The Infrastructure Finance Challenge

The Infrastructure Finance Challenge Ingo Walter (ed.)
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The global interconnectedness of the world’s economies, along with the torrid pace of urbanization in the developing world, lead to urgent and manifestly complex issues about infrastructure. This monograph takes on some of the fundamental questions in this area, attempting to clarify how to think about the boundaries of what is meant by ‘infrastructure’, its pricing, its potential adverse effects and its financing.
—Paul Boghossian, Director, Global Institute for Advanced Study, NYU

Infrastructure and its effects on economic growth, social welfare, and sustainability receive a great deal of attention today. There is widespread agreement that infrastructure is a key dimension of global development and that its impact reaches deep into the broader economy with important and multifaceted implications for social progress.
At the same time, infrastructure finance is among the most complex and challenging areas in the global financial architecture. Ingo Walter, Professor Emeritus of Finance, Corporate Governance and Ethics at the Stern School of Business, New York University, and his team of experts tackle the issue by focussing on key findings backed by serious theoretical and empirical research. The result is a set of viable guideposts for researchers, policy-makers, students and anybody interested in the varied challenges of the contemporary economy.


The Infrastructure Finance Challenge
Edited by Ingo Walter | November 2016
vi + 128 | colour | 6.14" x 9.21" (234 x 156 mm)
Open Reports Series, vol. 3 | ISSN: 2399-6668 (Print); 2399-6676 (Online)
ISBN Paperback: 9781783742936
ISBN Hardback: 9781783742943
ISBN Digital (PDF): 9781783742950
ISBN Digital ebook (epub): 9781783742967
ISBN Digital ebook (mobi): 9781783742974
DOI: 10.11647/OBP.0106
Subject codes: BIC: K (Economics, finance, business and management); BISAC: BUS032000 (Infrastructure), BUS051000 (Public Finance)



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Preface
Paul Boghossian
Executive Summary
Some Key Conclusions

1. Infrastructure, Performance and Economic Growth
2. Investable Infrastructure Assets
3. Infrastructure Attributes and Problems of Market Failure
4. Legal Structures and Frameworks
5. Beyond Economics: Governance and Infrastructure Development
6. The Global Infrastructure Development Sector
7. Infrastructure Finance
8. Structuring the Financial Mosaic
9. Identification and Mitigation of Project-related Risks
10. Intermediating Infrastructure Finance: Market Contours
11. Establishing Robust Markets for Infrastructure-backed Securities
12. Infrastructure Equity as an Asset Class
13. Project and Infrastructure Debt as an Asset Class
14. Portfolio Optimization: Institutional Investors and Asset Managers
15. Accelerating Infrastructure Finance
16. Some Solutions

References
Contributors

Working Group on Infrastructure Finance Stern School of Business, New York University
Pankaj Ghemawat, Professor of Management
Joel Hasbrouck, Professor of Finance
Peter Henry, Professor of Economics
Michael Posner, Professor of Business and Society
Paul Romer, Professor of Economics
Michael Spence, Professor of Economics
Paul Tice, Executive in Residence
Stijn Van Nieuwerburgh, Professor of Finance
Ingo Walter, Professor Emeritus of Finance
Tensie Whelan, Professor of Business and Society
Lawrence White, Professor of Economics
David Yermack, Professor of Finance

