Category Archives: Infrastructure

So 2020 was truly challenging for many economies. First we had a global pandemic which by itself, was really a healthcare crisis. It threatens to overwhelm the healthcare infrastructure of many countries including the most developed countries. The response of the government to proceed to lockdown mode, which created a bit of an economic crisis as the force shut-downs dampened demand severely, threatening a whole lot of jobs. So they then have to mount a secondary response to the impact of the primary response of lockdowns.

And that was unemployment benefits or at least wage subsidies to large employers to keep jobs and hence businesses breathing. The stimulus became the ventilator for the economy as Covid-19 continued to spread and impacted global supply chains, air travel, jeopardising much-needed tourism industry in many countries.

Being able to put together a giant budget to pump-prime the economy is an opportunity for putting down investments which would have much longer term positive impacts on the economy. For most developing economies which lack infrastructure, there’s a encouragement from the Multi-lateral Development Banks to explore an ‘infrastructure-led recovery’; especially to take advantage of the low-interest rate environments to take on more debt from the international markets.

Most of these points are probably theoretically true but in reality, to invest into large scale infrastructure takes time, political will, and support from population who will not see the benefits of the infrastructure until much later. The immediate job creation angle will be important and there has to be trust that the budget is not being overly strained. The ability to first obtain that supply of capital at low price, while sizing up demand for the infrastructure at a time of lockdowns, uncertain future is extremely challenging. When we lack the alignment of these key ingredients, projects don’t take off. Even when great ideas are there, the financing appears to be available and there is a compelling vision for the infrastructure. And I wonder if this is the reason for how the KL-SG HSR project came to end in a whimper.

Instead of thinking of infrastructure as a ‘means’ of recovery, we should abandon the whole notion of recovery. People die from covid, businesses shut down from the lockdowns. Economies reconfigure. And there really isn’t ‘recovery’ per se. We ought to confess that the original system of the economy that relies on sectors like tourism, aviation, or other face-to-face services have their inherent weaknesses; hence there’s a need for us to keep building up our resilience.

And often, resilience comes from creating slack in the economy, from increasing supply capacity, and making room to grow newer industries. Infrastructure is a good way to do that; especially infrastructure that allows more business activities. In a safe-distanced world, we may move away from trying to exploit agglomeration economies, so building strong connections and logistic networks will be important. The story for the infrastructure needs to be well-thought out and aligns to a greater vision of the district, region, country. Infrastructure need not be part of a recovery or growth. Singapore successfully made infrastructure development part of our story, part of our culture. We’ve build a story around infrastructure as part of livelihood that contributes to the community if the community is willing to contribute for it. Planting that in the consciousness of people is important.

For good or for worst, I’m returning to another topic in finance though with the slant of focusing on infrastructure. I think this stems from the fact that Singapore is in fact a financial hub and this is an area that our players are strong in, and where they participate most in the infrastructure sector. On the other hand, infrastructure projects do require huge amount of capital in order to be implemented and hence finance is particularly important as a gate through which infrastructure projects must sail through.

If we talk about the evolution of infrastructure financing, I would say that capital markets, and asset securitisation is probably serving as the tail end of the string by which financing evolves. The most basic would be government financing, where the government takes it upon their budget, either directly or through government debt, take on the project. The next stage is for a private company, using its balance sheet but also the merit of the government long-term contract, to obtain financing from the banks (with corporate guarantee and hence recourse) to develop the infrastructure. Project finance comes after that, where the merits of the project alone together with the credentials of its stakeholders allows the project to be financed by a syndicate of banks. Capital markets would then take this further by taking over the financing from the syndicate of banks either when the project is completed or when the project has gone through due diligence processes.

Capital markets is essentially the market for capital – they exists in physical form commonly in stock exchanges where the prices of various capital instruments are listed, priced and traded. Project debt or equity can also be put up on the capital markets. The slight difference of course is that unlike companies which can be assumed to exist in perpetuity, projects tend to have a finite lifecycle so there might be a predictable route its value will take given the profile of its cashflow projections. Of course, surprise situations and external circumstances will still affect its value but in some sense, projects tend to be more stable, and hence amenable to issuance of debt instruments in the capital markets. Mostly in the form of project bonds.

