target, i.e. to double their investment in infrastructure, to be reached in the five coming years.

In a recent survey undertaken by Infrastructure Investor and Meridiam on infrastructure perception by institutional investors, two thirds of the c. 100 interviewed institutional investors indicated an appetite for infrastructure debt products, with their preferred route to access these assets being direct investments and individual investments by investors ranging from US$40m to US$500m. The survey showed also that the appetite of investors is far greater for investment grade ratings with a significant share (above 25%) of interviewed investors being in a position to invest in lower medium grade rated infrastructure bonds. Interestingly, the survey shows that slightly less of 50% of the interviewed investors are willing to take construction risk. In other words, the belief that institutional investors need to invest in at least A rated bonds not exposed to construction risk is not correct anymore. This evolution of institutional investors’ focus is becoming visible in the market. We are also seeing debt products being offered by institutional investors competing and winning against bank offerings in the marketplace in terms of maturity, terms and cost.

3 http://www.mckinsey.com/insights/engineering_construction/infrastructure_productivity

In PPP infrastructure markets, Meridiam has been intensively working to finalize arrangements with institutional investors, such as German, French, British or Dutch players to fast-track private placement/bonds solutions also for European PPP Projects. Meridiam has also been recently instrumental in the issuing of the first non-wrapped greenfield4 bond since the financial crisis.

In this respect, through selected financial advisory mandates, Meridiam has worked with banks on a competitive basis with capital markets providers in order to test the extent of this new approach in terms of actual ability to deliver. It appears from this experience that several banks, even if trends are positive due to a capacity to access new sources of long term funding, will need to further develop their ability to become efficient and competitive delivery and distribution platforms.

In conclusion, Meridiam considers that going forward, banks will retain various roles in providing financial structuring as part of long term financing packages: advisory, providing shorter term guarantees, roles in swaps and derivatives and as bridges to capital markets issues but their previously over-arching role will be significantly reduced.

Q4: How could the role of national and multilateral development banks best support the financing of long term investment? Is there scope for greater coordination between these banks in the pursuit of EU policy goals? How could financial instruments under the EU budget better support the financing of long term investment in sustainable growth?

As already stressed above, development banks play a decisive role in fostering long term investment. The Meridiam funds all benefit from the support of development banks that sent a clear positive signal to institutional investors by supporting this innovative long term project. The leverage effect of EIB investment in Meridiam funds has been equal to 11 for its first fund and more than 16 in its second European fund.

It is Meridiam’s belief that development banks should continue to be the frontrunners in the long term financing universe triggering the commitment of large institutional investors. Within the European Union, a concrete example of this is the Project Bond 2020 Initiative that started the process of educating institutional investors on infrastructure and has proved rather successful given the increased demand for such bonds. The Project Bond Credit Enhancement (PBCE) product was developed jointly by the EIB and the European Commission as part of this initiative. This initiative has been a political catalyst to the development of project bond markets, drawing attention of all stakeholders (institutional investors, sponsors, investment banks as well as tendering authorities) to the benefits of this type of financing.

Further coordination among national and multilateral development banks would be beneficial even if already well advanced. The cooperation between EIB and other European Development Finance

4 The greenfield term covers in the infrastructure space projects that are to be built (starting from a “green field”). The brownfield term refers to alreadt operational infrastructure assets.

Institutions outside the EU that includes in particular financial resources pooling solutions5 or sharing of due diligence results could provide interesting cooperation solutions within the European Union.

The development of financial instruments under the EU budget is welcome. It enables to increase substantially the leverage effect of budgetary resources that are limited by nature. It is however important to maintain a certain form of flexibility in the uses of these instruments.

As discussed above, several institutional investors have for instance now a real appetite for lower medium grade bonds, looking for more attractive risk-adjusted returns than high grade bonds. This might mean that in some jurisdictions, where standalone ratings of project bonds are already in the region of BBB- to BBB+, a credit enhancement is not necessary anymore to fund new infrastructure projects.

