Financing infrastructure development: time to unshackle the bonds?
| Date | 04 April 2016 |
| DOI | https://doi.org/10.1108/JPIF-07-2015-0047 |
| Published date | 04 April 2016 |
| Pages | 208-224 |
| Author | Norman Hutchison,Graham Squires,Alastair Adair,Jim Berry,Daniel Lo,Stanley McGreal,Sam Organ |
| Subject Matter | Property management & built environment,Real estate & property,Property valuation & finance |
Financing infrastructure
development: time to unshackle
the bonds?
Norman Hutchison
Centre for Real Estate Research, University of Aberdeen, Aberdeen, UK
Graham Squires
Centre for Urban and Regional Studies, University of Birmingham,
Birmingham, UK
Alastair Adair and Jim Berry
Built Environment Research Institute, University of Ulster, Newtownabbey, UK
Daniel Lo
Centre for Real Estate Research, University of Aberdeen, Aberdeen, UK
Stanley McGreal
Built Environment Research Institute, University of Ulster,
Newtownabbey, UK, and
Sam Organ
Construction and Property Research Centre,
University of the West of England, Bristol, UK
Abstract
Purpose –The purpose of this paper is to consider the merits of using projects bonds to finance
infrastructure investment projects and considers the pricing of such bonds and the level of risk
premium demanded by the market.
Design/methodology/approach –The research used a mix of qualitative and quantitative methods
with desk-based study and interviews. Interviews were held with policy makers, local authority staff,
planners, developers, investors, fund managers and academics. Infrastructure bond data were obtained
from the Bloomberg database on all project bonds issued in four Asian countries –Malaysia, China,
Taiwan and India –over the period 2003-2014.
Findings –The analysis indicates investor appetite for project bonds and suggests that a risk
premium of between 150 and 300 basis points over the comparable government bond is appropriate
depending on the sector and the degree of government involvement in underwriting the issue.
Practical implications –The paper argues that the introduction of project bonds would be an
important innovation, assisting the financing of infrastructure investment at a time when bank lending
is likely to remain fragile. The current conditions in the sovereign debt market, where strong demand
has forced down yields, has opened up the opportunity to introduce project bonds offering a higher
yield to satisfy institutional investment demand for long term fixed income products.
Originality/value –The originality of this paper stems from the analysis of the merits of using
projects bonds to finance infrastructure investment projects, the pricing of such bonds and the level of
risk premium demanded by the market.
Keywords Institutions, Investment, Finance, Risk premium, Infrastructure, Project bonds
Paper type Research paper
Journal of Property Investment &
Finance
Vol. 34 No. 3, 2016
pp. 208-224
©Emerald Group Publishing Limited
1463-578X
DOI 10.1108/JPIF-07-2015-0047
Received 8 July 2015
Revised 26 August 2015
26 October 2015
Accepted 2 December 2015
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1463-578X.htm
The authors would like to thank the RICS for their financial support of the project and the
numerous respondents who gave so freely of their time. Part of the research was supported by a
grant from the Hong Kong-Scotland Partners in Post-Doctoral Research Scheme sponsored by
the Research Grants Council of Hong Kong and the Scottish Government (S-HKU701/13).
208
JPIF
34,3
1. Introduction
Cost estimates project global infrastructure requirements at more than US$50 trillion
over the next 25 years, with emerging countries including China and India at the
forefront of infrastructural modernisation which is intended to project their economies
into global leadership positions (Urban Land Institute, Ernst & Young, 2010). The
Organisation for Economic Co-operation and Development (OECD) series of reports
entitled “Infrastructure to 2030”highlight the growing global need for infrastructure
investment and conclude that the task will run beyond the capacity of national
governments alone and that the private sector has an important role to play in funding
the development of essential services (Adair et al., 2011).
The scale of the challenge in financing infrastructure development allied with
capital budget constraints has meant that the appetite for innovative finance
instruments has gained considerable momentum. According to Strickland (2013), the
need for international finance and development is a consequence of the economic crisis,
which has resulted in reduced inward income of public sector funds. Most OECD
countries have reduced public expenditure in an attempt to curb public debt, resulting
in budget cuts (Merk et al., 2012). Consequently there has been a reduction in traditional
funding routes for infrastructure and regeneration development projects and a clear
need to explore alternative routes (Strickland, 2013).
Bonds are one possible alternative option for funding infrastructure and their
applicability is the focus of this paper. Bond financing has the potential to be
particularly desirable given the current economic climate where global savings rates
are high (the “global savings glut”described by Bernanke, 2005), access to
conventional financing vehicles for sizeable public projects is restricted, while demand
for development is firmly on the rise. The paper therefore investigates whether the
effective use of infrastructure bonds would facilitate the matching of available savings
with demand for infrastructure finance.
The provision of modern infrastructure is often the precursor to successful property
development. While traditionally the financing of infrastructure has not been viewed as
a main stream real estate issue and has not received much coverage in the literature,
this would appear to be an omission as the construction of roads, railways and airports
and the provision of utilities, such as electricity, gas, water, telecoms and sewerag e are
enablers of property development schemes and underpin their success. To understand
the most efficient way for this infrastructure to be financed seems to be an important
consideration for both the real estate and finance industry across the world. Real estate
alternatives are a growing field of interest for investors and infrastructure is part of the
alternatives sector. Traditionally investment in real estate has been in the form of
equity, but bond investment is worthy of detailed consideration.
In the UK, there has been devolution of financial power from central to local
government presented as an aspect of the localism agenda with increasing financial
responsibility passed onto local government. This shift can be viewed as an
opportunity for local authorities to use innovative financial instruments, such as Tax
Incremental Financing (TIF), as they become more financially autonomous (Hutchison
et al., 2012). The restructuring of financial responsibility has driven increase d
participation of private actors in real estate development and “more innovative and
entrepreneurial modes of infrastructure provision”(Strickland, 2013, p. 387). However
in the UK, Regional Development Agencies previously “tasked with shaping innovation
policy below national level”were disbanded after the 2010 Conservative-led coalition
government came to power and replaced with Local Enterprise Partnerships, which
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Financing
infrastructure
development
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