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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.
Financing alternatives
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?
United Kingdom
The UK Government recently released its 2011 National
Infrastructure Plan 2 (NIP 2), which targets Ł20 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
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 Netherlands
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.
Footnote
1 Published in July 2011
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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