Meridiam has for instance funded a UK higher education greenfield (i.e. in construction phase) infrastructure project6 in May 2013 through the first European project related capital markets issue without credit enhancement, rated A- by S&P without any credit enhancement instrument. This bond has a 41 year maturity and has been subscribed by a UK pension fund. Other Meridiam projects in continental projects, either in construction or in operations phase, should benefit from similar long term financing scheme without any credit enhancement.

This means that the budgetary resources allocated to “back” the EIB interventions under the PBCE umbrella could be for instance focused either on jurisdictions where sovereign ratings constrain project ratings, requiring the project bond’s rating to gain one or two notches compared to “standalone” ratings to reach an investment grade rating or on projects for which specific industrial or revenue risks constrain the rating. These resources could also back EIB direct senior lending interventions for some low investment grade projects, enabling for instance EIB to subscribe, alongside other investors, to buy the project bonds themselves and ensure thus successful issuance. Such EIB support could be limited in duration, as changes and re-rating of countries and projects (for example, post construction) such support could be withdrawn.

In the infrastructure sector, the development of an EU fund of funds to support long term equity investment could be envisaged. The successful contribution of the European Investment Fund (EIF) to the European SMEs financing shows that EU equity tools could be beneficial in the infrastructure sector. As discussed above, the EIB has already played a key role in fostering the development of innovative and long term infrastructure funds such as Meridiam. An interesting model in this framework could be to use part of the resources allocated under the Connecting Europe Facility (CEF) for financial instruments to

5 The European Financing Partners ('EFP') vehicle is an interesting model. It has been established by the EIB and 12 leading European development finance institutions for African, Caribbean and Pacific (ACP) countries private sector financing. Its objective is to build notably on the EIB and selected partners financial strength and ability to identify best investments opportunities across the target areas. This mechanism enables to build at the same time on the financial resources made available at EU level and on the capacity of various players to develop a strong pipeline. It works de facto on a 'first come first served' basis (provided investments criteria are met) and therefore provides an incentive to ensure efficient and timely allocation of resources. The operational structure of EFP is characterised by an efficient and fast track process with low administrative overheads. 6 The University of Hertfordshire Student Accommodation College Lane project.

implement an EU infrastructure fund of funds7, managed by EIB. Part of the resources allocated to financial instruments in the framework of the CEF could also be used to support the development of an EU infrastructure saving account (see below for further development of this idea).

Q5: Are there other public policy tools and frameworks that can support the financing of long-term investment?

A general answer corresponds to the stability of the regulatory or contractual frameworks underlying the long-term investments. Long term investment means in essence feeling secure about the stability of the legal framework and political intention over the contemplated investment period.

Rule of law and investments’ protection are hopefully amongst the comparative advantage of the European Union, as is the expectation of a coherent and stable political approach.

Stability at the sector regulatory level is critical. Meridiam considers for instance that certain infrastructure sub-sectors (e.g. regulated energy assets such as power and gas transmission and distribution networks) do not benefit from a similar visibility as PPP projects for instance but to the contrary are more suited to short to medium term private equity strategies8.

At a time of significant increases in long term investment needs to fund the EU energy transition or achieve the Single Market, several sectors, including energy, will require to adapt the regulatory framework to the needs of long term investors, in particular predictability and visibility of returns over the long term. One such approach – using the UK’s ‘Contracts for Difference’ is already extending regulatory certainty in the energy sector.

In addition to appropriate financial regulations, tax incentives could also, in some specific cases and subject to long term fiscal stability, be used to make long term productive investment attractive. So- called Private Activity Bonds (PABs) are an interesting tool reflecting the U.S. Federal Government's desire to increase in particular private sector investment in U.S. transportation infrastructure. These are tax-exempt bonds issued for the purpose of providing special financing benefits for qualified projects. The total envelope of PABs financing is up USD 15bn, with USD 3.8bn issued so far in support of project financing. Consideration should be given to offering tax advantages to investors in long term financing such as that for infrastructure, particularly in respect of those projects of key strategic interest to the EU. This approach would ‘lock in’ interest in such projects as they would provide an enhanced return and potentially attract new investors.

