Currently, Asian infrastructure is funded by government provisions and regional banks, but the increasing sophistication of Asian investors is leading the regionÆs governments to disintermediate infrastructure funding and to expand domestic bond markets. The success of this developing capital model approach depends to a large degree on AsiaÆs commitment to developing a ôcredit cultureö, which includes solid due diligence, continual oversight, and regular disclosure.
The move to such a credit and information culture will be a huge adjustment for many Asian issuers of debt, who never before have had to concern themselves with such oversight and disclosure. But such changes to legal and cultural structures will facilitate greater participation by global investors.
Although infrastructure projects and assets are long-term investments, in many cases they have a limited lifespan, dependent on physical longevity (as is the case with power plants) or concession terms (toll roads). Thus, financing ideally is through long-term amortising debt that provides certainty, as there is no funding risk in a fully amortised structure. Unfortunately, the current financial instability has reduced the availability of long-term funding, resulting in many assets being financed through short-term debt amid hopes for a speedy capital market recovery.
The high cost of funds inevitably will influence the price that private investors pay to gain access to the largely fixed revenue stream that infrastructure investment generates. Finance is still available for private investors but at higher prices, reflecting the costs to banks in terms of lower leverage, tighter terms and conditions, and more equity of a long-term nature. In the short term, bond markets may not be used for funding infrastructure; also, the pricing arbitrage of monoline insurance is unlikely to be attractive until investors regain confidence in monoline bonds.
In recent years the equity markets have learned that the complexity of their financial engineering for infrastructure did not lead to quick profit, and so they are now moving toward viewing infrastructure as a long-term investment rather than a get-rich-quick opportunity. Given that the lifespan of infrastructure assets are generally long-term in the first place, this is a logical and welcome development.
Strong political sponsorship is seen as essential for delivery of privately-financed infrastructure. Governments need to match the skills of the private sector by building their own expertise to understand the benefits and risk of various proposals. A clear and well-thought-out selection process for both assets and bidders will facilitate the process, and the key to a successful bid will be a well-thought-out project definition that does not become a wish list.
All of these changes would constitute an immense cultural shift for Asia and the efforts will take time to mature. However, they are essential if Asia is to be able to fund its future infrastructure needs.
Ian Greer is a managing director with Standard & Poor's in Asia-Pacific.
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