This presentation was made by Raffaele Della Croce, OECD, at the 8th meeting of Senior Public-Private Partnerships and Infrastructure Officials held in Paris on 23-24 March 2015.

1. OECD PROJECT ON INSTITUTIONAL
INVESTORS AND LONG TERM
INVESTMENT
Raffaele Della Croce
Lead Manager, LTI Project,
Financial Affairs Division - OECD
raffaele.dellacroce@oecd.org

2. 1. The Demand for LT Assets - Large Pension
Fund Survey
2. Attracting Private Finance in Infrastructure
- Matching Supply and Demand
3. Taxonomy of Instruments for LTI
4. OECD work on Long Term Investment
2
Contents

3. The Demand for Long Term
Investment
Role of Institutional Investors
3

4. Role of Institutional Investors
4
Inst Investors AUM have been growing to USD 92tr AUM in
OECD countries [in EM approx USD5tn AUM]
Assets held by Institutional Investors in the OECD, 2001-2013 (USD Tn)
Source: OECD Global Pension Statistics, Global Insurance Statistics and
Institutional Investors’ Assets databases, and OECD estimates.

5. Trends in Asset Allocation – Large
Pension Fund Survey 2014
5
Over 70 funds for USD10tn AUM : Trends in Alternatives, overall
limited investment in infrastructure with exceptions (i.e.
Australia & Canada)
Source: OECD
Fixed income and
cash
52%
Listed equity
31%
Unlisted
Infrastructure
2%
Other
Alternatives
15%
LPFs
Fixed income and
cash
55%
Listed equity
30%
Unlisted
Infrastructure
1%
Other
Alternatives
14%
PPRFs

6. Barriers to Infrastructure Investment
Source OECD
2011: Policy
Action for
Pension Fund
investment in
Infrastructure
Problems with
government support
for infrastructure
projects
 Lack of political commitment over the long-term
 Lack of infrastructure project pipeline
 Fragmentation of the market among different levels
of government
 Regulatory instability
 High bidding costs
Lack of investor
capability
 Lack of expertise in the infrastructure sector
 Problem of scale of pension funds
 Regulatory barriers
 Short-termism of investors
Problems with
investment
conditions
 Negative perception of the value of infrastructure
investments
 Lack of transparency in the infrastructure sector
 Mis-alignment of interests between infrastructure
funds and pension funds
 Shortage of data on infrastructure projects
Why so little is invested? Need to Ensure the preconditions to investment
(i.e. rule of law, transparency etc) and face several barriers..

7. Attracting long term
investment in infrastructure
Matching Supply and Demand
7

8. Attract Private Finance to Close the
Financing Gap
• The Business Climate: need to establish stable and
predictable political environment [the OECD Investment
Policy Review, Anti Bribery work]
• Governance of Infrastructure: Standardized legal PPP
framework (i.e. independent regulatory institutions,
transparent tendering process, coherent regulatory design)
[OECD Senior PPP Official Network]
• Bankability of projects: promoting investable projects
engaging the investors [OECD Development of Infrastructure
as an asset Class/ LTI Network]
– Adequate Risk/return profiles
– Appropriate financial instruments
– Information gap
8
Policy Initiatives: the EU Investment Plan, US Build
America Investment Initiative

9. Leveraging Private Sector Capital: Policy
Role
9
Risk transfer: What are the risks (Project/Market)? Who is best
positioned to take those risks (public/private, banks inst. Investors)?
Ultimate goal is to
optimize risk allocation
to reduce costs of
financing

10. Matching Supply and Demand: Development
of Infrastructure as an Asset Class
10
Infrastructure as an Asset Class: A different risk profile will imply
different expected returns from investors
Source: OECD 2014
Policy Initiative: G20 Global Infrastructure HUB

11. Taxonomy of Instruments to
attract Long Term Investment
In Infrastructure
Investing in the Real Economy
11

12. BACKGROUND TO THE
TAXONOMY
12

13. Background: Taxonomy of instruments and
incentives for infrastructure
• Taxonomy part of G20 mandate to the OECD
to prepare an Analysis of Government and
Market Based Incentives for LTI (2013 Feb
G20 communique)
• Analysis developed in 2014-15 under the
Australian and Turkish G20 presidencies
through G20 Investment & Infrastructure
(IIWG) & G20/OECD LTI Taskforce,
including IOs (WB, IMF, FSB, UN)
13
G20 mandate to the OECD..