7 One structure could be that around 10% of the available equity under the CEF was made available, as part of their fund raising process, to each of around 5 managers that have a proven track record and team for making investments and whose strategies were aligned with the requirements of the CEF. Each of these managers would then have access, on a time limited ‘first come, first served’ basis to the remainder of the facility that would be held by the EIB on agreed co-investment terms. 8 With typically the following steps: (i) acquisition of a utility at the beginning of a 5 year tariff period with 0a leverage buy out financing (increase of company leverage limiting the company capacity to raise further debt to fund an increase over the long term of investments) (ii) significant, but often unsustainable, reduction of operating expenses and (iii) sale of the company to another investor with a capital gain.

Meridiam would also like to draw the attention to one of the most successful initiatives of the United States in respect of financing long term infrastructure projects: the Transport Infrastructure Finance and Innovation Act (“TIFIA”) credit program. The Transportation Infrastructure Finance and Innovation Act of 1998 (TIFIA) is a Federal program under which US Department of Transport (USDOT) provides credit assistance to major surface transportation projects of national or regional significance, including highway, transit, and rail. USDOT awards credit assistance to eligible applicants, which include state departments of transportation, transit operators, special authorities, local governments, and private entities. The program is designed to fill market gaps and leverage limited Federal resources and substantial co-investment by providing projects with supplemental or subordinated debt rather than grants and acts de facto as an institutional investors’ financing catalyst. As an example, 5 major bond financed US transportation infrastructure projects have for instance benefited from a support of TIFIA.

Question 6 : To what extent and how can institutional investors play a greater role in the changing landscape financing?

Meridiam concurs with the European Commission assessment that institutional investors can play a major role in the changing landscape of financing.

In the case of Meridiam, institutional investors have been substantive supporters of the Meridiam 25 year greenfield PPP focused funds. Institutional investors represent c. 80% of the Meridiam investor base, the remainder being provided by development banks. Long term investors include institutions such as the Caisse Nationale de Prevoyance (CNP), the Development Bank of Japan (DBJ) or Dutch pension fund APG (All Pension Group). Thanks to the support of its investors, Meridiam has been in a position to develop and finance 25 long term greenfield infrastructure projects in Europe or North America over the past 7 years.

Meridiam considers that the involvement of institutional investors is instrumental in the development of long term financing, especially in infrastructure. As stated above, such investors can replace bank debt as a source of long term financing, can utilize the savings of the population of Europe in order to ensure stable infrastructure development and provide investment in project equity either directly or through funds enabling greenfield infrastructure projects to take place.

Q7: How can prudential objectives and the desire to support long term financing best be balanced in the design and implementation of the respective prudential rules for insurers, reinsurers and pension funds such as IORPs?

First and foremost, Meridiam wants to commit clearly in favour of global financial stability. Meridiam has been created as a modest but effective contribution to the enhanced stability of financial markets. This means that we advocate strongly in favour of sound prudential rules that would ensure effective robustness of global and European financial systems.

This implies however that the prudential treatment of long term investment in infrastructure has to fully reflect the risk features of such investment. Our conviction is however that the current envisaged

treatment of infrastructure in the Solvency II regulatory framework does not factor in the stability and predictability of infrastructure investment.

Meridiam is however fully aware that the relative youth of the infrastructure sector as an asset class makes the assessment of financial regulators difficult. This has led Meridiam to sponsor a Chair on Infrastructure Equity Management and Benchmarking at EDHEC Risk Institute, whose ultimate goal is the definition of an academically validated index for equity investment in infrastructure projects (see further description below).

In the meantime, other sources and approaches will be necessary to perform a calibrated analysis of unlisted equity investment in infrastructure, with a specific focus on equity investment in infrastructure project finance schemes. The first findings of EDHEC-Risk Institute Chair can be a useful ground for EIOPA’s ongoing analysis in addition to the elements provided below as regards listed indexes.

Based on a Monte Carlo modeling methodology, Dr Blanc-Brude and Dr Ismail from EDHEC-Risk Institute show that for a typical PPP infrastructure project (with a 90% leverage) 99.5% one-year VaR of equity investment fluctuates between 21.5% and 23% during the project’s life.

