Pension Funds in Infrastructure Project Finance Regulations and Instrument Design

Vives, Antonio. Pension funds in infrastructure project finance : regulations and instrument design / Antonio Vives. " This is a reprint of a paper originally published in May 1999. " p. cm. (Sustainable Development Dept. Technical papers series ; IFM-110) Includes bibliographical references. The opinions expressed herein are the responsibility of the author and do not necessarily represent the official position of the Inter-American Development Bank. Foreword The significant increase in economic activity in Latin America and the Caribbean during the nineties has increased the need for infrastructure investment, which the Governments have had difficulty in supplying. As a result, they have resorted to fostering private financing of infrastructure by creating the proper environment for investment and in the process redirecting scarce state resources to satisfy unmet social demands. This change in strategy has been supported by the Bank Group through its Private and Public Sector lending and technical cooperation activities, as required by its infrastructure strategy and Public Utilities Policy. Most private financing has come from foreign sources because local financial markets are relatively underdeveloped. Despite the availability of foreign financing, its timing and cost was affected by the recent financial crisis. In addition, foreign financing carries with it additional risks to the projects, in particular, foreign exchange exposure which is hard to cover given that the projects provide services mostly for local markets. This, in turn, leads to more expensive public services than would otherwise be the case. Fortunately, there has been an almost simultaneous trend toward pension fund reform, including the creation of privately managed pension fund accounts. On the one hand, through these individual savings, Latin American economies are building a pool of financial resources in search of attractive investment opportunities that the local markets cannot supply. On the other hand, infrastructure projects are providing needed services that promote economic growth and social well-being and require long-term local financing. The time is now right to enact the necessary measures that will bring them together. This paper describes what it takes to achieve such a union. It suggests ways to structure projects to make them more attractive to pension funds, and describes needed regulatory changes to permit pension funds to invest in them. We hope that this paper will stimulate project finance sponsors to consider pension funds as a viable financing alternative. Similarly, we hope that pension fund regulators and managers will make the necessary changes to …