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14 May 2010 Bogotá Sovereign Wealth Funds and Infrastructure: A Perspective for Latin America Rolando Avendaño Javier Santiso OECD Development Centre Seminar on Infrastructure Financing in Latin America CAF-IFC-OECD

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  • 14 May 2010 Bogot

    Sovereign Wealth Funds and Infrastructure: A Perspective for Latin

    America

    Rolando AvendaoJavier Santiso

    OECD Development Centre

    Seminar on Infrastructure Financing in Latin AmericaCAF-IFC-OECD

  • Latin Americas Infrastructure needs in the long run 1

    Sovereign Wealth Funds: New Investment Drivers2

    Looking and Emerging Economies: Infrastructure and Commodities3

  • Infrastructure investment in Latin America : long-term prospects for 2030

    0 1 2 3 4

    Greece

    Mexico

    Turkey

    Russia

    Italy

    Spain

    China

    Brazil

    India

    Portugal

    % o

    f G

    DP

    Projected expenditure on water infrastructure

    By 2025

    By 2015

    0 5000 10000 15000

    Russia

    Middle East

    Africa

    East Asia

    South Asia

    Latin America

    China

    OECD

    % o

    f G

    DP

    Final Electricity consumption by region (TWh)

    (Reference Scenario)

    2030

    2010

    Source: Infrastructure in 2030. Telecom, land, transport and electricity. OECD 2007.

  • Infrastructure requirements in the long run:Similar needs in EM and OECD

    0

    0.1

    0.2

    0.3

    0.4

    0.5

    2000 2010 2020 2030

    Highly Industrialised Countries

    OECD Non-OECD

    0

    0.1

    0.2

    0.3

    0.4

    0.5

    2000 2010 2020 2030

    Developing and Emerging Countries

    BRIC + Indonesia (big 5) Others

    0

    0.02

    0.04

    0.06

    0.08

    0.1

    2000 2010 2020 2030

    Highly Industrialised Countries

    OECD Non-OECD

    0

    0.02

    0.04

    0.06

    0.08

    0.1

    2000 2010 2020 2030

    Developing and Emerging Countries

    BRIC + Indonesia (big 5) Others

    Road new construction requirements Rail new construction requirements

    Source: Infrastructure in 2030. Telecom, land, transport and electricity. OECD 2007.

  • Latin Americas Infrastructure needs in the long run 1

    Sovereign Wealth Funds: New Investment Drivers2

    Looking and Emerging Economies: Infrastructure and Commodities3

  • Emerging economies accumulated foreign reserves in the last decade

    0

    200

    400

    600

    800

    1,000

    1,200

    1,400

    1,600

    1,800

    2,000

    1988

    1990

    1992

    1994

    1996

    1998

    2000

    2002

    2004

    2006

    2008

    US

    D b

    illi

    on

    International reserves emerging countries

    Brazil

    China

    India

    Mexico

    Russia

    South Africa

    0

    200

    400

    600

    800

    1,000

    1,200

    1,400

    1,600

    1,800

    2,000

    1988

    1990

    1992

    1994

    1996

    1998

    2000

    2002

    2004

    2006

    US

    D b

    illi

    on

    International reservesDeveloped countries

    Germany

    France

    Netherlands

    Switzerland

    UK

    US

    Source: OECD Development Centre, based on Economist Intelligence Unit. 2010.

    2008

  • Where are the Sovereign Wealth Funds?

    Sovereign Wealth Funds (SWFs) - 2009

    NumberTotal assets

    (USD bn)

    Middle East 7 1533

    Asia 9 867

    OECD 10 489

    Russia & Central Asia 4 177

    Africa 7 109

    Latin America 4 23

    Pacific islands 6 1.2

    Total 47 3,194

    Source: OECD Development Centre, estimation based on Dealogic, Deutsche Bank , and SWF Institute.

