AT Capital

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AT Capital
Infrastructure Financing Through Capital Market
Md. Minhaz Zia, CFA Partner Asian Tiger Capital
Partners, October 2009
www.at-capital.com
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Topic

• Infrastructure Investment An Overview
• Financing at Greenfield Stage
• Financing Through Capital Market

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• Infrastructure Investment an overview

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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.

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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

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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
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Comparative Infrastructure Indicators
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Why Infrastructure Investment has long been Poor

• Two Basic Reasons-
• The governments reliance on ADP-based public
  sector investment program which has declined
  steadily in relation to GDP in recent years and
• (ii) The governments failure to attract
  private investment in the infrastructure sector.

Source Ministry of Finance, GOB
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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.

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International Experience is Different
International experience with infrastructure
funding is very different from Bangladesh. Most
emerging economies have successfully tapped
private sector funding for infrastructure
investment
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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
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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

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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.

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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).
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• Financing at Greenfield Stage

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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.

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Institutional Structural Constraints

• Imbalanced Distribution of Savings
• About 80 of the countrys 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.

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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

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Institutional constraints
Major impediments towards development of bond
market in Bangladesh

• Governments 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)

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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

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• Financing Through Capital Market

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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

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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

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Infrastructure capitalisation in Regional Stock
Markets
With current offer price for GrameenPhone the
market cap of infrastructure ratio will go to
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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.

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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

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• Thank You