5.3.1. The most significant capital markets potential for PPP in the Eurozone appears to be in the Netherlands. The Netherlands has a substantial pension scheme, a large portion of which is managed by APG and its affiliates. There is approximately €670 billion under management, which cover both public and private sector employ-ees. APG has invested in infrastructure (not only PPPs) and has expressed interest in broadening its activities in this area.
5.3.2. In contrast to the UK investor focus on project risk allocation, the main driver for APG is inflation protection, in keeping with its focus on pension asset management. Inflation index-linked sovereign debt has been issued in a number of countries, providing a benchmark for pricing other inflation-linked debt. The Dutch govern-ment, however, has not issued index-linked debt, which gives rise to a point that will have be addressed in many countries: which inflation index should be used? The government benchmark bond is critical to investors because to create liquidity for the debt that they hold, there must be a standard risk-free benchmark against which various issuers can be compared.
In the UK the problem does not arise because the UK government issues sovereign debt indexed to the Retail Price Inflation (RPI) index. Pension fund managers are legally required to hedge their liabilities against RPI; therefore, there is a match between the benchmark debt supply and investor demand. In the Eurozone, inves-tors wishing to match future pension liabilities within a single country will also be attracted to a national index that mirrors the inflation of those liabilities, but unless the country in which they operate issues index-linked sovereign debt, that index may not be highly correlated to the inflation measure used to index the available benchmark debt instruments. In the Netherlands, for example, unless the Dutch government decides to issue index-linked sovereign debt, another country's debt must be used as the benchmark. The most active Eurozone issuer of index-linked debt has been France through its OATi bonds, which are liquid and should therefore be an attractive benchmark, but these are linked to French inflation, which, over the long periods required for PPP financing, may diverge significantly from Dutch inflation, materially lessening inflation pro-tection for Dutch investors.
Cross-country indexation also presents risks for the public sector authority procuring a project because it will have contracted to index a portion of the unitary charge to a measure of inflation that will not necessarily track the inflation that it experiences in its tax revenues. Similar problems arise if European-wide inflation measures are used rather than national ones. Few investors will have liabilities that reflect European inflation as a whole, limiting the attractiveness of a bond indexed to European inflation.
5.3.3. The inflation risk allocation issue aside, it appears that the Netherlands is well-placed to bring institutional investors into PPP. Several of the problems raised earlier in the paper appear to have been addressed. APG believes that it has the analytical capability to assess projects and structure them, mitigating the need for the higher credit ratings that UK investor have demanded. The issues of lender control in a bond issue may still need to be assessed, depending on the appetite of Dutch investors to take large percentages of the debt required in a given project. Other technical matters may need to be explored more fully between procuring authorities and APG to determine if the bond execution can be successfully implemented in the near term on a Dutch project. It would also be interesting to know APG's appetite for projects in the Eurozone but outside of the Netherlands.
5.3.4. Another avenue being explored is for Dutch pension funds to issue straight project debt rather than bonds.