Bonds are debt instruments, basically it promises a stream of payments that flows into the future. These payments are fixed and can involve a huge lump sum at a certain point in time or a multiple payments on a set schedule. They are issued by corporations, governments, and of course, projects. As I mentioned in the project finance article, a lot of upstream work involves the bank finding comfort and security in the asset itself. At the point when the project has been constructed and operating, with cashflow coming from the government, some of the major risks which exists at project conception have been removed, which means that now, the project might want to reconsider if the 10% rate of interest (it can be any figure, frankly, depending on the bank and the project) the project might be better off issuing a bond at 8% (assuming the market is able to take it) and use its proceeds to repay the project finance loan. That is essentially a refinancing activity, substituting one loan with another which is at a lower cost. The difference in returns goes to the equity owners of the project.

Accessing the capital markets is considered a ‘holy grail’ for most of infrastructure; not just because it gets the banks off the backs of project owners but because the risks becomes even more distributed and hence priced lower than if the risks was concentrated and sold. Of course, the capital markets can tolerate only the higher quality projects which are well-structured and with well-specified contracts where almost every contingency is spelt out so as to give the markets clarity and comfort. With the heightened interest by large institutional investor in green and sustainable investing, there had been rise in mention of ‘green bonds’ and debt instruments to support green (& blue) infrastructure such as renewable energy projects as well as water and sanitation projects. Whether these moves from conversations to widespread reality will still take much work.

For now, most of the projects that actually have successful accessed the capital markets are in Europe because of well-established standards both for debt instruments and also for infrastructure assets. Asia was on a growing trajectory of projects being refinanced using capital markets with these transactions ballooning from 1 in 2017 (the landmark Paiton Energy Bond issuance) to 2-digit number of transactions in 2019. Covid-19 probably made a huge dent on the trajectory, but this is most certainly a space worth watching.

This article is part of a series I’m working on to make topics in infrastructure a little more accessible to students and people from outside the industry who might want to get involved.

Taking a bit of a break from the more heavy-going infrastructure topics and looking at another, perhaps more personally-important topic – careers! In this short article, I thought to just share generally what sort of work and roles are there in this sector, from what I’ve observed in my few years being involved in it. I think infrastructure can be thought of as an extremely interesting sector to build a career. And it also helps to break out of the traditional mould of thinking of a career within a single profession, or in a linear fashion. In the brave new world where linear progression is no longer the norm, infrastructure presents a new way of thinking about, and approaching future careers.

As I’ve mentioned previously, there are various different streams of work for any given infrastructure project; and the professions with expertise they require would include engineers, financiers/bankers, accountants, lawyers, business development managers, project managers, economic consultants, planners, technical designers, insurers. Of course, the different parties have varying degrees of involvement and at different times, but with this spread of requirements and different perspectives, there is opportunities for anyone to move around from specialist roles into more general roles, and also for generalist to look towards acquiring credentials and become specialists as well. In fact, I’m beginning to see a lot of specialists in the area of infrastructure making a career out of it by moving to more general management or investment roles. For example, a project finance banker can move into the developer firms to help with project development, build the case for investment internally and drive the project forward. An infrastructure lawyer can do the same, bringing his specialisation into the contracts negotiation and even the structuring of legal risks to protect the developer.

Engineers, on the other hand who might have experience operating infrastructure or even knowledge in the construction and technical solutions can hop over to the commercial team to assess the commercial viability, leveraging on their understanding of the technical requirements and solutions for the piece of infrastructure. Even as a bid engineer, one can grow to be a general manager overseeing the business development team. On the other hand, a general business development staff can build up their spreadsheet and modeling skills, and become a specialist in raising capital or financing for the projects they are working on. In that sense, building a career in infrastructure can be more than just about climbing the corporate ladder and moving to a higher place but getting more exposure on different sides of the deal and being better able to get it to close because your understand helps to de-bottleneck underlying issues.

Having given a fair number of examples on the mobility of the various different kinds of roles within the sector, I thought to lay out also the subject and topic areas that infrastructure calls for. That is perhaps the area which I found the most fascinating having been involved in the work myself close to 6 years now. Infrastructure is multi-disciplinary, and range from national level concerns to hyper-local issues. I’ve already mentioned the various areas of expertise required ranging from financial, legal, technical, economic, business-commercial, even strong understanding of environment and wildlife issues. Of course, these topic areas don’t have to be mastered by any single person and are generally parcelled out broadly to domain experts who have their distinct roles in the project. For example, the consultant group behind the environmental-social impact assessment reports may consists of anthropologists, biologists, scientists, putting together the report to be read by the financiers, insurers and other stakeholders. On the other hand, the banks will of course have the accountants, the financial modellers as well as the due diligence teams.

