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Promoting the Use of Capital Markets For Public Disclosure Authorized Promoting the Use of Capital Markets for Infrastructure Financing LESSONS FOR SECURITIES MARKETS REGULATORS IN EMERGING MARKET ECONOMIES Public Disclosure Authorized Public Disclosure Authorized NOVEMBER 2017 Public Disclosure Authorized ACKNOWLEDGEMENTS This Policy Note was produced by staff from the World Bank together with external consultants. The main authors are Ana Fiorella Carvajal, WB staff and Daniel Bond and Diana Adams, both Consultants. The Note was produced under the oversight of Alfonso Garcia Mora, Director of the Finance & Markets Global Practice and Samuel Munzele Maimbo, Practice Manager. The team benefited from substantive contributions from Catiana Garcia Kilroy. In addition, very helpful comments were received from Fiona Stewart, John Daniel Pollner, Satheesh Kumar Sundararajan, and Pietro Calice, who peer-reviewed the Note. The team also had the support of Swee Ee Ang. The Policy Note was shared with the securities regulators of the countries for which country summaries were developed. The team wants to extend its appreciation to the securities regulatory authorities and staff from the Australian Securities and Investment Commission, the Comissão de Valores Mobiliários of Brazil, the Comisión Nacional Bancaria y de Valores of Mexico, the Financial Services Board of South Africa, the Capital Markets Board of Turkey, and the United States Securities and Exchange Commission for their disposition to review the Note and the corresponding country summary. Their review does not mean their endorsement of the cases. Errors, if any, are the sole responsibility of the authors. The team appreciates feedback received from members of the Task Force on Infrastructure Financing of the International Organization of Securities Commissions (IOSCO). Their comments highlight the value of this Note and reinforce the commitment of the WBG to continue supporting emerging market economies in their efforts to enhance the role that capital markets can play in financing strategic sectors of the economy. Page 2 | 115 Table of Contents Executive Summary ....................................................................................................................................... 4 Introduction .................................................................................................................................................. 8 Section I. Public versus Private Offering ..................................................................................................... 11 Section II. Disclosure Obligations ................................................................................................................ 18 Section III. Control Issues ............................................................................................................................ 24 Section IV. Other Issues of Relevance to Securities Regulators ................................................................. 28 Section V. Conclusions and Recommendations .......................................................................................... 31 Annex I. Overview of Non-Recourse Financing ........................................................................................... 36 Annex II. Data .............................................................................................................................................. 39 Annex III. Country Summaries..................................................................................................................... 42 Australia .................................................................................................................................................. 43 Brazil ........................................................................................................................................................ 46 Canada .................................................................................................................................................... 54 Colombia ................................................................................................................................................. 57 Costa Rica ................................................................................................................................................ 63 European Union ...................................................................................................................................... 68 Indonesia ................................................................................................................................................. 76 Mexico ..................................................................................................................................................... 80 Peru ......................................................................................................................................................... 85 South Africa ............................................................................................................................................. 91 Turkey ..................................................................................................................................................... 98 United States ......................................................................................................................................... 103 Bibliography .............................................................................................................................................. 111 Page 3 | 115 EXECUTIVE SUMMARY Securities markets regulators in emerging market economies (EMEs) have a key role to play in facilitating the use of the domestic capital markets to fill the infrastructure financing gap. Many of the factors that have hindered institutional investors’ participation in infrastructure financing are outside the control of securities markets regulators. However, as the conditions for mobilizing institutional investors improve, securities markets regulators should seek to ensure that the regulatory regimes for the issuance and placement of securities, as well as for developing new vehicles and instruments, are appropriately structured to address the needs of project sponsors and investors and avoid unintentionally hindering the use of capital markets for infrastructure financing. This Note provides guidance to securities markets regulators in EMEs about key regulatory issues that could affect the issuance of debt instruments for infrastructure financing over which they have some control. The Note focuses on three areas (placement regime, disclosure obligations and control issues in financing structures) and whether and how their regulation could affect the use of two debt financing instruments in EMEs, project bonds and infrastructure debt funds. To this end, it has drawn from the experiences of a select number of countries in both advanced and emerging market economies to distill lessons that can be used by securities regulators in EMEs to tailor their regulatory frameworks so that they can support infrastructure financing. The choice of debt financing instruments stems from the fact that the most pressing need for EMEs is access to lower cost, longer term debt which the two instruments discussed herein are likely to deliver. The key lesson from the experiences reviewed is the need to strike the right balance in the regulation of capital markets instruments in EMEs. Sufficient flexibility needs to be given in the placement regime, disclosure and control issues so that project sponsors consider capital markets a viable solution that can complement and in some cases substitute bank financing. Yet, in some EMEs concerns about institutional investors’ engagement in infrastructure financing have resulted in the imposition of obligations and restrictions that in practice have hindered the use of capital markets. Thus, while certain safeguards might be advisable they need to be carefully defined. To this end, it is key that securities markets regulators coordinate closely with other government authorities (e.g. Ministries of Finance), financial sector regulators (e.g. pension and insurance regulators) and market participants as they develop regulations to support the mobilization of capital markets for infrastructure financing. At a more granular level the key findings and recommendations are detailed below. For project bonds • A private offering regime for the issuance of project bonds should be available for institutional investors’ investment in infrastructure. This type of regime is not available Page 4 | 115 to institutional investors in some EMEs, either as a result of deficiencies in the general framework of securities regulation or restrictions directly imposed on them. Yet project sponsors may be more likely to utilize the capital markets to raise funding if such an avenue is available. The reasons are multifold and include a greater ability to (i) keep confidential sensitive information on the infrastructure projects, (ii) manage control issues, (iii) have more certainty of pricing, and (iv) greater flexibility for tailor made solutions aligned with the diversity of infrastructure assets and (v) to deal with carry costs. Thus, it is critical that securities markets regulations define clearly the boundaries of such regime and that, in tandem, obstacles are removed for its use by institutional investors. The latter could involve, for example, authorizing
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