Pankaj Ghemawat joined New York University Stern School of Business in September 2014 as Global Professor of Management and Strategy in Stern’s Management & Organizations Department. Professor Ghemawat has been appointed by Stern to lead the new Center for the Globalization of Education and Management, to drive scholarship and pedagogy on the business implications of globalization. He is also the Anselmo Rubiralta Professor of Global Strategy at IESE Business School. Pankaj has written five books and more than 100 research articles and case studies on global business strategy and is one of the world’s best-selling authors of teaching cases. He also compiles an annual globalization index that looks at the connectivity of more than 130 countries with the rest of the world in terms of trade, capital, information and people flows.
Pankaj is a fellow of the Academy of International Business and of the Strategic Management Society. A recent book, World 3.0 (2011, Harvard Business Review Press), re-examines beliefs about markets and globalization, praising market integration whilst addressing its potential negative ramifications against the goal of increasing prosperity. World 3.0 won the 50 Thinkers Book Award for the best business book published in 2010–2011, the Axiom Business Book Gold Award in the International Business/Globalization category and the IESE Alumni Research Excellence Award. In August 2014 Pankaj received the Eminent Scholar award of the International Management Division of the Academy of Management. From 1983 to 2008, Pankaj was on the faculty of Harvard Business School, becoming the youngest person in the school’s history to be appointed a full professor, in 1991. He was also the youngest "guru” included in the guide to the greatest management thinkers of all time, published in 2008 by The Economist. Since 2006, he has been on the faculty of IESE.Pankaj earned both his B.S. in Applied Mathematics and his PhD in Business Economics from Harvard University.

Joel Hasbrouck is the Kenneth G. Langone Professor of Business Administration and Professor of Finance at the Stern School of Business, NYU. His research focuses on the analysis, design and regulation of securities trading mechanisms (market microstructure). He is the author of Empirical Market Microstructure (Oxford, 2006) and numerous articles. Joel is presently an Advisory Editor of the Journal of Financial Markets, and an Associate Editor of the Journal of Financial Econometrics, the Journal of Financial Intermediation, and a former editor of the Review of Financial Studies. He holds MA and PhD degrees from the University of Pennsylvania and a BS in Chemistry from Haverford College.

Peter Blair Henry is the Dean of New York University’s Stern School of Business and a former Professor of International Economics at Stanford University. He is also the author of Turnaround: Third World Lessons for First World Growth (Basic Books, 2013). In 2008, Peter led Barack Obama’s Presidential Transition Team in its review of international lending agencies such as the IMF and World Bank. A member of the Federal Reserve Bank of New York’s Economic Advisory Panel and a member of the boards of the National Bureau of Economic Research (NBER), the Council on Foreign Relations, Citi, and General Electric, in 2015, Peter was awarded the Foreign Policy Association Medal, the highest honor bestowed by the organization. Peter received his PhD in Economics from MIT and Bachelor’s degrees from Oxford University, where he was a Rhodes Scholar, and the University of North Carolina, where he was a Morehead Scholar and a finalist in the 1991 campus-wide slam dunk competition. Born in Jamaica, Peter became a US citizen in 1986. He lives in New York City with his wife of 20 years and their four sons.

Michael H. Posner is the Jerome Kohlberg Professor of Ethics and Finance and a Professor of Business and Society at NYU’s Stern School of Business, where he is working to launch the first-ever center on business and human rights at a business school. Prior to joining NYU Stern, Michael served from 2009 to 2013 in the Obama Administration as Assistant Secretary of State for the Bureau of Democracy, Human Rights and Labor at the State Department. From 1978 to 2009, he led Human Rights First, a New York-based human rights advocacy organization. Michael is recognized as a leader and expert in advancing a rights-based approach to national security, challenging the practice of torture, combating discrimination, and promoting refugee protection. He is a frequent public commentator on these issues, and has testified dozens of times before the US Congress. As Assistant Secretary, Michael traveled extensively, representing the US Government to foreign officials and representatives of civil society in countries of strategic importance to the US, including China, Russia, Egypt, Burma, Bahrain, Nigeria, Afghanistan, and Pakistan, among many others. Throughout his career, Michael has been a prominent voice in support of human rights protections in global business operations in the manufacturing supply chain, the extractives industry, and the information and communications technology sector. As a member of the White House Apparel Industry Partnership Task Force in the mid-’90s, he helped found the Fair Labor Association (FLA), an organization that brings together corporations, local leaders, universities, and NGOs to promote corporate accountability for working conditions in the apparel industry. He was a founding member of the Global Network Initiative, a multi-stakeholder initiative aimed at promoting free expression and privacy rights on the Internet, and has spoken widely on the issue of Internet freedom. Michael spearheaded the US Government’s efforts to enhance the effectiveness of the Voluntary Principles on Security and Human Rights, which works to improve human rights around oil, gas, and mining operations. Michael played a key role in proposing and campaigning for the first US law providing for political asylum, which became part of the Refugee Act of 1980, as well as the Torture Victim Protection Act, which was adopted in 1992. In 1998, he led the Human Rights First delegation to the Rome conference at which the statute of the International Criminal Court (ICC) was adopted.
Before joining Human Rights First, Michael was a lawyer with Sonnenschein, Nath & Rosenthal in Chicago. He lectured at Yale Law School from 1981 to 1984, and again in 2009, when he taught with former Dean Harold Koh. He was a visiting lecturer at Columbia University Law School from 1984 to 2008. A member of the California Bar and the Illinois Bar, he received his J.D. from the University of California, Berkeley Law School (Boalt Hall) in 1975, and a BA with distinction and honors in History from the University of Michigan in 1972.

