Emerging market countries must rely more heavily on bond markets to bridge the $5.2tr shortfall in infrastructure financing, according to leading fund managers. They should use products such as green bonds and liquidity supported PPP bonds, such as that debuted in a Turkish hospital project last year, to unlock more institutional capital and move away from traditional PPP financing.
“For EM, the big question is how do we bring more sticky money into infrastructure,” said Greg Saichin, chief investment officer of global emerging market fixed income at Allianz Global Investors in London.
“The needs are huge but the big issue for debt managers is that a lot of these projects are greenfield and have many layers of risk that, if linked to providing daily liquidity to end investors, we are not able to take.”
Another concern is that there are not sophisticated enough hedging mechanisms to deal with long term investments in countries that have high volatility in their local currency markets.
Saichin pointed to quasi-sovereign project bonds such as Mexico City’s $2bn green airport bond issued in September, as a possible solution, but noted that the credit work to invest in such an issue was intensive.
“The low hanging fruit is to raise money through green bonds,” he said. “There is more focus on this sort of investment and there is a ready pool of investors wanting to buy it.”
POLITICAL RISK INSURANCE
Saichin is critical of the development financing institution (DFI)-led PPP model. “There is too much money sloshing around providing funding at concessional terms and it has been crowding out private investment. DFIs have the privilege in the pecking order and they set the bar too low in terms of risk-reward for private investors. Developing countries need to pay more to bring in more capital and de-risk their transactions.”
Another solution is presented by project bonds with enhanced liquidity features that improve access to institutional funds for projects in sub-investment grade emerging market countries. They offer an alternative to traditional PPPs, according to Matthew Jordan-Tank, the EBRD’s head of infrastructure policy and project preparation.
The product was first used to finance a hospital in Turkey and took the form of a €288m project bond for the Elazig Hospital with enhanced political risk insurance. The country was an obvious candidate, said Jordan-Tank, because it had a large infrastructure programme which included 30 greenfield hospital projects.
“Of course they could go for long term bank financing, but by combining this new risk mitigation product applied for the first time in Elazig Hospital PPP with political risk insurance from MIGA, there is a way to innovate, and to open up financing on the bond market,” said Jordan-Tank. “The whole goal was to widen the pool of institutional investor money.”
Although access to that pool was restricted by the Turkey’s sub-investment grade rating, the liquidity backstop in the form of an unfunded facility provided by the EBRD meant Moody’s rated the bond Baa2, giving it investment grade status, two notches above Turkey’s sovereign rating.