Infrastructure financing update 2019

How much can foreign capital and bond markets contribute to infrastructure financing? In all discussions about infrastructure finance, the arguments in favour of developing bond markets takes centre stage. 

Let's take foreign private capital. The Preqin Infrastructure Report 2019 provides these takeaways. The total money raised globally in 2018 through unlisted infrastructure funds was $90 bn.

Incidentally, nearly 60% of the funds raised in 2018 were focused on renewables. Just $4.1 bn of this was focused on Asia

Equity funds are the dominant form of unlisted private capital.

In terms of unlisted infrastructure assets under management (AUM)

In terms of AUM, Asia had just $72 bn assets outstanding, of which dry powder is $24 bn.

What about local currency debt securities? Annex II here indicates that the volume of domestic debt securities raised by non-financial corporates even in the developed countries is a very small proportion of GDP. At 1-3% of GDP, these are small amounts in comparison to the total bond issuance by governments and financial institutions, which itself is small compared to the total banking sector. And infrastructure itself is only one among the several non-financial corporate sectors. 

As the graphic below shows, the total domestic infrastructure bond markets remain very small compared to the total non-financial corporate bond market.

Banks remain the major source of infrastructure financing and bond market development remains a challenge,

According to the World Economic Forum (2014), commercial banks provided an estimated 90% of all private debt for infrastructure financing from 1999 to 2009... Although local currency bond financing can plug large financing gaps and finance long-term infrastructure projects in Asia, the Asian infrastructure bond market is in a nascent stage with a meager size of bond issuance compared to the large amount of investment required.... the small and fragmented economies of Asia face difficulties in developing liquid and efficient bond markets because they require a certain minimum efficient scale. Economic size is one critical determinant of the infrastructure bond market.

It is the case even in Europe,

In Europe, 70-80% of financing has historically been provided by the banking sector with only around 20-30% from capital markets... This feature is not specific to infrastructure financing but is common across European small and mid-market companies.

The comparison between loans and bonds as sources of infrastructure financing is stark.

China is an exception, doubtless helped by the financial repression and the tightly directed nature of financial intermediation. 

This overwhelming evidence is a note of caution against placing too much faith on bond markets and foreign capital to finance infrastructure. Further, the major share of infrastructure financing has to be from government's budgetary support. This has been the case with developed countries, and will be so with developing countries. India can, at best, raise $2-3 bn dollars annually from foreign capital and $5-10 bn from bond markets. Even these are stretch goals.

It is therefore encouraging that the Government of India expects 78% of the funding for the National Infrastructure Pipeline to come from public finance. The challenge though is how, given the low and declining national savings rate?