at capital md. minhaz zia, cfa partner asian tiger capital partners, october 2009 infrastructure...
TRANSCRIPT
AT Capital
Md. Minhaz Zia, CFA
PartnerAsian Tiger Capital Partners, October 2009
www.at-capital.com
Infrastructure Financing Through Capital Market
2Asian Tiger Capital Partners, Level 16, UTC Tower, Panthapath, Dhaka-1215, Tel: +880-2-9114286, Web: www.at-capital.com
Topic
Infrastructure Investment: An Overview
Financing at Greenfield Stage
Financing Through Capital Market
3Asian Tiger Capital Partners, Level 16, UTC Tower, Panthapath, Dhaka-1215, Tel: +880-2-9114286, Web: www.at-capital.com
Infrastructure Investment: an overview
4Asian Tiger Capital Partners, Level 16, UTC Tower, Panthapath, Dhaka-1215, Tel: +880-2-9114286, Web: www.at-capital.com
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.
Infrastructure Range
Transportation Road and highway Railways Canals lighthouses Seaports Airports
Water management Drinking water supply Sewage Drainage irrigation systems flood control systems
Communications Telephone/Mobile Networks Cable television networks Internet backbone Communication satellites
Energy Electric power network Natural gas pipelines Petroleum pipelines heating systems
Geophysical monitoring Meteorological monitoring Seismometer networks Remote sensing satellites
Waste management waste landfills waste incinerators
5Asian Tiger Capital Partners, Level 16, UTC Tower, Panthapath, Dhaka-1215, Tel: +880-2-9114286, Web: www.at-capital.com
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
6Asian Tiger Capital Partners, Level 16, UTC Tower, Panthapath, Dhaka-1215, Tel: +880-2-9114286, Web: www.at-capital.com
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
South Asian nations Ranking in Global Competitiveness Report 2009-10
India 49
Srilanka 79
Pakistan 101
Bangladesh 126
Source: Global Competitiveness Report, WEF 2009
GCR shows ‘more than 80 percent businessmen said infrastructure remained largely underdeveloped in 2008’
7Asian Tiger Capital Partners, Level 16, UTC Tower, Panthapath, Dhaka-1215, Tel: +880-2-9114286, Web: www.at-capital.com
Comparative Infrastructure Indicators
Comparative Infrastructure Indicators, 2007
Indicators Bangladesh India South AsiaAverage
China Vietnam East Asia and Pacific
Average
Access to electricity (% of population) 20 43 29 99 76 63
Electric power consumption (kwh per capita) 147 380 210 987 374 1230
Improved water source (% pop with access) 74 86 76 77 85 75
Improved sanitation facilities (% pop with access) 39 33 53 44 61 60
Source: Private participation in infrastructure Projects database. The World Bank Group 2009
8Asian Tiger Capital Partners, Level 16, UTC Tower, Panthapath, Dhaka-1215, Tel: +880-2-9114286, Web: www.at-capital.com
Why Infrastructure Investment has long been ‘Poor’
Two Basic Reasons-
(i) The government’s reliance on ADP-based public sector investment program which has declined steadily in relation to GDP in recent years; and
(ii) The government’s failure to attract private investment in the infrastructure sector.
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0 6.35.7
3.2 3.4
(% o
f GD
P)
Trend in ADP (2000-09)
Source: Ministry of Finance, GOB
9Asian Tiger Capital Partners, Level 16, UTC Tower, Panthapath, Dhaka-1215, Tel: +880-2-9114286, Web: www.at-capital.com
‘Poor’ ADP implementation is leveraging the Inefficiency
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.
Source: Ministry of Finance, GOB
10Asian Tiger Capital Partners, Level 16, UTC Tower, Panthapath, Dhaka-1215, Tel: +880-2-9114286, Web: www.at-capital.com
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
Comparative Infrastructure Investment in US $ billion
BY Sector Bangladesh IndiaSouth Asia
AverageChina Vietnam
Energy 1 34 7 36 3
Telecom 4 43 10 15 2
Transport 0 19 3 42 1
Water and sewerage
0 0.26 0.04 7 0.21
Total 5 96 21 100 6
Source: Private Participation in Infrastructure Projects Database , The World Bank Group 2009.
