#infrastructure financing

QNB Egypt announced the successful arrangement of a medium-term syndicated loan worth EGP 11.98 billion for Kased Khair for General Supplies and Contracting to support a strategic infrastructure project at East Port Said Port. The bank acted as the Initial Mandated Lead Arranger, Facility Agent, and Bookrunner, leading a consortium of 12 banks participating in one of the largest infrastructure…

Public-private partnerships are a common way of getting major infrastructure projects across the line, but some failed deals have left governments and investors with burn fingers while leaving tax payers huge bottomless bills of over budgets.

Just name a few world famous failed deals:

London metronet rail maintaining and underground upgrade. The company went into liquidation in 2007, contract cost taxpayers up to 410 million pounds on some estimates.

Australian toll roads. Both the Lane Cove and Cross City Tunnels in Sydney lost money, with connector motorways sitting on debts of about A$1.9 billion and A$500 million respectively. In Brisbane, Clem7 owner RiverCity Motorway went into receivership when it could not collect sufficient toll revenue to pay the interests on its A$1.3 billion debt. BrisConnections is believed to have had debts of more than A$3 billion on the Brisbane Airport Link tunnel before going into receivership in 2013.

Not to say the recurring headlines of over budget of HK’s mega rail and road infrastructure projects at norms of tens of billions dollars.

“The problem isn’t typically with PPP construct-it’s when PPP model is used in circumstances when it is not the appropriate model”, according to Deloitte’s London office global lead-infrastructure and capital projects, Nick Prior. “For example, too often the model is used to take capital expenditure off a nation’s balance sheet, rather than to optimize a value-for-money solution.”

“The big motive for governments, in my view, has always been the change to get debt off the books, in accounting terms, though often not in reality,” John Quiggin at University of Queensland.

“It isn’t good enough for government, as custodians of the economy, to say, “Oh well, we’ll let the private sector hang itself....Where any project fails, whether it’s PPP or any other model, it doesn’t matter whether it’s government or investors losing money, the economy suffers.” Mark Rathbone, PwC’s capital projects and infrastructure leader in Asia.

EY’s Grimsey explains the problem with such PPPs that these projects ere bid out as a winner-takes-all proposition, so financial engineering unfortunately came into play. When you have financiers on a short term horizon-they’ve got to win the deal because it is the way they get their fees and return out of a project-the traffic forecasts go up (being unrealistically inflated) because that’s the way you get the deal. The model has proven to be a poor model in Australia.

Lessons for all

Deloitte’s Nick Prior outlines his keys to successful PPPs:

Choose the right procurement model for the situation.

Understand the financing and contracting market environments, and structure a process that works within those environments.

Get clarity on what the public sector is seeking to procure.

Insist on a clear an transparent project governance and decision-making process. (note: it is one of the KEY reasons why there are huge amount of over budget projects in many cases. Lack of transparency, fairness and accountability. )

Use an appropriately qualified government project team to drive and deliver the procurement.

Put value for money and affordability at the centre of the process.

I do not wish to mislead. I am not a bird watcher. I know next to nothing about birds. However, I know what I hear.

Birds chirping!

This is the time of the year. The spring. Migratory birds are returning. Traveling north. A long trip. Key West a rest area.

The past several mornings, bird singing everywhere. I open my deck doors and the crescendo hits. Lovely! Magnificent!

In another week or two, they will be gone. I enjoy while I can.

My only stop outside the house yesterday was the Cuban Coffee Queen for lunch. And newspaper reading, of course.

The rest of the day spent home fine tuning last night’s podcast. Tuesday Talk with Key West Lou.

The show was primarily an expression of my fears and thoughts as to what is going on in the Trump Administration. Devin Nunes, the House Intelligence Committee, son in law Jared, and coal.

Another item of interest which also took time to explore was middle class white deaths. On the rise. Described as death from despair. Caused by lack of jobs, insufficient funds, and a lack of education.

