www.ifc.org/ThoughtLeadership Note 36 | April 2017 Mobilizing Institutional Investments into Emerging Market Infrastructure The infrastructure financing gap remains a critical global challenge for sustainable development. New thinking and innovative financial models are needed in order to mobilize more private capital to infrastructure investments. IFC’s new Managed Co-Lending Portfolio Program for Infrastructure seeks to address numerous infrastructure financing challenges that inhibit the flow of resources to emerging markets. The program provides an innovative model for mobilizing financing for infrastructure projects that combines financing from insurance companies, project origination and credit enhancement from IFC, and support from public sector donors. Infrastructure investment plays a crucial role in fostering sheets. At the same time, new liquidity rules and a narrower economic growth and has been proven to promote other focus on core markets has led to a reduction in long-term development priorities such as improved economic lending from large international commercial banks that were opportunities and life outcomes for the very poor, reduced previously active in this market. Local capital markets, inequality and increased labor force participation by women. meanwhile, face high costs of capital, unsophisticated actors, However, infrastructure continues to face numerous financing limited scale, and low financial depth. As a result, there is a challenges that have resulted in a wide and persistent dwindling supply of financing to meet an ever-expanding infrastructure gap, particularly in developing countries. demand for infrastructure. The Managed Co-Lending Portfolio Program (MCPP) for Historically, the primary platform for mobilizing third-party Infrastructure was developed to address these challenges. As an financing into IFC loans has been through syndicated lending. innovative debt product it is designed to leverage IFC’s Since inception this method has managed to mobilize over $50 experience and expertise in emerging market investments, as billion, with approximately half of those funds flowing to well as IFC’s track record in structuring and managing a infrastructure. Given the increasing demand, however, this globally diversified infrastructure portfolio, in order to unlock traditional approach will not suffice to satisfy future needs, and institutional investor financing for infrastructure in emerging additional sources of financing are required. market economies. One large, untapped source of debt financing for infrastructure Untapped Institutional Investor Financing investment in emerging markets comes from institutional investors that control deep and rapidly growing pools of assets Emerging markets will require a significant increase in with enormous potential to transform the infrastructure infrastructure investment in coming years to facilitate economic financing landscape. In OECD countries, total assets under growth, to respond to demographic and urbanization pressures, management by “traditional” institutional investors more than and to meet sustainable development goals. Current doubled from 2000 to 2011, from $36 trillion to $73.4 trillion.1 infrastructure investment amounts to approximately $1 trillion per year, an amount that will need to triple annually over the This potential, however, has largely not translated to significant next decade to meet the unmet demand for infrastructure. investments in emerging markets infrastructure, even though institutional investors are active participants in infrastructure Public finance remains a significant lending source for financing in advanced economies. The exceptions to this trend infrastructure, yet many governments are facing fiscal pressure have been very large scale projects in upper middle-income and are looking to reduce, rather than expand, their balance countries (China, Turkey, and Brazil, for example), where the scale justified developing a tailored credit reviewing expertise, The newest iteration, MCPP Infrastructure, adapts the MCPP and where the risk profile was in line with the risk–return model to the needs of institutional investors with an explicit appetite of institutional investors, in particular their preference interest in investing in infrastructure. In addition, in order to for investment-grade assets. provide investors with an investment-grade profile, IFC provides credit-enhancement through a first-loss tranche. Issues such as regulatory uncertainty, project bankability, the lack of data about asset performance, and the institutional It is estimated that IFC will be able to leverage ten dollars of capacity of procuring governments are gating constraints that, institutional financing for each dollar of IFC money invested in while complex, can be overcome through use of appropriate the first-loss tranche. policy levers. A steeper challenge is to convince investors to participate in a broad range of projects across sectors and The first phase of the MCPP infrastructure initiative will countries. The absence of a track record makes it difficult for involve partnerships with two to four investors, with a goal of investors to decide on target return and asset allocation, while raising between $1.5 billion and $2 billion, with a subsequent the risk profile is usually sub-investment grade, and therefore scaling up of the model to mobilize additional volumes. Up to outside the risk appetite that dominates the bulk of institutional $5 billion is expected over the next three to five years. balance sheets. In addition, the absence of local expertise in smaller markets makes individual credit review impossible or How it works excessively onerous for projects outside of a few large middle- Through MCPP Infrastructure, external investors will be able income countries. to deploy