    SWFs: Special-purpose investment funds or arrangements owned

    by the general government, with the mandate to hold, manage, or

    administer assets to achieve financial objectives, GAPP 2008.

  • 0 500 1000 1500 2000 2500 3000 3500

    SWFs total assets

    Potential 2018 SWF flows to EM

    United Arab Emirates: ADIA

    Norway: Pension Fund Global

    Potential current SWF flows to EM

    Singapore: GIC

    Kuwait: KIA

    China: CIC

    Russia: Stabilisation Fund

    Singapore: Temasek

    Development Aid DAC donors

    USD billionEmerging market investment potential by SWFs

    Source: Country reports, Deutsche Bank, and SWF Institute, 2009.

    SWFs: A potential to reach USD 1.4 trillion to emerging markets over the coming decade

  • SWF after the crisis GCC funds in 2009 and the Reversal of fortune

    Source: OECD Development Centre, 2009. Based on Setser and Ziemba GCC Sovereign Funds: Reversal of Fortune. WP Council for Foreign Relations, 2009.

    Losses as share of 2008Fall in Value for GCC funds

  • -60

    -50

    -40

    -30

    -20

    -10

    0

    Blackstone Bear StearsMorgan Stanley

    Pe

    rfo

    rman

    ce (

    %)

    China

    -60

    -50

    -40

    -30

    -20

    -10

    0

    10

    AMD Citi Carlyle

    Pe

    rfo

    rman

    ce (

    %)

    Abu Dhabi

    -60

    -50

    -40

    -30

    -20

    -10

    0

    Blackstone Bear StearsMorgan Stanley

    Pe

    rfo

    rman

    ce (

    %)

    Dubai

    Source: Financial Times, March 2009.

    Performance of Notable Sovereign Funds Investments

    Large stakes in the developed financial sector: A good strategy?

  • Moving forward in the Regulatory agenda

    1. Legal framework: ensuring recipient regulatory requirements.

    2. Appropriate governance: transparent and sound governance structures for adequateoperational controls.

    3. Accountability: public disclosures in a variety of areas, although mindful of SWFs competitive position

    4. Prudent investment practices: invest only on the basis of economic and risk and return, contribute to stable financial markets.

    Santiago Guidelines

    1. Recipient countries should not erect protectionist barriers to foreign investment.

    2. Recipient countries should not discriminate among investors in like circumstances. Only legitimate national security concerns.

    3. Where national security concerns do arise, investment safeguards should be:

    - Transparent and predictable,

    - Proportional to clearly-identified national security risks, and

    - Subject to accountability in their application.

    OCDE Guidelines

  • SWF regional allocations: room for future investment

    Asia

    EU

    US

    Middle East

    Japan

    AfricaOthers

    Asia

    EU

    US

    Middle East

    Japan

    Africa

    Others

    Asia and EU remain preferred targets for SWF investments.

    An interest to diversify from dominating currencies (EUR, JPY)

    Asian investment reflects long-term growth potential

    Latin America lags behind other emerging regions

    Note: Covers public transactions for the period 1995-2009

    Source: Dealogic.

    SWF investments by region

  • Sovereign Wealth Funds and Infrastructure investment potential (i)

    Investment perspective for SWFs:

    Freedom in asset choice

    Diversify resource allocation

    Longer-term investment horizon

    Higher return perspective

    Infrastructure investment

    A safe investment

    Countercyclical tool for governments

    Source: Factset. Thomson financial and Dealogic, 2009.

    Sovereign Wealth Funds investments by sectorEstimation 1995-2008

  • Infrastructure investment potential (ii)

    Attracting SWFs to Infrastructure:

    Potentially high historical returns

    Low correlation with other asset classes

    Revenues implicitly linked to inflation

    Stability of cash flows

    Monopolistic or quasi-monopolistic

    activities

    Source: Brookfield Redding/ Dow Jones, 2009.

    Historical Return by Asset Class

  • Looking at the data: SWFs and other Institutional investors

    Using data on equity holdings for a set of SWFs, we compare their investments to private mutual funds (index and actively managed).

