澳门六合彩

Infrastructure projects seem like the for large capital holders such as pension funds. Investing in ports, roads, and rails can offer steady, returns to cover pensions鈥� liabilities over the long term.听

However, infrastructure can also be risky, particularly in emerging markets and developing economies (EMDEs). Since infrastructure is a relatively requiring a lengthy commitment, these investments are vulnerable to and risks that can jeopardize project completion and future returns. Concerns over risk deter investors and leave many EMDEs without the capital they need.听

What can be done to reduce risk and deepen pension fund participation in overseas infrastructure? The Wahba Institution for Strategic Competition (WISC) has been working with the private and public sectors to develop ways of mobilizing more capital for the world鈥檚 sustainable development needs. Recent discussions in collaboration with the (PPI) yielded three recommendations for further investigation.听

Steps toward de-risking

Mobilizing capital starts with being realistic about constraints facing fund managers. A pension fund鈥檚 primary obligation is to achieve consistent earnings on its assets to cover its liabilities as they grow with inflation. They do not have a mandate to abroad. As a result, if investments exceed managers鈥� risk tolerance, investing in them may violate their fiduciary responsibilities.

Given those constraints, investing in the world鈥檚 least developed countries (LDCs) is for many funds. On average, LDCs are riskier due to their histories of political and economic instability. And returns, , may not be enough to justify the risk of investing. Investing in LDCs is generally perceived as better left to government-sponsored development lenders.

Narrowing the field of eligible countries still leaves plenty of opportunity. There are more than 听100 middle-income countries, according to , and efforts to encourage private investment should focus on them, where addressing risk is more feasible.听

The WISC-PPI working group discussion identified three priority areas:听

1.Foster collaboration with infrastructure general partners (GPs)

Development finance institutions (DFIs) and multilateral development banks (MDBs) are not alone in identifying and funding projects in emerging markets. Infrastructure GPs specialize in identifying market opportunities and conducting the due diligence to assess risk accurately. As such, GPs have on-the-ground experience, along with market incentives, to invest carefully in projects promising high returns.听

GPs with strong track records of providing stable returns have already gained the confidence of many pension fund managers. Concurrently, many DFIs and MDBs already GPs through a variety of blended finance arrangements. These arrangements are mutually beneficial. The private investor or funding that DFIs and MDBs can provide while the development lender does not have to carry the full project costs and benefits from the GPs expertise and market knowledge.听

Still, more could be done to strengthen and expand these partnerships. To our knowledge, there has been no systematic analysis of the different models of collaboration between GPs and DFIs/MDBs. Identifying best practices can help structure deals in ways palatable to investors, such as pension funds.听

2. Protect against reputational costs

Investors are of the imperative to meet high environmental and social standards. Failing to do so can generate significant reputational costs to the investor. However, identifying suitable opportunities can be time-consuming and expensive, such as when multiple environmental reviews are required.听

Greater cross-national collaboration can reduce informational barriers and help expedite responsible investment. For example, the OECD鈥檚 is a project-level certification program scoring projects on a that includes environmental sustainability. Mutual recognition of these assessments allows participating countries to save the costs of conducting independent reviews. More efforts such as these can help pension funds identify credible and safe opportunities.听

Beyond environmental concerns, investors may also worry about the reputational costs of doing business with or countries vulnerable to corruption, rights abuses, or other to the investor鈥檚 stakeholders. This is another area in which closer collaboration with DFIs and MDBs could help. Working in private-public partnerships is advantageous because:听

• Government-backed lenders are to rent-seeking behaviors by host governments.听
• Many DFIs, such as the , are prohibited from working with certain regimes, which effectively screens out host markets with unacceptable risk profiles.听
• DFIs and MDBs typically have obligations to monitor (and ) project performance, including compliance with environmental and social standards.听

For those reasons, DFI/MDB projects can help pension funds ensure that investments do not expose the fund to unacceptable reputational costs. More work should be done to explore areas for expediting investment while maintaining high standards.听

3. Develop cost-effective tools to hedge currency risk

Currency risk鈥搃ncluding unanticipated fluctuations in exchange rates鈥搑emains a to foreign investment. Currency risk can affect all stages of a project鈥檚 lifespan, from construction costs to . For example, a financial crisis in a host market may cause the local currency to depreciate sharply, significantly lowering revenue accrued to the foreign investor when converted to its own currency.听

EMDE governments cannot always guarantee against risks given and, in some cases, their inability to manage exchange rates credibly. Instead, lenders have developed a for increasing local currency liquidity from the outset of projects. Local currency facilities can help absorb shocks that would otherwise create liquidity and/or convertibility risk.听

Existing efforts include the (TCX), a 鈥渕arket-making鈥� fund that offers over-the-counter derivatives to help investors hedge more than 100 currencies where no long-term opportunities are available elsewhere in local or global markets. Led by the Netherlands and Germany, TCX has buy-in from DFIs, MDBs, and the European Union. Specifically, forward contracts and currency swaps鈥搕wo ways of limiting risk by locking in the volume, price, and timing of future exchanges.

TCX is one example of a broader push to involve local currency in project finance. Other possibilities include that share exposure to risk among foreign and local banks. MDBs have also relied increasingly on facilitating currency swaps and issuing .听

In crafting solutions for currency risk, it is important to understand that programs that do not give host governments a stake in the deal raise the possibility that poor policy choices will increase risk.

No approach is free of cost to the investor, particularly compared with opportunities within developed economies with deeper currency-hedging markets and more stable currencies. Given the tradeoffs, identifying the safest, most affordable strategy to mitigate currency risk will require more research.听

Cosponsored by the Pacific Pension & Investment Institute

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