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).
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