A combination of public reform and deepening private capital pools could result in a larger infrastructure financing capital base. A key challenge in realizing this outcome is ensuring a steady and sizable pipeline of bankable projects.
Using a database of deals from the past decade, APRC segmented these deals by investor preferences (tenor, currency, sector, location, etc.) and achieved the following "bankability" split. Exhibit 14 shows that three-fifths of emerging markets infrastructure projects in Asia are not bankable without government or MDB (or similar institutions') involvement.
To create a bankable supply of projects, it is vital for respective country authorities to take on a more active role, putting in place measures and reforms which support a greater flow of bankable domestic infrastructure projects.
The next section of this report presents a set of guidelines to help improve infrastructure project bankability in Asia. These guidelines reflect an ideal environment for bankable projects and consist of a series of enabling levers which would support an increase in the number of such projects. The remaining sections of this report highlight how these guidelines apply in the largest infrastructure sectors by spend and in key growth countries for infrastructure investment within the region.
EXHIBIT 14: APRC'S ANALYSIS OF PROJECT BANKABILITY IN EMERGING MARKETS
1 | 2 | 3 | 4 | |||
1 | BANKABLE- HIGH QUALITY(5-10%) Largely denominated in foreign currencies, stable industries, reputable projects, longer time horizon. Attracts broadest group of investors, including many foreign and international institutional investors (but many of these have country rating exclusions, thus focus on "least emerging" countries) | 2 | BANKABLE-MEDIUM QUALITY(10-15%) Increasing quality of projects with more foreign currency (G8) denomination (e.g. US$/€/AU$), more stable industries, emerging rather than frontier markets, better individual project characteristics (e.g. stable cash-flow). Investors are still largely commercial banks, and other domestic or higher risk appetite investors | |||
3 | BANKABLE- LOW QUALITY (15-20%) Projects where private sector funding is feasible, but with high risks. Revenues accrued are in domestic currency. Typically in "exotic" frontier markets with low political stability, high FX risks, volatile infrastructure industries. Investors include domestic capital, high-risk investors (e.g. credit funds with emerging market focus) and commercial banks | 4 | NOT BANKABLE PROJECTS (55-65%) Projects which are not economic (i.e. cost of building and operating is less than that of the amount of tariffs received) require the government or MDBs' involvement either in the form of financing the overall project or as an anchor investor, resulting in them taking more risks
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Source: APRC proprietary model and methodology; Bankable split estimated based on detailed modeling of infrastructure project flow and banks' balance sheet assessment; "not bankable" share estimated based on triangulation of non-private funding sources