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We believe first of all that there is a qualitative difference between bank lending and capital market financing, in terms of flexibility, quality of the risk assessment and interconnectedness.
The expected decline in bank lending as a result of bank deleveraging is also not inevitable and would be the banks' choice.
We appreciate that it is not a question of either one or the other. And we welcome alternative channels of financing, especially if they contribute to a reduction in maturity transformation in the system.
However we believe that more could be done to prevent a decline in bank lending, including revisiting the overly prescriptive approach of prudential regulation that promotes asset homogeneity, and providing banks with stronger guidance on the type of activities expected of them.
Because the discussions are premised on a reasonable financial return to attract investors, these approaches are viable only to the extent that infrastructure generates revenues. Given the constraints on governments' budgets and their reluctance to further increase taxes, it is likely that user charging will become a more common policy.
This raises questions about the public willingness to pay tolls on more highways, and also about whether favouring user-fee based projects is compatible with the objective of promoting sustainable and inclusive growth.
Private equity and infrastructure are already growing asset classes, in some cases with too many hunters for too few targets. Therefore we must ensure that the objective to fill the funding gap does not lead to a bubble, just as the political objective to increase home ownership contributed to the real estate bubble.
Possible measures could include ensuring a meaningful financial commitment of the asset manager to the fund, either a cash commitment or via the reinvestment of performance fees in the fund, depending on the structure.
They could include as well management fees based on operating expenses rather than assets under management, as excessive base fees have been known to distort investment decisions and encourage so-called "zombie funds", that is poor-performing and inactive funds that still collect fees from investors.
Performance fees should also include a meaningful threshold, be linked to the cash distributed to investors and include claw back provisions.
In conclusion, we believe that provided some key issues outside the scope are addressed and provided strong governance arrangements are included in the proposal, the ELTIF should achieve its objective of channelling more investments to finance the real economy.