who can and should finance infrastructure? lessons from...
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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
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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
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Financing the Infrastructure Gap:Private and Public Alternatives
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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
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Actual versus Required Infrastructure Spending in LAC (% of GDP)
Source: Serebrisky et al., IDB, 2015.
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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).
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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
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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
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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
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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
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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
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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)
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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
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Is Foreign Saving the Answer in LAC (and the world)?
Foreign SavingGross National Investment Rate
Domestic Saving% of GDP
Source: ECLAC. Data for LAC.
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Back to Budget:Why it´s still a government problem
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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
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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).
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Source: McKinsey (2013).
Government Share of Infrastructure Investment (in % of total)
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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
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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
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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.
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Conclusions
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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
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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