2.7.3 Consultation and Review 2019-2020

The 2019 Consultation 

The 2019 TICCS® market consultation took place between May and September 2019. The objectives of the consultations were

1. whether each TICCS pillar serves a clear purpose

2. whether there are categories under each pillar that should be added, revised or removed

3. whether any other pillars should be considered

4. how TICCS is useful to their organisation

120 responses were provided, mostly by asset owners and managers but also consultants and regulators.

69% of respondents considered TICCS® 2018 to be appropriate, with no changes required. The remaining 31% of respondents had comments or required clarifications about the classification. These comments and suggestions were then passed to the TICCS® Review Committee for their consideration and expert opinion.

(You can download the 2019 Consultation Results here.)  

The rest of this document includes the key January 2020 recommendations of the Review Committee and a discussion of most of the suggested changes or clarifications. Note that a number of suggestions were aggregated, and a few were excluded because they were not considered relevant.

Recommendations of the Review Committee (January 2020)

2019 CONSULTATION TICCS® 2020√

A Pure Taxonomy

The consultation report prompted several comments regarding hybrid business models, in which companies cross multiple classifications within the same pillar. The consensus of the TICCS® committee members on the call was that the classifications should remain pure, without making accommodations for hybrids. Individual users of the TICCS® classifications may use them however they want, of course, including placing companies into multiple classifications. Additionally, we may recommend publication of a Q&A document regarding suggest practices for users to classify these companies.

A Granular Taxonomy

The consultation report included several comments suggesting more granular classifications for the business risk and industrial classification pillars. The committee discussed that workable indices are unlikely to be possible in the near-term for classifications that get too granular, given that EDHEC currently published indices only where there are at least 25 constituents in a classification. The opinion of the committee is that we should allow classifications to get quite granular even if they do not contain sufficient constituents at present for an index, because users may still find the classifications useful for their internal purposes.

A Normative but Open Taxonomy

The committee discussed whether the TICCS® classifications should be in principle be descriptive or normative or somewhere in between. It is apparent that many investors are expanding their definitions of infrastructure, and/or are investing in assets that may or may not have the physical and/or investment characteristics that investors look for in infrastructure. The consensus of the committee seemed to be that TICCS® should be normative-but-open: we should work together to exclude investments that do not meet some basic guidelines to be considered infrastructure, but that we be willing to expand and shift the classifications over time. The committee agreed that these guidelines will not constitute a definition of infrastructure, but rather mere guidelines for whether an investment should be included in TICCS® or not. 

Note: the above is verbatim from the Review Committee’s Minutes. Committee members also provided detailed feedback and voted on each of the 70+ material questions or suggestions made by the 120+ consultation participants. What follows was edited by EDHECinfra to aggregate the comments and suggestions provided by respondents to the consultation and the Review Committee.

2019-2020 Consultation & Review

The vast majority of respondents were happy with TICCS® and found it clear and useful. Most of the comments in the consultation report were granular, focusing on specific points of specific classifications, especially within the industrial pillar.

Pillar one (Business Risk)

• 83% of respondents to the 2019 TICCS® consultation considered this pillar to service a clear purpose.

• Is more granularity needed? The Committee noted that there is a trade-off between classifying information in a granular manner and the cost of doing so. We also note that when information about a business risk category may apply to any subclass (e.g. index-linked or with a certain type of counter-party) then this information is an attribute of the firm in this class but does not justify creating a new subclass, since all branches of the taxonomy would then have the same subclasses.

• The committee argued that more precision is probably needed to better define terms like “contracted” in particular with regards to how much time remains in the contract and what proportion of revenues is contracted. What about contracts that are short term but are known to be renewed automatically? Likewise, the proportion of contracted revenues and the horizon (or remaining length) of the contract were raised as needing clarification? Implementation Guidelines are suggested in TICCS® 2020.

• Indexed revenues: Contracted revenues may be linked to an index. While this is important to many investors in infrastructure, this is an attribute of the company’s business risk classification but not a category in itself. As a result, TICCS® does not distinguish between contracted revenues that are index-linked and contracted revenues that are not.

• The question of knowing whether only business volume or tariff was contracted is considered covered by the Partially Contracted category (BR11). This question was also raised for merchant companies but the answer remains the same.

