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Citi Perspectives for the Public Sector
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2015 – 2016
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keeping performing projects in their books
to maturity is key to the development of the
institutional investor ecosystem.
Managing currency risk
Currency risk is a key concern among
institutional investors when considering
investments in emerging markets.
Infrastructure projects are particularly sensitive
to exchange rate fluctuations, given the
mismatch between costs and debt in foreign
currency, typically USD, and local currency
revenues. The ongoing devaluation of many
Latin American currencies, including those
of Brazil, Colombia and Mexico, which have
large-scale infrastructure investment programs,
makes this risk even more relevant. DFIs, ECAs
and governments are generally better-suited
to take or guarantee currency risk, whether
through specific currency risk mitigation
products or by accelerating the development of
the local derivatives and capital markets.
In the short term, DFIs and ECAs could provide
currency risk mitigation instruments. The
Multilateral Investment Guarantee Agency, for
example, used its Non-Honoring of Sovereign
Financial Obligations product to guarantee
a hedging arrangement entered by the
Government of Senegal to cover against foreign
currency risk on a sovereign Eurobond, which
was used to finance infrastructure assets.
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In the medium term, an adequate regulatory
framework that allows the development of
local currency long-dated swap markets can
mitigate exchange rate risk in the absence
of a developed local capital market. The
development of local capital markets is a
significant long-term challenge that requires
financial, macroeconomic and legal reforms,
and goes far beyond the realm of infrastructure.
Ensuring access to best practices
Project structuring knowledge is currently
scattered among stakeholders in the
infrastructure space, creating a disjointed
market and reducing the opportunity to
leverage best practices at all stages of the
project cycle. Bringing together knowledge
about project preparation, financing and
execution into a regional knowledge clearing
house should help make projects more
attractive to different sources of financing.
Institutional investors would benefit from
increased data transparency allowing them
to analyze risk in the context of an asset
allocation model; and governments would be
able to leverage successful practices around
procurement, permitting, public–private
partnership models, and contracts, bringing
regulatory predictability to bidding processes.
There are multiple initiatives underway around
the world to tackle this knowledge-sharing gap.
The Global Infrastructure Hub (GIH)
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is the most
recent effort to create a knowledge-sharing
platform to bring together governments, DFIs,
international organizations and the private
sector. The GIH will develop a network to share
information about projects and financing
options, address information gaps, build the
capacity of government officials and match
projects to potential investors. The West Coast
Infrastructure Exchange (WCX)
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in the United
States and Canada serves a similar purpose at
a regional level. The WCX was created by the
states of California, Oregon, Washington and
British Columbia to foster innovative solutions
to advance a new infrastructure model.
Important advances have been made in
addressing many of the issues that prevent the
proper flow of long-term financing to long-term
needs in the infrastructure space. However,
improved alignment is required among key
infrastructure stakeholders in order to find
scalable template solutions. Citi continues
to work in partnership with stakeholders,
including DFIs, ECAs, institutional investors and
governments globally, to advance the dialogue
about infrastructure financing and design
solutions that reflect the needs and realities
of the market.
6
Multilateral Investment Guarantee Agency, “Annual Report 2012”, p. 21 www.miga.org/documents/AR2012_English.pdf;
last accessed 09/18/2015
7
http://globalinfrastructurehub.org/; last accessed 09/18/2015
8
http://westcoastx.com/about/; last accessed 09/18/2015
Citi continues
to work in
partnership
with
stakeholders,
including DFIs,
ECAs,
institutional
investors and
governments
globally, to
advance the
dialogue about
infrastructure
financing and
design solutions
that reflect the
needs and
realities of
the market.