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    Moody’s Analytics Data Alliance Project Finance Consortium Helps World Bank Group Achieve its Strategic Objectives

    July 2020

    Moody’s Analytics Data Alliance Project Finance Consortium Helps World Bank Group Achieve its Strategic Objectives

    The World Bank Group is an international financial institution that gives financial and technical assistance to developing countries. Its public sector-facing elements are the International Bank for Reconstruction and Development (IBRD), which focuses on middle-income countries, and the International Development Association (IDA), which offers low-interest loans, zero- to low-interest credits, and grants to governments in the poorer developing countries. The private sector arms, the International Finance Corporation (IFC) and the Multilateral Investment Guarantee Agency (MIGA), give financing and insurance protection to private enterprises investing in development projects. Together, World Bank Group invests in education, health, public administration, infrastructure, financial and private sector development, agriculture, and environmental and natural resource management. Some projects are co-financed with governments, other multilateral institutions, commercial banks, export credit agencies, and private sector investors.

    Established in 1944, the World Bank Group is headquartered in Washington, DC. It has more than 10,000 employees in more than 120 offices worldwide. 

    Challenges Facing the World Bank Group

    Long-term investment is critical to achieving the World Bank Group’s twin goals of ending extreme poverty and boosting shared prosperity by 2030. This intent applies especially to well-planned and climate-smart infrastructure projects. Such projects not only raise potential output growth and enhance resilience but can also help reduce the carbon footprint that comes with economic progress.

    Infrastructure projects take many years to complete and require long-term investment. Yet, many developing countries do not have the fiscal capacity and domestic savings to meet local demand for infrastructure. Thus, making infrastructure investment in these countries attractive to private capital has become a more prominent objective in development finance. Most bilateral institutions, donor countries, and multilateral development banks such as the World Bank actively support this effort.

    Creating an enabling regulatory environment for infrastructure investment can help mobilize long-term finance from institutional investors such as insurance companies. Infrastructure projects are asset-intensive and generate predictable, stable cash flows over the long term, with low correlation to other assets. Hence, they are a natural match for insurers’ liabilities-driven investment strategies.

    However, the resilient credit performance of infrastructure is not reflected in most regulatory frameworks, which tend to follow the historical default experience of corporate exposures. Several G20 countries—and other countries with important insurance sectors—have only partial treatment, or no special treatment, for infrastructure. Many solvency regimes require insurers to allocate sizeable amounts of capital to cover infrastructure debt investments, especially for unrated transactions.

    So far, the lack of data on the credit performance of infrastructure projects has hindered greater comparability to corporate exposures and a more differentiated regulatory treatment. Improving the availability of performance data on infrastructure projects for governments, regulators, and investors would help widen the perimeter of a more favorable regulatory treatment.

    The Moody’s Analytics Solution: Project Finance Consortium

    The World Bank Group is committed to helping overcome the informational hurdles affecting infrastructure investment in developing countries. This task includes addressing data gaps on financial performance to deliver a more balanced view of risks and the tools to mitigate them. As part of this effort, World Bank Group staff have been reviewing the regulatory treatment of infrastructure investment by insurance companies. Such a review helps ensure that capital charges are suitably calibrated and do not act as a disincentive to investment.

    Recently, Moody’s Analytics released data on the historical credit performance of project finance loans. The data showed that infrastructure debt in developing countries has a lower default and higher recovery rate than many investors might think. Indeed, it is lower than insurance regulators believe. World Bank Group staff used the published data from the Moody’s Analytics Project Finance Consortium to calibrate a differentiated capital charge. This charge reflects the actual credit risk profile of infrastructure projects under two important solvency regimes—: Solvency II in Europe and the forthcoming Insurance Capital Standard (ICS) for internationally active insurance groups. The ICS is under development by the International Association of Insurance Supervisors (IAIS).

    The findings suggest sufficient scope for lower capital charges to be applied to infrastructure investment—through project loans—without altering the current (or planned) calibration methods (Jobst, 2018a; Levy, 2017 and 2018). While the initial default rate exceeds the level for investment-grade corporates, it steadily declines as the loans mature. After about five years, the marginal default rate is consistent with solid investment-grade credit quality, creating a distinctive “hump-shaped” risk profile. The recovery rate is high, comparable to that of senior secured corporate loans. This favorable credit performance is even more pronounced for projects in sectors that would fall within the scope of the eligibility requirements for green bonds (Jobst, 2018b). Capital charges that recognize the declining downgrade risk of infrastructure debt over time could potentially free up the capital of institutional investors, such as insurers; this would help mobilize resources to finance infrastructure—thus, promoting development.

