New infrastructure fund, project bonds on the menu for G20

Antonia Oprita,, 21.05.2013
Participants in the G20 meeting in September will receive proposals to kick-start a special fund for budding infrastructure projects, according to the head of a special task force

Kirill Dmitriev, the CEO of Kremlin-backed fund RDIF and chairman of the B20's business group taskforce on investments and infrastructure, created during Russia's presidency of the G20, said the proposals came as a result of a meeting with more than 50 institutional investors, capital markets specialists and operators of international infrastructure projects who gathered in London on Tuesday.

"We discussed project bonds and project finance at length. Project finance is one of the fastest, the most interesting growth areas in the market because governments are trying to figure out how to securitize cash flows and how to make sure that projects get done," Dmitriev told Emerging Markets after the meeting.

"There was a clear understanding that that is a growing market, a very interesting market. Canada has done very well there. This is a huge opportunity."

Asked whether his fund – created in 2011 to make equity investments mainly in Russia – would invest in such a project bond, he said: "We would consider it."

During a media briefing after the meeting, which was held at the EBRD headquarters in London, Dmitriev said that consultancy company McKinsey estimates $57 trillion would be invested in infrastructure between 2013 and 2030, but that there were many challenges ahead.

"There is huge inefficiency in being able to finance the first steps of the projects, when the project documentation is prepared," he said.

Governments in emerging markets want to build infrastructure such as roads and power plants but need money for the documentation and feasibility studies for these projects in order to bring them to the attention of investors. The amounts needed can vary between $500,000 and $1 million or even more, depending on the complexity of the project.

"That money typically is very difficult to find," Dmitriev said. "This is a simple market inefficiency. Investors find it too risky at this stage."

"We are making a recommendation to create a joint [G20] fund to fund this kind of inefficiency."

He noted that while in Western Europe more than half of infrastructure spending came from private capital, in developing countries the participation of private investors was much smaller – only 17% in Asia, 35% in Latin America and 27% in Eastern Europe according to analysis by Ernst & Young.

The main reason were the higher risks associated with the mostly Greenfield nature of investment in infrastructure, poor corporate governance and changing market rules.

Other recommendations to the G20 will be removing barriers from the free flow of capital to help cross-border investment activity, strengthening capital markets to enable them to create the instruments to bring private capital into infrastructure and the application of best practices, he added.

Thomas Maier, managing director for infrastructure at the EBRD, said that the problem was not just financing, but "bringing the big infrastructure projects to the market," and this is a process that would take time.

"There is no silver bullet. Infrastructure is a business where you have to walk before you run," he said.

Earlier this month, EBRD President Suma Chakrabarti told Emerging Markets that the bank was trying to involve institutional investors such as pension funds and sovereign wealth funds in co-financing projects in infrastructure in its countries of operation.

At the beginning of May, Asian Development Bank President Takehiko Nakao said in an interview that low interest rates hindered investment and the bank was looking for additional sources of funds if it is to maintain recent annual lending levels of around $10 billion.

Participants at the ADB meeting in Delhi discussed about creating a new infrastructure funding bank for Asia.