The determinants for PPPs presented in this chapter go a long way toward identifying further factors that can stimulate infrastructure PPPs. The results show that macroeconomic factors such as economic growth and inflation are the most relevant determinants of an infrastructure PPP investment. For macroeconomic stability, inflation and exchange rate instability could discourage private investment. The results also show the significance of previous PPP experience in promoting new PPPs.
Our new findings indicate that bond market development in the countries studied is not a critical determinant of PPPs. Moreover, PPPs to finance infrastructure, especially from the private sector side, will be crowded out in underdeveloped corporate bond markets dominated by government bonds. The negative impact of underdeveloped bond markets and low-income levels on PPPs should be further examined. But it can be said that countries with larger populations-and therefore greater demand for infrastructure-fail to attract PPP investments of a sufficient size to provide infrastructure services to their citizens.
Most emerging economies still depend on fiscal financing for infrastructure projects because of underdeveloped corporate bond markets and banks being the major financing sources for private sectors.6 Our empirical results reconfirm that banks remain major financiers to infrastructure projects. But banks with short-term liabilities are not well suited to hold long-term assets, such as PPP projects, on their balances sheets. Moreover, revenues from infrastructure projects are usually generated in local currency, while the major financing source is foreign bank lending in foreign currencies. This poses a "double mismatch" in maturity and currency, as was experienced during the Asian financial crisis.
As well as the double-mismatch problem, the decreasing capacity of commercial banks to finance long-term infrastructure projects is further limiting financial access to invest in infrastructure. Since the global financial crisis, commercial bank debt under Basel III has become more difficult to secure and lending terms have worsened, affecting the bankability and value for money of PPP projects. The current financial market conditions have made bond financing pivotal for closing the financing gap for infrastructure investments.
Because of this, domestic bond markets should be developed to increase their depth and liquidity at a level that can provide long-term funding for infrastructure projects to private sector investors. The European Investment Bank and the European Union jointly developed the Project Bond Initiative to facilitate capital market financing for large-scale infrastructure projects. In Asia, regional multilateral development banks, such as the Asian Development Bank, have a catalytic role to play in developing infrastructure bond markets in the region in line with the Asian Bond Markets Initiative.7