To a large extent, when you’re working within infrastructure, there is opportunity to hop around across the various relevant disciplines. And even more importantly, having both a private as well as public perspective in infrastructure is actually really useful because it ultimately takes both sides to work together to deliver on projects. To that extent, there should be no qualms about moving across both sides and gaining the experience to cover greater grounds. Of course, there’s added opportunities in the global organisations like the World Bank Group, Asian Development Bank and Asian Infrastructure Investment Bank.

This article is part of a series I’m working on to make topics in infrastructure a little more accessible to students and people from outside the industry who might want to get involved.

Well, maybe this is not so much about infrastructure than ‘finance for infrastructure’. But given how much infrastructure generally costs, it is not quite possible to ever run away from the issue of financing. I mentioned before about the Equator Principles in article on feasibility studies and it just goes to show how much financing affects the selection of projects and the manner by which projects are developed. You realised in my previous few pieces, I was always dwelling in one way or another about finance; and the trend continues here.

Drawing private sector involvement into new, unproven greenfield (not-yet-built projects) can be challenging because they have not seen operating revenues coming online, and they don’t know how established the demand may be for the projects. Even the most sophisticated feasibility studies and advanced projections can have significant room for errors and the degree or extent of these errors often depends on the level of optimism the developers have for the projects. Yet the government will always need to build new infrastructure or expand capacities. To avoid ever-increasing debt load on the government, one way to involve private sector capital to inject financing into infrastructure is to get them involved in the existing portfolio of assets.

The government often already hold a portfolio of infrastructure ranging from utilities, toll roads and bridges, to ports and airports. These infrastructure can be cashflow generating and already have proven demands. If these existing pools of cashflow can exchanged for a lump-sum of capital, then the government have access to new pool of funds to develop new infrastructure. In an ideal world where there is no issue of government corruption and projects are executed properly with governments assessing the risks involved carefully, as well as to perform the proper economic cost-benefit analysis, this process can be repeated. While this may have been called ‘privatisation’ from the Thatcher era, the ‘new-ish’ idea here, which involves more than just straight-out sale of the asset, is called ‘Asset Recycling’.

Asset Recycling essentially depends on existing, brownfield assets that are already on the books of the government, where they are carrying debt on the asset, as well as equity share in them. They could also have large amount of people on their payroll trained to operate the asset. The possible ways in which asset recycling is done determines how much the government ‘gets out’ of the picture as capital from private sector is unlocked upfront. There’s (1) straight out sale of equity; (2) issuance of project bonds; (3) asset securitisation. Of course there are also customised approach that governments can take on under brownfield ‘Public-Private Partnership (PPP) Schemes’ but we will not dwell on that today.

Sale of Equity (aka divestment or privatisation)

By having the private sector take over the asset (often by just hiring the same group of people over) and exchanging the longer term cashflow for an immediate lump-sum of money, the government is essentially making the private sector be the ones borrowing the money against a long-term, safer stream of cashflow. Since the cashflow is somewhat proven, if it was an infrastructure where the user-pays, there might no longer be a need for government to guarantee the revenues and that means that the responsibility of the government in keeping the project viable is only to the extent they deem it strategic. No hard commitments anymore. There is also arguments that the private sector might be able to operate the asset more efficiently than the government – something I’m neutral about. I think that the profit motive is no more powerful than the desire to serve the customer well in getting a job done efficiently.

Privatisation has its share of critics and at the end of the day for each of those options, there must be safeguards that they are performed properly, priced carefully so that the taxpayers are not shortchanged in the deal.

Issuance of Project Bonds

Project bonds, which perhaps deserves an article in its own right is basically the bond version of project finance. I mentioned in that previous article a point about banks grouping together to lend to the single project. Imagine now then that instead of having banks group together, we have investors, either public or private (retail investors, or institutional ones) coming together to lend to that single project. And with these debt instruments traded, it provides liquidity for the debt-holders to more easily sell their debt down to another party should they decide they suddenly need a lump-sum of cash rather than a stream of steady cashflows.

This allows the risks to be more diffused in the market rather than concentrated in the hands of a few banks or institutions and is touted to make the system safer, especially as the world steps up capital regulation and requires banks to hold more ‘safe’ capital. In Asia, infrastructure debt are still generally classed as risk capital which banks have significant caps on in their books. There’s insufficient data indicating to banking regulators that Asian infrastructure is ‘reliable’ or stable enough in performance in order to allow them to be classed as lower risk capital.

Again, with the project already having proven cashflow the bonds can be designed for maximum ease of serviceability by the project and that will ensure a good performance. Further reading of this Deloitte article might be helpful.