    Source: FactSet and Thomson Financial on portfolio holdings of institutional and private funds. Mandatory filings with national regulatory agencies (e.g. 13 filings with SEC, share register with UK), annual reports and primary sources.

    SWFs: 22 funds 14.000 holdings

    Mutual funds: 25 largest US funds 11.600 holdings

    Period studied: 2006-2009

  • Sovereign Wealth Fund Equities Fixed income

    China Investment Corporation

    Return net-of-fees 300 bps above MSCI All country Index for global equities 200 bps above EAFE 300 bps above MSCI EM Asia ex-Japan, benchmark to be suggested by manager seek in the mandate.

    150 bps above the JP Morgan EMBI Global

    Kuwait Outperform MSCI Global Index

    Norway FTSE large and mid-cap equity indices for the countries where it invests.

    Saudi Arabia S&P 500, MSCI (Europe and Global), TSE (Japan)

    JPM Global Bond Index, 3-month Libor (cash/deposits)

    Korea MSCI world equity. Lehman global bond index (now Barclays)

    GIC Singapore MSCI World equity Lehman global bond indices.

    Kazakhstan MSCI World Equity Merrill Lynch 6-month T-bill index, Salomon World Government Bond Index

    Alaska S&P 500, Russell 1000, Russell 2000, MSCI EAFE, EM

    Alberta Standard & Poor's/ TSX Composite Index (Canada), Standard & Poor's 1500 Index (US), MSCI EAFE

    Scotia Capital Universe Bond Index

    Example of disclosed Benchmarks for selected Sovereign Wealth Funds

    Note: Benchmarks for 2008-2009Source: Ziemba, 2009.

    An investment benchmark for SWFs?

    Overall portfolio benchmarks (index or total return)

    Separate benchmarks for each asset class

    Most benchmarks based on market indices are customised.

  • Average Portfolio Characteristics for SWFs and Mutual Funds

    Sources: Avendano and Santiso (2009), based on FactSet and Thomson Financial, 2009.

    0.0

    5.0

    10.0

    15.0

    20.0

    25.0

    Avg Price/Earnings Ratio

    Avg Price-to-Book Ratio

    Average Dividend Yield(%)

    Avg Sales Growth (%)

    Sovereign Wealth Funds Mutual Funds

    0.0

    0.2

    0.4

    0.6

    0.8

    1.0

    1.2

    Price Momentum Beta

    SWFs Portfolio Characteristics: Not radically different from other investors

  • Distribution of Fund Holdings Regions

    0.00

    0.05

    0.10

    0.15

    0.20

    0.25

    0.30

    0.35

    0.40

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    SWFs

    0.00

    0.05

    0.10

    0.15

    0.20

    0.25

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    No

    rth

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    eri

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    Mid

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    t

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    rce

    nta

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    f To

    tal

    Mutual Funds

    Regional destinations: Asia and US targets

    Sources: Avendano and Santiso (2009), based on FactSet and Thomson Financial, 2009.

  • 0.00

    0.05

    0.10

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    0.000.050.100.150.200.250.300.350.40

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    Mutual Funds

    Distribution of Fund Holdings Sectors

    Sector distribution: critical sectors aredifferent across groups

    Sources: Avendano and Santiso (2009), based on FactSet and Thomson Financial, 2009.

  • Political regimes in recipient countries:SWFs and mutual funds act alike

    Sources: Avendano and Santiso (2009), based on FactSet, Thomson Financial, and Polity IV Project, 2009.

