Innovative partnership to boost infrastructure funding in Southeast Asia
The Credit Guarantee & Investment Facility (CGIF) and Surbana Jurong Private Limited (SJ) today announced a collaboration to boost the use of local currency-denominated project bonds to finance greenfield infrastructure projects in Southeast Asia.
CGIF is a multilateral facility established by ASEAN+3 countries and the Asian Development Bank to develop and strengthen local currency and regional bond markets in ASEAN.
Under this collaboration, SJ will provide technical assessments to validate the time, cost and quality aspects of identified greenfield infrastructure projects aiming to issue project bonds with the support of CGIF’s Construction Period Guarantee (CPG). CGIF will offer irrevocable and unconditional guarantees to projects in ASEAN with robust construction programmes, as screened by SJ. These guarantees can stretch up to US$140 million equivalent per single greenfield infrastructure project to facilitate the issuance of long term local currency bonds.
The CPG, launched in July last year, is designed to frame risks associated with the construction period to acceptable levels for conservative long term investors to consider greenfield project bonds. (See Appendix I for more info on CPG.)
This collaboration marks the first partnership between CGIF and a urban, industrial and infrastructure consulting firm. CGIF has undertaken 13 corporate bond guarantee transactions since her establishment in May 2012, and is actively looking to embark on her first infrastructure project bond guarantee with SJ.
“For many conservative long term investors, construction risk has been the key impediment keeping them from supporting the build-up of infrastructure assets despite their natural appetite for long term bonds. This collaboration marks an innovative attempt to bring to the market high quality greenfield project bonds where construction risks have been adequately appraised and mitigated as guided by the engineering prowess of a firm like Surbana Jurong and backed by CGIF’s guarantees,” said Mr Kiyoshi Nishimura, Chief Executive Officer of CGIF.
He further added: “Many ASEAN countries are witnessing rapid accumulation of domestic savings in the non-bank sectors such as pension funds and insurance companies as their economies grow and their income levels rise. However these savings are not well tapped to finance critically needed infrastructure assets. Catalyzing these institutional investors’ support for infrastructure projects perfectly fits the aspirations of CGIF’s Contributors which includes the Singapore Government to find new methods to narrow the widening infrastructure gap in the region”.
“For a country to develop and grow, infrastructure development is key. However, perceived risks in such projects in Developing Asia deter investors, and infrastructure development is, in turn, often severely hampered. Surbana Jurong is delighted to partner the CGIF to develop a robust construction risk assessment and mitigation framework that will provide assurance to new investors in greenfield infrastructure project bonds. This partnership aims to boost infrastructure investment in ASEAN,” said Mr Wong Heang Fine, Group Chief Executive Officer of SJ.
He added: “As one of the largest Asia-based urban, industrial and infrastructure consultancy service providers, SJ is always keen to further value-add to our global clients with a complete value-chain of services. This complementary partnership with CGIF allows us to now offer a new dimension of financing solutions for our infrastructure project pipeline. We believe we are the only player in our industry to offer such a solution.”
Stimulating local currency bonds
According to the Asian Development Bank’s latest forecasts, Developing Asia will need to invest US$26 trillion from 2016 to 2030, or US$1.7 trillion per year, in order to maintain the region’s growth momentum, eradicate poverty, and respond to climate change. New approaches will be required to stimulate private sector finance in infrastructure investments and to prevent the region from falling further behind.
One such approach is to facilitate the channelling of domestic long term savings to finance infrastructure directly via project bonds, particularly at the greenfield stage. Mobilising long term savings to meet long term funding needs in matching currencies is the most efficient model of financing infrastructure. However, only a few countries have successfully pursued this capability. A critical impediment towards mobilising long term savings is the low risk appetite of pension and insurance fund managers and their aversion to construction risks.
How the CGIF-SJ collaboration helps to boost funding
The collaboration between CGIF and SJ aims to deliver the assurance needed by institutional investors to make investments in greenfield project bonds. It marries CGIF’s financial strength as a guarantor, in particular via its new Construction Period Guarantee or CPG, with the engineering and technical prowess of SJ to examine and validate construction-related risks on projects. When construction risks are expertly assessed, properly managed and mitigated, CGIF’s irrevocable and unconditional guarantee for project completion can attract long term investors to invest in greenfield project bonds.
Initially, long term investors will rely on expert assessments like those from SJ and CGIF’s CPG risk assessment framework to frame construction risks to acceptable levels. However, over time, it is envisaged that this will ultimately aid infrastructure investors to gain the necessary experience to evaluate future greenfield project bonds, and to help narrow the region’s substantial infrastructure gap.
CGIF was established by the 10 members of the Association of Southeast Asian Nations (ASEAN) together with China, Japan and Korea (ASEAN+3), and the Asian Development Bank (ADB) in 2010 to develop ASEAN local currency bond markets. It exists as a trust fund of ADB and operates independently out of ADB’s headquarters in Manila.
CGIF is tasked to deploy credit guarantees to corporate, project and securitization bonds to boost issuer and investor participation in ASEAN’s current local currency bond markets such as Indonesia Rupiah (IDR), Malaysian Ringgit (MYR), Philippine Peso (PHP), Singapore Dollar (SGD), Thai Baht (THB) and Vietnamese Dong (VND). Instigating the inaugural bond issuances in Brunei, Cambodia, Laos and Myanmar is also part of its development mandate.
With “AA” global scale from S&P and “AAA” local scale ratings in many of the local currency markets in ASEAN, CGIF’s guarantee has successfully mobilized over USD 1 billion equivalent from local bond investors to new issuers as well as new types of bonds since commencing its operations in May 2012.
Background of CGIF
Before the Asian Financial Crisis in the late nineties, many investments in the region were financed by short-term foreign currency borrowing from commercial banks. This caused a “double mismatch” problem; a mismatch in currency and a mismatch in tenor in financing investments. This double mismatch problem was considered one of the causes of the crisis.
ASEAN+3, together with ADB, started a regional cooperation initiative known as the Asian Bond Market Initiative (ABMI) to address the double mismatch issue. ASEAN+3 has been working together under the ABMI to develop local currency bond markets in the region which companies in the region can tap. CGIF is one of the key elements of this multilateral initiative.
Need for Bond Market Development
Bonds allow investors to directly lend money to finance corporations and infrastructure assets; by-passing intermediation of funds by the banking sector. For infrastructure projects, long-term fixed rate project bonds in matching local currencies are the best method of financing projects including those at the green-field stage. Therefore, building institutional capacity amongst long-term investors to evaluate well developed projects is a key step towards thriving bond markets to finance infrastructure in the region.
Use of CGIF’s Guarantees
Companies and project companies can seek CGIF’s irrevocable and unconditional guarantee for the full tenure of the bonds to reach conservative long-term investors who are less familiar with their business activities and risks. For projects under construction with robust operational phase cash flows, CGIF can provide a guarantee just for the construction period with its Construction Period Guarantee (CPG) to allow bond investors to earn higher returns by taking the operational phase risks without the punitive construction risks associated with green-field bonds. CGIF’s CPG will require the construction program to be well developed and analysed guided by expert opinions from technical consultants as inputs to ensure construction risks are well-framed within acceptable levels.