The idea of bond market financing of infrastructure has been a enduring argument. As I have blogged several times earlier (see this and this), while in theory bond markets are better placed to finance infrastructure assets, reality points to banks being the main source across the world and bond markets being a marginal financier.
An ADB report analyses 11,054 projects (involving 23,991 financing facilities/instruments) with a total cost of $2.8 trillion (January 1994 prices) in 152 countries and 31 sectors which achieved financial closure between January 1994 and May 2019.
More than 75% of projects use loans (8,529 projects), followed by debt (4,972 projects, about 45% of the sample), equity (2,865 projects, about 25% of the sample) and lastly bonds (951 projects, about 9% of the projects).
As a percentage of aggregate project amount in January 1994 prices, loans amount to 59.5%, other debt 19.4%, equity 12.4%, and bonds 8.7%.
In fact, the total amount of annual bond financing is less than even $20 bn!
So what is the lesson from this for India. Some headline takeaways
1. Focus on infrastructure financing as a two-step process. Finance the greenfield investment with syndicated bank loans. Then refinance through other capital sources, including bonds, where projects are commercially viable.
2. Instead of chasing chimera of bond markets, get used to the reality of banks being the predominant financier for infrastructure projects. Put in place mechanisms to support banks appraise projects (greenfield ones) better.
By all means engage actively to broaden and deepen bond markets, but with the full realisation of its limitations, as global experience points to conclusively.
3. Promote different bank-based financing by simplifying and making it easier to undertake syndication, takeout financing, and other ALM minimising approaches.
4. Establish public financed infrastructure DFIs with the expectations and along the lines as discussed here.
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