quarta-feira, março 13, 2013

Project bonds and the limitations of credit enhancement

The EU Project Bond Initiative aims to mobilize third party guarantees to make projects bankable and attractie, even by risk averse investors, especially in situations of "market failure" as we might be experiencing in the current credit crunch.

But there are real limitations and even arguments against excessive reliance on "credit enhancements".

Clearly "credit enhancements" do not make a BAD project GOOD, they just add counterparty risk by transferring project risks to the guarantor. If the guarantor is the EIB with counter-guarantees from the European Union, that's one thing.  If the EIB as guarantor requires a sovereign counter-guarantee (ultimately from the taxpayers)  that adds to the sovereign debt burden,  the project should reclassified and budgeted within public debt limits and the long term public expenditure limits like the MTEF. 

It is questionable what is the value added by a guarantor/investors which won't take project risks  and which will participate only on the basis of sponsor/bank/sovereign guarantees.  Rather,  this raises issues of potential moral hazard.
As has been said by other commentators, in order to ensure investment efficiency,  investors and creditors should have "skin in the game" and incentives to do their own due diligence, and their own project monitoring and control.  Those so-called "investors" who have only their reputations at risk, no real "skin" in the project,  are like the rating agencies and the multitude of advisors:  just agents  not principals.

For good productive projects, sustainable for ALL project parties, we need a risk underwriting approach by professional investors who are rigourous and highly selective, and with a sufficiently large portfolio to absorb   the expectable thoughinfrequent losses, without having to burden the taxpayers with bailouts of poor projects.

Just as there are negative feedback loops between bank and sovereign risks,   there are negative feedback loops between infrastructure and sovereign risks.
So,  the Concedent Government should think twice if creditors are not willing to take volume or traffic risk. Or else, prepare to pay for a few white elephants.

Mariana Abrantes de Sousa 
PPP Lusofonia 

As you may  read in Irwin's book on Government guarantees