This research suggests that the current Solvency II treatment of equity investment in PPP under the ‘other equity’ sub-module, which states that the one-year 99.5% VaR of the “other equity” market is estimated to be equal to 49%, is inadequate. First, this sub-module does not account for the dynamic risk profile of infrastructure project finance equity, in particular, the impact of de-leveraging. Second, in all likelihood, it overestimates the 99.5% VaR of infrastructure equity and the implied equity shock to be applied in the estimate of the SCR.

This analysis is consistent with practitioners’ ’ intuition of, for instance, the unbalanced treatment under Solvency II of property and infrastructure PPP and strongly advocates from a financial standpoint in favor of a carve-out for equity investment in PPPs. It also provides the first step towards an academically validated methodology of valuation of unlisted infrastructure equity investments that could serve as a basis for European regulators and insurers willing to value these assets in the future.

Two options can be identified from a Solvency II standpoint:

- Either create a dedicated module for project finance9, covering both debt and equity investment in such frameworks building for instance on Basel-2 definition. Such approach is probably the most appropriate one over the long term. Calibration of this module would rely on the significant data available for project finance debt from banks, to be supplemented, as regards equity investment, by the EDHEC analysis and the data collection work described above; - Or envisage a quasi-systematic integration of long term infrastructure direct and indirect equity investments in the Solvency II category of strategic participations. The nature of such strategic participation could be demonstrated by a long term commitment. Such treatment should be however only temporary as fostering long term investment in infrastructure in a sound prudential framework requires visibility.

9 Most PPP projects are indeed financed under limited recourse project finance schemes.

Q8: What are the barriers to creating pooled investment vehicles? Could platforms be developed at the EU level?

Pooling resources, in particular technical ones, to access assets is paramount for most of institutional investors. Even large ones, while developing direct investment activities, tend to invest through investment vehicles managed by third parties under a traditional General Partner (GP) – Limited Partners (LP) model (the latter being the position of the institutional investor when investing through a fund). Such model enables to mutualize specialized external resources across several investors and, when investing in various funds, enables investors to reach a reasonable level of diversification relatively quickly10.

Several models can be envisaged. The most classical corresponds to the support of investment platforms structure under a classical GP – LP model as described above. In another close approach, the GP can be partly owned by LPs but Meridiam’s conviction is that independence of the fund manager is instrumental in preserving appropriate incentives. Platforms of direct co-investment among institutional investors can be implemented but, as the Pension Infrastructure Platform initiative, these platforms will require the support of experienced managers, at least in the early stages of these platforms in order to ensure the correct level of expertise.

Hybrid models, such as the one developed by Meridiam, articulate a traditional GP-LP model with a co- investment platform involving investors, in general large ones, willing to access assets directly. This model enables investors to rely on the development/investment and asset management skills of an experienced manager (and share the corresponding costs with other investors) and direct access to assets, enabling the building of internal capacity over the long run and reducing transaction costs.

Further pooling of resources could be fostered by the development at EU level of common regulatory frameworks for institutional investors in terms of eligible investment vehicles. To provide a concrete example, several mutual insurance companies in continental Europe, whose often limited size makes pooling absolutely paramount, have been unable to invest in Meridiam funds in spite of a clear match with their asset liability management requirement. This is the case for instance for many French insurance companies who are authorized to invest when contemplating unlisted equity investment through Fond Commun de Placement à Risque (FCPR). Unfortunately, the regulations of the investments vehicles prevent them from implementing investment strategies longer than 12 years as underlying assets have in general to be liquidated at that horizon. Meridiam saw several large French institutional investors unable to invest in long term funds for that pure regulatory reason. This issue also exists in other European Member States.

10 Analysis of the strategy of direct investment only of institutional investors having chosen this strategy show that they are strongly exposed to the performance of individual investments given the limited size of their portfolios often composed, to mitigate transaction costs, of less than 10 big assets of significant size, exposing the investor to individual risks.

To that respect, the AIFM directive and Solvency II framework should be beneficial to ensure a pan-EU consistency fostering the development of European long term investment vehicle. Meridiam is at the full disposal of the European Commission to work on any proposal, building on its rather unique model, as regards a European Long term Investment Vehicle that could further improve accessibility of European institutional investors to long term infrastructure investment.

