infrastructure gap

The shortfall in investment for essential projects
around the world is estimated to exceed US$1 trillion
annually, and
companies and countries are taking a
range of innovative new approaches
in an effort to build
the infrastructure required for the future.

Project bonds go mainstream

The G20 and the World Economic Forum put global infrastructure improvement at the top of their strategic agendas in 2014. But because bank lending remains tight and public funds are scarce, sponsors have had to look beyond traditional loan finance to fund infrastructure development. As a result, project bonds have become increasingly popular, and they are now a viable option for sponsors in a growing number of markets.

As a result, project bonds can be issued in several forms for both greenfield and brownfield projects: privately placed or publicly listed; rated or unrated; and with or without external credit enhancement.

Infrastructure projects are well-suited to debt investors, particularly in a low-interest rate environment, because they provide attractive yields and significant credit spreads. They also provide investors with collateral in the form of real assets that are often deployed in quasi-monopolistic contexts.

Several major projects are now being financed under the European Commission’s Europe 2020 Project Bond Initiative (PBI), whose mission is to facilitate the development of bond finance in the European infrastructure market. The European Investment Bank provides credit enhancement for PBI projects, encouraging insurance companies, pension funds and other institutional investors to take positions in debt for infrastructure projects for the first time. Outside Europe, other multilateral institutions, such as the African Development Bank, are considering how they could support similar initiatives.

Non-bank debt is also increasingly a component of infrastructure finance in emerging markets, and countries such as Peru, Mexico, Colombia and the Emirate of Abu Dhabi are looking to bond investors to help fund essential programs.

Many sponsors have been reticent about using project bonds to finance infrastructure projects because they perceive them to be complex or expensive relative to bank lending, but this situation is changing.

It is important to note that project bond issuance must be supported by a robust legal framework. Many countries around the world are working to establish the appropriate contractual frameworks or legislation for public-private partnerships to attract institutional investors to infrastructure projects.

Capital markets enable infrastructure development in Latin America

Countries throughout Latin America are advancing ambitious infrastructure programs, particularly in energy and transportation, to support regional integration and strong economic growth.

To finance these projects, sponsors and financial institutions are increasingly turning to the international debt capital markets. Latin American and Caribbean issuers raised US$139.2 billion in bonds in international capital markets in 2014, a 10.2 percent increase from 2013.

While certain Latin American countries have healthy domestic banking systems and stock exchanges for financing projects, the sheer scale of ongoing and planned projects means financing from international investors is essential. This is particularly true for projects in the Andean region, where the mountainous terrain can make infrastructure development more expensive than elsewhere.

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Rule 144A/Regulation S project bonds by Latin American issuers have proven particularly attractive in the past year. In part, this is because US interest rates remained at historic lows, and these bonds encourage US investors to pursue opportunities in Latin America for higher yields. The reduction in political risk in the region has also given new confidence to US investors and fund managers.

While pension funds and insurers have become increasingly comfortable investing in infrastructure bonds for new projects in mature markets such as Europe, most bonds in Latin America have been issued to finance brownfield projects or to refinance projects that are already under way. But in the past year or so, a number of bonds were issued for greenfield projects in the region, and the trend is expected to continue.

A number of countries are establishing robust frameworks for public-private partnerships (PPPs) to attract international investors for greenfield projects, many of which may be financed with project bonds. Brazil has indicated that it will open more concessions and initiate more PPPs. Colombia recently passed a new PPP law to attract international financing for what is being hailed as the biggest road-building project in Latin America. Chile plans to open new concessions and is putting a new focus on infrastructure investment. Peru sees continuing activity in PPPs focused on roads, hospitals and water. And Mexico’s historic reforms include PPP reforms that provide greater certainty for infrastructure investors and contractors.

Financing high-speed broadband infrastructure

Countries need high-speed broadband infrastructure to compete in the digital era, but existing broadband capacity is limited around the world. Trillions of dollars are required to fund the deployment of broadband networks through to 2030. Consulting firm McKinsey & Company estimates that Organisation for Economic Co-operation and Development (OECD) countries, plus Brazil, China and India, need to invest US$10 trillion in broadband infrastructure. The needs are huge, but how will they be financed?

Government grants and subsidies are covering some of the costs of building infrastructure. For instance, the US Department of Commerce’s National Telecommunications and Information Administration has invested more than US$4 billion since 2009 to increase broadband access to underserved communities across the United States.

Equally vital is the support governments can offer through loans, guarantees and project bonds. As the European Commission’s Digital Agenda for Europe report points out, “These instruments can be an effective means of support for infrastructure projects which have potential for commercial revenues, but which face constraints in accessing usual sources of financing.” Many countries are making private sector partnership and infrastructure investments a priority.

Private sector involvement will be key, and the investment case for private entities will depend on the level of return and the timing of cash flow for each broadband project, as well as the availability of finance and the relative attractiveness of alternative investments. Governments will need to create a favorable environment for attracting investment and financing; developing a stable regulatory regime that encourages investment and a clear government strategy for doing so is paramount. But the outlook is promising: At least 140 countries already have a national broadband strategy or policy in place.

However broadband infrastructure is financed, its development is essential for all countries. According to The State of Broadband 2014: Broadband for All, a report issued by the Broadband Commission, “Broadband for all can transform policy, social and development outcomes around the world” and is “essential for national competitiveness and success in the modern economy.”


Demonstrating the effectiveness of public-private partnerships in broadband infrastructure financing, we represented the European Investment Bank (EIB) in the issuance of the first project bond in Europe for digital infrastructure. The project bond refinanced the debt of the 11 French telecoms concessions owned by Axione Infrastructures, which will continue and extend its implementation of fast and superfast digital infrastructure in sparsely populated areas.

The project bond was issued with a debt enhancement, using the Project Bond Credit Enhancement structure launched by the European Commission and EIB in 2012. In addition to being the first European project bond issued for digital infrastructure, it was also the first project bond to be issued in France, governed by French law and listed on the regulated market of Euronext Paris.