AT Capital Infrastructure Financing Through Capital Market Md. Minhaz Zia, CFA Partner Asian Tiger Capital Partners, October 2009 www.at-capital.com
Topic • Infrastructure Investment: An Overview • Financing at Greenfield Stage • Financing Through Capital Market
Infrastructure defined Infrastructure is the basic physical structures needed for the operation of a society or enterprise, or the services and facilities necessary for an economy to function. The term typically refers to the technical structures that support a society, such as roads, water supply, sewers, power grids, telecommunications, and so forth.
Infrastructure Investment Characteristics Infrastructure Investment Characteristics: • Capital Intensive • Long Gestation • Complex structure involving multiple and often unique risk • Limited recourse ( Investors paid from the revenue of project) • Requires Government Concession
Infrastructure Status of BD • Infrastructure in Bangladesh ranks among the worst in the world, securing only the 126th position in 133 nations, according to the Global Competitiveness Report 2009-10 GCR shows ‘more than 80 percent businessmen said infrastructure remained largely underdeveloped in 2008’
Why Infrastructure Investment has long been ‘Poor’ Two Basic Reasons- • The government’s reliance on ADP-based public sector investment program which has declined steadily in relation to GDP in recent years; and (ii) The government’s failure to attract private investment in the infrastructure sector. Source: Ministry of Finance, GOB
‘Poor’ ADP implementation is leveraging the Inefficiency Source: Ministry of Finance, GOB • The key factors contributing to the unsatisfactory implementation of the ADP are: • Complex procurement policy; • Inadequate capacity of the implementing agencies; and • A lack of proper monitoring of the agencies implementing the ADP.
International Experience is ‘Different’ Investment Commitments to Infrastructure with Private Participation in Emerging Markets 2003-2007 (US$B) International experience with infrastructure funding is very different from Bangladesh. Most emerging economies have successfully tapped private sector funding for infrastructure investment
Bangladesh Case: To attain a sustained growth rate of 8-10 percent per annum over the next decade, Bangladesh will have to raise its investment rate closes to levels attained by India and China today, i.e. 37-40 percent of GDP. For that to happen the infrastructure investment has to be taken at least to 8% of GDP as against 4% now. The challenge lies not only in mobilizing sufficient resources to finance that investment but also to develop effective institutional arrangements to implement large infrastructure projects Source: Asian Development Bank Source: Ministry of Finance, GOB
Infrastructure Financing: Macro Bottlenecks • Inefficient intermediation process • Poor investment quality • Limited capacity of public financing • Unavailability of risk capital • Concentration of risk • No Sovereign Rating
Broad Infrastructure Strategy • Improving intermediation of domestic financial savings so that they are channeled to meet the specific • requirements of infrastructure investment such as those relating to risk, tenor and scale. • Distributing financial risk more widely and efficiently across the domestic financial system and abroad, to avoid • excessive concentration. • Making infrastructure financing--especially in sectors where it has not been traditionally forthcoming--relatively • more attractive for a wide spectrum of investor/ financier classes by providing more liberal regulatory • regimes for infrastructure vis-à-vis non-infrastructure sectors and in some cases, offering well-designed fiscal • incentives. • Achieving all the above through a facilitating (rather than directive) framework for each class of financing • institution, while ensuring that accelerated investment in infrastructure does not jeopardize fiscal discipline, • financial stability and external viability.
Spectrum for Infrastructure financing Public Sector Private Sector GOB owned and GOB operated (GOB only) GOB owned and privately operated GOB & Private jointly owned and privately Operated (PPP) Privately owned and privately operated Initial Investment can be in innovative financing solution like PPP (Public-Private Partnership).
Infrastructure project financing at Greenfield stage • Worldwide Infrastructure projects at Greenfield stage are usually financed through • Sponsors Equity/ Quasi Equity • Commercial Bank Lending • Private Placement of Bond with Institutions Only at a mature stage it is taken to the capital market to- • Bring liquidity in the market and • Broaden the investor base.
Institutional & Structural Constraints • Imbalanced Distribution of Savings • About 80% of the country’s total financial savings is invested in the Banking system as deposits. • Debt market almost entirely comprised of non liquid and non traded Government Securities. • Virtually non existent Corporate Bond market. • Investment in Equity Market still low. • Insurance industry not attracting significant financial savings nor playing a meaningful role in investment. • Pension scheme not funded.
Institutional & Structural Constraints (contd.) .. And Poor channeling of saving surplus Banking system with present surplus liquidity of about Taka 30 Billion have very low appetite to Infrastructure investment. This is due to--- • The maturity mismatch between the asset and liability is the key constraint of commercial bank lending on a high scale. • The risk appetite of the commercial Bank is different from that required in huge infrastructure investment. • The exposure limit and norms may prevent banks from infrastructure investment • Absence of any debt swap market to take care of exposure problem • Absence of risk transfer mechanism (ie. Securitzation) in the system
Institutional constraints Major impediments towards development of bond market in Bangladesh • Government’s inconsistent initiative and policy support for development of Bond market • Default Culture in Corporate Bond • Poor and lengthy legal enforcement • Unaccountable Trustee • High risk free interest rate • Absence of proper benchmark and yield curve • Absence of large institutional Investors • Lack of liquidity and secondary trading (No Market Maker)
Measure needed to be taken for liquidity of the Private Placement • Allowing REPO transactions on corporate bonds in the interbank REPO Market through a specialized clearing and settlement platform • Private Placement should be confined only to Qualified Institutional Buyer (QIBs) • Develop an OTC Market for Trading in Privately Placed Debt Securities
Financing Through Capital Market Bangladesh has got two stock exchanges namely Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE). The market is however characterized by the following two major constraints- • The Market is predominantly equity- centric • Supply of securities with strong fundamentals is extremely limited. DSE Main board as on September 2009:
Regional Market Capitalisation as % of GDP • Dhaka Stock Exchange is 22 % of the GDP in 2009 while Bombay Stock Exchange is 54.5% of GDP
Infrastructure capitalisation in Regional Stock Markets With current offer price for GrameenPhone the market cap of infrastructure ratio will go to 15%
Infrastructure Fund from Capital Market • Infrastructure fund can be tapped from the Market by- • - Issuing equity or debt of infrastructure projects • - Enhancing participation of plain vanilla mutual fund in infrastructure related issues. • - Issuing Dedicated Infrastructure Mutual Fund • Bangladesh Economy growing at a rate of 6-7% will soon cross $100 Billion • Market Capitalization will reach at least 25% of the GDP as the investor appetite to capital market is growing fast. • Infrastructure capitalization reaching 20% of market cap an additional USD 2.5bn fund can be tapped from capital Market by 2012.
Policy issues • Revenue from the infrastructure project can be securitized. • Cap of investment up to maximum 25% for mutual fund in non listed securities should be relaxed if the funds are invested in non listed infrastructure projects . • Existing IPO quota of 10% for the general mutual fund and dedicated mutual fund can be enhanced for infrastructure related issues. • Mutual funds can also be incentivized through lower tax against income generated from infrastructure issues • The lock in rule for infrastructure related issue should be relaxed for investor to make an early exit. • Insurance companies should by regulatory requirement be asked to hold a certain proportion of their • assets in infrastructure investment. • They should be allowed to hold a substantial part of their portfolio in the securities of the non listed • infrastructure companies. • Pension scheme should be funded • SEC should broaden the scope of the foreign investors in the existing rules and enact necessary new • rules to ensure spontaneous participation of foreign investors in listed Infrastructure Bond.