14. Taxonomy - Objective
• Objective of the taxonomy is to create an agreed framework to better
understand the wider financing landscape for infrastructure,
particularly the relationship of the different flows and types of
finance and allow the development of infrastructure as an asset class,
in order to leverage private sector capital – in particular institutional
investors involvement.
• The taxonomy will also develop a framework for categorizing the risks
related to infrastructure projects, match them with available risk
mitigation instruments and identify where gaps between the supply
and demand for risk mitigation continue to impede investment.
14
What are the investment options available to private investors? What their
risks/returns? Which instruments and incentives to attract the private sector?
What kind of innovative financial instruments should be developed? What is the
role for policy makers?

15. TAXONOMY STRUCTURE
15

16. Taxonomy PART I: Mapping infrastructure
investment channels
16
Source OECD
Asset Category Instrument Capital Pool
Corporate Balance
Sheet /
Other Entities
Infrastructure
Project
Debt
Bonds
Bond Funds, Bond
Indices
Corporate Bonds,
Green Bonds
Project Bonds
Municipal
Bonds/Revenue
Bonds
Subordinated Bonds Green Bonds/Sukuk
Loans
Debt Funds
Direct/Co-investment
lending to
infrastructure
corporate
Direct/Co- Investment
lending to
Infrastructure project /
project loans
Securitised Loans,
Syndicated Loans,
CLOs
Syndicated Loans
Mixed Hybrid Mezzanine debt funds
Subordinated Bonds,
Convertible Bonds
Subordinated Loans,
Mezzanine Finance
Equity
Listed
Listed
infrastructure
equity funds,
Indices, trusts
Listed infrastructure &
utilities stocks YieldCos, Closed-
end Funds
MLPs, REITs, IITs
Unlisted
Unlisted
infrastructure
funds
Direct/Co-investment
in infrastructure
corporate equity
Direct/Co-investment
in infrastructure
project equity

17. Low Risk/ Return Low Risk/ Return Medium Risk/
Return
High Risk/ Return
Bonds Alternative debt “Hybrid”
instruments
Equity
instruments
 Government /
municipal bonds
 Corporate bonds
 Project bonds
 Green bonds
/Sukuk
 Securitised debt
 Debt funds
 Direct
lending/Co-
invest
 Subordinated
debt
 Mezzanine
finance
 Listed equity
stocks and funds
 Unlisted funds
 Direct/Co-
investment
17
Taxonomy PART I: Alternative Financing
Techniques for Infrastructure
Across the Risk/Return Spectrum..
Source OECD

18. 18
Risk
Categories
Political
and
regulatory:
Project feasibility and
inclusion in investments
plan*
Land availability
Change in service tariff, defined by the
regulator/authority
Changes in tariff regulation
Longer bidding phase and
consequent change of
market conditions*
Social acceptance
Authority doesn’t comply with
payment obligations
Termination value different from
expected
Change in taxation
Change in law
Stability of business and legal environment
Macro-
economic
and
market
Land availability Volatility of demand
Availability of affordable funding Refinancing risk
Inflation
Exchange rate fluctuation
Force Majeure
Stability of business and legal environment
Default of operators/SPV
Termination value different from expected
Technical
Quality of project development
Reliability of forecasts for
construction costs and
delivery time
Underperformance of the
infrastructure, which may cause
increase of life cycle costs or furtherArchaeological Environmental
Taxonomy Part II: Classification of risk linked to Infra Projects
Development Phase Construction Phase Operation Phase

19. Taxonomy PART II: Mapping the Mitigation Tools
19
Tools Features
1. Grant 1. Lump sum capital grant
2. Revenue grant:
2.1 Periodic fixed amount (mitigating the demand risk)
2.2 Revenue integration (it leaves the demand risk on the private player)
3. Grant on debt interests
2. Availability
payment
1. Availability payment is typical in the social infrastructure sector, in which
the main user is the public authority. In some cases, availability payment
can be used also for economic infrastructure – the service can be delivered
free of charge to users or tariff are retained by the public authority
3. Guarantee on
debt
1. Minimum payment
2. Guarantee in case of default
3. Guarantee in case of refinancing
4. Provision of
capital
1. Subordinated (junior) debt
2. Debt:
2.1 pari passu condition
2.2 at lower interest rate
3. Equity:
3.1 at pari passu conditions
3.3 at more advantageous conditions
5. Other
specific
measures
1. Officially mandated change to capital structure (reduced gearing)
2.1 Favourable taxation schemes for SPV
2.2 Favourable taxation schemes for equity investors
Mapping risk mitigation instruments..
Source: OECD

