Project bonds
Unlocking African infrastructure
development
I
n a report prepared in collaboration with PricewaterhouseCoopers
(PwC), the Organisation for Economic Co-operation and
Development (OECD) and the World Economic Forum
estimates that around 3.5–4% of global gross domestic product
(GDP) (or around US$53 trillion from 2010 to 2030) needs to be
invested in infrastructure for electricity distribution, transportation,
telecommunications, and water infrastructure annually. For subSaharan Africa, the World Bank estimates infrastructure funding
requirements at US$93 billion per annum for the next 10 years, of which
at least 50% must be financed from non-government sources.
Policymakers, governments and banks are refocusing their efforts
on how infrastructure needs to be financed in the wake of the global
financial crisis. Budgetary constraints have left many governments
financially constrained and unable to pay for large infrastructure
projects on their own.
‘Although banks are continuing to lend, they are unlikely to meet
the demands of a growing project pipeline. New banking regulations,
such as Basel III, are also making long tenure project finance loans
challenging’, says Jonathan Cawood, capital projects leader for PwC
Africa. ‘Based on our recent research in this area, The rise of non-bank
infrastructure project finance, we think there is an opportunity for the
private sector to provide infrastructure financing by way of project
bonds and non-bank lending.’
Project bonds, still largely unexplored in South Africa and the African
continent, are a debt instrument usually issued by the government or
private companies to raise funds from capital markets for infrastructure
projects. Infrastructure bonds can also be issued by private companies
without government assistance.
To date, no dominant project-bond model has yet emerged. There are
numerous financing solutions for investor and procurer attention, each
with different benefits and challenges.
Discussions at the 14th IMF-OECD World Bank Global Bond Market
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Forum focused on how capital markets can help enhance infrastructure
financing. Issues such as the role of banks, other financial intermediaries
and local currency bond markets in financing infrastructure are on the
agenda.
In South Africa, local currency infrastructure bonds have not been
issued to date as the government is of the view that such bonds are
far removed from infrastructure projects. Instead, parastatal bonds
have been issued and, in some instances, the government has provided
guarantees for certain projects. Implementation of Basel III and a
growing pipeline of projects are expected to spur greater demand for
capital markets financing.
In Africa, many countries will need to deepen sovereign and
multilateral bond issuance as a precursor to corporate and project
issuance. Across most of the continent, reforms to date have focused
on getting sovereign bonds issued, often to finance infrastructure
development. Many sovereigns are not rated, and those with naturalresource revenues often need to set-up a sinking fund committing
future revenues to secure financing. Nonetheless, 2012 and 2013 saw
significant Eurobond issuances, notably Ghana, Rwanda, Zambia,
Tanzania, Angola, Nigeria and Kenya.
South Africa has a developed bond market in place, and sizable life
insurance and pension markets. Some institutional investors have bought
into projects post-completion, but have not yet shown much appetite for
construction risk. The infrastructure market in the country is dominated
by state-owned utilities such as Transnet and Eskom, who finance
infrastructure on balance sheet. The largest project-finance programme
to date is to support investment in the ambitious renewables Private
Public Partnership (PPP) programme, which the domestic banks have so
far financed comfortably, to the surprise of some international investors.
In particular, round three of the renewables programme will drive
R30 billion to R40 billion of capex.
Emerging economies such as Chile are also using project finance
bonds as a means to attract investor interest in large-scale infrastructure
projects. ‘However, it is important to bear in mind and understand the
different policy measures and governments regarding the creation
and processes in place for these project bonds,’ adds John Gibbs, PwC
advisory partner. ‘In addition, different markets have varying degrees of
receptivity to institutional debt and different norms.’
The PwC study identifies four preconditions that should exist for a
project bond market to take root:
• Available capital outside of the banking system. In most cases, this
implies a stable and well-structured private, public or third-sector
insurance and savings industry with retirement savings and pension
funds managed by investment professionals. Such a system creates
a competitive pool of capital, which generally seeks a wide range of
debt investment opportunities.
• Sufficient govern [