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Road Network Operations
& Intelligent Transport Systems
A guide for practitioners!
ITS is often deployed as part of a wider road project. An example is MIDAS: the Motorway Incident Detection and Automated Signalling system in English motorways (See www.highways.gov.uk). Increasingly ITS projects are being deployed as freestanding projects, such as Berlin's traffic management centre and the M42 active traffic management scheme (See Active Traffic Management)
Whether as part of a wider road improvement or a freestanding project, there is a multitude of sources for financing the capital works and, to a lesser extent, the subsequent operation and maintenance.
Depending on the economic and financial advancement of a country, the sources of project financing for ITS projects include the following.
Traditionally, very low income countries have attracted grants from multi-lateral institutions, such as the World Bank International Development Agency (IDA), to finance the capital cost of road improvements, with or without ITS.
The European Union provides various grants for ITS deployment to its Member States, some of which are among the richest countries in the world. The European Union also offer grants to Member States to help finance the capital works of ITS projects. These EU grants, which need not be repaid, typically require matching national financing. Some of the EU grants, such as the Cohesion and Regional Development Funds, are targeted at less developed EU regions and Member States. Other EU grants for financing ITS projects include:
Less well known is the opportunity for selected African, Caribbean & Pacific, Central Asian, Asia and Latin American, and EU Eastern Neighbours countries to borrow from the EIB - even though these countries are not member countries. The EIB can lend to these selected countries according to the mandates set by the European Union. (See EIB Regions) Projects with environmental benefits are particularly favoured.
Multi-lateral loans typically involve some form of sovereign guarantee by the borrower's country to repay the principal and interests.
Multi-lateral institutions have long been encouraging member countries to involve the private sector in the provision of infrastructure assets and services. Multi-lateral institutions have also developed private sector lending to projects on a non-recourse basis. The International Finance Corporation, which is part of the World Bank Group, is the most prominent in lending to private sector infrastructure. Other regional institutions are increasingly involved in lending on a non- or limited- recourse basis, for example the African Development Bank and the Asian Development Bank.
In recent years some governments have set up special purpose funds and/or national development banks to co-finance infrastructure projects, including road, involving private sector partners. Examples are:
With the growth in public-private partnership projects in the mid 1990s, some major private sector banks set up in-house PE units to co-invest in the equity of PPP projects. Following the 2007/8 Global Financial Crisis, many of these in-house PE units have been spun off as independent organisations, as they are now considered as non-core assets for the banks.
In the past few years traditional PE managers have started to invest in infrastructure, including ICT and roads. Some PE managers, such as 3i Group plc, Blackstone and KKR & Company LLP , have set up special-purpose infrastructure funds. PE managers typically invest in the equity portion of project finance.
An Infrastructure Fund is the common name for closed-end investment funds, which may be publicly listed and traded or or unlisted. Examples are:
These funds typically invest in the equity portion of the infrastructure projects. Some more recent infrastructure funds are focussed on investing in the debt portion of infrastructure projects. Examples are the GCP Infrastructure Fund Limited and Sequoia Infrastructure Debt S.A. . The rationale for debt focussed infrastructure funds is three fold:
The Global Financial Crisis of 2007/8 triggered a severe squeeze in the availability and price of debt for private sector financing of infrastructure projects. Consequently, the advent of debt infrastructure funds is particularly welcomed.
In recent years some very large pension funds, particularly from Australia and Canada, have been active investors in road infrastructure assets. More recently, an investment platform for UK pension funds to invest in infrastructure has been set up. (See Pensions Infrastructure Platform Limited)
Prior to the Global Financial Crisis it was common practice for a handful of private sector banks to form a syndicate to jointly lend to a major PPP project. Now banks club together as equals to jointly lend to a major project. This means longer bank terms negotiation and slower credit decision-making. All banks have to agree to whatever that is negotiated and agreed. The Global Financial Crisis has weakened the financial strength of many private sector banks involved in PPP infrastructure lending, and has exposed many of the banks' working assumptions as optimistic. Consequently, the availability of this particular source of project financing has reduced and the cost has increased. Recent international regulatory moves (known as Basel III - designed to make private sector banks more robust from failure) require banks to hold more capital against infrastructure lending. This is likely to further increase cost and reduce availability of bank loans for infrastructure projects.
Capital markets have also played important role in infrastructure debt financing in the form of bond financing. One advantage of bond financing over bank loans is the longer tenor. Some bonds come with repayment guarantees underwritten by multi-lateral institutions and/or specialist insurers, known as 'monolines'. A disadvantage of bond financing for projects with a long construction period is 'negative carry' where the cost of financing exceeds the return on the investment. This results from the difference between the interest paid to bond holders and the interest received for the money deposited during the construction period awaiting disbursement.
Multi-lateral institutions offer a range of financial guarantees against various risks, ranging from political and regulatory risks to risk of shortfall in expected revenues. For example, the Inter-American Development Bank guaranteed 10% of the bond issue for the project financing of the Santiago-Valparaiso PPP toll motorway in Chile in 2002.
The Multi-Lateral Investment Guarantee Agency (MIGA) offers political risk guarantee, whereas the World Bank and Asian Development Bank and Inter-American Development Bank offer partial risk guarantees (PRGs) that cover regulatory and revenue risks.
In the mid-1990s the private sector began to offer guarantees for bonds, providing investors with the highest possible rating. These 'triple-A' rated specialist insurance companies provided comprehensive guarantees, known as 'monolines', that were in excess of the PRGs offered by the multi-lateral institutions. The objective was to ensure project implementation and cover timely payments to investors whatever the actual project performance. These monolines have been severely weakened by the Global Financial Crisis. All have lost their triple-A ratings and do not have the same capacity to underwrite financial guarantees as they did prior to the Global Financial Crisis.