Sustainable Infrastructure Projects: The bankability issue
By Fida Rana, May 9, 2017
More often than not, the discussion on sustainable infrastructure projects tends to centre on the “sustainable” issues only, with little focus on financing.
However, with a more than USD 1.5 trillion infrastructure financing gap globally each year, the issue of financing for sustainable infrastructure projects, green financing and climate financing, etc., is coming to the forefront of policy discussions globally.
The central theme of this year’s Global Infrastructure Forum, held in Washington, D.C. on April 22, 2017, was how to deliver inclusive and sustainable infrastructure to ensure we achieve the objectives of the Paris Agreement and the Sustainable Development Goals. Bringing together the presidents of the multilateral development banks and hundreds of investors and practitioners, the forum aimed to enhance public and private sector cooperation to deliver the trillions of dollars in investment in sustainable infrastructure needed in developing countries.
It is very difficult to escape the bankability topic when it comes to financing infrastructure projects. The term “bankable” is perhaps one of the most frequently used words when it comes discussing financing for sustainable infrastructure projects. And yet somewhat misleadingly, perhaps by the semantics of the term “bank,” many of us tend to associate the issue of bankability with bankers: "Let the bankers discuss and deal with the bankability aspect of the project.” This sentiment is a misconception at best.
Commercial bankers and other commercial infrastructure debt providers do not make a project bankable. Rather, their task is to assess the bankability of a project and, if found acceptable, provide the financing. If it is not deemed bankable, they will move on in search of other projects.
The fate of the bankability of any infrastructure project is set 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 aiming to attract private capital, it has to, among many other aspects, decide on the key risk-sharing protocol of the project. That is to say, who will share which risks during different phases of the project, such as pre-construction, construction and operation?
Infrastructure finance entails long-term engagement from banks—typically up to 80 per cent of the total investment requirement of a project, and the tenor can extend as long as 15–20 years. Understandably, banks would not get involved in a project that lacks comfortable risk-sharing protocols.
Designing an optimal risk-sharing protocol at the project-development phase is 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 an inability to find investors and lenders. And going back to the drawing board to re-design public-private partnerships is a costly exercise.
This brings forward an interesting question: if bankers appear at a later stage of the project cycle, how can we ensure the bankability of a project in the development phase? Those who are developing the project at ministry or agency levels are not necessarily banking experts. There is a crucial need to get bankers’ feedback on board as a project is being prepared. There is no magic formula for how to do this—a continuous dialogue with the banking community is perhaps the best possible route.