Infrastructure projects (in particular PPPs) provide an ideal opportunity for holders of long-term local currency. In addition to treasuries and real estate, infrastructure offers one of the better long-term placement opportunities for developing economies. It also creates economic opportunities, jobs, and growth.
However, most developing country financial sectors are ill-equipped to respond to the opportunities of infrastructure finance. They do not generally have lending products with the long tenors, fixed interest rates and grace periods needed by infrastructure investments. Also, the risk profile for infrastructure differs from the normal diet of local financiers.
| Box 6.8 : Brazilian Economic Development Bank (BNDES) |
| Formed in 1952, BNDES raises money through the issuance of Government securities in favour of BNDES. It also has access to the capital markets and can raise money through trading securities and all manner of derivatives; it also earns income from its loan portfolio and can issue debentures. With its long term financing BNDES has been fundamental in the growth of PPP in Brazil. But is also subject to criticism, in particular long wait times for approval of loans, being overly risk averse, and requiring security from sponsors more appropriate to corporate financing than PPP. BNDES is also criticised for squeezing out private lenders due to its dominant position. Source: www.bndes.gov.br and author). |
Intermediaries can help. These are specially equipped entities that can provide advice, structure projects and offer specialised financial instruments to help address the challenges faced by local financiers. These intermediaries can borrow from the local markets and convert these liabilities into the kind of financial instruments sought by infrastructure projects, and/or they can co-finance with local financial institutions and financiers to achieve together the lending products sought.
Creating such intermediaries (whether from existing entities or by creating new ventures) can be costly and time consuming. There is no easy or standard approach to intermediation. Each country will need to consider carefully its requirements, its legal framework, the make-up of its financial sector and the kind of infrastructure that is to be financed, before creating such an intermediary. Key lessons have been discussed above, learned from countries that have significant experience in creating intermediaries for infrastructure finance.