In March 2013 the European Commission published a green paper on the long-term financing of the European economy in order to initiate a broad debate about how to foster the supply of long-term financing and how to improve and diversify the system of financial intermediation for long-term investment in Europe. The Commission requested responses to a series of questions in the Green Paper, in order to assess the barriers to long-term financing, with a view to identifying possible policy actions to overcome them. This paper presents the answers of EDHECinfra to the questions of the green paper.
In March 2013 the European Insurance and Occupational Pension Authority presented the preliminary findings of its analyses into the regulatory capital requirements for insurers’ long-term investments in certain asset classes under the Solvency II regime. Infrastructure financing and other long-term financing through project bonds and other types of debt and equity were included for consideration. EIOPA sought responses to the findings in order to help produce well informed recommendations on the design and calibration of the standard formula in relation to the asset classes considered. This paper presents the answers of EDHECinfra to the questions of the discussion paper.
The paper highlights a recent research quandary with respect to infrastructure equity investment which has also been a source of interrogation for final investors: while the economics of underlying infrastructure investment suggests a low and potentially attractive risk profile, the experience of investors and available research evidence have been different and rather mixed.
This paper attempts to explain why this has been the case and what new research and benchmarking efforts are necessary to create investment solutions that realign expectation and observed investment performance as well as to inform the regulatory debate in relation to institutional investing in long-term assets like infrastructure equity.
In February 2012, EDHECinfra responded to the UK Treasury’s Call for Evidence about the reform of the Private Finance Initiative (PFI) with a particular reference to the opportunity for pension funds to invest in infrastructure assets. In this publication, we extend our response to the issues relating to pension fund investment in social infrastructure. Social infrastructure investments have by design the characteristics that pension funds find attractive in a liability-driven investment context: long-term contracts with steady and predictable inflation- linked income, high operating margins and high risk-adjusted return. Social infrastructure also corresponds to the bulk of the assets procured under PFI.
Theoretical literature suggests higher asset construction costs in a public private partnership (PPP) than in traditional public procurement, due to the bundling of construction and operation and the transfer of construction risk, among other factors. Data on ex ante road construction prices in Europe suggest a PPP road to be 24% more expensive than a traditionally procured road, ceteris paribus. This estimate resembles reported ex post cost overruns in traditionally procured roads. Thus, the public sector seems to pay a premium on ex ante PPP construction contract prices mostly to cover construction risk transfer. Other reported sources of higher PPP road construction costs, including bundling, seem on average of lesser importance.
This paper offers an updated description of the macroeconomic and sectoral significance of PPPs in Europe, without assessing PPPs from a normative perspective. It shows that, over the past fifteen years, more than one thousand PPP contracts have been signed in the EU, representing a capital value of almost 200 billion euro. While PPPs have in recent years become increasingly popular in a growing number of European countries, they are of macroeconomic and systemic significance only in the UK, Portugal, and Spain. In all other European countries, the importance of investment through PPPs remains small in comparison to traditional public procurement of investment projects. However, PPP procurement is used extensively for major projects and this is spreading out from transport into other sectors.
This paper uses a new dataset, “WATSAN,” of Private Sector Participation (PSP) projects for water and sanitation in developing countries to examine the determinants of the number of projects signed per country between 1990 and 2004. The new dataset improves on existing sources in particular in its coverage of projects with local investors and provides adequate data for cross- country regression analysis. We use a negative binomial regression model to investigate the factors influencing the number of PSP projects in a sample of 60 developing countries with 460 PSP projects. The regression results provide support for the hypotheses that PSP is greater in larger markets where the ability to pay is higher and where governments are fiscally constrained. We test several indicators of institutional quality and find that these are generally significant in determining the number of projects signed per country. Measures of the protection of property rights and the quality of the bureaucracy emerge as the most important institutions that encourage PSP. Rule of law and the control of corruption are significant, albeit at a lower level, while the quality of contract law and political stability are not robustly significant.