Project bonds offer a chance for official shareholders to partake in infrastructure projects through registered tradable securities that offer higher risk-adjusted proceeds (Roothman, 2013; Delloitte, 2013). Project bonds open up an alternative debt finance path to source funding for infrastructure linked plans (Roothman, 2012; OECD, 2015). Normally, deals have been funded through banks.
However, the enactment of Basel III principles necessitates firmer monitoring and disclosures, leading to higher costs and higher capital requirements (Taylor, 2017). Higher expenses are inherited by the project developers converting into diminished project internal rate of return (IRR) (Delloitte, 2013; Taylor, 2017). Gaining access to the official bond market could assist businesses in decreasing the development funding fee. Government and the banks single-handedly cannot supply South Africa’s R3.4 trillion infrastructure platform. The usage of pledges permits project originators to tap into R3 trillion worth of resources under administration by South African official shareholders (Delloitte, 2013).
The use of project bonds as a finance tool may be unappealing to shareholders with a lesser appetite for risk which is essentially greater in the construction business (Roothman, 2012).
Before the financial crunch, capital markets were understood to be unstable than debt markets which have now reformed and assumed the decrease in international liquidity (Deloitte, 2013;
Taylor, 2017). Resident official bond shareholders are comfortable with taking performance risk, but are not ready to take on any form of construction risk (Schoen, Dusina & Castillo-Bernaus, 2013). This source of finance tool will surely offer profits to the project developers in the form of possibly superior profits owing to the lower cost of capital (Deloitte, 2013). The use of project
34
bonds by borrowers can assist with branching out from normal dependence on banks as the only source of funding (Schoen, Dusina & Castillo-Bernaus, 2013).
2.13.1 Project bonds in Europe
As of today, project bonds have long been effectively used in Europe and America to fund infrastructure projects (Roothman, 2012; Deloitte, 2013; Taylor, 2017). In Europe, commercial bond markets continue to grow regardless of the rise in market instability, and it is predicted that the use of corporate bonds to finance infrastructure projects in Europe will continue to play an important role in enhancing the economy (Deloitte, 2013; Taylor, 2017).
2.13.2 Project bonds in Kenya and Nigeria
Roothman (2012) raised a question of who is ready to test project bonds as an alternative form of financing infrastructure. With that said, Kenya and Nigeria rose up to the challenge as two African cases where project bonds have effectively been executed (Deloitte, 2013; Taylor, 2017).
Both countries have a rising recognisable shareholder base. In Nigeria, corporate bonds are tax discharged, while Kenya has explicit exclusions for infrastructure bonds which inspire the usage as an alternative funding tool (Taylor, 2017). Other African countries are still in the initial phase of expansion of project bonds, and the necessity for infrastructure growth is obvious. It will need financiers to gather additional funds, pledgers to gain a greater assurance in the bond market and governments to make an environment which will support the issuance of project bonds (Deloitte, 2013).
In April 2013, South Africa saw the initial registration and investment-grade ranked infrastructure project bond held wholly by recognised shareholders. The bond was registered on the Johannesburg Stock Exchange in June 2013 (Deloitte, 2013). The bond’s appeal depends on its design and its greatest notable feature is its repayment terms with an attractive fixed coupon rate of 11% over a 15-year period, centred on a pay back profile compared to a bullet arrangement (Deloitte, 2013). The successful issue of the bond unlocks an alternative debt funding opportunity to source funding for infrastructure-linked projects (Taylor, 2017).
2.13.3 Property crowdfunding
Even real estate developers in Africa are considering crowdfunding as an alternative funding source as it is a win-win for everyone. Faes (2018) discovered that the collaborations of government and the alternative lending industry are critical to solve the current market challenge.
35
Reality Africa offers a distinctive crowdfunding platform where developers can source funding for their real estate developments by inviting local and international investors (Estate Living, 2017).
The property crowdfunding offers an alternative funding source to developers who have struggled to get traditional funding sources and do not have contact to a universal financier system. This is further confirmed by Hutchison (2018) where partnerships are formed by finding shareholders who can combine their funds and sharing the returns on the positive, with the advantage of limiting risk.
Dryer (2019) mentions another alternative financing option of instalment sale that offers home buyers who do not qualify for a conventional home loan. It is the same concept used to finance motor vehicles and other portable consumer goods where the buyer pays monthly instalments for a certain agreed repayment term which is a portion of capital plus interest on capital and a monthly service fee. The bond originators will ensure that the repayment structure is affordable like the normal bond payment (Dryer, 2019). Property crowdfunding in sub-Saharan Africa is open to different categories of financiers. The estate is operating fully within the current legal structure (Estate Living, 2017). The South African Home Loans founded an alternative funding model which by-passed banks, linking the individual straight to the capital markets (SA Home loans, 2001).
According to Kazaure & Abdullah (2018), crowdfunding has lately appeared as a novel method of funding new ventures. McCloskey (2018) noted that the increase in alternative finance was caused by the perceived gap between bank-supply and borrower-demand. It is the funding of a new venture by a crowd of people instead of traditional institutions, permitting the inventors of for- profit, cultural or social developments to apply for funding from the crowd, often in return for future goods or equity (Rahman, Duasa & Kamil, 2016). Nowadays, crowdfunding is a ground-breaking internet-created wonder, implying the financing of a novel venture that is fast gaining popularity (Suhaili & Rizal, 2016; Broth, 2016).
Moreover, crowdfunding allow individuals to ask for little funds, donations or loans over the internet from a varied range of stakeholders. Crowdfunding arisen as an innovative and possibly important foundation of funds for commercial and benevolent donations (Yu et al., 2017). High- tech advancement has assisted the fast growth of crowdfunding market. The fact is that the high- tech advances has the capability to build an unrestricted online connectivity, precise credit scores that can be used by several diverse sponsors as well as safe online financial activities that can be used to involve geographically spread huge number of individuals (Enoila & Entebang, 2015).
Moreover, Barbi & Bigelli (2017) stated that at the rate at which crowdfunding is growing, it is
36
expected to become one of the key bases of funding new and current business in the immediate future. This is concurred by Paschen (2016) who noted that crowdfunding has an important role to play in founding a financial resource base of business start-ups investments. Similarly, Riley- Huff et al. (2016) found that crowdfunding can play a vital part in an organisational fundraising approach. Online crowdfunding promotion is a strong tool in encouraging venture funding in a nation state (Renwick & Mossialos, 2017; Yu et al., 2017; Suhaili & Rizal 2016; Callaghan; 2014).
For the framework to work, it requires at least two parties partaking – the first is the project owner and second is the crowdfunding platform. The platforms function as mediators in handling the allocation of the funds raised from the contributors to the fundraiser (Abdullah, 2016). The project contributor gets a reward in the form of a gift, dividend and interest, or a letter of gratitude in return of his contribution. The platforms manage the funding process and take the accountability of following the project’s progress, centred on the projects’ funding operation goals.