who can and should finance infrastructure? lessons from...

Who Can and Should Finance Infrastructure?

Lessons from International Data

September 19, 2017

Ricardo Bebczuk

Chief Economist – BICE, Argentina

Bank Negara Malaysia – World Bank GroupGlobal Symposium on Development Financial Institutions

My point in a nutshell

� There´s clearly an infrastructure gap, in an era of fiscal deficits

� Innovative responses from the private and public sector exist

� But they are unlikely to have a massive impact in filling such gap

� So the non-financial public sector will remain the chief provider and financier

Financing the Infrastructure Gap:Private and Public Alternatives

Infrastructure Gap

+

Overall fiscal deficits

Market-Based

Non-budgetary

solutions

Government-Based

A New Insfrastructure Game?

� State guarantees

� Development banks (and IFIs)

More suitable for:

Emerging economies without

good governance and investor protection

� Domestic institutional investors

� Foreign Capital

More suitable for:

Advanced economies with

good governance and investor protection

Actual versus Required Infrastructure Spending in LAC (% of GDP)

Source: Serebrisky et al., IDB, 2015.

1197

499

757

1554

715660

0

200

400

600

800

1000

1200

1400

1600

1800

Developed Emerging LAC

1980 2015

Public Infrastructure Spending, in US$ (ppp) per capita

Source: IDB (forthcoming, 2018).

Market-based solutions:

What makes infrastructure financing attractive to private investors?

� Monopoly and high entry barriers

� Long economic life

� Stable and predictable operating cash flows

� Low correlation with economic cycle

Market-based solutions:

What are the risks of infrastructure financing?

� High (and irreversible) investment

� Long gestation

� Unanticipated changes in input prices (during construction phase)

� Political and regulatory risk, including contract repudiation

0.75

9.79

0

1

2

3

4

5

6

7

8

9

10

Argentina Rest of South America

Argentina: Price of residential electricity (US$ per 100 KWh) in 2015

after 2002 freeze in utility tariffs

Pension Funds (and other II) in the Infrastructure Business: Pros and Cons (from fund manager viewpoint)

� Pros:

� Maturity match

� Low correlation with other financial assets

� Cons:

� Heterogeneity and opacity in the infrastructure sector

� Lack of experience in managing this asset class

� Regulatory barriers and bias against unlisted vehicles (mainly in emerging countries)

� Investor´s short-term horizon

0

10

20

30

40

50

60

70

80

90

100

OECD Countries Non-OECD Countries

Pension Fund Assets: Size and Infrastructure Share

Source: OECD (2016), Della Croce and Yermo (2013) and PPIAF (2014).

Non-OECD CountriesAssets =

36.3% of GDP

OECD CountriesAssets =

123.6% of GDP

% Infrastructure = 1.6% of total

% Infrastructure = 0.5% of total

National Development Banks in the Infrastructure Business: Pros and Cons

� Pros:

� Focus on long-term projects with positive externalities

� Cons:

� Conflict of interest in the event of renegotiations and default

� NDBs are typically small, so infrastructure finance may give rise to:

� Crowding-out, jeopardizing other goals such as SME financial assistance

� Poor portfolio diversification

� Contingent government obligations, when assistance takes the form of

mezzanine debt or guarantees

Out of 90 NDBs around the globe, just 4% have an explicit mandate to finance infrastructure(Luna Martínez and Vicente, 2012)

11.5%

4.3%

1.2% 0.9% 0.8% 0.7% 0.7%

0.02%0%

2%

4%

6%

8%

10%

12%

BNDES(Brazil)

ICO (Spain) COFIDE (Peru) NAFIN(Mexico)

BANCOMEXT(Mexico)

BICE(Argentina)

BANCOLDEX(Colombia)

FDN(Colombia)

Source: Own elaboration based on annual Reports and Central Banks. Data as of 2015.

Development Banks in Latin America and Spain: Stock of Loans to GDP

Recall: LA requires an additional annual infrastructure investment of 2.0%-2.5% of GDP

Is Foreign Saving the Answer in LAC (and the world)?

Foreign SavingGross National Investment Rate

Domestic Saving% of GDP

Source: ECLAC. Data for LAC.

Back to Budget:Why it´s still a government problem

Infrastructure as a Public Good

� Non-rivalrous and non-excludable

� Externalities

� Social purpose

� Textbook case of a public good

� Textbook funding solution:

First resort: Public funding

Last resort: Private funding

Government Budget:

60%

Private Finance: 23%

National DBs:

10%

IFIs:

7%

Sources of Infrastructure Financing in Emerging Economies (% of total)

Source: Own elaboration based on Bhattacharya and Romani (2013).

Source: McKinsey (2013).

Government Share of Infrastructure Investment (in % of total)

6369

30

27

7 4

0

10

20

30

40

50

60

70

80

90

100

Infrastructure Investment Corporate Investment

Own funds Debt Equity

Source: Own elaboration based on McKinsey 2013 (infrastructure figures) and Enterprise Surveys, World Bank, 2012 (corporate investment).

Financing Infrastructure and Corporate Investment: Two Different Worlds?International averages, in % of total funding

About Governments and Infrastructure in Emerging Countries

� Governments in emerging countries, and LAC in particular, have since the 2000s:

� Enjoyed tax revenue bonanzas

� Greatly increased overall and current expenditure

� Relatively neglected public investment

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Overall GovernmentExpenditure

Government InfrastructureInvestment

25%

1%

42%

4%

Year 2000 Year 2016

Government Current and Infrastructure Expenditure: The Argentine Case

In %

of

GD

P

Should governments repair market failures, or should the market repair government failures?

+3 p.p.

+17 p.p.

Conclusions

Lessons from the data

� General government budgets may remain the main source of infrastructure funding

� In both developing and developed economies, market failures prevent the private

sector to assume a leading role

� Private sector should certainly be encouraged, most of all through a healthy

contracting environment, but without getting the public sector off the hook

� DFIs have in general limited resources to substitute governments as the chief

financier of infrastructure spending

Who Can and Should Finance Infrastructure?

Lessons from International Data

September 19, 2017

Ricardo Bebczuk

Chief Economist – BICE, Argentina

Bank Negara Malaysia – World Bank GroupGlobal Symposium on Development Financial Institutions