Q9: What other options and instruments could be considered to enhance the capacity of banks and institutional investors to channel long-term finance?

Development banks could continue to play a role in educating stakeholders to long term investment features. The action of the Development Bank of Japan (DBJ), an investor in Meridiam, is worth mentioning. In addition to its traditional lending activities in Japan and abroad, the DBJ plays a leading role in Japan in terms of best practices sharing and capacity building among institutional investors. In developing its investment strategy in infrastructure, DBJ was keen to ensure that it received specific support from the selected fund manager it invested in. DBJ objective was to use these investments to also educate Japanese institutional investors in investing in infrastructure opportunities outside of Japan. DBJ, by making investments, gain the necessary expertise and knowledge to build robust and reliable case studies and investment opportunities and then explain the risk and rewards associated with such long term investment opportunities to Japanese institutional investors. As a consequence, Meridiam expects that an increasing number of Japanese institutional investors will be active in the medium term in the infrastructure financing market, in Europe and North America.

More importantly, the capacity of institutional investors to channel long-term finance in the real economy will depend on the credibility of the emergence of a clear pipeline of investable assets. Developing internal skills development in a specific sector (infrastructure, SMEs financing) is de facto a significant investment that makes sense if and only if concrete investment opportunities can be accessed on a regular basis and with an expectation of a reasonable time from original announcement to award. If it is clear that projects are being delivered on a regular basis, resources from such investors will be directed at such opportunities and internal funding will be offered by such institutions to teams who are developing their expertise.

It means in practice that procurement authorities will have to try to avoid any “stop and go” phenomenon in launching projects. This will key to build credible pipelines of investable opportunities, enabling institutional investors to engage the associated investment corresponding to internal capacity development. At present, the European pipeline of projects can be somewhat staccato in its delivery and dependent on the political cycles within European nation states.

The development by public development banks of liquidity instruments to ensure that institutional investors are not so concerned about long term liquidity if they need to change strategy could be also contemplated.

Finally and foremost, stability of legal, tax, political and regulatory frameworks is paramount when dealing with capital-intensive projects. In spite of turmoil in certain sectors (e.g. renewables’ sector) and the Eurozone crisis, European infrastructure sector has proven relatively resilient in that respect and its regulatory stability I remains one of its attractions. As already stressed, it will be critical to preserve in the future this still significant competitive advantage of the EU in the fierce global economic competition.

Q10 to Q14 are not covered by this contribution.

Q15: What are the merits of the various models for a specific savings account available within the EU level? Could an EU model be designed?

Targeted saving accounts, as the French Livret A or the Libretti postali in Italy, have proven successful, since their creation, as a powerful tool to finance the real economy.

In France, the bulk of savings (more than €350bn as of mid-2012) collected through the Livret A and other regulated saving accounts that can be oriented over the long term is mobilized through the Caisse des Dépôts et Consignations (CDC) to finance long term loans to the benefit of social housing projects (c. €118bn of outstanding loans to this sector at the end of 2011).

A significant share (c. €15bn at end 2011) is in addition allocated to other projects of public interest, including infrastructure ones. Meridiam has in particular financed two high speed link railway projects in France with the support of the CDC as long term lender alongside the EIB. Such support has proved paramount in the context of the financial crisis to access to long term funding.

Such model is particularly interesting from a political standpoint as it creates a de facto solidarity between savers and concrete projects contributing to Europe competitiveness and or low carbon transition.

Against this background, Meridiam would suggest developing a pan-European concept of Infrastructure Savings Account. This Infrastructure Savings Account could be initially developed in a limited number of Member States with the objective of raising, for instance, only up to €2bn. It would be distributed by financial institutions (e.g. Sparkassenvolskbanken in Germany, Caisses d’Epargne or Banque Postale in France, Banco Postale in Italy, etc.) with an extensive retail network.

Its liquidity from savers’ standpoint could be of less importance than that of Livret A, for instance, to be consistent the long term duration of infrastructure assets. However, minimum liquidity should be provided to savers in case for instance of crucial life events (e.g. marriage or child birth). Such liquidity could be ensured either through contributions by the distributing local financial institutions themselves brought by new savers’ entry (such entry would be managed by distributing local financial institutions).

