Mag. Alois Steinbichler

CEO Kommunalkredit Austria AG


New Ways of Infrastructure Financing

 

Under the constraints of budget consolidation, limits on public debt are being tightened to a growing extent. Financing infrastructure projects from the public budget alone is therefore becoming more and more difficult. Regulatory requirements limit the possibility for banks to carry long-term assets on their balance sheets. In this strategic environment, which is characterized by the imperative of budgetary discipline, on the one hand, and the need to invest in municipal infrastructure, on the other hand, broadening the basis for public infrastructure financing is of particular importance.

 

The current edition of the Municipal Finance Report[1] shows that capital expenditure by municipal authorities increased by 17.8% to EUR 2.1 billion in 2014. In nominal terms, this is the third highest level of municipal investments since 2000; the highest level was reached in 2003 with EUR 2.2 billion. 92% of the increase, i.e. EUR 300 million, is due to higher investments by communities with fewer than 10,000 inhabitants. Excluding new debt, this level of capital expenditure is the highest since 2000 (see Diagram 1). In their investment activities, municipalities have to comply with the provisions of the Austrian Stability Compact (in force since 2011) and aim for a balanced result in accordance with the Maastricht criteria by 2016; since 2011, this target has been met fully, with the municipalities reporting a positive result, most recently in the order of EUR 185 million or 0.06% of GDP. This is a clear indication of the commitment to budgetary discipline at the local level. In 2014, the level of local government debt was reduced by another EUR 79.9 million or 0.7% to EUR 11.27 billion.

 

Diagram 1: Investments by municipalities (excluding Vienna) in EUR million 

 

Kommunalkredit Austria specializes in public-sector-related infrastructure project business, offering comprehensive advisory services and innovative solutions. Kommunalkredit acts as a link and a bridge between clients and project sponsors, on the one hand, and institutional investors, on the other hand. Its activities are concentrated in three core segments: “Social Infrastructure”, “Energy and Environment” and “Transport”.

 

The strategic framework for infrastructure projects has changed significantly in recent years:

 

  • As the financial latitude allowed to public entities is increasingly limited on account of the need for budget consolidation, infrastructure projects can no longer be financed exclusively from government debt and demand an innovative approach.
  • Regulatory requirements to be met by banks in accordance with Basel III rules, such as the new stable funding ratio (reduced possibilities of maturity transformation), make it more and more difficult for banks to carry long-term assets on their balance sheets and increase the costs of long-term loans.
  • Faced with a historic low of capital market yields, with base rates of 0.95% for 10-year investments and less than 1.5% for 30-year investments, institutional investors have to broaden their investment universe. Public-sector-related infrastructure projects with stable cash flows are an attractive target segment.

 

Such an environment calls for new approaches to the financing of long-term infrastructure projects. Having anticipated this development, Kommunalkredit has positioned itself as a specialist in infrastructure project business for public-sector clients. The bank bridges the gap between the needs of project sponsors for structuring and financing solutions and institutional investors (insurance companies, investment funds, etc.) looking for investment opportunities. Kommunalkredit’s special focus is on project structuring and financing of the construction phase; to a growing extent, long-term finance for the operational phase will be provided, above all, by institutional investors. On this basis, added value is created for municipalities, clients and project developers as well as institutional investors.

 

 

Alois Steinbichler

Chairman of the Executive Board of Kommunalkredit Austria

 

 

 

[1] Published by Kommunalkredit Austria in cooperation with the Association of Austrian Municipalities and the Association of Austrian Cities and Towns; www.kommunalkredit.at/gemeindefinanzbericht2015


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