Successful infrastructure project bonds require improved regulatory frameworks – AfDB study

A new report launched by the African Development Bank (AfDB) during the IMF and World Bank Spring Meetings in April 2013 by the bank’s Finance Vice-President, Charles Boamah, says African countries need to improve their regulatory frameworks in order to ensure the successful launch of African infrastructure project bonds.

The AfDB report titled “Structured Finance – Conditions for infrastructure project bonds in African markets,” states further that Africa is ready for the launch of such infrastructure bonds, provided some conditions are met.

According to Donald Kaberuka, President of the African Development Bank, in the foreword of the report, “With Africa having now no other option than to tap into its own internal resources, ‘the book points in the right direction’.

“I hope it will be useful for all Africans who are involved in infrastructure development,” he adds.

Meanwhile, the report is of the view that domestic capital markets can contribute to funding some of the most important local and regional infrastructure projects.

Given the limited ability of local banks to provide long-term funding and the shrinking international assistance, the report encourages project sponsors to turn to domestic institutional investors by issuing infrastructure project bonds.

One of the issues brought to light by the report, is that although the legal and regulatory framework for bond issuance exists in many countries which are active issuers of bonds for their own funding needs, competition between the sovereign and other issuers is a potential issue in all markets.

Many of the ingredients for infrastructure project bond issuance are present, but more needs to be done to make it attractive for sponsors to tap local markets. From a sponsor’s perspective, issuing an infrastructure project bond must offer the optimal tenor and pricing compared to other options. It is therefore essential that governments do more to reduce local market rates and lengthen the yield curve, the report recommends.

According to the report, a crucial barrier in African markets is the enabling environment for infrastructure, indicating that the regulatory and tariff framework in many sectors is incomplete.

It also espouses that although many countries have established public-private partnership (PPP) laws and institutions, they often lack the resources and capacity to prepare bankable projects for the market.

Despite being important, there is often a lack of advocacy and political support for driving concessions and PPP projects through government, and too few are coming to market, although it remains early days in many countries, says the AfDB report.

Suggesting there is a crucial role for governments in promoting infrastructure project bonds, it says governments can play a greater role in supporting stable economic conditions, developing local capital markets and strengthening institutions.

Those actions will encourage all issuers to come to market, particularly corporations for whom bond issuance has been limited to date, says the report. It adds that promoting reform and corporatisation of utilities and parastatals, including professional management and a clear regulatory environment, are preconditions for such entities to issue in the local bond markets – an important landmark in the development of local capital markets and the emergence of infrastructure project bonds.

Cedric Mbeng Mezui, the report’s lead author, also believes “The African Development Bank can play various roles in that regard,” as “It can provide technical assistance in infrastructure, capital markets and domestic issuance, and work with intermediaries”.

“For specific projects, it can use instruments such as the partial credit guarantee as well as any new tailored instruments, to enhance bond issuance and catalyse the market. Direct funding for projects in early-stage preparation and through debt and equity investments at financial close will help promote the overall market. Finally, the AfDB can play a role in unblocking the political bottlenecks that obstruct projects from being developed and implemented,” the lead author stresses.

For Moono Mupotola, Regional Integration Manager, AfDB however, “the book was prepared with a number of objectives in mind: firstly, to highlight the opportunity for project bonds; secondly, to elaborate on the conditions for efficient capital markets; thirdly, to explain the crucial role of constructive government policies; and finally to highlight lessons learned in other markets that might be useful for Africa.”

By Edmund Smith-Asante