InfrastructureInfrastructure sees drop in funding last year

Published 12 February 2013

Infrastructure investments in roads, bridges, and power stations have dropped significantly in 2012 as banks struggled to offer long-term debt and governments targeted cost savings. There were hopes that infrastructure spending would boost the world economy in 2012, but funding fell from $159 billion worldwide in 2011 to $99 billion.

Infrastructure investments in  roads, bridges, and power stations have dropped significantly in 2012 as banks struggled to offer long-term debt and governments targeted cost savings.

There were hopes that infrastructure spending would boost the world economy in 2012, but funding fell from $159 billion worldwide in 2011 to $99 billion, according to the trade publication Infrastructure Journal.

The drop in funding can be traced back to hardships governments around the world are facing in getting the private sector to invest in infrastructure.

The Financial Times reports that the project expert model, which provided long-term, low-cost loans based on projected cash flows of the asset, could be in danger as governments squeeze infrastructure pipelines and banks are being forced to hold more capital against long-term projects as a result of Basel III regulation.

Andrew Briggs, a partner at Hogan-Lovells, said infrastructure development is struggling at the moment.
“Infrastructure development is between a rock and a hard place. The ability of governments to support new investment is undermined by deficit reduction programs and the ability of the private sector to self-start is hampered by long term liquidity constraints faced by traditional bank lenders,” Briggs told the Financial Times.

Social infrastructure took the biggest hit last year as funding for hospitals, schools, and public housing sectors that usually live on direct government spending .

European banks have also been pushed to shrink and as a result many of them have been selling existing project financing assets instead of making new loans.

Lenders from the Asia-Pacific region, however, have continued to thrive and are currently the most active project financiers. The Bank of Tokyo Mitsubishi is the current front runner with an 8 percent market share. The Sumitomo Mitsui Banking Corporation and HSBC are also leading the pack.

Institutional lenders are also getting in the game as Aviva became the biggest lender in the market, making it the first time this has occurred.

Michael Wilkins, the managing director of infrastructure finance at Standard and Poor’s, said most European lenders are no longer able to lend for the extent of a long-term project, but they have been able to use their expertise at the beginning 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],” Wilkins told the Financial Times.

Pension funds and insurers are now looking for high yielding assets and are chomping at the bit to take on infrastructure debt and equity as analysts have been expecting a jump in the amount raised for projects in bond markets for some time.