The past few years have brought a flood of new financing options to the infrastructure sector. And that has finally put infrastructure financing - particularly in the emerging markets - onto solid footing.
The wellsprings of the flood are varied: a sustained period of low interest rates; the emergence of institutional capital targeting infrastructure as an asset class; the rise of local currency financing; the growth of sustainable investment vehicles. Together, they all add up to a swell of new financing options becoming available to infrastructure projects.
More innovation is coming. Some commercial banks, for example, are now working to monetize project finance debt into structured bonds (with first loss protection) for institutional capital. Others are starting to link the cost of borrowing to sustainable performance parameters. Green financing is on the rise.
The ongoing recycling of capital through the divestiture of operating infrastructure assets should also provide additional impetus to unlock capital markets and attract long-term institutional investors seeking investment-class annuity returns.
Indeed, our view suggests we are now on the cusp of seeing a flood of new capital flow in from pension funds and insurance companies who, now that the risks are better understood, are looking aggressively at brownfield assets and greenfield projects for increased returns.
However, the flip side of the coin is that lower interest rates and increased funding options also means that well-structured projects in emerging markets are attracting investors with much lower return expectations.
For well-prepared governments with a strong and structured pipeline and well-structured deals, the news couldn't be better. The ability to tap different sources of funding, including institutional capital and sustainable funds, over the top of local and regional banks and capital markets, should lead to a wealth of well-priced capital to compliment government finances.
Over the coming year, expect to see new investors gravitate towards infrastructure vehicles that provide sustainable inflation-protected long-term annuity returns, particularly as treasury rates remain low.