Financing infrastructure development: time to unshackle the bonds?

Norman Hutchison, Graham Squires, Alastair Adair, Jim Berry, Daniel Lo, Stanley McGreal, Sam Organ

    Research output: Contribution to journalArticle

    6 Citations (Scopus)
    3 Downloads (Pure)

    Abstract

    Purpose
    This paper considers the merits of using projects bonds to finance infrastructure investment projects and considers the pricing of such bonds and the level of risk premium demanded by the market.
    Design/methodology/approach
    The research used a mix of qualitative and quantitative methods with desk based study and interviews. Interviews were held with policy makers, local authority staff, planners, developers, investors, fund managers and academics. Infrastructure bond data was obtained from the Bloomberg database on all project bonds issued in four Asian countries -Malaysia, China, Taiwan and India - over the period 2003 to 2014.
    Findings
    The analysis indicates investor appetite for project bonds and suggests that a risk premium of between 150 to 300 basis points over the comparable government bond is appropriate depending on the sector and the degree of government involvement in underwriting the issue.
    Practical implications
    The paper argues that the introduction of project bonds would be an important innovation, assisting the financing of infrastructure investment at a time when bank lending is likely to remain fragile. The current conditions in the sovereign debt market, where strong demand has forced down yields, has opened up the opportunity to introduce project bonds offering a higher yield to satisfy institutional investment demand for long term fixed income products.
    Originality/value
    The originality of this paper stems from the analysis of the merits of using projects bonds to finance infrastructure investment projects, the pricing of such bonds and the level of risk premium demanded by the market.
    Original languageEnglish
    Pages (from-to)208-224
    Number of pages17
    JournalJournal of Property Investment & Finance
    Volume34
    Issue number3
    DOIs
    Publication statusPublished - 2016

    Fingerprint

    Infrastructure investment
    Risk premium
    Financing
    Infrastructure development
    Investment project
    Investors
    Finance
    Pricing
    Government bonds
    Politicians
    India
    Underwriting
    Institutional investment
    Fund managers
    China
    Sovereign debt
    Developer
    Taiwan
    Data base
    Fixed income

    Keywords

    • infrastructure
    • finance
    • project bonds
    • risk premium
    • investment
    • institutions

    Cite this

    Financing infrastructure development : time to unshackle the bonds? / Hutchison, Norman; Squires, Graham; Adair, Alastair; Berry, Jim; Lo, Daniel; McGreal, Stanley; Organ, Sam.

    In: Journal of Property Investment & Finance, Vol. 34, No. 3, 2016, p. 208-224.

    Research output: Contribution to journalArticle

    Hutchison, Norman ; Squires, Graham ; Adair, Alastair ; Berry, Jim ; Lo, Daniel ; McGreal, Stanley ; Organ, Sam. / Financing infrastructure development : time to unshackle the bonds?. In: Journal of Property Investment & Finance. 2016 ; Vol. 34, No. 3. pp. 208-224.
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    author = "Norman Hutchison and Graham Squires and Alastair Adair and Jim Berry and Daniel Lo and Stanley McGreal and Sam Organ",
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    AU - Lo, Daniel

    AU - McGreal, Stanley

    AU - Organ, Sam

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    AB - PurposeThis paper considers the merits of using projects bonds to finance infrastructure investment projects and considers the pricing of such bonds and the level of risk premium demanded by the market.Design/methodology/approachThe research used a mix of qualitative and quantitative methods with desk based study and interviews. Interviews were held with policy makers, local authority staff, planners, developers, investors, fund managers and academics. Infrastructure bond data was obtained from the Bloomberg database on all project bonds issued in four Asian countries -Malaysia, China, Taiwan and India - over the period 2003 to 2014. FindingsThe analysis indicates investor appetite for project bonds and suggests that a risk premium of between 150 to 300 basis points over the comparable government bond is appropriate depending on the sector and the degree of government involvement in underwriting the issue. Practical implicationsThe paper argues that the introduction of project bonds would be an important innovation, assisting the financing of infrastructure investment at a time when bank lending is likely to remain fragile. The current conditions in the sovereign debt market, where strong demand has forced down yields, has opened up the opportunity to introduce project bonds offering a higher yield to satisfy institutional investment demand for long term fixed income products. Originality/valueThe originality of this paper stems from the analysis of the merits of using projects bonds to finance infrastructure investment projects, the pricing of such bonds and the level of risk premium demanded by the market.

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