BREXIT: Life after, and Ideas worth throwing in the pot

Posted on June 27, 2016. Filed under: Uncategorized | Tags: , , , , , , , , , |

Greetings of the day everyone !

So based on the popular calendar that we currently use, this day is, the 27 th of June 2016. I was away last week, partially it was an intentional decision and also I had to do some running around. A lot has happened while I was away, and now we are living in and with the aftermath of the post referendum day in the UK. I went to the classroom earlier today, and my teacher said, the topic of the entire day is going to be BREXIT. I went around the classroom, to see if any of my friends have done some work, which I could use, to write up something that might please my teacher, or at least get her off my back. But to my surprise, most of friends aren’t in the mood, and after talking with some of them, I am getting a sense that, they are probably not willing to accept a BREXIT or what has transpired. I sincerely hope the teachers and the principals, have a sense of what might be coming. And, if you are wondering, why principals and not principal? Well, we go to a special school where we have a number of principals, and that’s why it’s difficult to run the school sometime. Also, most of the times, the teachers and the principles haven’t a clue of what’s happening inside the school.

Anyways, it seems to me that, while some of my friends are visibly quite confused and in shock, but others are getting quite determined to teach the teachers and the principals, a lesson, and they may be gearing up to bring down the school, not in the literal sense of the word obviously. I didn’t know what to do, so after consulting with my grandMa, I decided that the prudent thing to do, will be to take my leave, and also take my books and belongings with me, just in case. And I can’t blame my friends, because 99% of what they thought was known is, now Unknown to them.

But, I don’t want the teacher to complain to my parents, for not doing the assignment, so therefore, I called upon my Birdie friend ( the tweeting bird ), to help me out with the assignment. The translation equipment that I generally use to communicate with her, isn’t working well today, so I hope, I am doing justice to whatever she shared with me.

And here is what I believe, she wanted to share with me.

  • U.K. could replace its current arrangement with EU, with a free trade agreement. Obviously, the details will need to be worked out.
  • U.K. could also create similar free trade agreement with selective partners in Asia, Africa as well as Latin America.
  • To agree the free trade agreement with the EU and also to keep access to the single market. UK could possibly agree with the EU, to keep the status quo of all the EU citizens currently living in the UK. And also a quota based immigration with the EU could be agreed, to support its services and construction sector. Also an arrangement could be reached, where EU migrants could still enjoy quasi home status in the UK, and to remove the stress on the healthcare system, new migrants could be asked to pay a nominal consultancy fees to GP ( general doctors ), and any social benefit claims could be restricted for at least 2-3 years. So they may not immediate access to public funds. Their kids under 16 could access the healthcare system for free, but a nominal fee could be charged by the state school for education. And the same arrangements could apply for British citizens, who may want to live and work in the EU.
  • UK could possibly become an offshore hub for euro denominated trades as well as RMB and who knows going forward may be Indian Rupees, and other growing markets.
  • In a post BREXIT world, UK should be able to free up some of the cumbersome EU legislations, to make its financial system as well as the overall economy more attractive. Also any dial up on the existing efficiency level of various parts of the economy, will and should positively reflect on the investments coming into the country.
  • U.K.’s financial sector could still play a larger role in creating revenues for the country, and it can surely help China and India as well as other Emerging markets upgrade their financial infrastructure, and help them become developed markets over the years. This could be done through bilateral agreements.
  • A cheaper pound isn’t always a bad thing, it could help UK in getting some high end manufacturing back, also it may help improve the overall demand for real estate especially in London from overseas buyers. Councils could be given powers to work with overseas as well as local developers to allow them to build more housing across the country especially in high demand areas. UK companies may be able to gain market share while exporting good and services to other countries with a chapter pound. All this will help the economy.
  • And some inflation, because of cheap pound, might in fact end up becoming, a blessing in disguise. And it will put UK in a better position than EU. Also, a rate hike isn’t necessarily going to be, a net negative for the overall economy. A positive interest rate differential with continental European might in fact encourage investors to put capital in the city of London, which also give a floor to pound.
  • Scotland and Northern Ireland won’t do well in the EU, for a number of obvious reason, the biggest one is, delinking themselves from the overall UK economy, can and will have a damaging impact on their respective economies, and they have much more in common with their cousins in the UK than EU. Ireland could get a special status, so the existing relationship can be preserved without the need for setting up borders.
  • UK could delink NHS from Westminster and party politics, and it could be independently managed, but continued to be funded by the treasury. Also, to keep the funding sustainable, NHS could create provisions, whereby GP access will come with a nominal consultancy fee paid directly to the GPs, with exception for children under 16 and pensioners. Foreign residents could be asked to buy into a partially subsidised healthcare insurance program enabling them to access NHS.
  • To help with the mounting retirement costs, UK government while working the private sector could encourage some of the retirees, to consider retiring in places with lower living costs. A board could be set up, to monitor and supervise the standards. And UK companies with their local partners could participate in tenders to build and develop the infrastructure and townships, with funding support from pensions schemes etc.
  • UK could dial down on some of the heavier regulations as well as the cost of doing business, to become more competitive.

