Finance Infrastructure Investment Research Articles

A theory of National Development Bank: long-term investment and the agency problem

AbstractThis paper applies the contract theory to study the role of National Development Bank (NDB) in financing infrastructure investment. We first show that to mitigate overrun issues resulting from the agency problem during the infrastructure construction, the government uses mixed financing strategy combining fiscal funding with NDB loans. We then endogenize the NDB investment strategy to study the determinants of NDB profit and use cross-country panel data to empirically test our model predictions.

Islamic Infrastructure Project Finance: A Literature Review

Infrastructure plays an important role in supporting economic growth and competitiveness of a country, and well-developed infrastructure is often considered as the foundation for economic growth (Abdurraheem & Naim, 2018); (Amel et al, 2020). Infrastructure investment and economic growth are interrelated, because infrastructure improvements will have an impact on increasing economic growth, which in turn will encourage infrastructure investment (Selim et al, 2019). Infrastructure projects have a very large scope, long time span, and involve many stakeholders, and the need for investment in infrastructure also becomes less liquid (Mohamad, 2015). Infrastructure projects have two important characteristics that must be considered in terms of financing. The first is the long-term investment period and the second is the high cost involved in infrastructure projects (Manzoor et al, 2017). Most large-scale infrastructure projects are financed non-recourse to the sponsoring companies, this type of financing is commonly known as project finance (Camacho, 2005). Project finance has been implemented globally in infrastructure financing both in developed and developing countries. The current condition faced by developing countries, besides the high investment value required and short-term for financing in infrastructure development are the high interest rates (United Nations, 2021). Project finance with a sharia scheme (Islamic project finance) is expected to be one of the best alternatives in overcoming infrastructure financing problems. Sharia financing is the most appropriate instrument for infrastructure financing because the basic asset is the project itself that it can be used as a method for financing infrastructure investment (Abdulkareem & Mahmud, 2019) and other activities that are prohibited by Islamic finance principles (Rarasati et al, 2013). Keywords: Infrastructure; Long-term Investment; Project Finance; Sharia Scheme; Sukuk.

Innovation of Infrastructure Financing Through Optimization of Financial Investment of Domestic Hajj Funds

The suitability ofothe management of Hajj funds to be invested inovarious infrastructure developmentoprojectsobasedoonosharia principles and laws and regulations can be a benefit. The use of hajj funds for infrastructure financing can increase the value of the benefits of hajj funds even though they contain risks. Therefore, the use of hajj funds to finance infrastructure investment requires further study. The author is interested in conducting a study of the suitability of the policy forotheomanagement (investment) of Hajj funds in infrastructure financing in relation to Law Number 34oof 2014 concerning Hajj Financial Management. The article uses descriptive narrative analysis method. Based on the review narrative literature and the Indonesia Government Policy during 2012 until 2020. The analysis used is top down by analyzing macro factors towards the study, especially innovation of infrastucture investment. The existence of this conformity will provide confidence that the interests of prospective pilgrims will always be prioritized. Based on conclusions research is: the price range of hajj finances may be invested to help financing/supplying infrastructure due to the fact hajj finance has the nature of being a deposit fund so that it resembles the use of the wadiah yadh dhamanah principle in an sharia finance attitude, making it possible for the Hajj Financial Control Agency (BPKH) to optimize the value of the benefits of the budget. And based on descriptive literature, the financial investment of hajj funds is aimed at obtaining optimal value for the benefit of improving the implementation of the hajj pilgrimage by prioritizing the security aspects of the prospective hajj pilgrims' funds.

China’s urban construction investment bond: Contextualising a financial tool for local government

This paper examines the Urban Construction Investment Bond (UCIB) as a tradable product in the financial market and a financial tool for local government in China. The development of this financial product is contextualised in infrastructure finance and local government debt. The creation of UCIB helps finance infrastructure investment and potentially reveal the relative risks through the secondary market. The spatial distribution of UCIB demonstrates different relative risks of this financial instrument in local conditions. The government uses this financial tool to bridge the emerging capital market and infrastructure finance, and the Chinese financial market now treats UCIB as an emerging asset class. The development of UCIB has sped up the pace of financialisation in China. Although relative risks help investors choose different UCIBs, the overall risk of UCIB cannot be ignored.

