This chapter examines the factors influencing bank lending for project financing infrastructure public-private partnerships (PPPs) in developing Asia. Given the size of developing Asia's infrastructure investment gap and the financing requirements to close it, the role of the private sector is becoming increasingly important for meeting the region's infrastructure needs. The private sector's role in this effort is largely through PPPs, which require debt and equity investments in project-specific special purpose vehicles (SPVs).
To promote project financing through PPPs, regulatory, legal, institutional, and finance sector reforms are required (Vecchi et al. 2017; OECD 2014). Although PPPs are high on the agenda of several governments and companies, their popularity varies across sectors and locations. Understanding the incentives for stakeholders in a PPP transaction is essential to this issue. PPPs can help overcome some major obstacles to building and upgrading infrastructure, including insufficient funding, poor planning and project selection, inefficient or ineffective service delivery, and inadequate maintenance (World Bank 2014).
Assuming superior technical and servicing capacity by private parties, PPPs can improve the quantity and quality of service delivery, thereby creating better value for money compared with traditional public procurement (Vecchi et al. 2017). For bundled contracts, project sponsors have an incentive to incur high capital costs during construction to reduce operation and maintenance costs, leading to improved productive efficiency. These gains are needed to compensate for the higher costs of private finance resulting from improvements in an infrastructure's design, construction, and operation. Further, PPPs can be an attractive opportunity for institutional investors, though this depends on the sector, asset, and location. According to the World Economic Forum (WEF), the demands of global institutional investors seeking diversified portfolios with attractive returns incentivized the launch of infrastructure funds, which have contributed to the financialization" of infrastructure. As the WEF argues, "infrastructure project risk-return profiles present an attractive alternative investment-especially with real fixed income returns being near zero in the wake of the global financial crisis" (WEF 2013).
This chapter fills a void in the literature on the determinants of bank lending to infrastructure PPP projects, which are examined for seven countries: India, Indonesia, Malaysia, the Philippines, the Republic of Korea, Thailand, and Viet Nam. This is possibly the only academic contribution that explicitly analyzes how the economic fundamentals of banking (capital levels, profitability, asset riskiness, and cost efficiency) affect infrastructure project finance lending and, through this lending, the amount of debt provided to infrastructure financing in developing Asia.
The foundations of this research and the basis for the empirical analysis are derived from a literature review that focuses on the entire range of issues that can affect bank lending for project-finance type investments in infrastructure PPPs. After the literature review, the chapter discusses the requirements and sources of data, provides broad diagnostics on the data, analyzes the estimation of the empirical model, and discusses policy implications and guidance for further research. The findings suggest that financing infrastructure PPP projects is still in its infancy in the countries covered in this chapter, and that banks are guided more by macroeconomic risk factors and the strength of their balance sheets. By contrast, the comparative analysis of mature PPP markets stresses the transaction-based nature of bank lending.