Asset Securitisation

This is probably the most novel and somewhat complex way of asset recycling. In fact, some legal jurisdiction makes no room for asset securitisation or do not have sufficiently nuanced regulation and laws to enable this. Simply put here, asset securitisation takes selected or all of the revenue streams attributed to an asset and transfers it into a separate vehicle which is owned by a separate group of owners. Mizuho Bank has a really simple diagram to illustrate this and I’m just going to use it here shamelessly and have the diagram link back to its page.

The asset itself continues to be owned by the government and management control remains in the hands of the government. Contracts are signed between the revenue-collecting vehicle to somehow restrict the actions of the project owners so as not to jeopardise the cashflow. But that effectively allows you to ‘sell the cashflow but not the asset’.

This article is part of a series I’m working on to make topics in infrastructure a little more accessible to students and people from outside the industry who might want to get involved.

The topic of private sector financing of infrastructure cannot run away from the concept of Project Finance, which is really a financial structure that enables a projects to be financed solely based upon the cashflow expected from itself. In its purest form, it is non-recourse to the equity owners of the project; so the lenders cannot go after the owners of the project should the project itself fail to make payments on the loan. Often, project finance also provide higher leverage for the project sponsors than they could do at corporate level, which might be attractive even if the cost of debt is higher.

Maybe this already sounds like it is too much to take in. So bear with me a little while and allow me to take you from my credit-card application analogy to something closer, say, a mortgage loan. When you buy a house, you’d have no money to pay for it, and the bank would lend out the money to you, and for security/collateral, the bank gets your house. And the amount they would lend to you is based on the income that you make. Consider for a moment if the house is not yet built. So you commit to a loan, and the funds you are going to pay to the developers of the house, will be paid for by the bank, and the bank will be repaid by you, the customer, as the monthly payments are made. So did the developer actually borrow the money or was it you?

The bank must have a degree of trust in the developer, the project itself, and all the other things surrounding it, including the homebuyers’ ability to repay the loans for financing their homes eventually. And with all that in place, the home-building project itself actually can be financed largely by the lender rather than the developer themselves. An infrastructure project behaves very much the same way where the pre-commitments of the customer to that piece of infrastructure – very often the government – allows the lenders to take comfort that the project will be able to pay for itself over time.

This creates a very attractive structure for financing projects because it is self-contained, and parcels out various different risk factors to specific parties involved. For example, the developer takes care of the process to put together the parties and documentation required, the builders/contractors focus on bringing in execution capabilities, while the lenders bring in the much-needed capital and the users get their goods/services at a pre-arranged pricing schedule. Infrastructure is generally built for the long-term and last long. The demand for its services and payments to it are likewise long-term and repetitive; often also backed by the government as infrastructure often serves as public goods or at least club/common goods that are covered all or in-part by taxpayers. Project finance takes these advantages and enables benefits such as long-tenure financing (usually 15-20 years long repayment tenure, depending on the length of the concession contract), fixed interest rates over the long term (in some sense similar to a long-term sovereign bond), sometimes with repayment schedule sized according to the expected cashflow of the project (often part of ‘financial structuring’ of the loan).

This is last point is vital as infrastructure projects may be designed to accommodate growth over the next decade and therefore may be ‘overcapacity’ relative to the demand at time of commissioning. By sizing the repayments and managing the terms of the loan such that the lenders can tolerate lower payments in the beginning in exchange for higher payments at the end, the debt doesn’t become too overwhelming for the project to handle.

One final point I want to make is that project finance deals are often so large that a single bank would not want to take all the risks of lending to the project and would ‘syndicate’ with other banks or at least sell down part of their loan to another bank who would take the stream of payments down the line. This is another important feature of project finance as it allows multiple banks to partake in the risks of financing a single large project and be somehow acting as though they are a single lender  as opposed to having multiple lenders facing off a single project and doing their own evaluations separately.

There are more nuanced technicalities involved and I didn’t set out to write something that would just copy-and-paste textbooks or content from other sites so there’s some recommended possible readings to get deeper. Though they can indeed go quite in-depth into those nuances:

• Energy Finance 101: Project Finance by Thirdway
• Investopedia Article on Project Finance
• Denton’s Guide to Project Finance

The last link contains an article that is very involved; and the geeky me kind of like how they even talked about fenus nauticum (sea loan) during the Roman empire as a sort of ‘pre-cursor’ to project finance today (which really started in 1970s and took off 1980s). Dentons do update this guide every now and then so the link may not be the latest. Googling ‘Dentons Guide to Project Finance’ should help to point you to something more updated.

This article is part of a series I’m working on to make topics in infrastructure a little more accessible to students and people from outside the industry who might want to get involved.