KL Gates Building Bridges III - Tufts Fletcher...
Transcript of KL Gates Building Bridges III - Tufts Fletcher...
Jolanta Wysocka | CEO Mountain Pacific Group www.mountainpacificgroup.com
KL Gates Building Bridges III Innovations in Infrastructure Investment Platforms and the role of PPPs Washington, DC November 6, 2015
Banqiao Dam Failure, China - 231,000 dead • 64 dams failed • 6 miles wide and 9-23 feet high wave sped downwards at 31 mph • It wiped out an area 30 miles long and 10 kilometers wide
Data Source: FRED, October 2015
Total Public Construction Spending as Percent of GDP, USA
1.50%
1.70%
1.90%
2.10%
2.30%
Infrastructure Development Models
• Public Sector – Most of the infrastructure development today is paid out
of public budget. Sponsor engages in procurement and may issue bonds to finance the project
– Private sector’s participation limited to providing the funds
• PPP – tapping private sector resources in designing, implementing and managing the projects – Public Sector – specify what needs to be done – Private Sector – implement, manage and finance – Public Sector – subsidize, if needed
Challenges facing PPP today • Control issues
– Pre GFC: • Debt held by few banks • Monolines assumed all the credit risk AND full control rights
– Post GFC: • Hundreds of bond holders, many with no project knowledge • No monolines
• Attempts to deal with control issues
– Infrastructure development funds • Limited track record of funds/teams • Short life – fund life much shorter than project life • High fees
– Open Funds in Australia • High fees • Too much leverage
PPP in Emerging Markets
• “Sweet spot” - middle income countries: Chile, Colombia, Peru – “Need” is not a good predictor of returns
• Today compared to the 90’s – Local currency financing - “original sin” – Low inflation - high inflation – Benchmark 15-20y government yields available
• IFC, the World Bank and the local partners mitigate the risks
Post 2008 de-leveraging did not occur, instead there has been a massive growth in new debt accumulation globally.
Summary • Pension funds are looking at infrastructure in search of long
duration assets with good yield, and preferably inflation protection. • Unconventional monetary policies are distorting the price of risk • Current yields do not adequately compensate for illiquidity, political
and structural risks • Beware of hidden fees and expenses • Avoid excessive leverage on fund/project level. • Local institutions and super nationals are very helpful partners • Devil is in (deal) details - structuring, such as floating rate debt, can
adversely impact economics • Expert legal advice, including local legal advice, is critical in making
sure incentives are properly aligned and investor’s interests are protected