Referring to the day’s theme of “Mind the Gap”, Jean-Jacques Barbéris named infrastructure financing as one of the gaps that needs to be addressed. Xavier Musca explained that the financing gap for infrastructure is huge, but that it is matched by a large pool of savings in developed countries seeking investment opportunities with high yields. Institutional investors consider infrastructure a good investment but are still underweighted in this asset class. So the question is how to link the two worlds. The easy – and logical – answer is that MDBs (Multilateral Development Banks) should and are closing the gap: they have been created for that, notably the World Bank at the end of WWII, more recently, the EBRD, and the good news is that these MDBs are doing huge efforts, in order to meet this challenge, notably the EIB. We can also mention the creation of the Asian Infrastructure Investment Bank, Mr. Musca added.

The bad news is that those institutions are under constraint of capital. The question is how we can manage to bring the expertise and the capital from the private sector to the institution, to help them leverage the balance sheet, and to realise the junction between the pool of savings and the needs in the emerging world, and that was the question raised by G20.

INFRASTRUCTURES NEEDS – A HUGE GAP TO FILL

According to the 2017 Global Infrastructure Outlook report of Oxford Economics, the cost of providing infrastructure to support global economic growth and narrow the infrastructure gap between countries will amount to $94 trillion by 2040. Add in the Sustainable Development Goals of universal provision of clean water, sanitation, and electricity, and the total cost rises to $97 trillion. In addition, investment will have to include infrastructure that is resilient to climate change.

The largest gaps are in electricity and roads, with the latter, at $8 trillion, making up more than half of the total global investment gap, and electricity $2.9 trillion. Basic infrastructure such as roads, water and sanitation, and electricity are sorely lacking in many developing countries. About 60% of the world’s population does not have access to the Internet, 1.2 billion people live without electricity, more than 660 million do not have safe drinking water, and one in three lack toilets and are not served by all-weather roads.

WE NEED PRIVATE SECTOR INVESTMENT, POLICY CHANGES, AND STANDARDIZED INVESTMENT SOLUTIONS

Ambroise Fayolle added that there are three challenges. The first is the need to crowd-in the private sector, for which we must invent new financing models. The second involves policy changes to reduce the cost of investment or developing local pension markets to help with financing. And the third is to realize that there is no one-size-fits-all solution for infrastructure financing. The challenges are different in different sectors and geographies.

Concerning financing models, he referred to the Juncker Plan, which is a guarantee fund of 21 billion euros that helps the EIB invest in riskier projects. It has invested 315 billion euros in three years. This kind of scheme is very promising and should be expanded, he emphasized.

Mr. Musca added that, while infrastructure investment is interesting, with long-term, predictable returns not linked to other assets, there are bottlenecks. In four words they are “skill, scale, duration and risk”.

Infrastructure projects are generally very complex, and you need the skills to take master the political and legal environment. It is also difficult to build scale in the portfolio since you work project by project, and durations of over ten years are long for investors used to quicker returns. And finally, there are risks – not just financial, but also legal, political and social. These hurdles are amplified in emerging markets, so institutional investors are not even allowed to buy debt there.

Asked what he expects from asset managers, Mr. Fayolle said “great projects”, although these can be developed jointly. An example is Amundi Transition Energetics, a long-term fund that invests in very small projects, pairing the financial sponsor, Amundi, with an industrial sponsor, EDF. The EIB would like to replicate this, especially to meet climate targets and for greenfield investments, which are the most challenging.

« We have a huge pool of savings in developed countries seeking investment opportunities with high yields. All the surveys show that institutional investors consider that infrastructure investments are good. »

Xavier Musca

« We have a huge pool of savings in developed countries seeking investment opportunities with high yields. All the surveys show that institutional investors consider that infrastructure investments are good. »

Xavier Musca

GREEN BONDS TO LEVERAGE CLIMATE FRIENDLY INVESTMENT

Mr. Musca elaborated on what Amundi can contribute as an asset manager, citing the $1.4 billion green bond fund it is creating with IFC, which will invest in green bonds in emerging markets. It gives offshore investors a return of 5% over seven years and reduces risk through a first loss tranche guaranteed by IFC. Amundi is contributing to the public good through such deals, he emphasized. Most green bonds are issued in developed countries, but the needs for green infrastructure investment are greater in the developing world. Thanks to this mechanism, IFC can deploy more than $2 billion, with just a commitment of $125 million dollars for the first loss provision. This is a great multiplier effect. The second important outcome of the fund is that it helps standardise the issuance of green bonds, with Amundi verifying that they are compliant with the fund’s standards, obviating the need for investors to do so.

« We need to always be aware that there is nothing like ‘one-size-fits-all’; challenges are different in different geographies, and we need to find ways and products that will adapt to local circumstances. »

Ambroise Fayolle

« We need to always be aware that there is nothing like ‘one-size-fits-all’; challenges are different in different geographies, and we need to find ways and products that will adapt to local circumstances. »

Ambroise Fayolle