Why We Should But Don't Pay the Right Prices for Urban Infrastructure

Economics tells us that user charges should be used to finance many local public services and to pay for the related infrastructure. The only other way to do so is taxation. All the other possible ways to finance infrastructure investment that are so often discussed – borrowing, transfers, private-public partnerships and the like – are little more than ways to shift the burden from direct users to taxpayers, past, present or future. In the end some taxpayer at some level of government ends up paying the taxes used that support the transfers, borrowing or private participation. Since no one likes taxes, it is thus a bit curious that so little use has been made of user charges to finance infrastructure investment. A variety of reasons for this neglect may be found in the literature, ranging from technical problems in implementing the right kind of user charges to concerns that charges cannot finance large capital works or that externalities are so important that they swamp direct user benefits, often supported by rather vague expositions about why people do not understand or like user charges as well as almost always by laments about their undesirable distributive effects. This paper reviews this literature and concludes that the basic reasons so little attention is paid to user charge financing are in fact essentially political, although sometimes very deep-rooted and difficult to overcome. Though perhaps simply illustrating the triumph of hope over experience that keeps academics going, the paper concludes by offering a few ways that one may perhaps be able to do a better job in persuading the obviously skeptical and resistant public that it makes sense for user charges to play a much bigger role in financing urban infrastructure investment than is now evident anywhere.

Financing infrastructure development: time to unshackle the bonds?

Purpose – The purpose of this paper is to consider 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 were obtained from the Bloomberg database on all project bonds issued in four Asian countries – Malaysia, China, Taiwan and India – over the period 2003-2014. Findings – The analysis indicates investor appetite for project bonds and suggests that a risk premium of between 150 and 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.

China's sovereign debt: A balance-sheet perspective

We analyze China's sovereign debt by constructing balance sheets for China's government and public sector. We find that China's government debt-to-GDP ratio is lower than that of most large developed economies. We also find the debt-to-asset ratio of China's government and public sector significantly lower than its own historical height (1998–2002). Local government debt is mainly to finance infrastructure investments. Local government debt risk is amplified by two mismatches. The first is the income-expenditure mismatch between central and local governments. The second is the maturity mismatch of short-term debt and long-term infrastructure investments. The maturity mismatch may cause short-term repayment difficulties.

Structural Operations and Net Migration Across European Union Member Countries

AbstractThis paper analyzes the effects of international transfers to finance infrastructure on net migration flows among countries within the EU. A new economic geography model is employed with common pool financed infrastructure investments to derive a set of empirically testable hypotheses about the effects of transfer payments to finance infrastructure investments on migration. A significant effect of structural fund expenditures is identified on the bilateral net migration of workers among the EU member countries. On average, a one percentage point increase in the expenditures on structural funds (in per cent of gross domestic product (GDP)) leads to a reduction in the measure of bilateral net migration by about 0.4–0.8%.

Future of Asia’s Finance: How Can it Meet Challenges of Demographic Change and Infrastructure Needs?

There is a role for Asia’s financial sector to play to address the challenges associated with the region’s changing demographics and infrastructure investment needs. Enhancing financial innovation and integration in the region could facilitate intra-regional financial flows and mobilize resources from the aging savers in industrialized Asia to finance infrastructure investment in emerging Asia. Strengthening the financial ties within the region as well as with the global financial markets alongside appropriate prudential frameworks could also help diversify sources of financing and reduce the cost of funding in emerging Asia. Finally, financial deepening could help ease the potential overheating from scaling up infrastructure investment and hence achieve a more balanced growth in the region.

THE EU SOVEREIGN DEBT CRISIS AND „EUROPEAN BONDS“ OPTION

After the financial crisis economies with existing deficits usually are in danger to go to default due to uncontrolled borrowing paces. All the members of the European monetary union have violated treaty limits on allowable budget deficits – some of the members have four times larger deficit. Such a development clearly suggests that some countries in European Union might become insolvent, since their net external debt is really large measure to the size of their economies. After financial crisis economies back to the recovery after a period of 3 or 4 years. Therefore economies are shrinking or growing rate is very slight. Due to these processes it is really big challenge to bring these deficits back to satisfactory level. Governments then have to go to the market and ask for additional debt to cover its deficit. These countries, if not aided, will possibly default and will be forced to restructure their debt. This argument is the reason why European Commission and prime ministers of European Union make a lot of play on discussions about present and future sovereign debt issues, not only regarding the certain countries, but the entire EU. The Italian finance minister Giulio Tremonti and Luxembourg's Prime Minister Jean-Claude Juncker, in an article which appeared in the Financial Times on 5 December, launched the proposal to issue the “European bonds”. In this paper authors follow this idea and appeal to obvious arguments showing, that “European bonds” would be great cooperation to control Euro zone debt. Also authors consider “European bonds” as a tool to solve EU debt crisis and ensure future financial stability of all EU countries. The “European bonds” idea is not new. The first one goes back to Jacques Delors in the 1980s. Jacques Delors proposed the issue similar bonds in addition to European Investment Bank loans to finance infrastructure investments, so the initial idea was intended to provide a new debt instrument for financing pan-European infrastructures, but recently “European bonds” idea became the possible measure to overcome present sovereign debt problems. In the first part authors analyze occasions of sovereign debt crisis - unbalanced sovereign budgets, irrational social and public spending, too high trust of creditors, etc. The second part of the paper is devoted to theoretical assumptions of debt structures development and “debt dilution” phenomenon. Long recognized as a problem in corporate debt, dilution seems to have recently become a significant problem in sovereign debt markets. Debt dilution has undesirable consequences for both debt structures and the amounts and terms at which sovereigns borrow. In the third and fourth part various aspects of “European bonds” are being analyzed. Also the negative and positive consequences are analyzed if “European bonds” proposal would be implemented. Also government deficit, government consolidated gross debt and Long term government bond yields statistics are presented to append the paper findings. DOI: http://dx.doi.org/10.5755/j01.eis.0.5.1087

