Bangkok--14 Aug--Fitch Ratings
Fitch Ratings notes, in its "Infrastructure Finance in Asia - Boom, Bust and In Between", that investment is the "big buzz" in Asian financial and government circles these days. The present euphoric environment, in which construction contracts and bank loans are closed in record time, with little attention to risk analysis and mitigation, ignores Project Financing's real nature, and its history in Asia. In the report, jointly written by William Streeter, Managing Director and Head of Infrastructure and Project Finance Asia Pacific, Fitch looks at the current liquid environment for infrastructure finance transactions, as well as the risks of repeating the boom and bust cycles of the past, while missing out on the annuity value that only infrastructure projects can offer.
Project Finance often features stand-alone, non-recourse, and sometimes single-asset financing. "It relies on the economic value of its projects, the integrity and conditionality of its contracts, and the ability and willingness of its counterparties to honor the provisions of these contracts," commented Mr. Streeter. It also relies on the availability and depth of the transaction's risk mitigation provisions, such as reserves, liquidity facilities and insurance coverage. Infrastructure finance always has layers of risk, even when the eventual off-taker is a highly rated government entity.
Although many Asian countries have made great progress towards establishing a supportive environment for infrastructure finance, especially on the macroeconomic front, their legal and regulatory frameworks, and domestic debt markets often remain works in progress. "It is still hard to find Asian countries with a high level of political comfort in public-private partnerships, especially with the private sector's expectation of earning a reasonable rate of return on investments in facilities that often provide essential public services," said Robert Zivcic, Director and joint author of the report.
"A number of studies published in recent years by institutions including the UN, the World Bank and the Asian Development Bank (ADB) have indicated the need for Asian countries to invest significant amounts in basic infrastructure- power, roads, airports, ports, water and sewerage projects - for many years to come," noted S. Nandakumar, Director and joint author of the report. Some of this investment is necessary to sustain economic growth, but much is needed to accommodate the expectations of Asia's expanding middle class.
There is considerable cash available in Asia after years of economic growth; the supply of money for infrastructure is therefore not a problem, although it consists mostly of short- to medium-term bank loans. Infrastructure projects (as long-term assets in search of long-term financing) and pension funds (with long-term liabilities in search of long-term assets) appear to present a perfect fit. In anticipation of this development in supply and demand conditions, new infrastructure funds have sprung up at speeds that rival China's ability to build new power stations.
In this positive context, the subject of risk, or worries about Asia's underdeveloped credit culture have slipped from view. The Asian crisis of the late 1990s, and its dramatic effect on infrastructure investment, seems a long time ago, and the ebb and flow of capital no longer appears to be a concern because new capital is homegrown. Nevertheless, the question remains: will Asia's boom and bust cycles repeat themselves in infrastructure finance?
Contacts: William Streeter, Singapore, +65 6339 0441; Robert Zivcic, Sydney, +612 8256 0300; S. Nandakumar, Chennai, +91 44 2431 3338.
Media Relations: Lisa Lim, Singapore, Tel: +65 6238 7301; Shivani Sundralingam, Singapore, Tel: + 65 6336 0095.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.