20. Taxonomy PART II: Addressing the Risks
20
.. different Instruments have a specific impact on risks, project cash
flows and ratios of infrastructure projects
Revenues
Capex
Sustainable
interests on
debt, meeting
target interest
and DSCR
Dividends to
meet target
IRR equity
2.1 Availability
based
payment
1.2.1 Revenue
grant - fixed
amount
3.1 Minimum
revenue
scheme
1.2.2 Revenue
grant -
revenue
integration
Increasingeffectonreducing
demandrisks
3.2/3.3 Guarantee on debt
4.1 Subordinated debt
4.2.2 Debt provision at lower
interest rate
1.3 Grant on interest
1.1 Grants
4.2.1/4.3.1 Equity
and debt provision
at market
conditions
5.1 Reduced
gearing by law
increased
source of
funding
Opex and
corporate
taxation
5.2.1 Reduced
corporate taxation
4.3.2 Equity provision –with
downside protection and upside
leverage
5.2.2 Taxation on dividends and
capital gains

21. Future OECD Work on LTI
G20 developments and future LTI related OECD events
21

22. OECD work on long-term investment
• “Patient”,“Engaged”,“Productive”
capital
• LTI investors/LT assets
• NB: Short Term not bad
• OECD, APEC & G20 relevance
• Network of LTI Investors (new
Advisory Board)
22
What does long-term investment mean and why does it matter?

23. LTI Project: Deliverables, Structure and
OECD added value
Structure: Modules
Data
Collection on
Institutional
Investors
Governance
Infrastructure
Investment
Regulation
Emerging
Markets
Financing
1. Engaging in the
Policy Discussion
with G20 and APEC
2. Research/Data
Collection
3. Main Events
(conf./workshops)
Deliverables/Areas of
Activity
• G20/OECD Taskforce on LTI
• Institutional Investors expertise (CMF & IPPC Committees, IOPS)
• Data collection national level/Reference database on Inst Inv.
• Other work from OECD Directorates/divisions (ENV, GOV, DEV etc..)
• Network of stakeholders (i.e. Institutional investors, Asset managers,
Universities, Investors Group)
OECD added value
23

24. Research and Data: Deliverables
• Pooling of Institutional investors capital – Selected Case studies in
unlisted equity infrastructure (April 2014)
• Institutional Investors as owners: Who are they and what do they
do? (Dec 2013)
• Institutional Investors and Infrastructure Financing (Nov 2013)
• Annual Survey of Large Pension funds (Oct 2013)
• Institutional Investors and green infrastructure investments:
Selected case studies (Oct 2013)
• Policy Guidance for investment in Clean Energy Infrastructure
(August 2013)
• Pension Fund Investment in Infrastructure: A Comparison between
Australia and Canada (July 2013)
• Long-term investment, the cost of capital and the dividend buyback
puzzle (May 2013)
24
2. Research/
Data Collection
Deliverables/Areas of
Activity

25. • High Level Principles of LTI financing by institutional
investors (Sep 2013)
• Survey Report on Pension Funds’ LTI (Oct 2013)
• Pooling of Institutional investors capital – Selected Case
studies in unlisted equity infrastructure (April 2014)
• Private Sector Financing of Infrastructure (Oct 2014)
• Report on Effective Approaches of the G20/OECD High-level
Principles on LTI by Institutional Investors (Sep 2014)
• G20/OECD Checklist on Long-term Investment Financing
Strategies and Institutional Investors (Sep 2014)
• Mapping Channels to Mobilise Institutional Investment in
Sustainable Energy (Feb 2015)
G20-OECD work on
long-term financing
25
Deliverables/Areas of
Activity
Work developed through the G20/OECD Taskforce

26. • 16 Nov 2014 – G20 Brisbane Summit, G20 leaders
prioritised work to "facilitate long-term financing from
institutional investors“ (Communiqué). Contributions by
the G20/OECD Task Force on Institutional Investors and
Long-term Financing included:
o Report on Effective Approaches to Support Implementation
of the G20/OECD High-level Principles on Long-term
Investment Financing by Institutional Investors | Annex
o G20/OECD Checklist on Long-term Investment Financing
Strategies and Institutional Investors
o G20/OECD High Level Round Table on Institutional
Investors and Long-term Investment, Discussion
Summary, Singapore, 4 June 2014
o Private financing and government support to promote long-
term investments in infrastructure, OECD report,
September 2014 26
Recent G20 developments
The OECD is leading a big agenda on LTI at the G20..

27. • Forthcoming Research:
– Large Insurance Survey – June 2015
– Taxonomy/ Analysis of Instruments and
incentives for LTI
– Infrastructure as an Asset Class
– Data collection on Infrastructure
performances, investment characteristics
Next Steps - Research
27

28. • G20/OECD Taskforce on Institutional Investors
and Long Term Investment 25th March 2015
• G20/OECD High-Level Roundtable on
Institutional Investors and Long-term
Investment, May 28 May 2015, Singapore
• OECD/ Euromoney Institutional Investors
Roundtable, November 2015 , Paris
Next Steps – Events
www.oecd.org/finance/lti - OECD long-term investment project
28