Paul Romer is a University Professor at NYU and director of its Marron Institute of Urban Management. His work now focuses on urbanization because better urban policy offers the best chance for speeding up growth in the developing world.  Paul is currently on leave as Chief Economist at the World Bank. Before coming to NYU. He taught at Stanford, and while there, started Aplia, an education technology company. In 2002, he received the Recktenwald Prize for work on the economics of ideas and the drivers of economic growth. Paul earned a B.S. in Mathematics and a PhD in Economics from the University of Chicago.

Michael Spence is Professor of Economics at the Stern School at NYU, Professor Emeritus of Management in the Graduate School of Business at Stanford University, a Senior Fellow of the Hoover Institution at Stanford.
Michael received the Nobel Prize in Economic Sciences in 2001, and the John Bates Clark Medal in 1982, for work on markets with asymmetrical information. He is the author of the book, The Next Convergence: The Future of Economic Growth in a Multispeed World (Ferrar, Straus and Giroux, 2011). He served as dean of the Stanford Business School from 1990 to 1999. As dean, he oversaw the finances, organization, and educational policies of the school. Michael currently serves on the board of Mercadolibre, and a number of private companies. He is a member of the board of the Stanford Management Company, and the International Chamber of Commerce Research Foundation. He is a Senior Advisor to Oak Hill Investment Management, and a consultant to PIMCO. He is the chairman of the academic board of the Fung Global Institute, based in Hong Kong. He recently became a member of the Advisory Board of the School of Economics and Management of Tsinghua University. Michael chaired the Independent Commission on Growth and Development (active from 2006 to 2010) dealing with growth in developing countries.

Paul Tice is a Senior Managing Director and Head of the Energy Capital Group in the Asset Management division of US Capital Advisors LLC, an energy-focused financial services boutique. Prior to joining USCA in 2015, he worked at BlackRock, where he was the Head of private energy investments for the firm’s Credit platform and Americas Fixed Income business, while also serving as the Lead Portfolio Manager for the Energy Strategy book within BlackRock’s R3 Fund. Prior to joining BlackRock in 2009, Paul was the Chief Operating Officer, Co-Chief Investment Officer and a Senior Partner of R3 Capital Management, a multi-strategy, credit-focused hedge fund manager that was spun out of Lehman Brothers in May 2008 and subsequently acquired by BlackRock in April 2009. Prior to R3, Paul worked for a total of 14 years at Lehman Brothers (2002–2008, 1989–1997) in a variety of roles, most recently as a Managing Director in the firm’s Global Principal Strategies (GPS) division, an internal, credit-focused proprietary fund that was formed in June 2006 and spun out in May 2008. While at GPS, Paul supervised the fund’s investments in the energy and power sector, while also managing the overall GPS research effort and approving all private equity and longer-term investments by the fund. Prior to joining the GPS group in 2006, Paul spent 17 years in sell-side credit research, both at Lehman Brothers and Deutsche Bank/Bankers Trust (1997–2002), where he mainly covered the energy sector, both as a senior analyst and a producing manager.  Paul has covered the energy sector since 1995 and was one of the top-ranked Investment Grade Energy analysts over 1995–2006. In 2006 and 1998, he was the #1 ranked Investment Grade Energy analyst on Institutional Investor’s All-America Fixed Income Research Team. Prior to originally joining Lehman Brothers in 1989, he was a senior financial analyst at JPMorgan Chase.  Paul has previously served on the Board of Directors for Lightfoot Capital Partners GP LLC and Richland-Stryker Investment LLC, two investment portfolio companies of the R3 Fund. He earned a BA degree in English, magna cum laude, from Columbia University in 1983, and an MBA degree in Finance from the Leonard N. Stern School of Business at New York University in 1988. He is a member of Phi Beta Kappa.  Paul is currently Executive-in-Residence at the Leonard N. Stern School of Business at New York University, where he is a guest lecturer, panel speaker and research contributor, and periodically writes Op-Ed pieces on energy- and finance-related topics in The Wall Street Journal and other news media.