I was hoping the tweeting bird will keep talking, but while we were talking, the birdie got another distress call, and left saying, we can talk about other things later, but for now, at least your teacher won’t be disappointed in you. And some of your friends, don’t seem to be in a mood to accept a BREXIT, so who knows, they may force the teachers along with the principals, to come to the negotiation table. You don’t fight nature, you work with it, or nature can destroy you.

So, there we are. I thought, I will take the liberty and share the ideas from the tweeting bird, and throw it in the pot along with others.

Good day to you all!

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Infrastructure Financing: Tapping into a diversified Funding Pool

Posted on January 16, 2012. Filed under: Uncategorized | Tags: , , , , , , , , , , , , , |

As a key asset infrastructure is one of the most important driving force of an economy and has a direct impact on the overall growth and development story of the country. Infrastructure assets support a wide range of systems in both public and private sectors without which the industrial society of today simply won’t function or be as efficient. Generally developed world tends to have better infrastructure than emerging economies but having said that the overall spending on infrastructure in GDP terms by developed economies have been declining recently whereas the emerging world has increased its overall spending on infrastructure. In a fast growing economy you would expect the demand for infrastructure assets to increase immensely year-on-year and the opposite is true for a slow growth economic environment.

 So the state of a country’s economy certainly plays an important role in infrastructural needs of that nation. Infrastructure assets should always be forwarding looking because the rapid growth in population and economy especially in emerging countries will put strain on the existing infrastructure creating bottlenecks relatively quickly but at the same time parts of the countries experiencing lower or minimal growth may create a situation of overcapacity.

 Conceiving a smart and forward looking infrastructure asset and supporting it with the right capital is always critical.In the past federal, state, local tax bases other funding sources have been used to pay for vital infrastructure projects across the world. We have seen the business model for developing and funding infrastructure assets evolve in the last decade where a number of high profile infrastructure assets were built and paid for through Public Private Partnership or Initiative ( PPP or PPI). Although a number of high profile PPP projects have failed this model of developing and financing infrastructure projects is still considered one of the best way to pay for it.

 While emerging economies have the need to keep building vital infrastructure to support their growth and improve the living standards of its citizens, the developed nations especially the US are sitting on an aging infrastructure that needs to be updated. All this requires capital and with the ongoing financial CRISIS it is getting harder to source funding for infrastructure assets as banks are still struggling to fix their balance sheet. Also the asset-liability (ALM) mismatch is one of the major defects in the traditional business model followed by banks today which makes it tougher for them to commit more resources towards financing infrastructure projects. Most infrastructure projects require long term capital commitments ranging from 7 to 20 or more whereas banks own source of capital ( i.e. deposits) tend to be of much shorter tenure ranging between 1 to 5 years or less. There are also regulatory issues including of the overall exposure to the sector and the credit risk rating of the asset which limits the ability of traditional banks to commit capital. Alternate source of capital providers including of hedge funds dedicated to investing in infrastructure sector as an asset class tend to prefer investing in liquid assets and in most cases their exposure to the sector is limited to owning stocks or debts of listed utilities, toll road operators, constructions companies, ports operators among others.

 There is a strong need to diversify the source of capital base by making infrastructure an appealing asset class to a wide range of investors especially when governments including of developed as well the developing world are targeting infrastructure spending. Recently the ministry of finance of India announced an initiative called Infrastructure debt fund as to way to attract capital into the sector. This is a step in the right direction but having said that the proposal doesn’t address the core issue facing prospective investors when looking at infrastructure financing opportunities. The government of India is targeting an investment of over US$ 1 trillion ( around 10% of GDP) on infrastructure in its 12th five year growth plan for the country and the expectation is that the private sector’s share will be 50%. It is no doubt a highly ambitious plan and through Infrastructure debt fund the government’s objective is to facilitate the flow of capital from public and private sectors as well as foreign investors into infrastructure projects in India. The government figures suggest that there is a funding gap of over US$ 135 billion and this is based on the assumptions that there will be as much as 50% budgetary support for the planned investment in its recently announced 12th five year plan and the policy & regulatory reforms will mobilize over US $174 billions. Looking at the state of infrastructure in India and the balance sheet strength of the local banks it is safe to say that in reality the funding gap may be much higher than government’s expectation.

