2018 FEMM: Co-Investment: Attracting Long-Term Infrastructure Investment In The Pacific

25-27 April 2018
Koror, Palau
Co-Investment: Attracting Long-Term
Infrastructure Investment In The Pacific
Summary of Issue
This paper has been prepared by the Pacific Investment Forum. It seeks to outline the issues related to Sovereign Wealth Funds, Social Security and Pension Funds, and Provident Funds, which together make up the Pacific Investment Forum, and their relationship to investment opportunities in infrastructure across Pacific Island Countries. It also seeks the support of Forum Economic Ministers to identify investable infrastructure opportunities across Pacific Island Countries, which could attract collaboration between governments and members of the Pacific Investment Forum.
  1. Introduction
  2. This paper outlines alternative arrangements within the Pacific region to attract long-term institutional investors into infrastructure finance and development.


  1. Background
  2. Private institutional capital is willing to fund infrastructure for several fundamental reasons. The foremost drivers are distinctive risk and return characteristics that separate infrastructure investments from other asset classes that institutional investors typically allocate capital to. Infrastructure assets can have a diversifying impact on an investment portfolio as a whole.


  1. The defining characteristics of infrastructure should include stable, inflation-linked cash flows from long-lived assets and long-term contractual arrangements, and the low correlations with equity markets.


  1. In the Pacific, it is well-acknowledged that the infrastructure gap is large, and expanding. It is a severe barrier to growth and development in both developed and emerging economies. In the face of demand for access from investors and a pressing need of governments to secure funding for infrastructure development, bridging the gap has become ever more urgent.


  1. However, attempts to bridge the gap often fail for a myriad of reasons. These include inadequately specified risk-sharing arrangements between governments and private capital, weak contractual provisions and performance, and surprise regulatory imposts. With infrastructure assets being public goods, and more often than not essential in nature, the failure or poor service performance, or price shocks, from individual infrastructure assets erode public support for the participation of private capital in this space.


  1. This document summarises measures that governments can take on, to attract and retain stable, long-term, financing for infrastructure development. The analysis is adapted from work by the World Economic Forum, – Focusing Capital on the Long Term and analysis by the New Zealand Institute of Economic Research[1].


  1. Priorities for Pacific governments, in order to secure private sector financing, relate to areas outlined in section B of the table below, where an emphasis is placed on certainty and predictability of regulation, tax, approvals and procurement policy. However, section D1 of the table should also be considered carefully, as the cost of preparing bids is significant for the limited resources of Pacific sovereign wealth, provident and social security funds.  Wherever possible, it is wise therefore to consider pre-competitive tender processes and project awards that enable short-term due diligence cost reductions.


Section An Infrastructure Blueprint for Governments
A. Strategic Vision       A.1 Develop an integrated infrastructure pipeline
·         Long-term vision should inform project prioritisation
·         Regular project stream encourages investors to build local expertise and capacity
·         Providers of capital can benefit from economies of scale on due-diligence
A.2 Clear and viable role for investors
·         Identify projects that benefit from private sector finance and are politically feasible
·         Ensure a representative selection of infrastructure investments are available to allow meaningful exposure to the access
·         Ensure there is a meaningful mix of transaction sizes and characteristics to fit investor preferences
     A.3 Communications strategy
·         Provide comprehensive public disclosures of costs and benefits for each project to all parties: government, investors, and public
·         Demonstrate there is a public willingness (or at least acceptance) for private sector investment
B. Policy and regulation      B.1 Limit re-negotiation risk
·         Protect investors from regulatory/administrative changes for more competitive bids
     B.2 Standardised procurement process
·         Standardise bidding and award processes, and documentation across projects
·         Develop a decision framework that accounts for investment as well as social returns and wider economic benefits
     B.3 Predictable project approvals process
·         Clear project roadmap detailing environmental consents & other approvals
·         Reduce uncertainty over planning and approvals timelines
     B.4 Tax policy
·         Ensure a stable and bias-free tax policy across the investor base, this may require improved tax treaties and mutual recognition across island states
C. Value proposition      C.1 Assess financial returns for investors
·         Provide consistent and market-oriented risk-return forecasts and benchmarks
     C.2 Risk allocation
·         Develop a consistent framework to divide and allocate all project risks/returns between government and investors, with minority protections
     C.3 Market sounding
·         Gauge interest and collect feedback on past/future projects, with experienced operators
D. Process Execution D.1 Invite long-term capital
·         Pursue competitive tenders when a project demands it
·         However, also recognise that off-market contracts can create opportunities for vendor and investor to reveal information to mutual benefit and build a relationship that is sustainable across multiple transactions. Ensure transparency for public support. Consider pre-competitive tender processes and project awards that enable short-term due diligence cost reductions
D.2 Comprehensive information sharing
·         Communication of the pipeline should list all relevant existing and future assets, an indication of the amount of debt and equity sought, the timeline and preferred commercial operating model
·         Develop information packs with information helpful for investors to accurately price risk – preferably via independent third parties (international banks, accounting firms, etc.) to provide assurance on data integrity and reduce investor diligence needs
D.3 Maintain transparency and timely investor engagement
·         Dedicate resource to the process and ensure timely response to investor queries
·         Maintain clear and transparent communication with investors to uphold the professional and commercial image the government wants to project
·         Communicate transparently with the public and other end-users of infrastructure to ensure ongoing public support for participation of private capital
·         Facilitate best-practice governance within a stable regulatory environment


  1. Working Group on Investment in the Pacific


  1. It is proposed that a Working Group (made up of Pacific Investment Forum, PIFS, and relevant technical agencies, as required) be established to identify and resolve the complex practical issues arising from a pooled equity structure drawn from investors across national boundaries. Issues relating to tax, legal mandate and strategy will also need to be explored, and solutions identified for any major regulatory issues arising from same.


  1. It is expected that the Working Group would seek to identify potential investable opportunities that are of sufficient scale/scalability, and long term nature, to attract investment interest from the sovereign wealth, social security and provident funds in the region. Initial sectors for consideration by the Working Group could include but not be limited to telecommunications infrastructure and fisheries.


  1. In addition, the proposed Working Group would need to establish a governance approach/arrangement as well as a pragmatic, workable framework for investment decision making, funding and management approach for the assets.


  1. Pacific Members of the Provident Funds and Social Security Forum in alphabetical order are:

Cook Islands National Superannuation Fund; Fiji National Provident Fund; Kiribati Provident Fund; Nauru Sovereign Wealth Fund; New Zealand Super Fund; Ngāti Awa Group Holdings Limited; Papua New Guinea – Nambawan Super; Papua New Guinea – NASFUND; Samoa National Provident Fund; Solomon Islands National Provident Fund; Tonga Retirement Fund Board; Tuvalu National Provident Fund; and Vanuatu National Provident Fund

  1. There are also a number of other funds in the Pacific region that may also be interested in supporting this initiative.

Pacific Investment Forum
25 March 2018

[1]Adapted from the World Economic Forum’s Infrastructure Blueprint (Infrastructure Investment Policy Blueprint | World Economic Forum) and work by Focusing Capital on the Long-Term (FCLT).

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