    Political regimes and governance in (investment) recipient countries: SWFs vs. Mutual funds

    0

    0.2

    0.4

    0.6

    0.8

    1

    1.2

    1.4

    1.6

    Institutionalized Democracy

    Autocracy Polity Score Regulation of Chief Executive Recruitment

    Competitiveness of Executive Recruitment

    Sovereign Wealth Funds Mutual Funds

    0

    0.2

    0.4

    0.6

    0.8

    1

    1.2

    1.4

    1.6

    1.8

    Openness of Exec. Recruitment

    Executive Constraints (Decision Rules)

    Regulation of Participation

    Competitiveness of Participation

    Executive Recruitment

    Political Competition

    Note: Scores weighted by holding amounts.

  • Latin Americas Infrastructure needs in the long run 1

    Sovereign Wealth Funds: New Investment Drivers2

    Looking and Emerging Economies: Infrastructure and Commodities3

  • Sovereign Wealth Funds: Public investment in Infrastructure

    Source: Avendano and Santiso (2010), based on Thomson Financial and Lionshares.

    0

    0.2

    0.4

    0.6

    0.8

    1

    1.2

    1.4

    1.6

    Q42006 Q42007 Q42008 Q42009

    % o

    f M

    arke

    t V

    alu

    e

    Average SWF investment in Infrastructure FirmsShare of Market Value

    Other sectors Infrastructure sectors

    Note: Data comprises SWF public equity investments.

  • SWF Investments in infrastructure:Regional differences

    0

    0.5

    1

    1.5

    2

    2.5

    Africa Asia Europe Latin America North America Pacific

    Shar

    e o

    f Fi

    rm v

    alu

    e (O

    /S)

    SWF equity investments in infrastructure Share of Market Value

    2006

    2007

    2008

    2009

    Source: Avendano and Santiso (2010), based on Thomson Financial and Lionshares.

    Note: Data comprises SWF public equity investments.

  • Estimated SWF Demand for assets Q4 2009

    Source: SWF Institute, based on annual reports.

    SWFs and Commodities: A new Investment space

    SWF investments - 2009:Commodities Sector Deals - Example

    China Investment Corporation:Kazakhstan Astana (gas)Indonesia PT Bumi (coal)Russia Noble Oil (oil supplier)Mongolia Iron Mining Int. (mining)Canada Teck Resources (mining)

    Temasek Singapore :Olam international (agriculture)

    Joint investments:1Malaysia Development (Malaysia) PetroSaudi(S. Arabia)Islamic Development Bank Qatar Investment Authority

  • SWFs in Latin America: Brazil is dominant in Infrastructure sectors

    Sector Firm Country % O/S Sector Firm Country % O/S

    Brasil Telecom Participacoes Sa Ord Brazil 0.387

    Brasil Telecom Sa Ord Brazil 0.083 Mercadolibre Inc Com Argentina 0.773

    Communications Gvt Holding Sa Ord Brazil 0.021 Totvs Sa Ord Brazil 0.399

    Tele Norte Leste Part Ord Brazil 1.006 Empresas La Polar Sa Ord Chile 1.073

    Telemar Norte Leste Sa Ord Brazil 0.153 All America Latina Log Ord Brazil 0.03

    Transportation Cia De Concessoes Rodoviarias Ord Brazil 0.356

    Electronic Technology Embraer (Emp Brasil Aero) Ord Brazil 0.021 Gol Linhas Aereas Intel Pfd Brazil 0.193

    Llx Logistica Sa Ord Brazil 0.083

    Energy Minerals Petrobras Energia Sa Adr B Argentina 0 Santos Brasil Part Sa Unit 4Pfd/Ord Brazil 0

    Ultrapar Participacoes Sa Pfd Brazil 0 Cia Sudamericana De Vapores Ord Chile 0.153

    Lan Airlines Sa Ord Chile 0.215

    Cia Siderurgica Nacional (Csn) Ord Brazil 0.33

    Confab Industrial Sa Pfd Brazil 0 Aes Tiete Sa Ord Brazil 0.588

    Metalurgica Gerdau Sa Ord Brazil 0.994 Cia Paranaense Ener/Copel Ord Pfd BBrazil 0

