Sri Lanka should see infrastructure bonds in the near future now that the country's economic confidence is setting in and analysts see the capital market as a main way out to funding infrastructure.
They also caution that one constraint in countries like Sri Lanka where mismanagement and corruption rates are high, is that the bond issues (to raise such funding) needs to be guaranteed by the government or at least by a bank.
"But at a time when the state itself is raising funds from the market, it becomes pointless for them to guarantee such an issue, unless you get a bank to guarantee it as it is almost the same as borrowing from a bank," an analyst said.
He added that given competing demands on scarce resources, governments are increasingly faced with the challenge of finding sufficient capital to build, refurbish, expand and maintain vital infrastructure. “The situation is even more challenging as the lack of adequate infrastructure clearly inhibits economic growth aspirations," he said, adding that the involvement of private capital is no longer a choice but has become a necessity.
Bond markets provide the ideal platform for marrying the needs of long-term investors such as pension funds and insurance companies seeking fixed ‘annuity’ type returns with infrastructure projects seeking long-term finance. A bond market expert noted that a well-functioning debt capital market provides the ideal bridge between long-term savings, seeking fixed returns and companies / projects seeking long tenor finance.
“It’s a very attractive supplement to traditional bank debt, but a number of constraints have held back this channeling of capital flows. These impact both availability of capital and demand for funds. Appropriate risk mitigation (including structuring) and policy reform could help bridge this gap," he added.