Infrastructure funding: a better way

THE CHALLENGES of infrastructure development have a lot more to do with funding than construction and engineering. What if there was a way of developing key large project infrastructure without government having to outlay a dollar?

What if the element that stops infrastructure development dead in its tracks – the funding of it, usually by governments – was solved? 

David Wallader, a former Queensland banker with experience in international money management – the area in which banks make profit from leveraging deposited funds, sometimes called the ‘short term’ money market – asked these very same questions several years ago.

Mr Wallader had studied how the bank guarantee system and the cash and securities trading markets worked and discovered very large projects were funded in this way in certain European countries.

“I began to wonder why we were not doing this type of thing in Australia,” Mr Wallader said, starting a new business, named Infrastructure Financial Opportunity, to explore the possibilities. “So I asked the question of the trading platform I know which handles these kinds of transactions – and the answer was astonishing.

“While they agreed Australia was, in many ways, an ideal market for this alternative way of funding infrastructure, for it was stable, secure and transparent in its financial dealings … the problem was simply that Australian projects were not of high enough value. And the companies who built them were, at the time, not themselves of high enough value against which to secure the bank guarantees, to be issued in their name and not transferable to a third party.

“This is an important point, because that guarantee stays in the company’s name and cannot be drawn upon. The trading platform matches the value of the guarantee with a cash portfolio, as the trading-for-profit has to be completed in cash, not with borrowed funds.

“Hence, this is a joint venture, as the company and the trading platform are contributing equally to the project.

“The starting point for many of these infrastructure deals was about US$500 million. Few Australian companies at the time could secure to that level.”

But just a few months ago Mr Wallader asked the question seriously of the trading platform he works with in Europe, which gave him the go-ahead to try to batch major infrastructure project funding in Australia using this particular financial model.

Infrastructure Financial Opportunity now has access to funds at much lower levels of entry, he said, starting with projects that require a minimum bank guarantee of US$200 million.

“This financial opportunity is a unique, transparent, secure joint venture opportunity with profits generated from commodity trading of discounted financial instruments,” Mr Wallader said. “This process generates a secure cash flow causing no borrowings, for the purpose of financing an infrastructure development, be it for the private sector or a government project.

“It means it ends up debt free at the end of the conditions of the originating contract.”

Mr Wallader said the opportunity was only open to private companies, not to government bodies, as the process was controlled and audited under the trading rules of world finance compliance authorities, which includes all European authorities, the Federal Reserve, International Monetary Fund and the World Bank.

But governments could contract vital infrastructure development to companies that could secure a bank guarantee, meaning government had no upfront financial outlay, with no debt or liability at the completion of the project. All the government does is select a project to build – say, a bridge, an airport or a hospital – set the specifications and extend a lease for an agreed period (usually 45-49 years) to the construction company..

The advantages to the contractor include full financial control of the project, no waiting for progress payments, and an enhancement of the project profits.

“How it works is, a government identifies an infrastructure project and calls for tenders as part of the usual processes,” Mr Wallader said. “A major construction company or developer pitches to build that infrastructure, as usual – except part of that tender is secured finance for the project right through to completion. This gives the tenderer quite an advantage.

“The way the tenderer does this is by arranging a bank guarantee, secured by the company’s own capital value, for the value of the project guarantee. Profits are secured within the joint venture arrangement (between the trading platform and the project management company) and are distributed monthly. The contractor can draw down on those profits as part of the normal construction process, to pay costs at set intervals.”

Under the rules of the trading platform, 80 percent of the profits generated from the trade must be applied the project. This then becomes another area of profit for the contractor, over and above the profits already built into the tender price.

“It may appear to be a very unusual way of funding infrastructure to us, but it has delivered many projects in Europe successfully,” Mr Wallader said. Profits through these types of financial platforms have developed high speed rail in Europe, agribusiness projects, large infrastructure and even contributed to space exploration and medical research. Right now, they are contributing to Ebola research.

“I think this is now a secure financial option for Australia, especially with our drive for infrastructure coming out of the Federal and State Governments,” Mr Wallader said. “I think it could be used for infrastructure projects in the Galilee Basin, for example, or the Toowoomba Range Second Crossing and Brisbane’s BAT Tunnel – even new airports and ports that are on the drawing boards, such as the Gold Coast’s new cruise terminal.

“Even the vital Bruce Highway duplication could be achieved in half the time, if was broken up, using this system, among half a dozen contractors.

“A favourite of mine would be to see Australia’s fast train system come to fruition – it’s possible using this alternative finance system for infrastructure,” Mr Wallader said. “Australia needs this kind of infrastructure boost and should make the most of this innovative financial opportunity.”

www.infrastructurefinancialopportunity.com

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