Financing threat to Australian resource projects

Australia: Funding shortfall threatens resources projects

the Australian,

26 March, 2012

THE economy's ability to reap the full benefits of the once in a generation resources boom is in jeopardy, with major projects facing a funding gap as more foreign banks leave the Australian market and local lenders struggle with ongoing turmoil in financial markets.

The big four banks all warn that a record pipeline of hundreds of billions of dollars worth of resources-related projects cannot be met by the banking sector alone while it is being crunched by current economic instability and is being forced to raise its capital levels to comply with new global banking rules.

A range of submissions from the major banks to a Productivity Commission inquiry into the future of the Export Finance and Insurance Corporation (EFIC) show the banks are worried the funding shortfall is set to worsen.

There are fears that a funding gap will exacerbate the "hollow nation" notion that Australia is not capitalising on the boom.

The biggest bank, the Commonwealth, predicts that the number of banks lending in the Australian market will shrink further.

"The forecast number and size of developments being contemplated across the infrastructure, natural resources and gas sectors is unprecedented. The capacity of the private sector to meet the debt requirements for these expected volumes is limited," CBA says.

National Australia Bank's group executive of wholesale banking, Rick Sawers, said there was a risk that funding to the resources sector could become constrained, which would ultimately hold back the sector's growth.

"As project capital costs have increased, particularly in the infrastructure and natural resources sectors, maximum individual bank exposure amounts are being tested," Mr Sawers said.

He said "additional sources of capital" were required.

The banks argued that there was a role for EFIC to provide funding to ensure export-oriented projects could be developed.

Mr Sawers said Australia needed to ensure that international sovereign wealth funds were encouraged to invest in the local market.

The recent $3 billion senior debt financing of the Wiggins Island Coal Export Terminal was backed by four overseas wealth funds, which pumped $780 million into the project -- the same level of capital as the Australian bank lenders.

Westpac warned that the major Australian banks were already facing "considerable pressure" because of large resource-related projects and the ongoing squeeze in global financial markets, while other funding sources "cannot meet the demand for funding created by the historically strong project pipeline in Australia at present".

"Australia currently faces a situation in which a huge project pipeline related to a once in a generation resources boom has intersected with substantial dislocation in capital markets."

ANZ said an estimated $109bn in debt would be needed to finance projects this year and Germany's Deutsche Bank said the impact of the global financial crisis was still being felt four years on as banks were forced to restrict their lending.

The funding gap has been worsened by European banks, particularly French institutions, retreating from the local market over the past year. According to Reserve Bank estimates, international banks held $240bn worth of Australian corporate loans before the global financial crisis, but that has now fallen by at least 14 per cent.

The banks' warnings are contained in new submissions to Julia Gillard's chief micro-economic adviser in a bid to convince it to reverse a recommendation that EFIC be cut back.

The Productivity Commission has accused EFIC, the government's export credit agency, of handing out damaging subsidies to big exporters.