• The nature of contract counter-parties (e.g. public or private) are also attributes (like indexation) of a contracted revenue stream and thus may apply to several subclasses. Moreover, the corporate or public nature of the counter-party, while highly relevant, is not a systematic discriminant between companies i.e. some corporates are more credit-worthy than some governments and vice versa.

• Distinguishing between companies with contracted inputs (costs) vs contracted revenues. Business risk classifications pertain to the business model of infrastructure companies and thus focus on the nature of their revenue stream, and not on other cash flows.

• It was suggested to include mixed models combining, for example regulated tariffs and subsidies. However, creating hybrid classifications is discouraged and public subsidies are not a relevant discriminant between types of infrastructure companies. See Review Committee Main Recommendations.

• Caps on revenues and minimum revenue guarantees are already covered by the price-cap regulation (BR31) and Partially Contracted (BR12) categories, respectively.

• Updating definitions / synonyms

  • Feed-in-Tariffs (FIT) is moved to the partially contracted class (BR12) because only price is contracted while volumes are typically predictable but not contracted.

  • Tolling Agreements is moved to the fully contracted class (BR11)

  • Shadow Tolls: continue to be considered partially contracted from the standpoint of equity owners. A senior lender may consider a shadow toll arrangement to be fully contracted if revenues for the first traffic band cover senior debt repayments in full.

• Removed synonyms

  • Renewable Obligation Certificate (ROC) is removed from the contracted category because it is a market instrument and may be found under different business models

Pillar two (Industrial Activity)

• Proportion of respondents to the 2019 TICCS® consultation who answered that the following Industrial Activity Super-classes served a clear purpose.

  • 80% IC10 – Power

  • 67% IC20 – Environmental Services

  • 88% IC30 – Social Infrastructure

  • 63% IC40 – Energy and Water Resources

  • 73% IC50 – Data

  • 88% IC60 – Transport

  • 80% IC70 – Renewables

  • 71% IC80 – Network Utilities

It was suggested that certain activities be re-organised within their own water super-class. The Review Committee did not provide a clear recommendation on this topic. EDHECinfra considered this option but concluded that the current distinction between ‘network’ businesses (including Water Utilities) and standalone assets (e.g. Water treatment plants) is warranted and reflects the fundamental economic mechanisms at play in infrastructure.

Suggested new Asset Subclasses were considered by the Review Committee and also the fundamental economic criteria described above.

• To be newly included

  • Crematorium (IC304040) under Health and Social Care Service (IC3040)

  • Waste Incineration (IC201040) under Waste Treatment (IC2010)

  • Hight Speed Rail Lines (IC604020) under Rail Companies (IC6040)

  • Freight Rail Rolling Stock (IC604030) ← See 'Treatment of Leases' below

  • Passenger Rail Rolling Stock (IC604040) ← See 'Treatment of Leases' below

  • LNG Ships (IC401050) under Natural Resources Transportation Companies (IC4010)

  • Floating Storage Units - FSU (IC404040)

  • Gaseous Waste Treatment under (IC201040) Waste Treatment (IC2010)

  • Carbon Capture under (IC204040) Environmental Management (IC2040)

  • Data Distribution Companies (IC8060) and Data Distribution Network (IC806010)

• Suggestions not to be included

  • Water rights

  • Recycling

  • Air pollution

  • e-Waste treatment

  • Food and agro projects

  • Private coaching and tuition

  • Zoos

  • Stevedoring, navigational aids and dredging

  • Smart meters

  • Electric vehicle charging

  • Ferries and water-based transport

  • Sea-containers

• Suggestions that were already covered in TICCS® 2018

  • Distributed generation

  • Military bases

  • Senior housing

  • Bus stations

  • Batteries and pumped storage

• Subclasses to be removed

  • Amusement Parks (IC305050): do not meet the fundamental economic criteria for long-term investments.

• Renaming of subclasses

  • ‘Solid Waste Treatment’ (IC2010) is renamed to ‘Waste Treatment’ to allow for gaseous waste.

  • Water Treatment (IC2020) is renamed ‘Water Supply and Treatment’ to reflect the inclusion of Dams amongst others.

  • Pipeline Companies (IC4010) is renamed Natural Resources Transportation Companies to accommodate LNG shipping amongst others

Pillar three (Geo-Economic)

• 92% of the consultation respondents found the third TICCS® pillar to serve a clear purpose

• While this this pillar could be made more granular it was felt by the Review Committee that users of TICCS® would prefer taxonomies to be simple and clean with minimal overlap and were comfortable applying weighs in-house.