Capturing Land Value Increment to Finance Infrastructure Investment—Possibilities for South Africa

In the globalisation age, cities are the drivers of economic growth. However, sustainable economic growth demands considerable investment in infrastructure. South African cities face a triple challenge of eradicating historical infrastructure backlogs inherited from the Apartheid era, servicing and maintaining existing infrastructure and providing new infrastructure to stimulate economic growth. In the South African context, the provision of municipal infrastructure plays a critical role in eradicating sociospatial inequalities as part of an overall poverty reduction strategy. This places a huge burden on local governments in South Africa in particular as they face capacity constraints and challenges in terms of raising sufficient own revenue in order to finance infrastructure projects. This paper argues that in light of the South African government’s current infrastructure drive and the significant amount of public resources being spent on transport infrastructure upgrades, it is an opportune time to consider the impact of transport infrastructure investment in particular on land value and how this value can be captured to finance the provision of infrastructure at local level. The paper cautions though that any programme aimed at capturing betterment needs to be based on sound research and needs to take cognisance of the legislative, policy and economic context in South Africa.

Infrastructure in the 21st Century Economy Overview and Summary of Methods and Findings

Four objectives were defined for this project's contribution to the Federal nfrastructure Strategy: 1. to answer the question of whether the nation (USA) is under-invested in infrastructure; 2. to gain insight into the mechanism by which infrastructure investment affects economic activity. 3. to resolve the discrepancies in various estimates of infrastructure's economic impacts; 4. to gain insight into which analytical approaches are best suited to answering specific questions about the economic effects of infrastructure. This means... Different methods have been used to answer different questions, using similar or identical data, and the results of these different exercises have been compared to assess how close they are to one another. The use of various econometric methods has been used to control for various statistical problems. A model has been constructed which links the macro and micro consequences of infrastructure, and which provides valuable insights in the impact of infrastructure at both levels of aggregation, as well as insights into the special characteristics of infrastructure capital. The Conclusions... Infrastructure matters - it is an important factor in production, but not as important as private investment (i.e. a small percentage increase in the latter has a more powerful effect on economic growth than does an equal percentage increase in the former). The impression left by some recent studies that infrastructure is merely a pork barrel public expenditure is not supported. However, an increase in infrastructure spending may have little of no effect on output, even though, on average, it matters a lot. The way in which infrastructure is financed matters - when distortionary taxes are used to finance infrastructure investments, losses due to those distortions in the use of private resources must be netted-out against the incremental gains. Rates of return to private and public capital appear to be approximately equal. Thus, there is no significant under-investment in infrastructure. Spillovers of impact from local areas to the nation as a whole appear to be largely absent, suggesting that the principal infrastructure systems have been built up and the main opportunities for super-normal returns in the US may already be exploited.

