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20 April, 2017 11:28:25 AM

Challenges for infrastructure financing

The outlook for 2017 has become brighter as the number of consumers and businesses as well as government expenditure are set to rise
Masihul Huq Chowdhury
Challenges for infrastructure financing

Bangladesh has marked her presence in the global economy with astounding growth story in socio economic indicators. Economists and businesses say that 2016 has been a successful year in terms of macroeconomic stability -- be it gross domestic product (GDP) growth, per capita income, inflation, export, import or poverty reduction. The outlook for 2017 has become brighter as the number of consumers and businesses as well as government expenditure are set to rise. Still, there are a number of challenges, not only in achieving higher growth but also in sustaining the current growth rate. While construction of major projects like Padma Bridge, Elevated Express  Way are under process, the requirement for more roads, bridges, sustainable energy, safe water, development of mass transports, health projects etc  in Dhaka and across the country are of prime importance towards an equitable growth of the country. The gini index will improve and the healthy distribution of income and wealth therefore will be possible for a sustainable socio economic development of the country. Now a days, income inequality is increasingly coming under scrutiny for the destructive forces it unleashes. When Janet Yallen, the Chairman of the Federal Reserve Board of Governors of the US spoke before the House of Representatives earlier this year, she brought up the issue of income inequality in the US. Her remarks might be dismissed as a casual observation or just a flight of imagination for the Fed chief. But it is hardly so. Income inequality is a serious matter around the globe and not only academics but also political leaders, central bankers, and multi-governmental donors are taking notice.

