Your retirement savings are likely doing, and earning, very little in today’s low interest rate environment. With stock markets volatile and bonds still yielding little, pension managers have limited options to ensure reliable returns without controlled risks. The result is that trillions of dollars of investable capital in retirement funds are in want of a better offer.
It may be time to give emerging market infrastructure projects a closer look. That is what I will be telling investors this week when the World Bank Group and the UK’s Department for International Development host working sessions on the topic.
Power plants, toll roads and mobile phone towers are capital-intensive projects that need debt financing from a variety of sources — from governments, banks and private financiers. In addition to providing vital services in developing countries where needs are great, these are long-term assets that generate strong, stable cash flows. As much as 80 per cent of infrastructure project costs are covered through loans that can yield more than government bonds, often with comparable credit profiles.
Yet only 10 per cent of debt financing for infrastructure comes from institutional investors such as pension funds, and infrastructure makes up a tiny allocation of most retirement portfolios.
What is holding back a scale-up?
First, infrastructure lending is uncharted territory for many institutional investors — it has long been the remit of governments and commercial banks, who until recently could provide enough capital to finance such projects.
The difference is that today, governments in developing countries in particular have dramatically scaled up their infrastructure ambitions, with robust plans to develop power, transport and telecoms capacity and service delivery. Emerging markets already account for more than half of global infrastructure spending and their share is only expected to increase. This new demand is creating additional needs for financing that governments and commercial banks simply cannot meet. Institutional investors are uniquely placed to fill this gap as they get to know the asset class better.
Another constraint is that even sophisticated funds can find it challenging to manage potential complications related to infrastructure projects, from construction delays to partner solvency to regulatory risks. Such considerations also vary from country to country. Finding, reviewing and monitoring large projects in distant geographies takes time and expertise that many institutional investors do not have — the transaction costs of originating loan assets and carrying out project-by-project due diligence are too high, particularly across multiple markets.
Overcoming this will require two things: innovative partnerships and smart risk mitigation tools.
This is an area where development finance institutions can help. Last year, we at the IFC, part of the World Bank Group, launched a Managed Co-Lending Portfolio Program that allows insurance companies to co-invest alongside us in high-quality infrastructure projects in emerging markets. Allianz was the first to sign up, and several other global insurers are expected to join too, attracted by the chance to get exposure to a diversified portfolio of infrastructure loans where due diligence and monitoring is conducted by the IFC’s industry and emerging market experts. The MCPP Infrastructure platform was structured to match the risk profile needs of institutional investors and includes a limited first-loss guarantee supported by the Swedish International Development Cooperation Agency.
Similar initiatives could go a long way to open up investment opportunities for pension funds — with benefits to developing countries whose critical projects depend on new sources of capital, and to retirement savers who could benefit from exposure to a new category of promising, high-yielding assets.
Bernard Sheahan is global director of infrastructure and natural resources at the IFC, a member of the World Bank Group.
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