(Reuters) - Rules designed to spare the world's taxpayers from paying for a future financial crisis could also make it more difficult to build and replace infrastructure such as the roads they drive on.
The rules, known as Basel III, will weigh on the ability of banks to provide project finance loans on which cash-strapped governments and developers of power plants, pipelines and renewable energy such as wind farms rely to fund schemes.
"Banks have been the stalwart of privately financed projects. If long-term lending requires more capital to back it, it affects the enthusiasm of banks to provide it," said Andrew Davison, senior vice president at credit rating agency Moody's.
In Europe, this will hamper efforts to attract private funds into transport, energy and communication networks that are key to economic growth as well as providing jobs at a time when many European countries are struggling with unemployment.
Construction accounts for 7.1 percent of Europe`s total employment, according to the European Construction Industry Federation. The European Union says Europe's infrastructure investment needs to 2020 could be up to 2 trillion euros (1.8 trillion pounds).
Project finance loans are also big business for banks, having grown from a $110.8 billion (67.7 billion pound) global industry in 2000 to $208.1 billion in 2010, according to data compiled by Thomson Reuters Project Finance International.
This rise, driven by the private sector's increasing participation in the funding of infrastructure, is at risk under Basel III, which will make project finance loans scarcer and more expensive due to the way they are accounted for.
"There is an expectation that the volume of project finance loans will drop very significantly over the coming years under Basel III," said Timothy Stone, chairman of the global infrastructure and projects group at accounting firm KPMG.
Under Basel III, a short-term liquidity buffer, known as the liquidity coverage ratio, will include liquid forms of debt such as government bonds and top-notch corporate paper, but not project finance loans, seen as among the most illiquid.
A second ratio, the net stable funding ratio, makes the provision of long-term debt such as project finance more expensive for banks by requiring them to match their liabilities with their assets in terms of funding.
While not all banks will abandon project finance as a result, their business will be severely affected, said Noburu Kato, EMEA head of structured finance at Sumitomo Mitsui Banking Corporation.
"I believe project finance by banks will continue because there is an increasing need for it, from governments that need to invest in infrastructure and companies that do not want to use their balance sheet. But costs will increase," Kato said.
Although Basel III is to be implemented between 2013 and 2018, bankers say the impact on project finance will be felt before the rules kick in as banks compete to show investors they are well positioned for the new capital requirements.
"I would expect most of the impact of Basel III on project finance to be priced in by 2014," said KPMG's Stone.
In the European Union, project finance accounts for slightly less than ten percent of total infrastructure finance, according to a 2010 European Investment Bank study. The European Commission is exploring initiatives such as backing project bonds to compensate for any drop in project finance loans.
www.reuters.co.uk
The rules, known as Basel III, will weigh on the ability of banks to provide project finance loans on which cash-strapped governments and developers of power plants, pipelines and renewable energy such as wind farms rely to fund schemes.
"Banks have been the stalwart of privately financed projects. If long-term lending requires more capital to back it, it affects the enthusiasm of banks to provide it," said Andrew Davison, senior vice president at credit rating agency Moody's.
In Europe, this will hamper efforts to attract private funds into transport, energy and communication networks that are key to economic growth as well as providing jobs at a time when many European countries are struggling with unemployment.
Construction accounts for 7.1 percent of Europe`s total employment, according to the European Construction Industry Federation. The European Union says Europe's infrastructure investment needs to 2020 could be up to 2 trillion euros (1.8 trillion pounds).
Project finance loans are also big business for banks, having grown from a $110.8 billion (67.7 billion pound) global industry in 2000 to $208.1 billion in 2010, according to data compiled by Thomson Reuters Project Finance International.
This rise, driven by the private sector's increasing participation in the funding of infrastructure, is at risk under Basel III, which will make project finance loans scarcer and more expensive due to the way they are accounted for.
"There is an expectation that the volume of project finance loans will drop very significantly over the coming years under Basel III," said Timothy Stone, chairman of the global infrastructure and projects group at accounting firm KPMG.
Under Basel III, a short-term liquidity buffer, known as the liquidity coverage ratio, will include liquid forms of debt such as government bonds and top-notch corporate paper, but not project finance loans, seen as among the most illiquid.
A second ratio, the net stable funding ratio, makes the provision of long-term debt such as project finance more expensive for banks by requiring them to match their liabilities with their assets in terms of funding.
While not all banks will abandon project finance as a result, their business will be severely affected, said Noburu Kato, EMEA head of structured finance at Sumitomo Mitsui Banking Corporation.
"I believe project finance by banks will continue because there is an increasing need for it, from governments that need to invest in infrastructure and companies that do not want to use their balance sheet. But costs will increase," Kato said.
Although Basel III is to be implemented between 2013 and 2018, bankers say the impact on project finance will be felt before the rules kick in as banks compete to show investors they are well positioned for the new capital requirements.
"I would expect most of the impact of Basel III on project finance to be priced in by 2014," said KPMG's Stone.
In the European Union, project finance accounts for slightly less than ten percent of total infrastructure finance, according to a 2010 European Investment Bank study. The European Commission is exploring initiatives such as backing project bonds to compensate for any drop in project finance loans.
www.reuters.co.uk
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