The presence in the mechanism of a pan-European liquidity provider could however be particularly beneficial. This role could be played for instance by EIB and funded through an EU budget envelope from the Connecting Europe Facility financial instruments’ pocket. As a very first estimate that will depend substantially on final liquidity offered to savers, a €100m envelope may be considered as sufficient.

The amounts raised could be then be used to fund projects contributing to EU political goals (energy efficiency programmes, transition towards a low carbon energy supply system, etc.) locally or at the European level.

A share of the proceeds (e.g. 35%11) could be invested locally by financial institutions contributing to the distribution of the retail product to local infrastructure projects contributing to these objectives.

The remainder could be managed at the European level by the EIB and invested for instance in the framework of the above-described infrastructure equity fund of funds. EIB role would in particular ensure a sound use of the proceeds that would be channeled to flagship infrastructure projects of European interest (e.g. the Continental Europe so-called Supergrid required to transmit the future Northern Sea off shore wind farm generated electricity to more southern industrial centers) building, to quote Robert Schumann, “de facto solidarities”.

Q16: What type of CIT reforms could improve investment conditions by removing distortions between debt and equity?

Meridiam agrees with the argument that different tax treatment between debt and equity should be corrected progressively to avoid tax distortions unlinked to economic underlying features of assets. Such correction should be undertaken taking into account the critical need for a stable tax framework to avoid discouraging long term investment.

Public infrastructure projects, because of the long term stability of their cash-flows and associated creditworthiness, are characterized by rather high ratio between debt and equity. Any change towards a less favorable tax treatment of interest charges (the so-called “tax shield”), increasing corporate tax income paid by project companies, would, if retroactive, have either a significant impact on profitability, acting as a deterrent for future long term investments, or make significantly more expensive costs charged to end-users (or public authorities in the case of infrastructure projects delivered under availability payment schemes) with eventually a negative impact on competitiveness.

This specificity of public infrastructure has been taken into account in the recent changes in tax policies affecting the tax shield across Europe, with some Member-States introducing specific carve-outs for PPP investments when passing such tax reforms. Meridiam considers such specific treatment of public infrastructure absolutely critical to ensure long term stability and affordability of infrastructure projects.

Otherwise, the tax treatment of shareholders’ loans interests that contributes to reducing the distortion between debt and equity in the PPP universe, would benefit from a clearer tax framework across the European Union. Uncertainties as regards assumptions over the long term of such tax treatment could be easily removed, strengthening the predictability of returns and therefore attractiveness of infrastructure investment for institutional investors.

11 This rate of savings eventually managed by the distributing financial institution (on centralized) is the one used in France for the Livret A.

Q17: What considerations should be taken into account the right incentives at national level for long- term savings? In particular, how should tax incentives be used to encourage long-term savings in a balanced way?

Some outside European Union initiatives could be of interest in the infrastructure European universe for some specific national markets. As described above, Private Activity Bonds (PABs) are an interesting tool reflecting the U.S. Federal Government's desire to increase in particular private sector investment in U.S. transportation infrastructure.

Q18: Not covered by this contribution

Q19: Would deeper tax coordination in the EU support the financing of long term investment?

As a pan-European long term investor, Meridiam welcomes any effort to deepen tax coordination across the EU even if such issue has not been identified so far as critical to foster long term investment.

Q20: Not covered by this contribution.

Q21: What kind of incentives could help promote long-term shareholder engagement?

It is first worth mentioning the ongoing policy initiatives, to which the EU and its Member States are key contributors. Ongoing EU support for the policy initiatives being undertaken by the G8, G20 and the OECD in relation to long term investment will be instrumental as well as to national analysis that could apply at the EU level (see for instance the analysis of benefits of long term investment as detailed in the “Review of UK Equity Markets and Long Term Decision Making” authored by John Kay in June 2012).

In the infrastructure sector, defined minimum periods of investment with incentives for shareholders to remain as investors for as long as possible – for example if investors wish to divest after five years of investment in an infrastructure project, then any benefit accruing to them from the sale of an investment would be shared 50:50 between public and private sectors with the ratio benefit increasing the longer the investment was held.

