EBRD in SWF talks over CEE project funding

18/05/2012 | Elliot Wilson and Taimur Ahmad

Active talks are underway between the EBRD and key sovereign wealth funds over infrastructure investment in eastern Europe

The EBRD is in active talks with cash-rich sovereign wealth funds (SWFs) of Asia and the Middle East for fresh capital sources to fund a growing infrastructure deficit in central and eastern Europe.

The bank has been talking with major SWFs, understood to include Temasek of Singapore, which has funded infrastructure projects around East Asia, Australasia, and increasingly North America.

Outgoing EBRD president Thomas Mirow told Emerging Markets in an interview earlier this week that the bank had “started discussions” and begun thinking about how cooperative schemes could be set up.

He also said that they were focusing on long term infrastructure projects with a public-private partnership (PPP) or build, operate transfer (BOT) element that would warrant long-term profit generation.

The rationale for “well managed” SWFs was to invest in long-term projects “which might not have a yield but a reliable one that would protect them from inflationary risks”.

“SWF investment into the region is certainly welcome,” said Thomas Maier, managing director, infrastructure, at the EBRD. “It would be fantastic to attract capital from Asian sovereign wealth funds and other key global investors.”

PricewaterhouseCoopers has estimated the region needs to pump $500 billion into road, railways, ports, airports and social infrastructure. Countless sums of money are lost each year because of outdated rolling stock and roads: Japanese auto makers, for example, export car parts to St Petersburg in Russia by sea, rather than via the Trans-Siberian Railway.

While CEE countries are desperate for capital, they do not always have enough working projects to fit the bill. “The need for investment in infrastructure is huge but universe of bankable transactions out there is small,” said Maier.

“Right now, it’s the lack of projects [that is slowing things down],” he said. “You can’t just look at the demand side: you have to finance something you are comfortable in. You need projects that match criteria set out by investors.”

In January, the EBRD joined forces with the $10 billion Russian Direct Investment Fund to buy a combined 7.54% stake in Russia’s MICEX-RTS stock exchange, part of a long-term strategy to promote the development of local capital markets in Russia.

A E1 billion Moscow-St Petersburg motorway, part-financed by France’s VINCI Concessions, a public-private partnership (PPP) is set for completion in 2013. But such collaborations remain rare.

Many investors, from SWFs to pension funds, have doubts about the reliability of regional markets and their political overlords. “In some markets the regulatory framework and the rule of law [are] just not yet that attractive to make PPP investments in infrastructure,” Maier said. “Most CEE markets aren’t in that position yet, or their governments are reluctant to use PPP modelling.”

The sovereign fund seen at the front of the queue to enter CEE infrastructure projects, through PPPs, is Singapore’s $160 billion fund Temasek, which has run the role over several projects around the region, collaborating with the EBRD as well as the European Investment Bank and the International Finance Corporation.

Infrastructure needs vary from state to state. Turkey, a country with a dynamic, growing economy, and a modernizing government that remains a major proponent of PPP investments into everything from new container terminals to motorways, wants to pump $115 billion into infrastructure projects over the next five years.

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