Q12 Should work on the tailored treatment of infrastructure

Q12 Should work on the tailored treatment of infrastructure investments target certain clearly
identifiable sub-classes of instruments? If so, which of these should COM prioritise in future
reviews of the prudential rules such as CRD?
The Commission should focus on increasing transparency in infrastructure financing and reducing
entry barriers related to risk assessment. This could improve access to finance for infrastructure
projects, particularly new greenfield developments.
We are supportive of any work which will help expand the evidence base for the calibration of risk
with regard to prudential rules. However, given the diverse nature of infrastructure project risks and
the lack of contract standardisation, it may be very challenging to tailor prudential rules such as CRD
to specific infrastructure instrument sub-classes at the current time. We believe work could be
undertaken to increase transparency and, in some cases, standardisation in the financing
arrangements for European infrastructure projects. In turn, this may help to diversify funding
sources and improve liquidity in infrastructure investments. In addition, we think that uncertainty
regarding the pipeline for future projects is a significant concern to would-be investors. A steady
project pipeline is essential to support the maintenance of the specialised knowledge that
infrastructure investment requires. Therefore any steps taken by the Commission to collate and
publicize information on the pipeline of European infrastructure projects requiring funding will be
helpful.
There are a variety of instruments through which investors can gain exposure to infrastructure
assets. These instrument include infrastructure SPV debt (loans or bonds) and equity, and
investment in listed or unlisted infrastructure funds. While unlisted investments may carry additional
governance risks compared to listed investments (which must comply with certain requirements),
across all the instruments that fund infrastructure projects the most critical factor, from the
perspective of capital adequacy, is the riskiness of the underlying project itself. Many different
aspects of an infrastructure project define its risk profile; characteristics such as the maturity of the
project (greenfield or brownfield), whether it is user funded or tax-payer funded, the volatility of
revenues in the sector, monopoly status, location, and the use of credit enhancement mechanisms
(such as sub-ordinated public debt), all have an impact and contribute to the bespoke nature of
infrastructure deals. With such a heterogeneous project base, it is hard to see how the range of
instruments can be broken into clearly identifiable sub-classes for the purposes of discrete
regulatory treatment, unless this process also takes account of the characteristics of the projects
themselves.
Changes to the regulatory framework may not be necessary to encourage greater investment in
European infrastructure, and greater diversity of funding sources. The complexity of infrastructure
risk assessment has traditionally created high entry barriers to investing, with only banks and large
funds able to consistently undertake the specialised analysis required for investor comfort.
Attempting to lessen the extent of these entry barriers could therefore be a potential route to
stimulating investment. Increasing the transparency of project company business models, and
encouraging greater standardisation in infrastructure debt contracts where possible, could lead to
greater liquidity and make infrastructure debt rating easier. This would help to enable a wider group
of investors to more easily assess risks in infrastructure projects, and consequently to invest in this
critical sector. The EU is well placed to achieve this due to well established frameworks for political
cooperation, a degree of common legal frameworks, and a high volume of trade and investment
between EU member states, which means currency risks are generally well understood and
manageable.
Parallel efforts in other areas of Capital Markets Union can have beneficial spill-over effects on
infrastructure financing. For example, support for greater investment in private placements may
have positive implications for infrastructure SPVs and unlisted infrastructure funds, as infrastructure
debt is commonly placed privately with institutional investors. By way of illustration, we anticipate
that the new exemption from withholding tax for private placements which the UK government
announced in December 2014 will be particularly useful for investors in UK infrastructure projects,
as it will reduce the administrative burden which they would otherwise face (see UK response to
Q4).