The Contradiction in China's Gradualist Banking Reforms

DURING CHINA'S TWO and a half decades of economic reform, it has often been observed that the bank-dominated financial system is the economy's Achilles' heel. Since 2003, China's central government has reformed the largest state-owned commercial banks to improve their competitiveness before opening the banking industry to foreign competitors, as mandated as part of the country' s accession to the World Trade Organization (WTO). Reform of these banks has markedly improved their performance, but the process has been gradual, and underlying problems remain. One can assess these developments in two contrasting ways. The first is optimistic: the Chinese authorities can afford to reform the state-owned banks gradually because of the economy's growth momentum, the small public sector debt-to-GDP ratio, the size of China's foreign exchange reserves, and the large volume of domestic savings? A complementary perspective by Jonathan Anderson notes that the removal of nonperforming loans (NPLs) from bank balance sheets has substantially reduced their financial risk, even if those NPLs have not all been resolved. (2) The alternative assessment is more skeptical, highlighting the depth of reforms and bank restructuring that remain. Nicholas Lardy has emphasized, as have others more recently, (3) that, in China as elsewhere, an efficient banking system is essential to the efficient allocation of capital and the transmission of monetary policy, and it is closely tied to capital account convertibility and other economic objectives. The gradual pace of reform in China, particularly of the government's involvement in bank ownership and decision-making, postpones the day when such a system arrives. This choice of continued public sector involvement reflects a basic trade-off between, on the one hand, greater efficiency in state-owned institutions, of which the banks are an important part, and, on the other, stable employment growth and, more recently, rural-urban and regional equality. The Chinese authorities seek rapid economic growth and employment creation sufficient to absorb the country's surplus labor force, which consists of new entrants, rural-urban migrants, and those laid off from money-losing state-owned enterprises (SOEs). In the past two decades, the banks have been enlisted to support the SOEs as well as to finance infrastructure investments and export platforms through policy lending (lending based on policy objectives or political criteria and connections rather than creditworthiness). Addressing the growing rural-urban and regional inequality is the centerpiece of China's 11th Five Year Program, approved by the National People's Congress in early 2006. The program seeks more balanced urban and rural development by improving public services in the rural areas and by increasing urbanization. We are skeptics on the issue of gradual banking reform. It is not uncommon for former command economies to undertake reform gradually in order to prevent widespread unemployment. As this paper will show, however, the dependence of China's government-affiliated firms on the state-owned banks for their working capital means that the banks are forced to satisfy contradictory objectives: financing employment and social stability while transforming themselves into commercially viable corporate entities. Further, we argue, the Chinese government is proceeding in a way that ignores this contradiction. The impact of continued government ownership of the banks is apparent in current institutional arrangements. Just as China's high average growth rates conceal large disparities between the three large coastal urban agglomerations--around Beijing, the Yangtze River Delta (Shanghai), and the Pearl River Delta (Hong Kong, Guangdong, Shenzen)--and the rest of the country, the banking system remains fragmented and often dominated by still-independent local branches and decisionmakers, whose objectives may differ from those of the Beijing headquarters. …

Foreign Exchange Markets in India

Since the onset of liberalization, foreign exchange markets have witnessed explosive growth in trading volume. The importance of the exchange rate to the Indian economy has also been greater than ever before. While the government has explicitly adopted a flexible exchange rate regime, in practice the rupee is one of most efficient trackers of the US dollar. Apprehensions of capital flow-driven currency crisis have held India back from capital account convertibility though the debate continues. The rupee's deviations from Covered Interest Parity (with respect to the dollar) exhibit relatively long-lived swings. An inevitable side-effect of the Indian exchange rate policy has been the ballooning of foreign exchange reserves to well over a hundred billion dollars. In an unprecedented move, the government is considering using part of these reserves to finance infrastructure investments in the country.

Financing road infrastructure by savings in congestion costs: A CGE analysis

Division of labor, outsourcing in manufacturing and just-in-time production require the provision of a good and sufficient road infrastructure system. The society is used to mobility, preference for it even increases, and the full benefit of competition can only be realized if special distances can be overcome at low cost of transportation. Since the 1970's, however, the negative aspects of an intensive extension of road infrastructure has dominated the political decision process. The objective of this paper is to model the aspects of bottlenecks in road infrastructure, of congestion costs and of the effect of investment in infrastructure in a computable general equilibrium framework. A long-run business as usual simulation will show how congestion and its cost will develop over time. Given the necessity to act we will raise the fuel tax to partly finance infrastructure investment. We will then compare the cost of the addition in infrastructure with the savings in congestion costs in order to see whether this policy measure is self-financing.

Financing Road Infrastructure by Savings in Congestion Costs: A CGE Analysis

Division of labor, outsourcing in manufacturing and just-in-time production require the provision of a good and sufficient road infrastructure system. The society is used to mobility, preference for it even increases, and the full benefit of competition can only be realized if special distances can be overcome at low cost of transportation. Since the 1970's, however, the negative aspects of an intensive extension of road infrastructure has dominated the political decision process. The objective of this paper is to model the aspects of bottlenecks in road infrastructure, of congestion costs and of the effect of investment in infrastructure in a computable general equilibrium framework. A long-run business as usual simulation will show how congestion and its cost will develop over time. Given the necessity to act we will raise the fuel tax to partly finance infrastructure investment. We will then compare the cost of the addition in infrastructure with the savings in congestion costs in order to see whether this policy measure is self-financing.

Financing urban transport projects in Europe

Transport demand in western Europe has risen steadily in recent years and the forecasts are that the unrestrained demand will continue to rise in the foreseeable future. This growth has put considerable pressure on the resources available to finance infrastructure investments and to fund what are seen as socially important social services. The recent developments in eastern Europe and the anticipated growth of the post-Communist states will pat further strains on the fiscal ability of authorities in these countries to fund transport invest- ments and operations. The outcome has been revisions in the way transport projects are funded. This paper, taking a very broad view of what constitutes a transport project, examines the specific nature of urban transport financing in Europe.