Infrastructure Financing Instruments

In early period infrastructure investments were financed with government funds. Over a period of time, public deficits, increased public debt to GDP ratios, budgetary pressures compelled governments to reduce the level of public funds which were allotted to infrastructure. Banks were constrained to reduce infrastructure financing on account of steps taken to strengthen prudential regulation in the banking sectors. After the economic crisis, banks were faced with situation to take initiatives to repair bank balance sheets and build capital and liquidity buffers. In this context the role of alternative sources of financing to support infrastructure development by institutional investors is of paramount significance. The long term nature of the liabilities for many types of institutional investors and their need for suitable long term assets is strategically significant for infrastructural investment. Financing of infrastructure involve different financial structures and instruments. Loans and bonds comprise the largest component with respect to sources of infrastructure finance. Syndicated loans are pooled loans created by commercial or development banks. The Euro bond market took a center stage with respect to project financing since the 1960s. Standalone infrastructure projects can be financed by standardized instruments such as project bonds. Green bonds are corporate bonds, project bonds, and sub-sovereign bonds that finance investment in green infrastructure assets such as clean energy. Modern infrastructure finance includes mechanisms like direct lending and co investment platforms.