Preparing bankable infrastructure projects

Photo: Magnus D | Flickr Creative Commons

The issue of bankability of infrastructure projects has long been a topic of discussion by the development and investors’ communities and is one of the key bottlenecks in attracting private capital to meet the global infrastructure gap and to provide millions of people with the key services they lack.
 
Under German presidency, the Business 20 (B20)—a platform that enables the global business community to contribute to international policy discussions—submitted 20 recommendations to Group of Twenty (G20) leaders under the theme “Building Resilience—Improving Sustainability—Assuming Responsibility.” Recommendation 14 is on boosting infrastructure finance and reads:
 

G20 members should boost infrastructure finance by developing and promoting bankable and investment-ready infrastructure project pipelines and by enhancing the role of Multilateral Development Banks as catalysts for private sector investment.

 
The B20 task force on infrastructure confirms “the investment gap in infrastructure is not the result of a shortage of capital. Real long-term interest rates are low, there is ample supply of long-term finance, interest by the private sector is high, and the benefits are obvious.” However, a number of factors hold back investment in terms of financing and funding. “The main challenge is to find bankable and investment-ready projects.”

Common misconceptions

Unfortunately, there seems to be a lack of understanding of what factors constitute—and more importantly, which parties contribute the most to—making infrastructure projects bankable. Somewhat misleading, perhaps by the semantics of the term “bank,” the issue of bankability tends to be associated with bankers. The argument, “Just let the bankers discuss and deal with the bankability aspect of the project,” is a misconception at best.

It is important to note that commercial banks and other commercial infrastructure debt providers do not make a project bankable.  Rather, their task is to assess the bankability of an infrastructure project and, if found acceptable, provide the risk capital. They are concerned about the risk profiles of the project, and as such, the riskiness of their investment decisions. Unless this group of investors, who typically provide up to 80% of a project’s financing needs, is satisfied with the risk profile of the project, they will not invest. Alternatively, they would ask for various risk mitigations or credit enhancements that would only raise the total cost of the projects.

Bankability and risk

The bankability of an infrastructure project is determined at a much earlier phase of project life—at the project development stage.

When the concerned ministry (or responsible agency) starts preparing a project to roll out into the market with an aim to attract private capital, it has to, among many other aspects, decide on the key risk-sharing protocol of the project.

Designing an optimal risk-sharing protocol at the project development phase is at the crux of ensuring bankability.  If the risks are not allocated to the right parties during a project’s conceptualization phase, the ultimate consequence is the inability to find investors and lenders. And going back to the drawing board for public/private partnership contract redesigning is a costly exercise. Two approaches, complementary to each other, can play important role at this stage:

• Project Preparation Facility (PPF): PPFs are used as a means of developing bankable, investment-ready projects. Under PPFs, technical and/or financial support is provided to project owners or concessionaires. Such support can cover a wide range of activities, such as undertaking project feasibility studies, including value-for-money analysis, developing procurement documents and project concessional agreements, undertaking social and environmental studies, and creating awareness among the stakeholders. 
• Market Sounding: Through market sounding exercises, important feedback from the lender community can feed into the project preparation phase and shape the risk allocation matrix in a market-acceptable manner. The lending market and the appetite of lenders can vary over time, due to a host of factors. These include legal and regulatory matters, global interest rate regimes, and capital market conditions. As such, bringing lenders’ feedback on board can be very useful to make the project bankable. 

An infrastructure project that has a risk-sharing protocol based on broad-level, early feedback from the lending community will be more likely to raise the required funding with fewer complications. Multi-lateral development banks have an important role to play in helping governments develop such protocols and improve the bankability of potential PPP projects.
 
A version of this post was published by BRINK News on August 15, 2017.
 
Disclaimer: The content of this blog does not necessarily reflect the views of the World Bank Group, its Board of Executive Directors, staff or the governments it represents. The World Bank Group does not guarantee the accuracy of the data, findings, or analysis in this post.

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