Thursday, 16 August 2018

Financing the essentials

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In almost any country with an interesting economic story to tell, there is an infrastructure trend underlying it, fuelling booms in the BRIC markets and beyond. And while sections of the public remain skeptical about privatisation of their essential services, a consensus is being reached that private investment is essential to deliver high quality services. Savita Iyer-Ahrestani reports.

It is a truth now universally acknowledged that the economic growth of emerging market nations is inexorably linked to their having in place the proper infrastructure to support it. Over the past years, as several emerging market countries have become important players on the world stage, and others continue to progress in their path toward becoming full-fledged market economies, great strides have also been taken to ensure infrastructure development keeps pace with economic growth.

However, there is still a great deal of ground to cover. The amount of funding being applied to infrastructure finance is probably half of what people think they need for economies to be sustainable, according to William Rathvon, global head of project and export finance at HSBC in London.

“Infrastructure development across the emerging world has been chronically under funded and World Bank studies will prove that,” Rathvon said. “My own personal view is that a lot of economies have done without infrastructure for so long that some of the needs people project for them are based on Western perspectives of what they actually need. Obviously, though, we’re not meeting the needs of many emerging market nations, but we’re still going on, even if intellectually the lack of infrastructure has to dampen growth.”

The ongoing global liquidity crisis has also thrown a spanner in the works. Many are wondering what kind of an impact it will have upon infrastructure financing going forward. “Over the past two and a half years, the liquidity situation in the world was very good and as governments gave out more projects, even standard commercial banks were seeing infrastructure as one of the new areas to get into,” said Anita George, director of infrastructure at the International Finance Corporation’s New Delhi office.

However, the funding needs for infrastructure going forward are colossal. India alone needs around US$500bn in the next five years, estimated IFC’s George, while Africa and the Middle East require close to US$200bn, as does Southeast Asia.

“These are big numbers especially if you look at the current state of the markets,” IFC’s George said. “Emerging markets were seen as a hot area where people put in money and made great returns. But given the limited amount of liquidity available today, how much of it will actually come to emerging markets?”

Latin America – a region where many countries have made great strides in beefing up their infrastructure – is already feeling the effects of the credit crunch.

“We are seeing that certain projects in Mexico, for example, are more difficult to execute and the refinancing of existing debt structures is getting tougher,” said Cherian George. managing director for the Americas in Fitch Ratings’ global infrastructure and project finance group, (who is not related to the IFC’s George). “If we see more evidence of this, there will definitely be an impact on infrastructure finance, but it’s still hard to argue that the slowdown won’t be anything but temporal because there is a latent demand for infrastructure and people are keen to finance it.”

To be sure, this holds true for every part of the emerging world and although banks – many now operating on tight budgets – have perhaps not been able to do as many deals as before, the infrastructure momentum is still there. “We have a healthy pipeline of deals lined up,” HSBC’s Rathvon said.

Despite the global pressures, infrastructure finance deals are still getting done in strong markets, said Connor McCoole, head of project finance, Asia, at Standard Chartered Bank in London. Malaysia, for example, has a great track record of fostering private sector infrastructure investment and has opened up numerous sectors including power, mobile telecoms, water treatment and toll roads to private investment over the past decade.

“Currently, we are advising world-class Malaysian companies on significant power and telecoms investments in Bangaladesh and Indonesia,” McCoole said.

Infrastructure giants

Experts predict Asia will continue to be the driving force for infrastructure finance in coming years. India and China alone make up the bulk of that; their respective governments have been doing what it takes to not only provide the necessary framework for private sector involvement in traditional infrastructure like roads and ports, but to also open up more novel areas for investment.

“You’re seeing a greater opening up of new sectors – China, for instance, has opened up for water and solid waste management,” the IFC’s George said. “This has allowed for companies to either come in and invest in joint ventures with state utilities, or even come in independently and hold a series of assets in China.”

In India, power continues to be the big story, and the progress of ultra-mega power projects is positive. The perennial problem for power and water is that they have traditionally been government-run sectors and it takes a while for the public and private sides to come together and show cohesion, the IFC’s George said. It is also hard to make power and water – two of the greatest infrastructure needs universally – commercially viable investments for the private sector without raising people’s ire.

“There is always a lot of good about the potential rise in prices of public goods,” the IFC’s George said. “These kinds of infrastructure services have always been subsidised, so when the private sector comes into an atmosphere of rising inflation and higher fuel costs, any talk of rising electricity or water prices leads to volatility.”

In Latin America, too, it is still tough for governments and the private sector to put together water deals. Any perception that the private sector might be looking to put up the price of water immediately becomes a political issue. Overall, though, there seems to be more of an appreciation of the value of infrastructure investment in Latin America, said Fitch’s George. The private sector has now become an accepted part of infrastructure finance in most emerging markets across the globe.

“We advise governments to go for the low-hanging fruit: Get some easy wins in those sectors where the private sector is already successful, ease the regulations and encourage existing investors to expand,” said Standard Chartered’s McCoole. “Then, move up the tree, select a few other sectors… but always make sure there is a firm foundation of public support.”

The exception proving the rule

The one part of the emerging world – a large part, at that – still relatively unmarked by private sector participation in infrastructure finance is Africa. The continent’s pressing need for proper infrastructure is no secret. Yet it is the “least understood need and the least financable,” HSBC’s Rathvon said.

“The financing of infrastructure is all about the stability of cashflow, so you need public sector involvement to assure that and it’s the reason why there has been so much more infrastructure financing in Asia and Latin America,” he said.

Africa, though, is the IFC’s priority right now, since it is the region where the marked lack of adequate infrastructure has the greatest impact in terms of slowing down economic growth. “It is a challenge, even though we have invested over a billion dollars a year over the past two years in Africa alone,” the IFC’s George said. “What we’re doing more of is focusing on the advisory side to start developing projects and we’re also pushing what we call South-South investments, which means encouraging companies like Tata Power in India to make investments in Africa.”

Companies that come from emerging markets themselves have a different mindset when it comes to investing in another emerging market, the IFC’s George said. They have less fear of the unknown and a longer time horizon, as well as a greater willingness to preserve in order to get things done.

“These are younger companies that have done well in their own markets and are now going global,” she said. “The Western companies have been through this and have reached a phase where they can be more selective in where they want to invest, choosing Asia over Africa, for instance. An Asian company can’t really go to the West, so its market would be another emerging market.”

Many African governments – Kenya, Nigeria and Ghana, to name a few – are also seriously working on ways to make infrastructure investing more interesting to the private sector. If the momentum continues, then, Africa may well provide the next wave of investment opportunities for infrastructure finance.

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