Tuesday, May 26, 2015

The infrastructure financing problem

Where does infrastructure financing money come from? I blogged earlier about how, contrary to conventional wisdom, the overwhelmingly dominant share of infrastructure financing comes from bank loans and the bonds have a marginal role.
But for China, syndicated loans form the lion's share of infrastructure financing. The total annual infrastructure bonds raised have been around $10-12 bn for all emerging markets excluding China.
And about infrastructure debt funds, the amounts raised globally are minuscule compared to the requirement. Just $4.7 bn was raised in  2011, the highest ever raised globally in a year by infrastructure debt funds.
Infrastructure equity funds, which leverage capital from pension funds, while larger, too form a small share of the total infrastructure financing and are concentrated in developed markets, especially the US and Europe. Globally, they formed just above $36 bn in 2013.
Furthermore, structured equity or debt financing - infrastructure equity fund, infrastructure debt funds, or bonds - is rarer still in the construction phase, where bank loans are the most risk-appropriate form of financing. So as India explores various infrastructure financing alternatives, it would do well to keep in mind the reality that bank loans would necessarily have to form the lion's share of infrastructure financing. Alternative sources like structured debt and equity can only contribute marginally. This again underscores the importance of restoring bank balance sheets and their recapitalization.

In any case, whether financed through loans or structured capital, rigorous project preparatory work is critical to the success of any long-term project. These projects will be able to attract private investments only if adequate preparatory work is done and rigorous enough feasibility and commercial viability studies and detailed project reports are available. Its preparation generally takes at the least 18-24 months. It may therefore be appropriate if, atleast to the extent of flagship infrastructure projects, a shelf of works are identified and their due-diligence and documentation initiated immediately, through public finance, and kept investment-ready.

Update 1 (31.05.2015)

The sample of the latest Preqin report is here and it contains this graphic which points to the rising share of infrastructure assets in the portfolios of investors. In 2014, institutional investors had just 4.3% of their assets invested in infrastructure assets, against their target of 5.7%. The report states that 67% of the investors surveyed had plans to increase their infrastructure allocations.
As the FT reports, even a one percentage point increase of allocation can be dramatic. Pension funds, insurers and other big pools of long-term investors seeking investments in assets other than cash, stock, and bonds have $65 trillion in assets. Even a four percentage points allocation is several times the current investments. In fact, of the $296 bn worth unlisted infrastructure assets under management by June 2014, over $100 bn are yet to be committed funds, of which $13 bn is earmarked for Asian markets.
There is a long-term dynamic driving this movement towards long-term infrastructure assets. Stagnant low yields in standard asset classes have forced asset managers to lower their target returns, making infrastructure assets extremely attractive. 

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