Pension funds for infrastructure

Pooling investments for emerging markets

A gigantic problem bedevils efforts to harness development funds for much-needed infrastructure investment in emerging markets. Massive volumes of financial resources controlled by pension funds and other long-term financial institutions around the world are held back from investment in developing countries because of fears of unmanageable political risk. But improvements could be on the way if the precepts of an ‘eminent persons group’ assembled by the G20, due to report in coming weeks, are properly implemented.

The 16-strong group chaired by Tharman Shanmugaratnam, Singapore’s deputy prime minister, will recommend greatly expanding political risk insurance already covering areas of lending by the World Bank and affiliated agencies.

The group, linking former government ministers, central banking officials and other financial experts from advanced and developing countries, is speaking to private sector reinsurance companies about bringing their additional expertise and financial clout into the initiative.

The strategy involves building on the 30-year-old model of the World Bank Group’s Multilateral Investment Guarantee Agency. MIGA has issued more than $28bn in political risk insurance for projects in a wide variety of sectors, and is aiming for 40% growth in the next few years.

Widening MIGA-like schemes to a broader swathe of institutions investing in emerging markets could be part of an ambitious worldwide platform covering both bilateral and multilateral capital flows to these countries.

The Shanmugaratnam plan will propose setting principles for emerging market investments in fields ranging from environmental and governance standards to procurement and debt sustainability. The aim is to make such engagement more palatable to conservative pension funds and other risk-averse public and private sector institutions.

Analysts view offering private sector institutions pooled investment schemes across a diversified set of countries grouping different geographies, income areas and sectors as critical to lowering risks and galvanising greater flows to these nations.

By pooling forces, governments and private sector organisations make emerging market infrastructure investments substantially ‘safer’ for private investors. This would lower required financial returns on these projects from current levels of above 20% to a more acceptable range of 11%-13% offered by developed markets.

A joint platform covering both bilateral and multilateral flows to emerging markets is seen as essential for building investment in these countries, since bilateral financial flows (decided often on specific national grounds) greatly exceed annual multilateral commitments. Experts regard risk insurance, provided under government-backed schemes under which public sector bodies in the advanced economies take the ‘first loss’ from any political setbacks, as vital to building confidence in such investments.

Subdividing investment tranches between the relatively high-risk project build-up stage over the first decade, and subsequent more settled implementation periods, is another method to increase such engagements’ attractiveness.

The International Finance Corporation, the private sector lending arm of the World Bank Group, has already pioneered such schemes. They are also being scrutinised by the European Bank for Reconstruction and Development, which is considering extending its activities into sub-Sharan Africa.

The Shanmugaratnam group was set up in April 2017, and has held eight meetings around the world to prepare its findings. It will issue its report on global financial architecture and governance, including on boosting private sector capital flows to emerging markets, in time for the annual meetings of the International Monetary Fund and World Bank Group in Bali in October.

Governments and investors have been stepping up efforts to guide the world’s surplus of income-seeking investable funds down the infrastructure route. The Shanmugaratnam group’s proposals represent an attempt to join forces among three categories of officialdom that rarely speak to each other: government investors, donors and project sponsors.

Global Public Investors (, including the world’s sovereign funds and public pension funds, together with central banks, command around $36tn of investable assets. Many of these institutions are seeking higher returns in ‘alternative’ assets like infrastructure, including green financing instruments.

Government guarantees from Nordic donors are already helping catalyse the IFC’s ‘managed co-lending portfolio programme’, allowing official and private sector institutional investors access to the IFC’s emerging market loan portfolio. Donors’ involvement in a World Bank loan guarantee facility is helping the Bank to recycle older loans, transferring them to private sector creditors. Under the Shanmugaratnam group initiative, such ideas could gain momentum across a still wider stage.

David Marsh is Chairman of OMFIF.

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