PPP financial intermediaries (FI) can be particularly difficult to implement effectively. Some of the key challenges when creating an intermediary are discussed below. The annex provides a quick snap shot of some of the global TFs.
Staying demand responsive-the FI must address identified market gaps, with access to products and instruments designed to address those gaps, but also with the flexibility to use other instruments or approaches that respond to the changing nature of such gaps and market needs. The Indonesian Infrastructure Finance Facility (IIFF) was created after much effort at market analysis and coordination with other market actors. The Brazilian Economic Development Bank (BNDES) was a public bank that was adapted to address a growing market need. In the same way, the FI must focus on the gap, rather than squeezing out private investment, it must squeeze-in private lenders and investors, to give them new opportunities. Once FIs are created, it is often difficult to get rid of them once they have served their purpose. Provision needs to be made for the FI to be wound up, sold off, absorbed into another entity or to evolve into some other mechanism that will be responsive to other market demands, relevant at that time.
Governance and management structures-investment project selection must be based on sound commercial criteria, and not driven by purely political priorities; the risk of capture of the intermediary by political interests is high. This is generally addressed by developing the FI as a privately owned company, for example the IIFF. At the same time, purely commercial motivation may be too risk averse for the investments available. The Emerging Africa Infrastructure Fund (EAIF) faced this challenge, a partnership between development financiers wanting to take risk and commercial financiers with a more risk averse approach to project selection, creating a particular challenge in the early days searching for an appropriate incentive mechanism for the fund manager.
Amount and source of original capital-any effort to make a significant impact on an infrastructure market is likely to require a large investment of capital in the FI. The Indian Infrastructure Finance Corporation Limited (IIFCL) and BNDES were allocated funding from government bond issuances, giving them access to significant amounts of capital at a low cost. The National Infrastructure Fund (FONADIN) of Mexico was allocated the revenues from a portfolio of publicly owned toll roads. The IIFF and EAIF started from a smaller capital base. Other credit enhancement can be provided by the Government.
Skilled staff and resources-newly formed FIs are a risky bet for experienced financiers, and yet an FI needs a solid, experienced management team to give comfort to the financial market and politicians. They must be able to attract funding from institutional investors and display a keen understating of the infrastructure market. The management team also needs to be committed for a reasonable period, this is not the job for a political appointee, a retiree looking for something to keep them busy, or a short term consultant. The role of CEO is key, a politically acceptable individual but with good banking experience and the right incentives to take calculated risks. The IIFF and the African Finance Corporation both had challenges with their management teams in their early days, finding the right set of skills and personality. These skilled staff can also be sourced through secondments from shareholders as was done for the Infrastructure Development Finance Company (IDFC); or through a management contract as was done for the EAIF.
| Box 6.6 : Development Bank of Southern Africa (DBSA) |
| The Development Bank of Southern Africa (DBSA) is a development finance institution wholly owned by the Government of South Africa that focuses on investments and joint ventures/partnerships in public and private sector financing. DBSA can raise money on local and international capital markets and is publicly listed on the New York Stock Exchange. Its bond ratings are the same as South African Sovereign Ratings. DBSA offers a variety of financial products, including grants, equity, debt (senior and subordinated), underwriting guarantees and other credit enhancement. Source: http://www.dbsa.org. |
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| Box 6.7 : Fondo Nacional de Infrastructura (Fonadin) of Mexico |
| Fonadin is housed within Banobras, Mexico's national development bank and was created in response to the tight credit market of the financial crisis to address risks that the market was not able to handle. It began with a sum of over 40 billion pesos (US $3.3 billion) in 2008 and has its own revenue source from existing toll road assets that were rescued in a Government bailout in the late 1990's, and therefore does not rely on Government support for its financing base. Fonadin's role is to finance infrastructure. It offers a variety of instruments including: grants, subsidies, guarantees (for stock, credit, damage and political risk), subordinated lines of credit, and grants for technical assistance. |
Identifying a solid pipeline-it is often tempting to focus on the market gap to be resolved by the FI. But, the FI's first investments, the demonstration projects, will be critical and must be carefully prepared as the FI is being created. This creates a timing challenge as the market is unlikely to wait for the FI. The Investment Promotion and Financing Facility (IPFF) of Bangladesh addressed this challenge by focusing on a series of gas-fired power projects in its first phase, projects that were well developed, easy to market and limited to one sector. Phase two expanded to other sectors and more risky projects. The IDFC and IIFF spent their first few years providing advisory services to the infrastructure sector and thereby developing their own pipelines of investments, the former by necessity and the latter by design.