Stijn Van Nieuwerburgh is the David S. Loeb Professor of Finance and the Director of the Center for Real Estate Finance Research at New York University Leonard N. Stern School of Business, which he joined in 2003.
Stijn’s research lies in the intersection of housing, asset pricing, and macroeconomics. One strand of his work studies how financial market liberalization in the mortgage market relaxed households’ down payment constraints, and how that affected the macro-economy, and the prices of stocks and bonds. In this area, he has also worked on regional housing prices and on household’s mortgage choice. He currently studies real estate price formation, and the impact of foreign buyers on the market. He has published articles in a range of journals including the Journal of Political Economy, American Economic Review, Econometrica, Review of Economic Studies, Journal of Finance, Review of Financial Studies, Journal of Financial Economics, and the Journal of Monetary Economics, among other journals. He is Editor at the Review of Financial Studies. He is a Faculty Research Associate at the National Bureau of Economic Research and at the Center for European Policy Research. Stijn has served as an advisor to the Norwegian Minister of Finance, and has been a visiting scholar at to the Central Bank of Belgium, the New York and Minneapolis Federal Reserve Banks, the Swedish House of Finance, the International Center for Housing Risk, and has contributed to the World Economic Forum project on real estate price dynamics.
He earned his PhD in Economics and MA in Financial Mathematics at Stanford University and his BA degree in Economics at the University of Ghent in Belgium.

Ingo Walter is Seymour Milstein Professor Emeritus of Finance, Corporate Governance and Ethics at the Stern School of Business, New York University.
From 1971 to 1979 he was Vice Dean for Academic Affairs and subsequently served a number of terms as Chair of International Business and Chair of Finance. He served as Director of the New York University Salomon Center for the Study of Financial Institutions (1990 -2003) and Director of the Stern Global Business Institute (2003-2006). He was Vice Dean of the Faculty of the Stern School from 2008 to 2012. Ingo has had visiting professorial appointments at the Free University of Berlin, University of Mannheim, University of Zurich, University of Basel, the Institute for Southeast Asian Studies in Singapore, IESE in Spain, NYU Abu Dhabi, the University of Western Australia and various other academic and research institutions. He also held a joint appointment as Professor of International Management at INSEAD from 1986 to 2005 and remains a visiting professor there.  His current areas of academic activity include international financial intermediation and banking. He has published papers in most of the professional journals in these fields and has authored or coauthored some two dozen books and monographs, and has served as a consultant to various corporations, banks, government agencies and international institutions.  Ingo received his AB summa cum laude and MS degrees from Lehigh University and his PhD degree from NYU, and has been on the faculty at NYU since 1970.

Tensie Whelan is the Director of NYU Stern School of Business’s Center for Sustainable Business, where she is bringing her 25 years of experience working on local, national and international environmental and sustainability issues to engage businesses in proactive and innovative mainstreaming of sustainability.
As President of the Rainforest Alliance, Tansie built the organization from a $4.5 million to $50 million budget, transforming the engagement of business with sustainability, recruiting 5,000 companies in more than 60 countries to work with Rainforest Alliance. Her previous work included serving as Executive Director of the New York League of Conservation Voters, Vice President of the National Audubon Society, Managing Editor of Ambio, a journal of the Swedish Academy of Sciences, and a journalist in Latin America. Tensie has been recognized by Ethisphere as one of the 100 Most Influential People in Business Ethics, was the Citi Fellow in Leadership and Ethics at NYU Stern in 2015 and has served on corporate advisory boards such as the Unilever Sustainable Sourcing Advisory Board and the Nespresso Innovation Fund Advisory Board.