Projects under Public Private Partnership (PPP) are seen as viable alternative to fund the infrastructure projects as required. 
The World will need to invest almost $57 trillion on new infrastructure over the next 15 years, according to the McKinsey Global Institute. That’s an enormous sum, but contrary to popular belief, there is no shortage of capital; in fact, there will be more than enough as both governments and investors increase their focus on infrastructure. The past five years, for example, have seen a steady rise in the number of institutional investors allocating assets to infrastructure, as well as the establishment of infrastructure as an asset class in its own right. At the same time, thanks to an increased appetite for direct investing by limited partners and the entrance onto the scene of giant sovereign-wealth funds, more money is in play. Meanwhile, multilateral and development-finance institutions are stepping up their efforts. The pool of capital available is deep. Across infrastructure funds, institutional investors, public treasuries, development banks, commercial banks, corporations, and even retail investors, it is estimated that more than $5 trillion a year is available for infrastructure investment. But the world requirement for infrastructure development is also in a sizeable manner. Hence, there is a competition among the constituent countries to attract these funds. While capital is, of course, necessary, it is not sufficient to ensure success. The money has to be focused on the right projects and then spent judiciously. There are two primary sources of revenue for investors in infrastructure. The first is public funds and the other is revenue streams in the form of charges, such as tolls, paid by end users. Historically, government has assumed most of the burden, particularly in emerging markets. But the scale of infrastructure required makes attracting private investment critical.To do so, projects in difficult-to-finance areas such as roads and water should take their cue from telecommunications. This sector manages to attract investors even in capital-poor countries because it offers a clear return on investment and predictable cash flows. In many cases, particularly in developing countries, people have become accustomed to paying little or nothing for water or roads. But they do, of course, derive benefits, economic and otherwise, from such projects; moreover, there needs to be a way to pay for maintenance. If charging users offers a realistic prospect of covering capital or operating costs, then doing so makes sense, assuming this arrangement makes provisions for low-income users, ensuring they are not overburdened. To replicate the telecoms model for other kinds of infrastructure, governments should ensure that charges reflect the economic costs. Even a well-structured project will fail to attract private financing if prices are set too low; in that case, the public sector will be forced to cover all the costs. The roads sector illustrates the difficulty of setting appropriate prices. The same is also true of wastewater; the beneficiaries of sewage systems, meaning everyone, often do not contribute to the cost of cleaning up the water. This is particularly true of developing markets, due to the inability to impose and collect charges. In too many cases, that means wastewater is left to pollute the landscape or, worse, seep back into the water supply. However unpopular doing so may be, governments need to set prices for such projects so that investors can earn a reasonable financial return. Once governments have structured projects to provide stable and appropriate revenue streams, they can begin to figure out which ones to do first. Setting priorities is important, particularly in developing countries that have severe fiscal constraints. South Africa’s National Development Plan contains dozens of road, port, and rail projects, including both public and private financing. Its Department of Public Enterprises has flagged several components, including a new coal terminal and a container port, for private investment. These represent investments that would be attractive to private firms. In fact it is time that our policy makers need to review the PPP framework and decide on how to derive the benefits of the existing liquidity in the global infrastructure funds. 
Having a lot of capital available for infrastructure doesn’t mean the right type of money will be there. Privately financed infrastructure projects require both debt and equity to manage risks and satisfy debt investors, who typically take the lion’s share of project costs. Capital is also flowing from nontraditional sources. Some countries require their mandatory pension funds to invest part of their resources domestically. This has helped generate a pool of resources suitable for domestic infrastructure investing. In the small town of Glyncoch, Wales, local crowdsourcing finances construction of a new community center without formal government support. Eliminating the legal barriers to crowdsourcing could ensure that personal, not just institutional, capital can help to build the future. The crowd funding has gained momentum in terms of raising funds for infrastructure projects. We can also explore this alternative mode of financing due to its 
The infrastructure financing institutions go through sophisticated analyses and understanding of countries, regions, and projects in order to match capital from investors, developers, and government sponsors alike with the infrastructure projects that need it. Simply put, investors need to deal with each emerging market individually and to harness local knowledge on the way. That may sound obvious, but it needs to be said. The fact is, many investors (or their limited partners) restrict themselves to Organisation of Economic Co-operation and Development (OECD) or investment-grade countries. Others will not take on “greenfield assets”—new-build infra-structure projects where investors must take on the risk of development and construction. Instead, they prefer to focus on already-built brownfield assets. But as more money flows into brownfield OECD markets (industry data provider Preqin has estimated that the number of institutional investors in the sector more than doubled between 2011 and 2014), heightened competition is placing pressure on returns. Although measuring precise changes in such investments is difficult, many institutional investors with long track records are looking beyond brownfield OECD infrastructure assets in response to rising prices.Many governments, particularly in developing markets, are missing the chance to tap a viable source of cash in the form of generating value from existing assets. The world’s infra-structure stock is valued at an estimated $48 trillion. Some of these assets are already profitable, while others could turn a profit if operations improved and subsidies declined. Reforming or privatizing state-owned infra-structure presents challenges, of course. An asset may operate at a loss, have a difficult labor situation, or need to be untangled from other businesses unsuitable for privatisation. Despite these complexities, purchasing these assets can yield greater returns from selling assets or turning money-losing assets into profitable ones. For example, Jordan’s Queen Alia Airport once required a government subsidy to operate; a private-sector operator not only has invested in its expansion but also makes enough money to pay fees back to the government.
The infrastructure-finance market is plagued by a lack of information. Governments and businesses aren’t in the habit of sharing best practices or benchmarks with each other, much less the details of what went wrong (or even right). Governments, investors, developers, and operators alike would benefit from sharing more information and in more structured ways. Many governments recognize that developers can be a valuable source of ideas—for example, about which projects would have the best economic returns or how to attract private investment. Early evaluation of project plans can help prospective bidders warn governments if the project looks unviable.One way to take advantage of the ideas and expertise of private-sector developers is to allow them to submit unsolicited proposals for infrastructure projects to government. Brazil and Colombia, which are two of the busiest and most promising infrastructure markets in South America, all accept such proposals. Other entities are seeking to open new channels of communication. For example, the Port Authority of New York and New Jersey has invited private investors and developers to share their perspectives on how to develop the region’s infrastructure. Tanzania’s government uses “delivery labs” of public, private, and social-sector experts to set infrastructure-investment plans. Chile has developed a way of evaluating PPP projects that rewards developers for proposing low-cost solutions to national-infrastructure problems. As each of these approaches becomes successful, private players become more comfortable and more willing to participate, and the public sector becomes more willing to pay attention. 
The writer, a banker by profession, has worked both in local and overseas market with various foreign and local banks in different positions


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Published by the Editor on behalf of Independent Publications Limited at Media Printers, 446/H, Tejgaon I/A, Dhaka-1215.
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Editor : M. Shamsur Rahman
Published by the Editor on behalf of Independent Publications Limited at Media Printers, 446/H, Tejgaon I/A, Dhaka-1215.
Editorial, News & Commercial Offices : Beximco Media Complex, 149-150 Tejgaon I/A, Dhaka-1208, Bangladesh. GPO Box No. 934, Dhaka-1000.

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