Financing infrastructure development: time to unshackle the bonds?

DSC02489It is important to consider the merits of using projects bonds to finance infrastructure investment projects – in particular, the pricing of such bonds and the level of risk premium demanded by the market. In investigating the use and pricing of project bonds, this research used a mix of qualitative and quantitative methods. In addition to secondary desk-based study, interviews were held with policy makers, local authority staff, planners, developers, investors, fund managers and academics. Infrastructure bond data were obtained from the Bloomberg database on all project bonds issued in four Asian countries – Malaysia, China, Taiwan and India – over the period 2003-2014. The findings and analysis indicates investor appetite for project bonds, and suggests that a risk premium of between 150 and 300 basis points over the comparable government bond is appropriate depending on the sector and the degree of government involvement in underwriting the issue.

More broadly, the paper argues that the introduction of project bonds would be an important innovation, assisting the financing of infrastructure investment at a time when bank lending is likely to remain fragile. The current conditions in the sovereign debt market, where strong demand has forced down yields, has opened up the opportunity to introduce project bonds offering a higher yield to satisfy institutional investment demand for long term fixed income products.

Keywords: Institutions, Investment, Finance, Risk premium, Infrastructure, Project bondsThe Full Paper can be downloaded here:

http://www.emeraldinsight.com/doi/pdfplus/10.1108/JPIF-07-2015-0047