G20/OECD Support Note on Diversification of Financial Instruments for Infrastructure SEPTEMBER 2016 This document contains the final version of the support note on diversified financing instruments for infrastructure. The G20/OECD Guidance Note on recommended policy steps to diversified financing instruments for infrastructure and SMEs was endorsed by the G20 Finance Ministers and Central Banks Governors at their meeting in Chengdu, China on 23-24 July 2016, and also by the G20 leaders at the Hangzhou Summit that took place on 4-5 September 2016. Contact: Mr. André Laboul, Deputy-Director, OECD Directorate for Financial and Enterprise Affairs [Tel: +33 1 45 24 91 27 | [email protected]], Mr Raffaele Della Croce, Financial Affairs Division, Directorate for Financial and Enterprise Affairs, OECD [Tel: +33 1 45 24 15 34 | [email protected]] or Mr. Joel Paula, Financial Affairs Division [Tel: +33 1 45 24 19 30 | [email protected]]. This report is circulated under the responsibility of the Secretary-General of the OECD. The opinions expressed and arguments employed herein do not necessarily reflect the official views of OECD member countries or of the G20. This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area. © OECD 2016. Applications for permission to reproduce or translate all or part of this material should be made to: [email protected]. 2 TABLE OF CONTENTS BACKGROUND ............................................................................................................................................. 5 PREAMBLE - PRE-CONDITIONS FOR DIVERSIFIED, INTEGRATED FINANCING FOR INFRASTRUCTURE AND OTHER LONG-TERM INVESTMENTS ......................................................... 6 PREAMBLE - RECOMMENDATIONS ON PRE-CONDITIONS FOR DIVERSIFIED, INTEGRATED FINANCING FOR INFRASTRUCTURE AND OTHER LONG-TERM INVESTMENTS ...................... 12 SECTION I - DIVERSIFYING INSTRUMENTS AND OPTIMISING RISK ALLOCATION ................. 13 SECTION I - RECOMMENDATIONS ON DIVERSIFYING INSTRUMENTS AND OPTIMISING RISK ALLOCATION ........................................................................................................... 22 SECTION II - EQUITY INSTRUMENTS FOR THE FINANCING OF INFRASTRUCTURE ................. 27 SECTION II - RECOMMENDATIONS ON EQUITY INSTRUMENTS FOR THE FINANCING OF INFRASTRUCTURE .................................................................................................................................... 35 SECTION III - ENGAGING INSTITUTIONAL INVESTORS AND CAPITAL MARKETS IN INFRASTRUCTURE FINANCING ............................................................................................................. 38 SECTION III - RECOMMENDATIONS ON ENGAGING INSTITUTIONAL INVESTORS AND CAPITAL MARKETS .................................................................................................................................. 48 SECTION IV – ADDRESSING THE INFORMATION GAP AND DEVELOPING INFRASTRUCTURE AS AN ASSET CLASS ............................................................................................ 51 SECTION IV - RECOMMENDATIONS ON ADDRESSING THE INFORMATION GAP AND DEVELOPING INFRASTRUCTURE AS AN ASSET CLASS .................................................................. 55 ANNEX 1 ...................................................................................................................................................... 57 EXAMPLES OF EFFECTIVE APPROACHES IDENTIFIED TO FACILITATE THE IMPLEMENTATION OF THE G20/OECD HIGH-LEVEL PRINCIPLES OF LONG-TERM INVESTMENT FINANCING BY INSTITUTIONAL INVESTORS WHICH ARE RELEVANT FOR THE SECTIONS OF THE SUPPORTING NOTE ....................................................................................... 57 ANNEX 2 ...................................................................................................................................................... 66 SELECTED EXAMPLES OF RECOMMENDED POLICY STEPS TO DIVERSIFYING SOURCES OF INFRASTRUCTURE FINANCE ................................................................................................................. 66 ANNEX 3 ...................................................................................................................................................... 75 TABLE: CURRENT AND POTENTIAL ALLOCATION OF INSTITUTIONAL INVESTORS TO EMERGING MARKET INFRASTRUCTURE ............................................................................................ 75 LIST OF ABBREVIATIONS ....................................................................................................................... 76 REFERENCES .............................................................................................................................................. 77 3 Tables Table 1. Instruments and vehicles for infrastructure financing ........................................................... 15 Table 2. Equity instruments and vehicles for infrastructure financing by financial sponsors and investors ............................................................................................................................................... 31 Table 3. Classification of risk linked to infrastructure assets .............................................................. 42 Table 4. Instruments and vehicles for infrastructure financing ........................................................... 43 Figures Figure 1. Infrastructure project development cycle .............................................................................. 20 Figure 2. Catalytic sources of infrastructure finance ............................................................................ 21 Figure 3. Change in equity mix in wind energy projects, Europe (shares of total equity in sample) ... 30 Figure 4. Initiatives in the equity market for infrastructure .................................................................. 33 4 BACKGROUND 1. As highlighted in the communiqué from G20 Finance Ministers and Central Banks Governors (26-27 February 2016, Shanghai), there is strong interest in advancing the global investment agenda, with a focus on infrastructure development, both in terms of quantity and quality. This work undertaken by the G20 Investment and Infrastructure Working Group (IIWG) in 2016 involves three main pillars: Pillar 1: Strengthening the role of MDBs and calling on them to take joint actions to further support infrastructure investment. Pillar 2: Promoting global infrastructure connectivity through enhanced cooperation and synergy among regional/national infrastructure initiatives. Pillar 3: Exploring diversified financing approaches and fostering private financing for infrastructure investment. 2. Under Pillar 3, the OECD, building on earlier work and working in close collaboration with the WBG, IMF and other international organisations, developed a report seeking to identify ways to diversify infrastructure financing approaches. Special attention was paid to equity financing and capital markets development, engaging institutional investors, and exploring the potential of describing infrastructure investments as an asset class. Also, under Pillar 3, the WBG has prepared a policy note on local currency infrastructure bonds. Furthermore, the Global Infrastructure Hub (GIH) presented at the April Washington DC meeting of Finance Ministers and Central Bank Governors a report on knowledge sharing, with an emphasis on fostering infrastructure investments in developing countries. 3. The IIWG first met under the Chinese Presidency on 16 December 2015 in Sanya to engage its members on this work. In support to the IIWG, the G20/OECD Task Force on Institutional Investors and Long-term Financing (the "Task Force") met on 17-18 March to initiate this important work stream and discussed the outline of the guidance and supporting documents. 4. The Task Force agreed on the main directions of the outline and also highlighted that the financing tools suitable for infrastructure may not be applicable for SMEs, given the different nature of infrastructure and SME financing. In this regard, two separate supporting documents, led by the OECD, have been prepared for infrastructure and SME financing, respectively. 5. A progress report including the draft outline was sent to Finance Ministers and Central Bank Governors meeting in Washington DC in April, after agreement by the IIWG. This document contains a third version of the supporting note on diversified financing instruments for infrastructure. It has been revised based on several rounds of comments provided under the written process on the first and second version and feedback received at the 12th meeting of the G20/OECD Task Force on Institutional Investors and Long-term Financing held on 26 April in Singapore and the G20 IIWG meetings, held on 28 April in Singapore and on 2 June in Bali. As decided in Singapore, several more detailed recommendations were transferred to the supporting note from the guidance note. 6. This report involves new research but also substantially draws on IIWG member contributions and Task Force meetings, and inputs from other organisations such as the IMF (for section 1), the WBG and GIH. In Annex 2 to this document is included the previous addendum to the Supporting Note including selected examples of recommended policy steps to diversifying sources