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AT Capital

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Title: AT Capital


1
AT Capital
Infrastructure Financing Through Capital Market
Md. Minhaz Zia, CFA Partner Asian Tiger Capital
Partners, October 2009
www.at-capital.com
2
Topic
  • Infrastructure Investment An Overview
  • Financing at Greenfield Stage
  • Financing Through Capital Market

3
  • Infrastructure Investment an overview

4
Infrastructure defined
  • Infrastructure is the basic physical structures
    needed for the operation of a society or
    enterprise, or the services and facilities
    necessary for an economy to function. The term
    typically refers to the technical structures that
    support a society, such as roads, water supply,
    sewers, power grids, telecommunications, and so
    forth.

5
Infrastructure Investment Characteristics
  • Infrastructure Investment Characteristics
  • Capital Intensive
  • Long Gestation
  • Complex structure involving multiple and often
    unique risk
  • Limited recourse ( Investors paid from the
    revenue of project)
  • Requires Government Concession

6
Infrastructure Status of BD
  • Infrastructure in Bangladesh ranks among the
    worst in the world, securing only the 126th
    position in 133 nations, according to the Global
    Competitiveness Report 2009-10

GCR shows more than 80 percent businessmen said
infrastructure remained largely underdeveloped in
2008
7
Comparative Infrastructure Indicators
8
Why Infrastructure Investment has long been Poor
  • Two Basic Reasons-
  • The governments reliance on ADP-based public
    sector investment program which has declined
    steadily in relation to GDP in recent years and
  • (ii) The governments failure to attract
    private investment in the infrastructure sector.

Source Ministry of Finance, GOB
9
Poor ADP implementation is leveraging the
Inefficiency
Source Ministry of Finance, GOB
  • The key factors contributing to the
    unsatisfactory implementation of the ADP are
  • Complex procurement policy
  • Inadequate capacity of the implementing agencies
    and
  • A lack of proper monitoring of the agencies
    implementing the ADP.

10
International Experience is Different
International experience with infrastructure
funding is very different from Bangladesh. Most
emerging economies have successfully tapped
private sector funding for infrastructure
investment
11
Bangladesh Case
To attain a sustained growth rate of 8-10 percent
per annum over the next decade, Bangladesh will
have to raise its investment rate closes to
levels attained by India and China today, i.e.
37-40 percent of GDP. For that to happen the
infrastructure investment has to be taken at
least to 8 of GDP as against 4 now. The
challenge lies not only in mobilizing sufficient
resources to finance that investment but also to
develop effective institutional arrangements to
implement large infrastructure projects
Source Asian Development Bank
Source Ministry of Finance, GOB
12
Infrastructure Financing Macro Bottlenecks
  • Inefficient intermediation process
  • Poor investment quality
  • Limited capacity of public financing
  • Unavailability of risk capital
  • Concentration of risk
  • No Sovereign Rating

13
Broad Infrastructure Strategy
  • Improving intermediation of domestic
    financial savings so that they are channeled to
    meet the specific
  • requirements of infrastructure investment
    such as those relating to risk, tenor and scale.
  • Distributing financial risk more widely and
    efficiently across the domestic financial system
    and abroad, to avoid
  • excessive concentration.
  • Making infrastructure financing--especially
    in sectors where it has not been traditionally
    forthcoming--relatively
  • more attractive for a wide spectrum of
    investor/ financier classes by providing more
    liberal regulatory
  • regimes for infrastructure vis-à-vis
    non-infrastructure sectors and in some cases,
    offering well-designed fiscal
  • incentives.
  • Achieving all the above through a
    facilitating (rather than directive) framework
    for each class of financing
  • institution, while ensuring that
    accelerated investment in infrastructure does not
    jeopardize fiscal discipline,
  • financial stability and external
    viability.

14
Spectrum for Infrastructure financing
Public Sector
Private Sector
GOB owned and GOB operated (GOB only)
GOB owned and privately operated
GOB Private jointly owned and privately
Operated (PPP)
Privately owned and privately operated
Initial Investment can be in innovative
financing solution like PPP (Public-Private
Partnership).
15
  • Financing at Greenfield Stage

16
Infrastructure project financing at Greenfield
stage
  • Worldwide Infrastructure projects at Greenfield
    stage are usually financed through
  • Sponsors Equity/ Quasi Equity
  • Commercial Bank Lending
  • Private Placement of Bond with Institutions
  • Only at a mature stage it is taken to the capital
    market to-
  • Bring liquidity in the market and
  • Broaden the investor base.

