The evidence indicates that the volume of debt financing in the seven Asian countries is driven more by their macroeconomic variables (GDP per capita and the ratio of gross debt to GDP) than by variables related to institutional quality and the microeconomic variables referred to in the project characteristics. This result is probably due to the still early adoption of structured finance techniques in these economies compared with advanced economies. Banks-and particularly large ones-only seem comfortable lending for infrastructure within PPP and project financing schemes in emerging economies if countries have reached minimum acceptable conditions for growth, and a reasonable risk profile in terms of the ratio of total debt to GDP. In this sense, the insignificance of project variables shows that banks do not discriminate against projects in different sectors if a country shows a good set of macroeconomic variables. From a policy perspective, this implies that attracting private financing for infrastructure PPP projects through project finance is dependent on policies for sustaining growth.
A special comment must be made on bank-specific variables. While the coefficient of the tier 1 ratio is positive and strongly significant in all the model specifications, the results show weak evidence of a negative relation between the gearing ratio of projects and the ratio of loans to total assets. While these results are interpreted as evidence that well-capitalized arrangers are in a better position to invest more debt in infrastructure projects, it also appears that project finance is a substitute for other lending activities. In fact, a negative coefficient in the ratio of loans to assets shows that the bigger the bank loan portfolio, the lower the gearing ratio is for infrastructure PPP projects in developing Asia. This corroborates the view of policymakers who see actions to strengthen bank capital bases under Basel III and, in the longer term, Solvency II for nonbank intermediaries as fundamental for expanding lending (OECD 2014).
The dominant literature on this issue suggests that strong institutions and a dedicated legal framework are crucial for developing PPPs (Vecchi, Airoldi, and Caselli 2015). It must be stressed, however, that the role of nonfinancial contracts in the context of infrastructure project finance in developing Asia is constrained by a paucity of data.