Prudential rules could be designed to favour long term shareholder engagement. As mentioned earlier, such long term commitment of insurers, when realised for instance by a legal commitment, could contribute to the classification of the corresponding investment as a strategic participations in the Solvency II framework. Full integration of Environment, Social and Governance (ESG) principles could also be a key criterion.

Question 22: How can the mandates and incentives given to asset managers be developed to support long-term investment strategies and relationships?

Effective mandates and incentives can be provided to asset managers to implement effectively long-term investment strategies.

Meridiam is of the opinion that the incentive structure should ensure alignment of interests between the team and the investors in particular in the very long term.

Long term compensation incentive mechanisms have a key role to play but should be tailored to be close to the philosophy of long term investors i.e. be a sort of “pension programme” for the asset manager’s team. In the case of Meridiam, such long term incentive mechanism is designed to cover the entire operational team.

It is also designed to take into account the duration of the fund to ensure alignment of interest with investors. First, the period of time for the team members to actually secure and accrue their rights to this long term incentive mechanism is consistent with the development and investment period of the funds (itself being of minimum 5 years). Second, no payment is made under this mechanism before the assets of the fund are fully mature and operational and full payment only occurs at the fund termination, in year 25.

Regarding the mandates, it should be noted that the remuneration of the management team through the fees and costs charged to investors should be designed to ensure that the management team primary incentive is provided through the long term investment incentive mechanism. Meridiam has adopted this approach and implemented among the most competitive management fees structure in the infrastructure market.

Q23: Not covered by this contribution.

Q24: To what extent can increased integration of financial and non-financial information help to provide a clearer overview of a company’s long term performance and contribute to better investment decision-making?

Financial information as regards equity investment infrastructure is covered by the question 25.

As regards non-financial information, a specific focus on Environmental, Social and Governance (ESG) aspects is necessary. Meridiam was founded in 2006 with a vision of investing in public infrastructure projects on a long-term, responsible and sustainable basis which would translate into lasting, tangible benefits for the communities concerned, particularly in terms of urban regeneration, job creation and strengthening social cohesion. This led to the launch of Meridiam's groundbreaking first infrastructure fund, with a life of 25 years and a focus on greenfield investment, to provide investors with a sustainable long-term running yield and the opportunity to match their long-term liabilities with long-term assets.

From the outset, ESG has been at the core of Meridiam's business, not only by virtue of the intrinsic nature of the projects in which it invests but also as a result of the long-term nature of Meridiam's investments.

Equally, Meridiam fully appreciates the importance of ESG issues to its investors and other stakeholders and, accordingly, the purpose of this document is to report on how we, as a company committed to investment over the very long term, view and fulfill our corporate responsibility, particularly in relation to ESG matters.

This corporate responsibility is entrenched in the values that led to the creation of Meridiam. We also believe that by fulfilling our corporate responsibility, we are better able to manage the risks inherent in our activities and to create value over the long term. Whatever the aim or the context of a particular project, its economic rationale and the benefits which will flow from it over a 25- to 30-year period depend not only on a rigorous evaluation of its potential impact on the natural environment and of the socio-economic context in which it takes place, but also on the robustness of its governance.

Rigorous risk assessment is a fundamental part of Meridiam's project appraisal process and if Meridiam's criteria are not met in relation to ESG issues on a particular project, Meridiam will not proceed with it. Our investment process, that includes this ESG assessment, is certified (ISO 9001).

The importance of ESG issues to Meridiam, reflected in our Sustainable Development Charter, is complemented by our overall commitment to corporate responsibility and to working at all levels continuously to improve our operational methodology.

This has led Meridiam to issue, even if such issuance was not a regulatory requirement for us, an annual basis an ESG report to its investors. This document aims in particular to articulate both our overall ESG policy and its implementation at the level of each project that Meridiam has developed to date. It is Meridiam objective to improve year after year how ESG impact of investment policies can be measured. We in particular intend to develop over the medium term quantitative tools that could support this objective.

Q25: Is there a need to develop specific long-term benchmarks?