17
Institutional Structural Constraints
  • Imbalanced Distribution of Savings
  • About 80 of the countrys total financial
    savings is invested in the Banking system as
    deposits.
  • Debt market almost entirely comprised of non
    liquid and non traded Government Securities.
  • Virtually non existent Corporate Bond market.
  • Investment in Equity Market still low.
  • Insurance industry not attracting significant
    financial savings nor playing a meaningful role
    in investment.
  • Pension scheme not funded.

18
Institutional Structural Constraints (contd.)
  • .. And Poor channeling of saving surplus
  • Banking system with present surplus liquidity of
    about Taka 30 Billion have very low appetite to
    Infrastructure investment.
  • This is due to---
  • The maturity mismatch between the asset and
    liability is the key constraint of commercial
    bank lending on a high scale.
  • The risk appetite of the commercial Bank is
    different from that required in huge
    infrastructure investment.
  • The exposure limit and norms may prevent banks
    from infrastructure investment
  • Absence of any debt swap market to take care of
    exposure problem
  • Absence of risk transfer mechanism (ie.
    Securitzation) in the system

19
Institutional constraints
Major impediments towards development of bond
market in Bangladesh
  • Governments inconsistent initiative and policy
    support for development of Bond market
  • Default Culture in Corporate Bond
  • Poor and lengthy legal enforcement
  • Unaccountable Trustee
  • High risk free interest rate
  • Absence of proper benchmark and yield curve
  • Absence of large institutional Investors
  • Lack of liquidity and secondary trading (No
    Market Maker)

20
Measure needed to be taken for liquidity of the
Private Placement
  • Allowing REPO transactions on corporate bonds in
    the interbank REPO Market through a specialized
    clearing and settlement platform
  • Private Placement should be confined only to
    Qualified Institutional Buyer (QIBs)
  • Develop an OTC Market for Trading in Privately
    Placed Debt Securities

21
  • Financing Through Capital Market

22
Financing Through Capital Market
  • Bangladesh has got two stock exchanges namely
    Dhaka Stock Exchange (DSE) and Chittagong Stock
    Exchange (CSE).
  • The market is however characterized by the
    following two major constraints-
  • The Market is predominantly equity- centric
  • Supply of securities with strong fundamentals
    is extremely limited.
  • DSE Main board as on September 2009

23
Regional Market Capitalisation as of GDP
  • Dhaka Stock Exchange is 22 of the GDP in 2009
    while Bombay Stock Exchange is 54.5 of GDP

24
Infrastructure capitalisation in Regional Stock
Markets
With current offer price for GrameenPhone the
market cap of infrastructure ratio will go to
15
25
Infrastructure Fund from Capital Market
  • Infrastructure fund can be tapped from the
    Market by-
  • - Issuing equity or debt of infrastructure
    projects
  • - Enhancing participation of plain vanilla
    mutual fund in infrastructure related issues.
  • - Issuing Dedicated Infrastructure Mutual
    Fund
  • Bangladesh Economy growing at a rate of 6-7 will
    soon cross 100 Billion
  • Market Capitalization will reach at least 25 of
    the GDP as the investor appetite to capital
    market is growing fast.
  • Infrastructure capitalization reaching 20 of
    market cap an additional USD 2.5bn fund can be
    tapped from capital Market by 2012.

26
Policy issues
  • Revenue from the infrastructure project can
    be securitized.
  • Cap of investment up to maximum 25 for
    mutual fund in non listed securities should be
    relaxed if the funds are invested in non listed
    infrastructure projects .
  • Existing IPO quota of 10 for the general
    mutual fund and dedicated mutual fund can be
    enhanced for infrastructure related issues.
  • Mutual funds can also be incentivized through
    lower tax against income generated from
    infrastructure issues
  • The lock in rule for infrastructure related
    issue should be relaxed for investor to make an
    early exit.
  • Insurance companies should by regulatory
    requirement be asked to hold a certain proportion
    of their
  • assets in infrastructure investment.
  • They should be allowed to hold a substantial
    part of their portfolio in the securities of the
    non listed
  • infrastructure companies.
  • Pension scheme should be funded

27
  • Thank You
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