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February 10, 2013 4:17 pm
Global investment in infrastructure such as schools, hospitals and power stations fell sharply in 2012 as banks struggled to offer long-term debt and austerity-focused governments targeted cost savings.
Despite hopes that infrastructure spending might boost the world economy, the global volume of project finance lending fell from $159bn worldwide in 2011 to $99bn in 2012, according to new research by Infrastructure Journal, a trade publication.
The retrenchment in project financing highlights the trouble governments face in getting the private sector to invest in much-needed infrastructure.
Experts say the project finance model – which provides long-term, low-cost loans based on the projected cash flows of the asset – is under threat as governments squeeze infrastructure pipelines while banks come under regulatory pressure to hold more capital against long-term projects as a result of Basel III regulation.
Andrew Briggs, partner at law firm Hogan Lovells, said: “Infrastructure development is between a rock and a hard place. The ability of governments to support new investment is undermined by deficit reduction programmes and the ability of the private sector to self-start is hampered by long term liquidity constraints faced by traditional bank lenders.”
European banks, in particular, are under pressure to shrink, spurring many to seek to sell existing project financing assets rather than make new loans.
As a result, lenders from the Asia-Pacific region remained the most active project financiers, led by Bank of Tokyo Mitsubishi, which has an 8 per cent market share, followed by Sumitomo Mitsui Banking Corporation and HSBC.
The Japanese banks’ dominance reflected their greater liquidity as well as a willingness to back national champions. The largest deal for Bank of Tokyo Mitsubishi, for example, was the $3.9bn Intercity Express programme, which will deliver 125mph Hitachi trains on the Great Western and East Coast railway lines in the UK by 2016.
The biggest drop worldwide was in social infrastructure project financing – which includes schools, hospitals and housing – sectors that typically rely on direct government spend rather than regulated charges to the consumer.
For the first time the biggest lender in this market was an insurer, Aviva, in a move that shows that institutional lenders are beginning to fill the gap left by banks.
Michael Wilkins, managing director of infrastructure finance at Standard & Poor’s, said most European lenders were no longer willing or able to lend for the full life of a 25-year project, but they were still able to use their expertise at the start of a contract.
“Banks are increasingly looking to come in on deals on a short-term basis to cover the construction period, then expecting to refinance as soon as they can after that so that they are not holding on to assets that receive excessively punitive treatment under Basel III [regulations],” Mr Wilkins said.
Pension funds and insurers are increasingly looking to take on infrastructure debt, as well as equity, as they hunt for high yielding assets in the low-rate environment. Analysts have also long been expecting a jump in the amount raised for projects in bond markets.
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