Model Estimation

The hypothesis on what determines bank lending to PPP projects in Asia is tested on the factors that influence bank exposure to projects with varying gearing ratios that measure bank leverage. Specifically, the empirical model is expressed as:

Gearing =+β1Bank Variables + β2Project Variables + β3Country Variables +ε.

The choice of gearing ratio as the dependent variable is based on the seminal paper by Corielli, Gattti, and Steffanoni (2010) in which the debt-equity ratio is regressed on a set of dependent variables, including ratings and currency risk, to determine the factors affecting project leverage on project finance transactions. SPV managers must decide how much equity is required from sponsors and the level of external debt to achieve financial close. This has a bearing on the cost of debt that SPVs can service. In providing debt, external lenders are guided by exogenous heterogeneous risk factors and the amount of equity cushion required for providing debt.

Consequently, using a variable for project leverage as the dependent variable has several advantages. It captures the role of equity in achieving the financial close of projects, and determines the amount of debt banks are willing to lend per unit of equity. The leverage aspect is also relevant for project finance transactions. Using a variable for project leverage also captures the heterogeneous risk factors across macroeconomic and project-related considerations. Accordingly, three broad factors constitute the independent variables: bank balance sheet items, project variables, and country or macroeconomic factors. Based on the literature review, these factors, which can affect bank lending, are now discussed.