 In the developed world, UK chancellor has earmarked over GBP 30 billion in infrastructure spending in his speech delivered to the British parliament in November of 2011. The UK treasury is hoping that two-thirds of its earmarked for infrastructure investments will come from the National Association of Pension Funds and the Pension Protection Fund. It is also seeking investments in infrastructure from insurance companies and from China. The United States will need to spend over $2.2 trillion on updating and developing infrastructure assets across the country over a period of five years to meet the current needs and around $1.1 trillion of the overall spending would be new. This is according to the American Society of Civil Engineers (ASCE), and while private sector is expected to make its contribution most of the heavy spending will have to come from the government as evident from the previous spending on infrastructure in the US. The Congressional Budget Office figures suggests that the federal government, state and local governments spent over US$ 312 billion in 2004 on just water and transport infrastructure in the United states with very little contribution from the private sector.

 The current state of the global economy makes it extremely difficult for infrastructure projects to get funded. In markets like China banks are over exposed to the sector by lending to local government financial vehicles (LGFV) and most local governments are sitting on bad projects that aren’t making money and have also created overcapacity. There is also a lack of an efficient and developed secondary market for infrastructure loans in emerging market economies especially in countries like India, making it difficult for both public and private sector banks to refinance their loan books and in most cases the banks are as the end users of credit by holding the asset on their balance sheet until maturity   therefore becoming super exposed to the sector and minimizing their ability to grant more loans. Also Indian banks have recently been running a daily deficit of over INR 1trillion per day for the past few months causing a systemic liquidity deficit in the banking system further limiting their ability to commit more capital to the sector.

 Considering the above, Infrastructure debt fund (IDF) initiative of the ministry of finance of India does sound like an idea whose time has time come as it proposes to offer banks a platform to help refinance their existing loan book and by means of credit enhancement also be able to tap into low cost long term funding sources including of Insurance and pension funds. Having said that Indian banks will be competing for capital with their peers and there are no guarantees that foreign pension and insurance funds will pick Indian infrastructure assets over others. Money has no nationality and most investors will need to understand the structure better before committing capital. According to the public information released by the ministry of finance of India, the proposed IDFs will either be formatted as a mutual fund or a non bank financial company under modus operandi set out by the regulatory agencies including of SEBI and RBI.

 Although the case for IDFs has merit going forward the structure will have to evolve incorporating the realities of the market. Besides IDFs other plausible long term, simpler and sustainable solution will be for banks to set up their own independent infrastructure investment companies or in a consortium with credit guarantee agencies, construction & development companies, Institutional investors, regional development banks, multilateral agencies, utilities among others. As the promoter of the “ Infra Investment Company(IIC)” banks will inject their existing infrastructure assets and loan books along with the cash flows ( from the projects) into the balance sheet of the company and other founding partners will provide seed capital (in cash equity) of around 10% to 15% of the assets held by the company in order to secure a strong rating and valuation. The Infra Investment company(IIC) will have fixed and guaranteed revenue stream coming from existing infrastructure assets it owns and it will be relatively easier for such a company to secure a credit loss insurance cover on its pool of revenues further protecting its cash flow.

To access a diversified pool of investor base the “IIC” could do dual listing in local and foreign markets, issue bonds in local as well as foreign currency supported by its balance sheet and the strength of its credit rating. It can also act as a platform to deliver infrastructure related credit and assets to end users including of pension and insurance funds. Also through the “IIC” institutional investors such as pension and insurance funds could commit new capital into the sector removing the need for them to hire a fund or portfolio manager to manage their investment in the infrastructure sector across various asset class.

 Infrastructure assets are a vital support pillar of any economy and though some investors may consider the sector boring, good Infrastructure investments does create a positive cycle of growth, providing essential networks and services, stimulating economic growth and improving the standard of living for current and future generations. Also the investment in the sector tends to be less volatile than any other publicly traded securities.

 Although the Infra structure Investment company may not address all the existing issues in the sector but by adopting a flexible strategy the “IIC” should be able to tap into a wide range of funding pool including of retail equity investors, institutional investors, sector focused investors among others. It provides an opportunity to Investors who in principle do like infrastructure but are reluctant to buy into it because of the lack of liquidity that comes with it.

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