A variety of instruments are available where Government seeks to help mobilize long-term local currency financing for infrastructure, including:
• Advisory services bring the assistance of experienced transaction advisers to the aid of contracting agencies or private investors, depending on the need. Mobilizing debt for infrastructure projects requires particular skills, for example packaging debt efficiently and managing lender groups and their due diligence requirements. One of the key advisory roles is the "arranger" of debt. An arranger needs to know the market and be known by the market to facilitate arranging and negotiation with other lenders.
• Equity and "equity-like" instruments for infrastructure projects can be large in value and risky, with long periods before equity distributions are realized. Sponsors are often the construction companies, infrastructure operators or other service providers whose principal focus is the provision of services to the project. The Government can provide equity investment and supply an intermediary to act as an equity investor. Equity investment in infrastructure is a difficult function to fulfil well; it requires a level of sophistication different than most equity investment. It is not just a question of funding, but rather the governance, the ability to make critical decisions in times of need, and to provide technical and commercial support, given the complexity of an infrastructure transaction.
• Long-term liquidity for equity investors-Equity investors also need access to large amounts of capital. Project sponsors will normally have less robust balance sheets and will not be able to leverage like lenders. In many countries, the lack of equity investment is a major challenge for infrastructure programs, reducing competition and making projects expensive.
• Debt-The Government may want to, or through an intermediary, help provide or mobilize debt for infrastructure projects themselves. Acting as lender is a difficult function for many Governments who do not have the due diligence, oversight, implementation and other key governance functions of financiers.
• Long-term liquidity for commercial banks- Commercial banks may have staff and capacity to finance projects, but may not have access to sufficient long term local currency capital. Often, their deposit base will be short term in nature, creating a liability mismatch if they create long-term assets. Also, commercial banks may be nervous about using what long-term capital they have on infrastructure (where competing opportunities are more profitable). The Government can help by providing financial institutions (in particular commercial banks) access to long term liquidity which they can then on-lend to infrastructure projects, for example helping commercial banks access local capital markets or supplying/lending long-term funds directly to commercial banks.
| Box 6.3: Arguments for Government Equity Holdings in Infrastructure |
| Some argue that Government should be an equity holder in infrastructure transactions. The argument usually runs that Government needs: • A share in the upside of very profitable projects, to ensure that Government gets a piece of the action. Counter-argument: But equity distributions in infrastructure are hard to control and harder to forecast. If Government wants to share in the upside, it should require a share of revenues or a fixed lease payment instead. • Control of the sector-to maintain Government influence over the project and the sector. Counter-argument: But private partners are likely to limit real Government control over the project as equity holders to mitigate conflict of interest and ensure that decisions are made on a commercial rather than political basis. Government would do better maintaining control through regulations and regulatory powers. • Access to information-Government may see equity as a mechanism for accessing company information. Counter-argument: However, private partners will inevitably establish a governance structure that isolates sensitive information. The Government may find that regulatory powers and data gathering of its own will provide a more practical solution to information access. |