Lawrence J. White is the Robert Kavesh Professor of Economics at New York University’s Stern School of Business and Deputy Chair of the Economics Department at Stern. During 1986–1989 he was on leave to serve as Board Member, Federal Home Loan Bank Board, in which capacity he also served as Board Member for Freddie Mac; and during 1982–1983 he was on leave to serve as Director of the Economic Policy Office, Antitrust Division, US Department of Justice. He is the General Editor of The Review of Industrial Organization and formerly Secretary-Treasurer of the Western Economic Association International.
Larry received his BA from Harvard University (1964), his M.Sc. from the London School of (1965), and his PhD from Harvard University (1969).  He is the author of The Automobile Industry Since 1945 (1971); Industrial Concentration and Economic Power in Pakistan (1974); Reforming Regulation: Processes and Problems (1981); The Regulation of Air Pollutant Emissions from Motor Vehicles (1982); The Public Library in the 1980s: The Problems of Choice (1983); International Trade in Ocean Shipping Services: The US and the World (1988); The S&L Debacle: Public Policy Lessons for Bank and Thrift Regulation (1991); and articles in leading economics, finance, and law journals. He is the co-author (with V.V. Acharya, M. Richardson, and S. Van Nieuwerburgh) of Guaranteed to Fail: Fannie Mae, Freddie Mac, and the Debacle of Mortgage Finance, Princeton University Press, 2011.
Larry is editor or coeditor of twelve volumes: Deregulation of the Banking and Securities Industries (1979); Mergers and Acquisitions: Current Problems in Perspective (1982); Technology and the Regulation of Financial Markets: Securities, Futures, and Banking (1986); Private Antitrust Litigation: New Evidence, New Learning (1988); The Antitrust Revolution (1989); Bank Management and Regulation (1992); Structural Change in Banking (1993); The Antitrust Revolution: The Role of Economics (6 editions). He was the North American Editor of The Journal of Industrial Economics, 1984–1987 and 1990–1995. Larry served on the Senior Staff of the President’s Council of Economic Advisers during 1978–1979, and he was Chairman of the Stern School’s Department of Economics from 1990 to 1995.

David L. Yermack is the Albert Fingerhut Professor of Finance and Business Transformation and Chairman of the Finance Department at New York University’s Stern School of Business, where he has been a member of the faculty since 1994. He is also an Adjunct Professor of Law at the New York University School of Law, Director of the NYU Pollack Center for Law and Business, and a Research Associate of the National Bureau of Economic Research law and economics program. At NYU David teaches a joint MBA-JD course, Restructuring Firms and Industries, as well as doctoral level courses on corporate governance, corporate restructuring, and executive compensation. In 2014 he began teaching the first course at a major university on digital currencies and blockchains in the financial services industry. David has published more than 25 papers in peer-reviewed academic journals, including some of the most cited papers in the fields of executive compensation and corporate governance. He has also written papers on such diverse topics as options in baseball player contracts, incentive compensation for clergymen, tobacco litigation, fraudulent charitable contributions, CEOs’ mansions, the governance of art museums, and Michelle Obama’s impact on the fashion industry. David was awarded AB (1985), MBA (1991), JD (1991), AM (1993) and PhD (1994) degrees, all from Harvard University. He is on the editorial boards of five leading finance journals and was elected in 2008 as an academic member of the board of directors of the Financial Management Association. David has been appointed a visiting professor at 15 international universities, a visiting scholar at the Federal Reserve Banks of New York and Philadelphia, and has given invited research seminars at more than 100 universities and institutes worldwide. David has work experience in management consulting, law, and financial journalism.