When it comes to the world’s much-publicised infrastructure financing gap, governments and banks tend to be seen as the problem rather than the solution. Hamstrung by budget deficits in the case of the former, and hampered by regulation in the case of the latter, the future of long-term infrastructure finance is assumed to lie elsewhere – in the shape of institutional investors such as pension funds and insurance companies.
But while it’s true that governments and banks can no longer bankroll infrastructure for decades ahead – while institutions theoretically can – it’s far from true to think that they no longer have a role at all. Indeed, in reviewing the impressive list of submissions for our inaugural 2013 Infrastructure Investor Awards for Banking Excellence, it occurred to us that they retain a crucial facilitating role.
While it was quickly acknowledged in the wake of the Crisis that ways would have to be found to tap into the potentially vast institutional capital pool, methods of effectively doing so took some time to emerge. Eventually, public sector initiatives began to rise to the key challenge of creating an investing environment sufficiently comfortable to assure conservative institutions that they could back infrastructure projects – even at an early stage of development – without exposing their policy holders to too much risk.
Evidence of the fruits of their labour were to be found among our award contenders, including the first utilisation of the European Investment Bank’s credit-enhancing project bond initiative and a number of deals taking advantage of state guarantees –among them one in France that effectively allowed institutions to enter a greenfield public-private partnership at the construction phase (a rare achievement).
In US deals, we saw the deployment of innovative state funding in the shape of Private Activity Bonds (PABs) and Transportation Infrastructure Finance and Innovation Act (TIFIA) loans – and how these could act as a magnet for private sector capital. One deal that particularly impressed us showed not only this combination of public and private sector financing sources but also some highly innovative risk sharing.
But while state initiatives have done much to help revive the long-term lending market, the banks also deserve a lot of the praise. Also in the US, we came across a transaction where banks were bold enough to take unprecedented construction phase risk onto their balance sheets (including eschewing standard EPC contracts) in order to make the asset investable. This was truly a pathfinder deal in a sector that has not traditionally used project finance.
There are also intriguing signs of confidence creeping back into the market. 2013 was after all the year when we saw a Private Finance Initiative deal in the UK feature (very) long-term bond issuance with no credit enhancement. Yes, it helps when you have relatively low gearing, strong asset demand and solid counterparties – all boxes that could be ticked in this case – but it still drops unmistakeable hints of pre-Crisis bullishness.
All in all, ways are indeed being found of encouraging institutions to step up to the long-term infrastructure financing plate – and banks and governments deserve a large slice of the credit for that.
*Winners of our 2013 Awards for Banking Excellence will be announced in the May 2014 issue of Infrastructure Investor.