Banks typically finance the early stages of infrastructure project finance transactions. Bank loans have several advantages over bonds or other structured instruments because (i) banks provide an important monitoring role; (ii) infrastructure projects require funds to be gradually disbursed and bank lending has the flexibility for this; and (iii) infrastructure projects are more likely to need debt restructuring during unforeseen events, and banks can quickly negotiate this (Esty and Megginson 2003). Banks also take on a higher level of project risk during construction, which lessens in the operation phase when bond financing and other structured instruments are more attractive for long-term investors in this asset class (Gatti 2012).
Several factors that potentially influence bank lending to PPP infrastructure projects emerge from the literature. These include monetary policy, bank-specific characteristics, project risks, and national PPP policies, which are discussed in this section. The literature also covers (i) the role of nonfinancial contracts in mitigating project risks; (ii) banks' nonperforming loans and profitability; (iii) the availability of risk mitigation instruments for infrastructure projects; (iv) the reputation of sponsors and lead arrangers in syndicated project finance transactions; and (v) the depth and liquidity in complementary financing markets, such as the capital markets.