    Mmx Mineracao E Metalicos Ord Brazil 0.197 Cia Saneamento Minas Gerais Ord Brazil 0.235

    Non-Energy Minerals Usiminas (Minas Gerais) Pfd A Brazil 0 Cia Transmissao Energia Paulista Pfd Brazil 0

    Vale Sa Adr Brazil 0 Cpfl Energia Sa Ord Brazil 0.004

    Cia Acero Del Pacifico (Cap Sa) Ord Chile 0.404 Eletrobras Ord Pfd B Brazil 0

    Cia De Minas Buenaventura Ord Peru 0.321 Eletropaulo Metropolitana Ord Brazil 0

    Sociedad Minera Cerro Verde Ord Peru 0.017 Utilities Energetica Sao Paulo (Cesp) Ord Brazil 1.262

    Southern Copper Corp Com Peru 0.124 Energias Do Brasil Sa Ord Brazil 0.17

    Volcan Compania Minera Sa Ord A Peru 0.063 Light Sa Ord Brazil 0.276

    Mpx Energia Sa Ord Brazil 0.118

    Sabesp (Saneamento Basico) Ord Brazil 0.795

    Tractebel Energia Sa Ord Brazil 0.261

    Transmissora Alianca (Terna) Ord Brazil 0

    Colbun Sa Ord Chile 0.233

    Endesa (Empresa Nac Elec) Ord Chile 0.258

    Enersis Sa Ord Chile 0.245

  • Gravity Model: Natural endowments

    Source: Avendano and Santiso (2010)

    SWF investments: firm determinants and natural endowments

    SWF investments - Firm factors

    Fuel exports (%) merchandise

    exports

    Agricultural raw material exports

    Arable land (% of land area)

    Forest area (%)

    Energy imports net (% of energy

    use)

    SWF investments Three dimensions

    Size

    Liquidity (turnover)

    Cross listed

    Cash Holdings

    Foreign Sales

    R&D

    Source: Commodity/non-commodity

    Peer effect: OECD/ non-OECD

    Foreign vs domestic invesments

  • SWF investments: firm determinants and natural endowments

    Non-commodity funds favour firms with more foreign activity and higher

    turnover, in contrast to commodity-funds.

    OECD-based funds privilege firms with lower leverage levels, whereas non-

    OECD funds have a preference for profitable (i.e. high ROE) and international

    (i.e. high foreign sales) firms.

    SWF foreign investments are oriented towards large and highly leveraged firms,

    in contrast with their domestic (and low leveraged) investments.

    Specific sectors, such as R&D, tend to attract foreign investments.

    Natural endowments explain large shifts towards commodity-related sectors.

  • SWF participation in infrastructure: Different needs, different schemes

    Concessional loans

    China Exim bank

    Equity Development Fund

    China-Africa Development Fund

    Partnership with financial entity

    Abu Dhabi Investment Authority and UBS

    Direct investment

    Libya Investment authority

    Regional Network

    Arab Fund for Economic and Social Development

  • Concluding remarks

    Differences in geographic/sector allocation between SWFs and other institutionalinvestors (mutual funds) are modest.

    The political regime. No differentiation for (investment) recipient countries

    Santiago and OECD Guidelines: More transparent and diversified investments.Double standards to regulate should be avoided

    The determinants of SWF investments: firm characteristics and naturalendowments. Large heterogeneity across fund types and targeted sectors

  • Concluding remarks

    Financial crisis in 2008 allowed SWFs to re-consider their mandates and re-directtheir investments: Flight to Quality vs Frontier Markets

    Traditional arguments to attract investment in infrastructure remain valid forSWFs:

    Long term horizonHigh returnsDiversified asset class

    SWF investments in Latin Americas infrastructure are modest, compared to otherregions. Between 2006-2009, the trend is increasing.

    SWFs, as other investors, want to reduce PPP-related risks

  • Gracias

    www.oecd.org/dev

    http://www.oecd.org/devhttp://www.oecd.org/dev