Structure
The infrastructure industry has developed over the last 10 years as new structures and avenues to access the asset class have emerged. Financing historically involved traditional debt, provided by banks, and equity from a sponsor. However, the cost of bank debt has increased with the implementation of stricter banking regulations following the global financial crisis, and an alternative structure of project financing for infrastructure has emerged. Project bonds provide an alternative to traditional debt and allow institutional investors to access the asset class more readily. In a project bond scenario, the investors underwrite debt securities issued by the project SPV. These bonds also open the potential investor pool for project developers to the institutional investors’ capital pool, rather than drawing funding solely from large banks.
Another avenue for institutional investors to invest in infrastructure is via a corporate bond issued by an investment development company. Viathan Group in Nigeria issued the country’s first corporate infrastructure bond in December 2017. InfraCredit guaranteed the NGN 10bn (approx. USD 28m) bonds, which offer a fixed rate of 16% interest and a 10-year term. Local currency bonds with a strong guarantee partner provide a compelling investment case to local institutions.
Due to the large size of infrastructure projects, African institutions are often too small on their own to make a meaningful investment, and struggle to get a seat at the table.
In South Africa, in a drive to increase private sector flows into state-driven infrastructure, the African National Congress (ANC), the country’s governing party, is investigating the option of a prescribed asset allocation towards infrastructure, housing, and employment creation. If the ANC implements such a policy, pension funds and possibly other asset managers would be forced to allocate a portion of their AUM to finance state development projects. This raises concerns due to the artificial demand that would be created, reducing the incentive of project developers to deliver an efficient project and competitive returns. As it is, state infrastructure projects in South Africa are often characterised by delays and cost overruns, delivering poor returns as a result. More concerning for asset managers is that this policy undermines their fiduciary duty to their investors.