• Implementation criteria or guidelines were felt to be needed to determine what matters the most and how to relate assets with one another. See TICCS® 2020 implementation guidelines.

Pillar four (Corporate Governance)

• 69% of the consultation respondents found the third TICCS® pillar to serve a clear purpose

• The Review Committee agreed that the distinction between project finance and corporate entities is important.

• Choice of corporate entity: The corporate entity to be considered should be the one that best represents the infrastructure business as a whole. In other words, TICCS® does not determine whether the HoldCo, BidCo or ProjCo should be considered. This is a matter of judgement to be exercised on a case-by-case basis, depending on the nature of these corporate structures. For example, if the HoldCo carries most of the debt related to the underlying investment (e.g. Heathrow) then it would be considered the most relevant level for the purpose of identifying or classifying infrastructure investments.

• Role of leverage: The distinction between projects and corporates aims to capture expected differences of behaviour between firms. These differences are primarily driven by the purpose for which the firm was created and the balance between the control rights of equity owners and those of external creditors. Yet the choice of classifying firms on the basis of a 50% senior debt threshold could be arbitrary. The reference to the level of gearing is removed and replaced by a qualitative criterion about the presence of external senior debt: Creditor Oversight.

• Because this distinction is only material for project finance companies, whereas corporates almost always have senior debtors, it is only maintained for project companies (CG11 and CG12) and abolished for corporates which only have a single class CG20.

Trans-pillar issues

1. Some respondents expressed concerns about the overlap between pillars: Indeed, some classes tend to be correlated across pillars. For instance, network utilities (IC80) tend to be corporates (CG02). TICCS® ignores such correlations but applying TICCS® allows documenting the structure of the investment universe empirically in terms of each pillar. Thus, the largest share of the investible market on the equity side is made of corporate utilities.

2. Treatment of leverage: it was suggested in the consultation that that leverage, as driver of the risk-return profile of an infrastructure investment should be considered as discriminant between investments. The Review Committee suggested that this was relevant but not necessarily the basis for a new category of assets. EDHECinfra finds that leverage is not specific to any given infrastructure company. While leverage is empirically higher or lower in certain business risk, industrial or corporate governance categories, it is not specific to any of them and if also found to vary with the credit cycle, local credit markets, etc. Moreover, in the fourth TICCS® pillar, the presence of senior leverage is meant to capture a different phenomenon: the extent of the oversight exercised by third party creditors, which is fundamentally different in project and corporate finance settings.

3. Treatment of leases: It is important to distinguish between finance leases (operating and maintenance costs covered by the lease for the life of the asset) and operating leases (operating and maintenance costs covered by the owner and the lease terms are short term). Only finance leases should be considered to be infrastructure investments.

4. Treatment of rolling stock : only rail rolling stock, ships, aeroplanes or satellite investments that are structured as finance leases should be considered infrastructure under TICCS®.

5. Some respondents suggested using bank-only metrics to categorise companies such as life-cover ratios. This was rejected for the same reasons than the ones pertaining to the treatment of leverage and also because this data is typically not available to any party but the lender.

6. Treatment of the firm lifecycle – should the taxonomy recognise ‘greenfield’ investments including the scope of works. The Committee noted that this is difficult to determine empirically. It was also mentioned that construction risk is largely idiosyncratic in nature. EDHECinfra agrees with this view: while the greenfield stage of an investment is typically riskier and does command higher returns (see EDHECinfra asset pricing methodology) it is also a passing stage in the life of an infrastructure asset or company

7. Are TICCS® classes and subclasses predictors of financial performance? TICCS® is also about risk. However, TICCS® is not designed to discriminate between pure sources of systematic risks in infrastructure companies. Rather, as a taxonomy of infrastructure companies, TICCS® aims to be an exhaustive list of objective, real world, distinguishing characteristics i.e. a system to organise information about actual firms. Each TICCS® pillar captures a different dimension of what makes infrastructure companies unique and relatively more homogenous. In that sense, the TICCS® pillars capture differences in aggregate risk profile that represent combinations of systematic risk factors, but these are not the object of the taxonomy.