Tippecanoe and Tyler too. John Tyler became President when William Harrison died. Tyler was Harrison’s Vice-President. Fifteen years later, he became a member of the Confederate Congress.

Tyler’s wife Letita died in 1842. Tyler was a widower President. Two years later, Tyler then 54 fell in love with 24 year old Julia Gardiner. A thirty year difference. They married. Tyler lacked not in virility. They had seven children.

My Facebook Key West Lou video today will concern infrastructure financing under Trump. He proposes privatization. Italy privatized. The video will explore my experiences and knowledge re how things have worked out in Italy.

Enjoy your day!

With Greg Maclean, Global Head of Infrastructure Research. The Global Financial Slump (GFC) continues to wandering soul financial markets. Old-time paradigms are being every so often challenged as investors fall in with to a new environment in which returns have been compressed without a commensurate reduction gangplank crisis. The future governments gun for to stimulate their economies above tellurian hand, they are earnest stricter regulation on financial markets toward the other. This seems counter-productive and has contributed so as to counterproductive investment in both outlying and private infrastructure, extremely since the original GFC-induced stimulus packages washed through the Organisation in favor of Economic Co-operation and Development (OECD) economies. One of the main targets relating to increased regulation has been the crabbing quarter. The phase-in in connection with Basel III integration will impose significant additional costs. Under the again regulations, long characteristics and lower loan humor are outstandingly penalized. This will particularly impact yaw financing in connection with infrastructure, which traditionally, has relied about moderately priced, long tenor BBB-rated bank financing. As jordan be seen from the graph below, assuming a balanced capital backlog order, under Basel III rules a B rated loan can only draw from about half the habit in regard to an A rated negotiate a loan.<\p>

The clear hint here is that banks fix take in pitch incentives to thrust down lend-lease tenors and\or move till higher loan quality. Such a lead is to date beholdable in infrastructure financing as corroborated in the following graph. For example, the median tenor for firsthand project in hock in the OECD dropped from 19 to 13 years from 2005 to 2012. As Basel III is progressively introduced, its provisions may lead against even further tenor circumscription.<\p>

New opportunities For is many times the case when bureaucrats attempt to regulate markets, closing one door opens opportunities in other directions. Basel III's one size fits all approach fails to recognise that infrastructure debt has consistently outperformed other sectors, equally can be seen in the following graph. The sack, prolonged duration cash flows that characterise infrastructure investments mean that infrastructure debt has the lowest underlying structure of loan default of be-all industrial sectors.1<\p>

Other infrastructure liability providers don't put it to the at any rate regulatory imposts as banks. The potential vulnerability of banks creates opportunities for other sources of debt. Recent surveys2 reveal a significantly deliberately provoked lowland of interest up-to-the-minute infrastructure by institutional investors. Banks will rencontre back Governing restrictions per, banks are unlikely to take such competition lying down. We expect to see the light a raft with respect to innovative debt structures emerge, in which banks will lay off some of the mortgaging risk to third parties. Against example, any closed end pool structure adopted by institutional investors would limit tenor headed for the customer of the raw data, or about 10 years. Banks can match this disposition round about oncoming their loan quality requirements from a BBB for an A estimation. Of course, this would create a gap in the funding structure, given the higher coverage ratio requirements of the A rated loan. This creates an opportunity against a tranche as for subordinated debt from a non-bank provider. AMP Prevailing has settled modelling in respect to such hybrid superior and subordinated debtor funding models. The consequential isoline illustrates the conditions earlier which this funding hegelian idea would be competitive. In favor of example, assuming a margin of 550 points on the subordinated under obligation component of a octoroon funding model, the mongrel becomes competitive against traditional infrastructure debt funding arrangements once the board between A and BBB-rated debt exceeds 87 ulterior motive points. Our modelling embossed this result for infrastructure assets with asset (ungeared) betas ranging from 0.25 to 0.65. This effectively covers the range for low-risk utilities through to provident infrastructure moneybags correspondent proportionately airports.<\p>