Nicholas Watson in Prague -
Europe may be in the doldrums, though large infrastructure projects, crucially backed by multilateral lenders and export credit agencies, look set to give Emerging Europe's economies a fillip over the next couple of years.
"The outlook for infrastructure projects is better, definitely we've seen a better start in 2013 and that will continue in 2014," says Werner Weihs-Raabl, head of infrastructure finance at Erste Bank Group.
"Romania and Croatia, for example, are building realistic projects; a few years ago it was rather castles in the sky," he says, referring to the large Romanian road projects of Comarnic-Brasov, the Bucharest South-Ring Belt and Craiova-Pitesti, and the tender to monetize the debt of Croatian motorway operators and sell off the country's shipyards.
The better outlook for financing and building infrastructure in Central and Southeast Europe is a combination of various factors.
First is that the region's economies are, by and large, doing better than their western counterparts. The European Bank for Reconstruction and Development (EBRD) said in May it expects the eight economies of Central Europe to experience average economic growth of 0.8% this year, while the eight in Southeast Europe will grow by 1.4% this year - meagre, but still much better than further west.
With Europe's shrinking banks struggling to meet new capital requirements, asset managers, pension funds and insurers are now looking for new opportunities in infrastructure such as power plants, renewable energy, liquefied natural gas facilities, toll roads, railways and ports, which should provide higher stable, inflation-linked returns in this super low-interest rate environment.
The withdrawal of banks from many infrastructure projects, which require much longer-term financing, has left a void that is being increasingly filled by multilateral lenders, notably the European Investment Bank (EIB), and other state-backed credit institutions. "These are projects that require vast amounts of capital and the financial crisis has changed the appetite of banks for long-term loans," Fred Hochberg, president of the US Export-Import Bank, tells bne during a recent trip to Prague. "We offer financial capacity for these infrastructure projects that have gotten so large... they require a much broader portfolio of credit, much more of a consortium approach to do the financing, and export credit agencies like us are being called upon more and more."
The EU estimates Europe's infrastructure needs in transport, energy, and information/communications technology at €1.5 trillion to €2 trillion between now and 2020, a good proportion of that in the new member states, which are suffering from decades of under-investment by governments and the private sector. The EIB, EBRD together with the World Bank have agreed on a plan to support economic recovery and growth in Central and Southeast Europe that includes more than €30bn of joint commitments for 2013-2014.
Given the scale and number of infrastructure projects across Emerging Europe, relying on bank funding alone in this economic climate clearly won't be possible.
One of the European Commission's ideas is to use EU budget funds and the EIB's recently bolstered balance sheet to attract more capital market financing into these long-term infrastructure projects. So projects are first funded in the bank loan market, then when construction is complete and revenue starts flowing in, institutional investors such as pension funds, asset management firms and insurers can take on that debt using the capital markets. "Institutional investors are redefining their investment and risk diversification strategies," European Commissioner for Economic and Monetary Affairs Olli Rehn said in a speech at the turn of the year. "A return to infrastructure financing is clearly on the menu worldwide as international investors look for better return opportunities."
For example, the world's largest asset manager, New York-based BlackRock, announced in November last year it was planning to start investing clients' money into European infrastructure projects, by offering debt and equity for new projects, as well as buying existing debt portfolios from European banks withdrawing from project finance deals.
To gee this process along, the EIB and European Commission launched this year the "Project Bond Initiative," whose first deal at the end of July was €1.4bn of bonds from Spain's private sector-owned Castor Gas Storage. The idea behind the scheme is for the EIB to make the deal more attractive to investors by providing credit enhancement in the form of a subordinated instrument ($500m in the case of Castor Gas Storage) to support the senior debt issued by the project company. "The success of [the Castor Gas Storage] deal highlights the demand that exists in the market and investors' increasing comfort with structures that provide the support necessary to help kick-start capital market investment for large-scale strategically important infrastructure projects," says Charles Poole-Warren, finance partner at Allen & Overy, which advised Banco Santander, the global coordinator of the deal.
Infrastructure investments are also proving increasingly popular among sovereign wealth funds. During a visit to Warsaw in April last year, Chinese Premier Wen Jiabao announced a plan to launch a $10bn fund to finance joint projects in infrastructure, high-tech and green energy in Emerging Europe.
Weihs-Raabl says that where a project has good local support then "crowd funding - where a collective of individuals pool their money to fund civic projects that can't raise bank loans - is also an option. "We must find an alternative to just bank financing. With a power project, for example, you can use project finance initially, then when it's connected to the grid, then refinance it using other players," Weihs-Raabl says.
There is some scepticism, however, about how much institutional money can actually find its way into these infrastructure projects. For example, many such investors look for fixed rates of interest, but project finance debt is mostly issued on a floating-rate basis. EU insurers will also from January 2014 be bound by the Solvency II Directive, which more strictly regulates the amount of capital that they must hold to reduce the risk of insolvency.
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