Climate Change Capital

Specialist Investors & Advisors – We advise and invest in companies that recognise the economic opportunity associated with sustainable, resource efficient, low carbon growth

Protecting emerging markets infrastructure investment against volatile capital flows

As interest rates are expected to rise in the US and the UK next year, and as monetary policy normalisation might also reach Europe in the mid-term future, there is a risk that capital flows into emerging economies will reverse. But emerging economies will be crucial to win or lose the battle against climate change. We therefore need to find new ways in which excess international capital can be converted into domestic capital in emerging economies. This paper argues that the New Development Bank and other international financial institutions should create an emerging markets infrastructure company that can do just that – convert excess capital into patient capital and become a self-sustaining source of financing for emerging market infrastructure.

The investment challenge for infrastructure is immense in emerging economies. An additional US $1 trillion is required every year in order to meet the needs of a growing and urbanising population, and an additional US $200-300 billion needs to be deployed every year to make this investment low-carbon (World Bank: 2013b).

The good news is that there is an enormous amount of capital that is idle or not invested to its full potential. Pension funds and insurance companies around the world have recently announced that they will help finance more low-carbon investment. Despite the low-interest rate environment, much capital is flowing into “safe investments” like government bonds from sovereigns with attractive credit ratings, while investment by pension funds and insurance companies into listed equities has been steadily decreasing (Group of Twenty: 2013). The average of funds raised through initial public offerings (IPOs) in OECD countries in the decade up to 2011 fell to about USD 129 billion from USD 164 billion. In emerging economies, the amount of funds raised through IPOs has been much more sizeable and already exceeded the amount of funds raised in OECD countries in that decade (OECD: 2013).

There is an enormous appetite for investments with attractive risk-return ratios, in particular by investor types that seek out stable yield over decades and that can benefit from a more favourable match between liabilities over decades and assets that yield returns over similar time spans. Real assets are increasingly sought after as they offer higher returns than similarly rated corporate or sovereign bonds.

The investment appetite for infrastructure investment should therefore be at historical highs. However, investment levels still fall significantly short of needs, especially in emerging economies – despite a recent surge in infrastructure investment in those economies (Oxford Economics: 2014). Moreover, syndicated loans as a traditional source of financing for emerging economy infrastructure have been greatly decreasing as European banks deleverage due to regulatory requirements, and especially due to lower willingness to take on perceived risk (Group of Twenty: 2013). Nevertheless, there is a significant amount of activity around infrastructure private equity funds and project financing vehicles. Institutions are increasingly recognising emerging market infrastructure as an attractive asset class, provided they are willing to commit their capital for the long term.

There are unique characteristics to infrastructure investment in emerging economies that merit a closer look at what is necessary in order to fill the infrastructure financing gap in those economies.

The paper will first look at the unique ways in which infrastructure in emerging economies is funded – since many infrastructure projects do not create sufficient revenue to cover project costs, the government needs to make arrangements for covering the incremental cost of those projects. The paper will then look at the unique nature of capital markets in emerging economies and at the unique ways in which infrastructure isfinanced (World Economic Forum: 2014). It will thirdly appraise existing financing models and funding arrangements in terms of their success in triggering low-carbon investment, and propose actions to accelerate renewables deployment in the emerging economies. It will argue that if two crucial issues – scale and liquidity – are addressed, renewable energy investment can be greatly accelerated and existing funding arrangements more fully utilised. This would help to safeguard investment against reversing capital flows as interest rates in the US and UK rise. Multilateral development banks and other providers of patient capital can help create an industrial-scale emerging markets infrastructure company with experience in emerging economy project development and finance that can access large amounts of listed equity investment to take advantage of high growth potentials.

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This BLOG  looks at pensions and their impact on what are called Public Private Partnerships or P3’s these are not really about private funding at all but about two streams of public funding, pensions and government with private capital a third partner.
We will also deal with other pension matters, such as Defined Contribution Plans (DC) vs Defined Benefit (DB) PLANS, the weakness in private plans, the need for pension reform in public pensions to have shareholder rights, directorships and ethical investment directives and policies. 
Finally taking the long view we will show how these funds are forms of evolving social capital that is dominating private capital as we evolve into socialization of capital. 
Click HERE to read more....