Investment Commitments to Infrastructure with Private Participation in Emerging Markets 2003-2007 (US$B)
11Asian Tiger Capital Partners, Level 16, UTC Tower, Panthapath, Dhaka-1215, Tel: +880-2-9114286, Web: www.at-capital.com
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
12Asian Tiger Capital Partners, Level 16, UTC Tower, Panthapath, Dhaka-1215, Tel: +880-2-9114286, Web: www.at-capital.com
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
13Asian Tiger Capital Partners, Level 16, UTC Tower, Panthapath, Dhaka-1215, Tel: +880-2-9114286, Web: www.at-capital.com
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.
14Asian Tiger Capital Partners, Level 16, UTC Tower, Panthapath, Dhaka-1215, Tel: +880-2-9114286, Web: www.at-capital.com
Spectrum for Infrastructure financing
GOB owned and GOB operated(GOB only)
Public
Sector
Private
Sector
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).
15Asian Tiger Capital Partners, Level 16, UTC Tower, Panthapath, Dhaka-1215, Tel: +880-2-9114286, Web: www.at-capital.com
Financing at Greenfield Stage
16Asian Tiger Capital Partners, Level 16, UTC Tower, Panthapath, Dhaka-1215, Tel: +880-2-9114286, Web: www.at-capital.com
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.
17Asian Tiger Capital Partners, Level 16, UTC Tower, Panthapath, Dhaka-1215, Tel: +880-2-9114286, Web: www.at-capital.com
Institutional & Structural Constraints
Imbalanced Distribution of Savings
About 80% of the country’s 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.
18Asian Tiger Capital Partners, Level 16, UTC Tower, Panthapath, Dhaka-1215, Tel: +880-2-9114286, Web: www.at-capital.com
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
19Asian Tiger Capital Partners, Level 16, UTC Tower, Panthapath, Dhaka-1215, Tel: +880-2-9114286, Web: www.at-capital.com
Institutional constraints
Major impediments towards development of bond market in Bangladesh
Government’s 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)
20Asian Tiger Capital Partners, Level 16, UTC Tower, Panthapath, Dhaka-1215, Tel: +880-2-9114286, Web: www.at-capital.com
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
21Asian Tiger Capital Partners, Level 16, UTC Tower, Panthapath, Dhaka-1215, Tel: +880-2-9114286, Web: www.at-capital.com
Financing Through Capital Market
22Asian Tiger Capital Partners, Level 16, UTC Tower, Panthapath, Dhaka-1215, Tel: +880-2-9114286, Web: www.at-capital.com
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:
BDT mn USD mnTotal Market Capitalisation of All Companies Shares 1,045,222 15,135
Total Market Capitalisation of All Mutual Funds 23,711 343
Total Market Capitalisation of All Debentures 576 8
Total Market Capitalisation of All Govt. T-Bonds 310,763 4,500Total Market Capitalisation of All Corporate Bonds 2,720 39
Total Market Capitalisation of All Listed Securities 1,382,991 20,026
23Asian Tiger Capital Partners, Level 16, UTC Tower, Panthapath, Dhaka-1215, Tel: +880-2-9114286, Web: www.at-capital.com
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
24Asian Tiger Capital Partners, Level 16, UTC Tower, Panthapath, Dhaka-1215, Tel: +880-2-9114286, Web: www.at-capital.com
Infrastructure capitalisation in Regional Stock Markets
With current offer price for GrameenPhone the market cap of infrastructure ratio will go to 15%
25Asian Tiger Capital Partners, Level 16, UTC Tower, Panthapath, Dhaka-1215, Tel: +880-2-9114286, Web: www.at-capital.com
Infrastructure Fund from Capital Market
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.
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
26Asian Tiger Capital Partners, Level 16, UTC Tower, Panthapath, Dhaka-1215, Tel: +880-2-9114286, Web: www.at-capital.com
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
SEC should broaden the scope of the foreign investors in the existing rules and enact necessary new rules to ensure spontaneous participation of foreign investors in listed Infrastructure Bond.
27Asian Tiger Capital Partners, Level 16, UTC Tower, Panthapath, Dhaka-1215, Tel: +880-2-9114286, Web: www.at-capital.com
Thank You