Infrastructure development:

Corporate and Banking sector to play major role

Sri Lanka's Road Development Authority (RDA) can bring the Southern Expressway to the market and raise funds for the construction of another expressway, said Director, Global Infrastructure and Project Finance of Fitch Ratings New York, Cynthia Howells.

She was responding to a question on the possibility of financing infrastructure projects, at a presentation in Colombo last week on 'Infrastructure Financing in Developing Countries: A New Role for Corporates and Banks'.

Following are excerpts from her presentation:

Out of hundreds of analyses done globally, Fitch has found that commercial bank loans and capital market bonds have become the model for infrastructure debt financing in the 'Developed World' . Fitch formed Global Infrastructure and Project Finance Group GIG in 2007 to consolidate the many and various infrastructure analyses being done at Fitch under one consistent methodology.

There are a large number of infrastructure projects underway and planned in Sri Lanka and all these projects are financed by international borrowings by the Government. The question is why banks and finance companies are not interested in investing in these projects. There are lot of advantages of private financing of infrastructure projects.

The questions I’d like to pose to investors, financiers, bankers, civil servants, regulators and others in Sri Lanka are: Why is private, corporate, and local bank capital not entering the infrastructure market in Sri Lanka? And can the Sri Lankan business and financial sector apply the financing structures, which are being successfully used in the rest of the world, to attract capital for needed infrastructure in Sri Lanka?

From my understanding there is little reason why this is not possible. There are advantages of involving non-government banks and private investors in infrastructure financing.

The benefits transitioning to private sector debt financing are; it provides attractive investment opportunities in Sri Lanka that could retain local and foreign capital, and talent, in the country.

It strengthens the local economy by fostering common goods that are the foundation of future growth such as roads, bridges, airports, power plants.It may accelerate the process of infrastructure development if many entities support different infrastructure projects at the same time.

Also the Government can’t do it all and frees up government focus for most difficult projects, while more straight-forward yet still important projects can be financed by the private sector.

There are some disadvantages too which surface during this transition, such as higher financial risk accompanies financing that is not backed by sovereign credits and additional expertise is needed to evaluate and mitigate the additional financial and infrastructure project risks for the investor.

She explained two examples of Project Financing Structures publicly-rated by Fitch, an Energy Project titled Caithness Shepherds Flat LLC, where the debt is typically structured around a long-term revenue contract provided by a regional utility company, or state or government power authority, to an independently-owned and built power plant.

After reviewing this power generation example, I have to stop and ask, is it possible for Sri Lanka to use this financing structure to build power plants?

This is a Public-private partnership, where the Government and private sectors share the risk of the financing of this asset that provides a common good. Is the Sri Lankan Ministry of Power and Energy an analogous entity to the US Department of Energy? Would this government entity be willing to partner with non-government entities? I understand that the Sri Lankan Government recently issued 10-year sovereign debt at a 5.85 percent coupon.

Is this a rate that private companies would be willing to provide capital under? Pointing out another tall road project as an example in Australia, she questioned whether it was possible for Sri Lanka to use this financing structure to build toll roads? Is the Sri Lankan Road Development Authority an analogous entity to the concession grant as in the State of New South Wales?

Is this a model that could be used for the Colombo-Kurunegala-Kandy toll road that is under consideration at the moment? Could the concession model be employed for the yet-to- be constructed portions of the Southern Expressway that currently runs from Colombo to Galle?