Banking & Finance | Infrastructure

Collaborative funding to deliver large scale infrastructure projects

30 May 2018, by Amy Sarcevic

Australia’s population is set to exceed 25 million; and this unprecedented increase demands equivalent growth in infrastructure. But who should pay; and how?

With large scale infrastructure projects now scaling tens of billions of dollars, funding and financing these projects presents an increasing challenge.

On the private side, many banks have restricted the value of new loans to infrastructure projects, particularly those with enhanced risk features. And in the public domain, government funding is constrained in Australia, as it is globally. While many governments have committed substantial funds to infrastructure initiatives, capital remains well short of what is needed to fully alleviate the nation’s infrastructure deficit and meet the demands of the future.

These factors, combined with consistently high construction costs, have prompted the government to explore novel funding and delivery models; according to Deloitte’s Global Financial Advisory Government & Public Services Leader, Michael Flynn.

Raising public funds

Urban renewal initiatives such as Sydney’s Westconnex and the Metros are costing tax payers billions of dollars. Meanwhile the properties that surround these infrastructure assets are forecast to scale considerably in value. The rationale for a ‘beneficiary pays’ approach to infrastructure financing, or at least a sharing of the value uplift, is clear. But to what extent is it equitable?

Mr. Flynn – who is due to deliver an international keynote at the Australian Financial Review’s National Infrastructure Summit – 4-5 June in Sydney – argues, “Value capture, including Asset Recycling, is currently being done well in Australia. But we encourage the public sector to look at where infrastructure is really generating value. Pegging the value right and sharing it appropriately across beneficiaries is critical to the success of this model”.

“The optimal use of funds must be used as a catalyst to deliver the required infrastructure. A clear understanding of the project business case and cash-flows coupled with an assessment of value capture opportunities must be completed before the optimal finance source and procurement structure can be determined. A systematic and tailored approach to each project design will improve project delivery success rates”.

Also addressing guests at the Summit is Luke Houghton, Deloitte Australia’s Asia Pacific Infrastructure and Capital Projects Lead, who added, “Australia has been at the forefront of a diversified approach to financing infrastructure, but with the Government earmarking so many projects, many of which are still in the business case phase with no clear understanding of cost, it’s critical that the right funding and financing approach is taken, appropriate to that project and the long term goals for the infrastructure being delivered.

Stimulating private investor interest

While globally there is significant liquidity seeking infrastructure investments, efforts are required to properly structure the proposed infrastructure deals so that they are attractive to investors. In doing this, a number of funding mechanisms which combine public and private capital are being investigated.

‘Co-funding’ or ‘Blending’, for example – where governments provide a portion of the total funding, or underpin some of the risks – assures investors of the credibility of the project. This approach is becoming more regular, particularly in projects with enhanced risk features.

Other government-supported models involve the government providing credit or liquidity support throughout the financing of the project. In projects with higher risk, particularly involving construction or technology, government support could allow a project through to operation where greater volumes of private capital are available.

Mr. Flynn says, “The key is to tailor the project transaction structure to allow the optimum capital structure available”. But, he also warns that exchequer support should be saved for projects where it is needed.

Mr. Houghton added, “While private sector financing can lead to more efficient structures, it is important that governments and the public understand that it is not free money. Private sector can help achieve more effective outcomes but this must be supported by a secure revenue stream”

While a wide range of promising collaborative funding models have been identified, many are still just in the investigation phase, or have only been trialed in certain countries.

Mr. Flynn’s international keynote at the Summit will offer clarity on these varying approaches and explore the challenges and opportunities of each.

The Australian Financial Review’s National Infrastructure Summit – to be held 4-5 June in Sydney – will host more than 300 of Australia’s top infrastructure planners, advisers, contractors, experts and industry stakeholders.

Learn more and register.

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