While some projects in the OECD markets enjoy fierce competition, those in non-OECD markets often struggle to attract any foreign investment at all. This creates opportunities for investors willing to take on the additional risk of the emerging markets. But it also creates challenges for global stability and growth.
To talk more about the decision to invest in OECD or non-OECD markets, Dave Neuenhaus, KPMG’s Global Head of Infrastructure Tax, sat down with Ana Corvalán from Eaglestone Advisory, a UK-based investment advisory firm, Enrique Fuentes from StepStone Group, a global private markets investment firm, and Thierry Deau (@meridiam_news) from Meridiam, a global private investment firm.
Dave Neuenhaus (DN): What will it take to drive infrastructure investment to non-OECD markets?
Thierry Deau (TD): At the project level, there needs to be more focus placed on project preparation and development, particularly in building up capacity on the government side. But with the right structuring and a strong set of risk mitigation products — such as the Multilateral Investment Guarantee Agency’s (MIGA) political risk insurance —these markets can be just as attractive to investors as their OECD equivalents.
Enrique Fuentes (EF): For governments, I think the next challenge is to create a very clear and visible pipeline of well-developed projects, preferably prioritised across departments and government units that will be attractive to international investors. At the same time, efforts must be made to simplify the legal and regulatory environment for foreign investors. It’s all about reducing complexity and making it as easy as possible for investors.
Ana Corvalán (AC): I certainly agree that there is a strong need for governments to develop a robust pipeline and build key capabilities. I think investors are looking for political and economic stability (including a sound foreign exchange (FX) policy to minimise FX and transferability risks), as well as a simplified legal system and regulatory framework with a view to making infrastructure investment attractive — be it foreign or local. Local pension funds and other institutional investors can also be key in securing a steady investment flow in the sector.
DN: Should non-OECD markets be trying to emulate the frameworks found in the developed markets?
EF: I certainly believe there are elements that can be borrowed. But there are also differences and peculiarities that must be recognised in each market. Some may be very interesting — those without incumbent operators, for example, have an opportunity to take a much more flexible and creative approach to developing frameworks adapted to new technologies for their market.
TD: I might go one step further and suggest that OECD countries may also have much to learn from non-OECD markets. South Africa and Morocco have both created very compelling models for steering the development of their renewables markets, where some other OECD markets have failed. I think ideas could be shared both ways.
AC: I think the energy sector is a really good example where some non-OECD countries are creating unique solutions to big challenges like the lack of grid connectivity across most of sub-Saharan Africa. So, in some sectors, there might not be a standard model to follow. In other sectors, particularly transportation and accommodation, some non-OECD markets such as Peru and Colombia are seeing success in emulating the Canadian and Australian frameworks.
DN: How can investors and other players help improve the investment climate in non-OECD markets?
AC: In some markets, it can be difficult. I’ve been quite focused on Sub-Saharan Africa recently and it is clear to me that there is a need for development finance institutions (DFI), multilaterals and other government initiatives to help channel investments into the region, until a more stable investment climate can be observed.UK Trade and Investment, for instance, is focused on opening doors to UK based companies in the region whether for trade or investment. The Department for International Development is making a mark on the water sector in Southern Africa(Southern African Development Community region), and a number of European DFIs have been helping public and private sector companies and financial institutions to channel liquidity with equity and debt. Their presence helps attract commercial banks and private sector investors where needed, though not to the sufficient degree the region needs. Equally important, Disbands multilaterals are also introducing the concepts of additionality and sustainable development which should be considered in markets aiming to achieve a stable investment climate.
EF: Personally, I think that International Financial Institutions will need to play the greatest role in unlocking investment into non-OECD markets by better covering certain risks which cannot be managed efficiently by investors and developers. For example, while we already have a form of insurance against political risk through MIGA, it is very rigid and only works when a default has occurred. What is needed are mechanisms by which multilaterals can underwrite government payment obligations in public-private partnership contracts, as well as standardised mechanisms to help investors manage currency risk. That would reduce one of the biggest barriers to investment in non-OECD countries and would make the investment case much clearer for foreign investors.
TD: We believe that, as investors, we can help bring better organisation to the project preparation and development phase in non-OECD markets. We spend a lot of time working in partnership with public authorities in places like Africa to essentially ‘invent’ new projects by helping to steer the procurement and development process. The approach certainly creates new challenges, but it also comes with significant benefits — both financial and non-financial.
DN: Are there particular non-OECD markets worth watching?
EF: As Ana mentioned, Peru and Colombia are both very exciting markets to watch and both seem to be on track to join the OECD group in the future. Peru has a centralised management agency and a good framework that is transparent with a strong track record of successful utilisation. They also have a strong pipeline that is well articulated. These types of factors make a market worth watching.
AC: There are also a number of exciting markets in Africa — Ivory Coast, Kenya and Rwanda are great examples. Ethiopia and Uganda are making efforts too and getting there. Ghana has an interesting pipeline of projects and with the recent change of government there are hopes of a better managed fiscal budget which should lift concerns regarding the International Monetary Fund’s guard on the economy. It is worth watching the region.
TD: We also believe that Africa is one of the most attractive regions today, followed closely by Latin America. But each opportunity must be weighed appropriately. For example, Latin American markets boast some of the lowest default rates for project finance transactions, but they also suffer from a lack of project development capacity.
DN: Political rhetoric in some of the developed markets suggests that a new wave of infrastructure investment will soon be underway within the OECD. Will this influence the outlook for non-OECD markets?
AC: I certainly worry that it will. I think many investors have been drawn into emerging markets due to high competition in mature markets. If spending on infrastructure increases in the OECD — particularly given today’s fiscal deficits — I think investors will start to question why they would want to take on the risks in an emerging market when they can get reasonable returns unstable markets.
EF: I would absolutely agree. But I would also argue that there is a limitation to how much new infrastructure is needed in the OECD markets versus the non-OECD. You can’t create another 20 percent growth in air travel in the developed markets just by building new airports. But 20 percent growth is just the low end of the expectation for some emerging markets in Latin America and Asia. And investors always like growth.
TD: I think that the non-OECD markets will represent a valuable and complementary investment opportunity for infrastructure investors. We firmly believe that someone-OECD markets will continue to deliver healthy premiums for those with the tenacity and the development skills necessary to succeed in the emerging markets. But remember that not all emerging markets are created equal.
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