It’s all about infrastructure these days, particularly in Asia where the annual spend required to plug the region’s gap in everything from power production to roads and airports is estimated to reach US$5.36trn annually by 2025, according to PwC. Small wonder, then, that lots of people are trying to get a piece of the project finance advisory game.
But that game has no rules, at least when it comes to project sponsors deciding which adviser to choose. So, to get the best bang for your buck, do you take the pure advisory route and select a professional service firm such as one of the big global accountants, a specialist boutique or one of the investment or commercial banks?
If you choose one of the banks as your adviser, you will probably do so on the promise of being provided with bridge financing or a project finance loan for construction. Or a bond which can come in project form to fund the greenfield stage of a project, or be issued later as a loan takeout.
Does that present conflict of interest in a capital markets arena that for many years has been all about scoring in the league tables? You bet it does.
Indeed, in Australia the non-bank project finance advisers market themselves on this very premise. The sales pitch is all about giving advice based on the best value for money in terms of the financing option proposed when all the usual due diligence nitty gritty and risk assessment has been done.
Of course, project sponsors will eventually have to go to the banks for financing, whether in loan or bond format, but the thinking is they go there better equipped with the advice of the “unbiased” independent adviser. And indeed what they often bring to the table is the link between the entrepreneurial aspirations of potential project sponsors and government.
It’s no surprise that many of the senior staffers of boutique project advisory firms used to work in government and are able to bring their public-sector contacts into play when it comes to getting public-private partnership concessions from government.
Indeed, such is the power of those government contacts that quite a few boutique project finance advisers in Australia are actually getting involved as sponsors, developers and project managers themselves to grab a bigger share of the fast-expanding PPP business in the country and further afield.
THE CONTRAST BETWEEN project finance as practised in North America, Europe and Australia versus Asia is that, according to a project finance banker I spoke to last week, sponsors in Asia expect banks to provide them with balance sheet before bringing them onboard as advisers.
Fair enough, I suppose, but one irony is that despite the booming PPP landscape in Asia – building infrastructure is a key political platform of newly elected Philippines president Rodrigo Duterte (as it was of his idol, former dictator Ferdinand Marcos) and fellow regional strongman India’s Narendra Modi – many of the big international banks are reluctant to get involved.
The reason is that loan margins are absurdly slim and lots of the mega banks are standing pat in the hope that a new round of Basel regulation will bring a return to sensible loan pricing for big-ticket project financing.
Mind you, that hasn’t held back the local banks in India, Indonesia and Malaysia or the Japanese behemoths – I’m thinking of cashed-up MUFG which owns around 6% of the Asian project loan market – from dancing to the sponsors’ tune, and of course pulling spreads down in the process.
IN RETURN FOR promising balance sheet they also get the fees, and advisory work too and any bond business that is the usual quid pro quo for getting out the chequebook.
Another point of dissuasion for big international banks with Asian franchises is that many of them are sitting on bad loan books, not only in Europe where a moribund economy has hammered debt service ability, but also in Asia, where the borrowing binge at the top of the global super cycle followed by the collapse in mining commodities as well as in the price of fossil fuel has decimated loan books.
Indeed, there are rumours of criminal charges being filed at some banks for past lending activity in Indonesia, just to bring home the point of how excessive and poorly judged it all was back in the heyday of the loan markets in the region.
Of course, in relation to the puffed up egos of some of the more “colourful” heads of state in Asia, the infrastructure project is a must. It reminds me of how gangsters frequently become philanthropists once they’ve laundered all that dirty money and put their past careers behind them, while still knowing where the bodies are buried.
And to take the case of the Philippines, who will care about thousands of extra-judicial killings when they see spanking new highways and airports?
Interestingly, the Philippines has developed a reputation via its PPP Center for having one of the region’s most transparent project procurement processes. One would hope that could continue, but nothing’s certain under the new regime. But as Mr Duterte cosies up to China you could only imagine that the bulk of the work from start to finish will go the Chinese banks, where bad loan books don’t seem to matter.
