Enhancing infra dev’t
Attracting funds and investors may well be one of the most crucial elements in an infrastructure program.
This is perhaps the reason why the Duterte administration recently announced a “make over” of its public private partnership (PPP) program that will see the adoption of a hybrid formula, news reports showed.
Under this scheme, the government will select, finance, and build big-ticket projects through competitive public bidding. Projects could be privatized at any stage of implementation whether in the middle or at the end—a move seen to make projects more attractive for investors that are not keen on taking risks typical in the early stages of a project.
One scheme being eyed is that upon completion, the operation and maintenance (O&M) of these projects will be auctioned off to the private sector.
This hybrid formula is seen to help move forward the government’s ambitious P8-trillion program that will supposedly pave the way for a “golden age of infrastructure.”
Finance Secretary Carlos Dominguez III was quoted as saying that “adopting a hybrid formula was the fastest and most cost-effective way of utilizing the PPP mode.” It will also allow the government to borrow money cheaper or attract more funds, he added.
Regional infra investments
The problem of attracting adequate funds is common elsewhere in Asia, which will need to invest $1.7 trillion per year in infrastructure from 2016 to 2030, or about 5.9 percent of projected gross domestic product, estimates from the Asian Development Bank showed.
Such large investment will require diverse funding sources to supplement government expenditure, Moody’s Investors Service said in a report entitled, “Infrastructure—Asia: Multi-pronged Financing Key to Enhancing Infrastructure Development”.
According to the Moody’s report, Asia’s infrastructure needs will drive innovation in long-term funding from the capital markets, as the sector becomes more familiar to a wider range of investors. A multi-pronged financing approach, however, is key to enhancing infrastructure development.
“In terms of debt funding, a multi-pronged approach that combines bank loans with institutional debt capital will help raise private sector debt capacity,” said Terry Fanous, Moody’s managing director for project and infrastructure finance in Asia Pacific.
“The role of governments and the multilateral development banks (MDBs) is key to catalyzing institutional investment by helping infrastructure projects become more investable,” added Ray Tay, Moody’s VP and senior credit officer.
Tay added: “Specifically, credit enhancement by multilateral development banks will help address different credit risks—such as political risk and the risk of cost overruns—that could otherwise constrain a project’s credit quality.”
Key points
Moody’s report considered infrastructure debt finance as comprising four components: corporate infrastructure bonds; corporate infrastructure loans; project finance bonds; and project finance loans.
Data in the report was for 11 key countries in the region namely Australia, China, Hong Kong, India, Indonesia, Japan, Malaysia, the Philippines, Singapore, South Korea, and Thailand.
Moody’s offers in its report five key insights about funding infrastructure projects in Asia:
There are opportunities for greater diversity in funding infrastructure in Asia.
According to Moody’s, annual infrastructure debt raising in the key countries in Asia has averaged $210 billion yearly in the past 10 years, indicating that a substantial ramp up is required to meet funding needs.
It was also estimated that about $750 billion of infrastructure debt is maturing over the next five years. There are thus opportunities for institutional investors to increase exposure to the infrastructure sector, including in developing Asia, where greenfield infrastructure needs are expected to be higher.
Infrastructure can be attractive to institutional investors.
The sector has attributes suited to institutional investors’ strategic objectives, such as offering investment opportunities with long asset lives that match their long-dated liabilities. Also, the credit risk performance of infrastructure debt is generally more stable than that of non-financial corporates.
Credit risks are constraining investor appetite.
These include construction risk, demand risk, political risk, regulatory risk and currency mismatch risk.
Investors are most familiar with corporate infrastructure debt raised by state-owned enterprises (SOEs) that benefit from sovereign support, while investors in project finance transactions need to satisfy themselves that key risks are identified, allocated and mitigated.
Credit enhancement by MDBs can mitigate credit risks.
Efforts by MDBs and organizations such as the Global Infrastructure Hub, in standardizing documentation and in establishing a project pipeline tracker will enhance investor confidence. MDBs are also optimizing balance sheets, which can help drive more credit enhancement for projects.
The Asian Infrastructure Investment Bank and the ADB are looking to support project finance in Asia with credit-enhanced structures similar to the Project Bond Initiative to crowd-in private sector capital.
Improved investor familiarity creates virtuous circle.
A regular flow of institutional capital would encourage investors to develop their sector expertise, hence increasing familiarity with the asset class and propensity to invest.
MDB-led and government-led efforts to improve project pipelines and procurement programs are essential to stimulate more institutional investment.