additional debt financing to support infrastructure projects that IFC originates and approves for investment. The MCPP Infrastructure process is objective, largely mechanized and transparent, and The MCPP Infrastructure initiative was specifically developed was designed to maximize efficiency. in close collaboration with leading insurance companies and other development partners to address these challenges. The Investors commit a certain amount of money in advance, to be approach follows from, and builds on, an established IFC invested alongside IFC funds within certain country and sector syndicated loans platform—the original Managed Co-Lending limits. In exchange, IFC shares with MCPP investors its full Portfolio Program that was launched in 2013. In the original pipeline of infrastructure projects, without the ability to cherry- program, IFC received an allocation of $3 billion from China’s pick projects. As a result, IFC and the borrower get certainty of State Administration of Foreign Exchange, SAFE, in a “blind financing upfront, while investors get to benefit from IFC’s 60- pool” approach. SAFE co-invested with IFC in every loan year track record of investing in emerging markets around the committed by IFC for its own balance sheet over a period of world, from IFC’s global infrastructure expertise, and from five years, subject to concentration limits. IFC’s local knowledge and presence in over 100 countries. The MCPP platform essentially provides investors with a The eligible infrastructure projects will be in the power, water, diversified portfolio of loans that mirrors IFC’s own, similar to transportation, and telecoms sectors, all of which provide the that of an index fund. This allows investors to benefit from stable, long-term cash flows that investors demand. Crowding IFC’s unique diversification across countries and sectors. in a new pool of institutional investors and funneling them toward these projects will create a powerful demonstration This publication may be reused for noncommercial purposes if the source is cited as IFC, a member of the World Bank Group. model that, when scaled, can help close critical infrastructure return profile of IFC’s investment, the Sida guarantee also gaps in emerging markets. significantly reduces IFC’s capital requirement for the first-loss tranche, thereby freeing up capital that can be used to replicate Key Partnerships and scale up the model. IFC has developed the MCPP Infrastructure approach in collaboration with institutional investors who have devoted The Sida team has actively participated in the design of the significant time and resources to creating the structure. In guarantee to ensure that it covers only investments that fit with addition to meeting the risk-return requirements of the Sida’s own strategic priorities. This arrangement of sharing the investment itself, these first movers also require additional risk on a subset of assets in the portfolio means that further return to compensate them for bearing these first-mover costs. variations on the model could see the use of donor support for high-priority strategic portfolios, such as the world’s poorest In setting up this first phase of the MCPP Infrastructure countries, fragile and conflict states, or climate financing. With initiative, IFC was able to benefit from the partnership and greater cooperation between multilateral and bilateral support of the Swedish international Development Cooperation development finance institutions, in structures similar to the Agency (Sida) which provides a guarantee on a portion of IFC’s IFC-Sida arrangement, new and innovative solutions can be first loss position in exchange for a guarantee premium. This scaled up and expanded in high developmental priority areas or helps to mitigate some of the volatility and improve the risk- more challenging markets. return profile of IFC’s investment. In turn, IFC provides a more attractive return to the private sector investors, ensuring their Value Add and Impact cost recovery and further encouraging their participation as first The main impact of the MCPP Infrastructure initiative is to movers under this structure. In addition to improving the risk- establish a new model to mobilize financing for infrastructure This publication may be reused for noncommercial purposes if the source is cited as IFC, a member of the World Bank Group. projects, one that combines financing from private sector that is proven to work and stand on its own would be extremely investors, origination and credit enhancement from IFC, and valuable from a developmental standpoint, in view of the support from public sector donors. overwhelming financing requirements—with institutional capital in a critical role—for developing sustainable The successful implementation of the model will provide infrastructure on a global basis. developmental benefits in two ways. First, directly through the financing of critical infrastructure projects in emerging markets and low-income countries, enabling these projects to reach Kopo Mapila, Consultant, Thought Leadership, IFC financial close on shorter lead times and at much lower (kmapila@ifc.org) transaction costs. This will accelerate the development of sustainable infrastructure in emerging market economies and Morten Lauridsen, Senior Economist, Thought Leadership, low-income countries. IFC (mlauridsen@ifc.org) Second, indirect benefits can be expected through a Carl Chastenay, Senior Syndications Officer, IFC, demonstration effect. The possibility of scaling up a structure (cchastenay@ifc.org)  1 Celik, Serdar, and Mats Isaksson. 2014. “Institutional Investors and Ownership Engagement.” Organization of Economic Co -operation and Development. This publication may be reused for noncommercial purposes if the source is cited as IFC, a member of the World Bank Group.