Financing Cross-Border Infrastructure Projects Introduction—What is ‘bankability’?

Introduction—What is ‘bankability’?

Over the last decade, much has been written about globalisation and how we’re more connected than ever before. In the infrastructure world, we think of connectivity as the “linkages of communities, economies and nations through transport, communications, energy, and water networks across a number of countries”. 

Large-scale infrastructure projects that cross national borders often implies that large investments are needed to fund these projects. Investors will look at whether these projects have efficient planning, an alignment of political will, a coordinated enabling environment, a reliable return, and sensible, shared risk allocation. If all the above criteria are met, investors may consider the project to be ‘bankable’.

Put simply, a project is considered bankable if lenders are willing to finance it . Investors (whether debt or equity providers) will only invest in projects that are likely to generate a sufficient and sustainable return to justify the risk they are taking.

This six-part blog series will mainly focus on the commercial bankability of projects, for which commercial banks and other investors are seeking a financial return. It will also cover bankability with the aid of development finance from multi-lateral development banks (MDBs) and development finance institutions (DFIs), as well as a combination of the two—also known as blended finance.

The series will be divided into the following topics:

1. Introduction to bankability
2. Planning and prioritisation
3. Political cooperation and coordinated enabling environment
4. Scale and certainty of returns
5. Sharing of responsibilities and benefits
6. Currency risk and credit ratings.

Many large cross-border projects require finance from both commercial banks, and MDBs and DFIs. A large proportion also remain publicly funded. Analysis by the Organisation for Economic Co-operation and Development (OECD) of current spending on connectivity transport infrastructure in developing countries indicates that 15 per cent (USD $52 billion) of total investment comes from private investment, while the majority (80 per cent) comes from government.

In general, cross-border projects require the same elements as national-level projects to achieve bankability, but these elements are amplified by the scale of the project and a wider range of factors. Where there is a viable return from such projects—and they have been well-developed through strong leadership, planning, and prioritisation—there will be sufficient interest from investors, despite other potential difficulties.

There are numerous benefits for investors in financing cross-border projects, including access to a bigger market and potentially reduced demand risk. Multiple studies have shown that there are many opportunities to be gained in upgrading cross-border infrastructure, including benefits for trade and economic growth, which will trigger further demand for better connectivity , and hence, more opportunities for investment.

The OECD has found a substantial projected investment gap—and therefore investment opportunity— in transport connectivity infrastructure in developing countries, with current spending levels (as of 2015) meeting only 42 per cent of estimated investment need.

The GI Hub and EDHEC Infrastructure Institute’s annual global infrastructure investor survey, Investor Perceptions of Infrastructure, 2017, found that 37 per cent of investors invest in emerging markets (up 20 per cent from last year). Of those investors already investing in emerging markets, 85 per cent want to increase their investment . This demonstrates a clear desire from investors to help close the spending gap, provided that they consider the projects to be bankable.

In terms of the project benefits themselves, regional projects can help address underlying issues of creditworthiness in a way that purely national projects cannot. For example, greater traffic flows arising from increased connectivity can reduce traffic demand risk associated with roads and railway projects if shared by more than one country, such as through a transport corridor.

Similarly, regional power pools, such as the West Africa Power Pool, can reduce the reliance of independent power producers (IPPs) on a single off-taker , increasing the market and decreasing the risk for investors, while creating more robust systems with the potential to lower capital investment requirements and reduce system operating costs. In a further example of regional energy integration, the European Union (EU) is implementing the Trans-European Networks for Energy (TEN-E) strategy linking the energy infrastructure of EU countries to strengthen cross-border interconnections, help integrate renewable energy, and foster market integration.

Finally, China has created the Belt and Road Initiative (BRI) to help investors take advantage of the benefits and opportunities in upgrading cross-border infrastructure. The BRI is an ambitious and complex program, involving over 68 countries. Such an initiative will inevitably face many challenges to bankability, as do all cross-border projects, which will be outlined later in this blog series.

Part two—Planning and prioritisation—is now available.