    These results resonate well with the G20 policy agenda for sustainable growth. The 2018 Leaders’ Summit in Buenos Aires delivered a strong commitment to building infrastructure for development, endorsing the Roadmap to Infrastructure as an Asset Class, which was continued in the G20 Principles for Quality Infrastructure Investment during Japan’s G20 Presidency and the drive for Utilizing Technology in Infrastructure during Saudi-Arabia’s current G20 Presidency, which also includes advice from the private sector through the OECD-led Task Force on Institutional Investors and Long-Term Financing and the B20 initiative on Financing Growth and Providing Quality Infrastructure. In the G20 context, two reports specifically encourage the review of the regulatory treatment of infrastructure investment, which the use of data from the Moody’s Analytics Project Finance Consortium helped facilitate:

    1. The Financial Stability Board’s evaluation of the impact of regulatory reforms on infrastructure finance. It was submitted to the G20 at the Buenos Aires Leaders’ Summit as part of its framework for post-implementation evaluation of the G20 financial regulatory reforms.

    2. The recent Report of the G20 Eminent Persons Group (EPG) on Global Financial Governance. It recommends reviewing the regulatory treatment of infrastructure finance for long-term institutional investors.

    About the Moody’s Analytics Data Alliance

    The Moody's Analytics Data Alliance is one of the world’s largest and most comprehensive data consortia covering Commercial & Industrial, Commercial Real Estate, Project & Infrastructure Finance, and Asset Finance. Built in partnership with over 120 leading global financial institutions, the Data Alliance database contains private firm financial statement, loan, default, and other key financial metrics.

    World Bank Group Contacts
    Anderson Silva
    Practice Manager, Long-Term Finance
    Vice Presidency for Equitable Growth, Finance and Institutions

    Andreas (Andy) Jobst
    Senior Economist
    International Monetary Fund (IMF)
    (fmr. Adviser, Office of the Managing Director and Chief Financial Officer)

    Diane Menville
    Head of ESG
    SCOPE Ratings
    (fmr. Research Officer, Office of the Managing Director and Chief Financial Officer)

    Jobst, Andreas A., 2018a, “Credit Dynamics of Infrastructure Investment: Considerations for Financial Regulators,” Policy Research Working Paper No. 8373, March 22 (Washington, D.C.: World Bank Group), available at http://documents.worldbank.org/curated/en/606411522326750586/pdf/124720-PUBLIC-Infrastructure-Regulation-Report-Mar28.pdf.

    ______, 2018b, “Green Infrastructure Investment: Implications for Insurance Regulators,” Report No. 131044, October 10 (Washington, D.C.: World Bank Group), available at http://documents.worldbank.org/curated/en/819691539907598556/Green-Infrastructure-Investment-Implications-for-Insurance-Regulators.

    Levy, Joaquim, 2017, “Risk and Capital Requirements for Infrastructure Investment in Emerging Market and Developing Economies,” Feature Story, December 22 (Washington, D.C.: World Bank Group), available at http://www.worldbank.org/en/news/feature/2017/12/22/risk-and-capital-requirements-for-infrastructure-investment-in-emerging-market-and-developing-economies.

    ______, 2018, “Insurance and Sustainable Development,” Opening Remarks for Panel Discussion on the Role of Insurance Supervisors in Supporting Sustainable Economic Development, IAIS Annual Conference, November 9 (Luxembourg: International Association of Insurance Supervisors), available at http://www.worldbank.org/en/news/speech/2018/11/09/opening-remarks-for-panel-discussion-on-the-role-of-insurance-supervisors-in-supporting-sustainable-economic-development.
    Moody’s Investors Service, 2017, “Default Research - Global: Default and Recovery Rates for Project Finance Bank Loans, 1983–2015: Resilient Performance in Emerging Markets,” December 13 (London: Moody’s Investors Service).
    ______, 2018a, “Default Research: Default and Recovery Rates for Project Finance Bank Loans, 1983–2016,” March 5 (London: Moody’s Investors Service).
    ______, 2018b, “Default Research - Global: Default and Recovery Rates for Project Finance Bank Loans, 1983–2016: Advanced Economies vs. Emerging Markets,” September 5 (London: Moody’s Investors Service).
    ______, 2018c, “Default Research - Global: Default and Recovery Rates for Project Finance Bank Loans, 1983–2016: Green Projects Demonstrate Lower Default Risk,” September 18 (London: Moody’s Investors Service).