The analysis in this chapter provides guidance on the role of banks in financing infrastructure in Asia through project finance deals. The findings suggest that macroeconomic risk factors and the strength of bank balance sheets are the key determinants of bank exposure to PPP projects in the current state of the market in developing Asia. In this context, it appears that banks are agnostic among projects belonging to different sectors, if the country shows a good set of macroeconomic variables. This evidence is corroborated by the analysis of advanced PPP markets where project financing norms have gained more traction and acceptability, and where project transactions variables are indeed significant.
The findings of this study for Asia's emerging markets have significant implications for developing an enabling framework for the PPP modality for infrastructure. Here, the role of project finance in promoting PPPs is crucial because the project finance technique promotes risk transfer and optimal risk allocation among PPP stakeholders. Several sources suggest the future progress of project finance lending will be based more on the direct role of debt capital markets than on traditional bank lending in both advanced and developing economies. The servicing of bank debt solely through SPV-specific cash flows results in higher credit spreads and so incentivizes project companies to seek alternative sources of finance; for example, through capital market instruments and by retiring bank loans. The role of banks will, therefore, be increasingly limited to financing in the initial PPP project construction phase.
This trend is expected to be accelerated by banks moving toward Basel III capital standards, given the notional comparison between developing Asian and mature PPP markets. Various sources estimate that the funding costs of banks are likely to increase by 60-110 basis points, and empirical estimates indicate the availability of project loans with maturities of over 10 years will be significantly reduced (Ma 2016). The reduction in the tenor of bank financing has further implications on the credit spread, as shorter tenors can put additional liquidity pressure on project SPVs before operations stabilize (Sorge and Gadanecz 2004). Accordingly, project companies will be further motivated to seek out capital market instruments to reduce funding costs and extend debt maturities. The current state of debt capital markets-which is marked by a large pool of available liquid resources, coupled with interest rates at record lows-is a setting that makes this search quicker and easier.
Further to this, the literature observes that project finance is a nexus of contracts, the quality of which has implications for the volume and pricing of infrastructure PPP project finance deals (Corielli, Gatti, and Steffanoni 2010; Subramainan and Tung 2016). The quality of contracts, and the optimality of risk allocation achieved through them, are determining factors in attracting investors to project-specific capital market instrument, especially because bond investors are far removed from projects and do not have the direct project monitoring capacity of banks.11 A careful examination of the contracts underpinning project finance deals, together with a more detailed analysis of country PPP regulations, would enable a better understanding of the determinants of infrastructure financing in developing Asia. This would also provide more guidance on institutional, regulatory, and governance gaps that will need to be filled to enable project SPVs access capital markets.
A further area of research, and one that is assuming increasing importance, is the role of guarantees in catalyzing finance, both through banks and bonds. Following Vecchi et al. (2017), the role of commercially provided guarantees that reduce project risk, while maintaining the essential feature of project finance and not encouraging moral hazard by banks, is of considerable interest. Data are scarce on guarantees in project finance transactions in developing Asia and the role of guarantees in achieving the financial close of projects. Several markets have unmitigated risk factors for project delays, and these significantly affect the cost and availability of debt. Research focused on the role of guarantees will shed light on the targeting and pricing of these instruments to expand financing options.