The impacts of the 2008/2009 credit crunch are being felt again with a lack of liquidity in the banking sector and renewed economic uncertainty keeping the cost of finance high. In this article we provide a snapshot of the steps being taken in a number of countries to combat the difficulties in obtaining project finance.
Current alternative financing model
One of the Australian responses has been a supported debt model which allows government funding to substitute more costly private finance. The private sector provides all financing for the project (both debt and equity) during the high risk construction phase. The public sector then steps in at the less risky operational phase to provide around 70% of the funding. However, a recent trend has been for public sector contributions to flow even earlier in the project lifecycle, during the construction phase decreasing risk for the private sector.
The Infrastructure Finance Working Group, an expert advisory panel to Infrastructure Australia, in its paper, "Infrastructure Finance Reform"1 identified the following six methods for maximising the pool of capital available for financing infrastructure investment:
- greater investment by superannuation funds;
- the creation of an infrastructure bond market;
- the establishment of an infrastructure bank;
- public sector provision of senior debt;
- sale of brownfield assets; and
- provision of insurance against demand.
While the path Australia will take remains to be seen, a number of these initiatives have been, or are in the process of being, implemented by governments around the world as discussed below.
What are other countries doing?
The UK Government recently released its 2011 National Infrastructure Plan 2 (NIP 2), which targets £20 billion in investment through a range of initiatives including pension funds and cooperation with the Chinese government (through the Chinese Investment Corporation). Details of how the investment by pension funds will be structured are not yet available.
Canada has been the leading proponent of the unwrapped bond (bonds that do not have the benefit of a guarantee standing behind them and are instead rated on the project itself) financing model. There has been some discussion of exporting the model into other markets, such as Australia and the UK. However, the biggest hurdle in doing so is investor confidence in markets that are unfamiliar with the model and do not have the risk appetite for unwrapped bonds.
The Dutch Government has made plans to encourage pension funds to invest in PPP project debt by offering inflation indexing for debt financing and the fees that will service it.
Initial debt financing is to be provided by banks and up to 70% of the debt is to be refinanced by pension funds post-construction. The approach is win-win with the banks provided with a guaranteed short-term exit strategy and pension funds avoiding the construction and inflation risk.
The above is intended as a brief overview of global financing responses only. For more information please see the January edition of Norton Rose LLP’s “Infrastructure Updater” and a local version of that article by James Morgan-Payler, Sefton Warner and Paul Mansouri published in the March edition of the Australian British Chamber of Commerce Quarterly magazine, The Chamber.