“Changing market conditions will force resource producers to amend infrastructure development plans. Given the softening commodity prices, the cost curve will play a more critical role in determining which projects will proceed and most importantly when they will be developed. ”Neal Johnston
Partner, Infrastructure Advisory, Ernst & Young Oceania

The long running minerals super-cycle has made lower quality or remote deposits viable, with the lack of sufficient infrastructure being the primary obstacle to the development of these resources.

Governments are no longer the natural vehicle through which infrastructure projects are funded, mainly due to their current weak budgetary positions. This means that financing has fallen to the private sector.

Large miners with balance sheet strength are under increased shareholder pressure to restrict new capital expenditure, and small miners often lack required financial strength to solely develop these projects.

The key influences on infrastructure financing include:

• The changing role of government to planning, approving and incentivizing financing of infrastructure
• The rising number of foreign investors in infrastructure from countries like China, Japan, Korea and India
• Funding from institutional investors including pension, sovereign wealth and infrastructure funds
• The increasing focus on corporate governance which has seen closer Board scrutiny of the return on investment which often results in projects with large infrastructure needs being shelved

To fulfill infrastructure needs, changes need to be made to procurement processes and risk allocation between government, users, developers and funders.

For this to be effective, traditional views around construction risk, residual value, revenue/pricing risk, capacity, operational control, credit risk and tax need to be re-assessed.

Unless the commercial risks can be adequately addressed and the take or pay contracts bankable, then development of infrastructure will continue be slower and more complicated than would appear necessary.

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Contacts

• Ernst & Young’s Global Mining & Metals Center