‘Give us a fighting chance’

A level playing field is among the requests volunteered by infrastructure investment professionals asked for their regulatory wish-lists. Chris Glynn did the quizzing

Regulating infrastructure investing is a hot-button issue, and people from every aspect of the asset class are willing to sound off from their own perspective. Below is how a selection responded to the following question:

“What is the single regulatory change you would like to see made in the infrastructure investment arena?”

Joel Moser, partner, Bingham McCutchen:

“Asking a lawyer for a single idea is like asking a musician for a single note, but I’ll try. The greatest current regulatory challenge for infrastructure investment in the US today is the un-level playing field created by the signifi cant federal subsidy embedded in the tax-exemption of state and local government bonds but generally unavailable to equity invested structures. Level the playing field and the pioneer investors will have a fighting chance.

I am frankly indifferent as to how that is done, either by extending the benefi t to private transactions or cutting it for traditional alternatives; but with the tax-exemption on the Simpson-Bowles shortlist of unaffordable subsidies, I think I know which way it will go. A smart way would be a gradual phase-out, but please use some of that early tax-saving for grants to support investment until the field is totally flat. There, that was almost one idea.” 

Sharad Jhingan, chief operating officer, structured finance, Lanco Infratech:
 
“In an Indian context, infrastructure projects are typically planned for anywhere between a 20-to-30-year concession period. Most of the projects are funded in large part by debt and have high financial leverage.

This implies that a large part of post-commissioning cash flows generated by projects go towards debt servicing.

The cash flow problem gets more acute when the tenor of the debt is shorter than the concession period, leaving little surplus in the hands of equity investors.

It further reduces the margin of safety. Meanwhile, the government is trying various options to create a bond market and allow the refinancing of project debts. I still feel that we may perhaps consider setting up an Infrastructure Refi nancing Bank (similar to the National Housing Bank), to refinance commercial banks for infra debt. A typical interest rate band may be fixed for financing such projects.

Once they are assured of longer-term capital, it will be possible for commercial banks to offer long-tenor construction debt, preferably for the entire concession period.

This could subsequently be replaced by issuing bonds. This will go a long way towards mitigating the need for long-term capital for up to 30-year tenors.” 

Chris Leslie, chief executive officer, Macquarie Infrastructure Partners:

 “One regulatory change that Macquarie would encourage is the harmonisation of the tax treatment of publicly sourced and privately sourced capital for infrastructure. Historically, municipal bond financing has been a major source of funding for infrastructure projects given the cost-of-capital advantage generated through the bonds’ income tax exemption. 

This has created an uneven playing field that has crowded out private capital for such projects. Private capital has recently become a signifi cant source of financing for infrastructure projects, which have traditionally been funded publicly. To stimulate private investment in infrastructure, Macquarie would encourage: 

(1) The expanded use of TIFIA and the creation of a national infrastructure bank offering subordinated debt;
(2) Expanding private activity bonds and preventing them from being subject to the alternative minimum tax;
(3) Modifying the private use rules so that they do not apply to truly public infrastructure, e.g., airports.

These changes could dramatically reduce the gap in infrastructure investment by filling it with private capital.” 

Karen Chester, partner, alternative research, Mercer:
 
“What I would humbly ask of the “regulator gods” is a world with greater independence, transparency and certainty. Elevated regulatory risk remains a GFC legacy. Most infrastructure investors will have a “battle story” of a regulator behaving in an unpredictable or unfathomable way. Regulatory uncertainty, whether motivated by a methodological innovation or political pressure, certainly makes investing in regulated infrastructure less attractive. 

Let’s not forget that private capital is much needed to finance the global infrastructure funding gap, especially against the continuing backdrop of fiscal deleveraging and public sector under-spend in Europe and the US. And investing in unlisted infrastructure makes sense for pension funds seeking meaningful diversification and better liability matching. 

So, to enable more efficient and mutually beneficial investing in infrastructure, I herald an investors’ call to arms, for our global regulators to unite under the banner of “independence, transparency and certainty”.