Meridiam is absolutely convinced of the need to develop specific long term benchmarks, in particular in the infrastructure universe. This need is the rationale of Meridiam’s support, together with Campbell Luytens, to an EDHEC Risk Institute Research Chair on equity investment in infrastructure.

With this Chair, EDHEC-Risk Institute conducts research “Infrastructure Equity Investment Management and Benchmarking.” The Chair will involve a research team made up of three senior researchers (professors and engineers) from EDHEC-Risk's campus in Singapore for the next three years.

This research aims to provide a better understanding of the nature and investment profile of equity investment in infrastructure assets. It focuses on fostering data collection and aggregation from investors and on improving the benchmarking of return distributions for direct and indirect investment in infrastructure equity by developing an academically-validated and industry-recognised benchmark.

Its foundation paper12 has in particular highlighted what benchmarking efforts are necessary to create investment solutions that align expectations and observed investment performance of infrastructure equity. The objective is to address these challenges by 2014.

Such work will require significant data collection from institutional investors and fund managers active in the sector as well as financial institutions acting as lenders. It could be undertaken in Europe under the

12 Available at http://docs.edhec-risk.com/mrk/000000/Press/Towards_Efficient_Benchmarks.pdf.

umbrella of a European Long Term Infrastructure Investment Association (ELTIA -see below for further description) to be created.

Q26-29: Not covered by this contribution.

Q30: In addition to the analysis and potential measures set out in this Green Paper, what else could contribute to the long term financing of the European economy?

While institutional investors often share with the EU institutions a similar long-term vision to investments, there is a need to make sure that decision makers at both EU and national levels are in a position to take their concerns into account. The questions of how the mobilisation of institutional investors can be facilitated to meet the EU infrastructure policy objectives and how institutional investors can advocate more efficiently in favour of Commission’s proposals needs in particular to be addressed.

Against this background, the set-up of a pan-European platform/association gathering long-term investors in infrastructure seems critical. By pulling resources together, infrastructure investment stakeholders would increase their influence towards Member States, and reach greater success in their advocacy efforts for promoting notably the Commission’s agenda, to the benefit of the European economy and European citizens.

In practice, the key objectives of such a platform/association would consist in:

a) Promoting long-term, sustainable and competitive investments in infrastructure in Europe. b) Facilitating research and analysis of long-term infrastructure financing in Europe, for instance by seeking the creation and promotion of a benchmark for the infrastructure asset class. c) Engaging policy-makers in the development of a favourable environment for the European infrastructure market, focusing, at first, on the financing of Trans-European Networks (TEN).

To meet these objectives, a small permanent structure and secretariat could be created. It would ideally be Brussels or Luxemburg-based in order to foster close cooperation with EU officials. The adequate governance, representation and organisation of this platform should be in a position to rapidly gather members from the business sector as well as high-level representatives from the political (e.g. MEPs active in the infrastructure field) and academic worlds.

Already half a dozen well-known European investors would be open to fill the representation gap that currently exists and ready to join this initiative. The aim would be to gather within two years up to 100 international institutional investors with the objective of 250 within five years.

More precisely, this platform would directly benefit the EU as a whole and the European Commission and the European Investment Bank (EIB) in particular by:

 Strengthening the ability of the private sector to provide sustainable financing to EU infrastructures on the long-term, as a significant part of the investment required in the future will be sourced from the private sector.

 Reinforcing the participation of the private sector in the Commission’s programmes and tools such as the financial instruments for infrastructure financing (e.g. the Project Bond Credit Enhancement Mechanism set up jointly by the Commission and EIB).  Promoting best practises in the sector, through for example the above-mentioned elaboration of a benchmark for the asset class.  Providing a unique platform for exchange by drastically reducing the numbers of interlocutors and ensuring that dialogue between institutions and investors is efficient.

An initial financial grant from the European Commission would legitimate the approach of the industry and enable the organisation to cover initial set-up costs. Based on rough first estimates, a first-year grant of a million euros, to be then gradually reduced, would enable to set-up the platform and help achieve the above-mentioned objectives.

Such clear political and financial support of the European Commission would be essential to the successful launch of this initiative.