Blending finance for bankability

Published on Wednesday, 10 May 2017

Published by Anouj Mehta on Wednesday, 10 May 2017

Blended finance is the best way to make infrastructure projects in Asia more bankable, and scalable.
Blended finance is the best way to make infrastructure projects in Asia more bankable, and scalable.

Money is at the heart of a key challenge faced by countries in developing Asia and the Pacific; namely, how to deliver the major infrastructure upgrades needed to cope with the enormous pressures from economic growth and rapid urbanization. ADB's latest estimate of the price tag for this is $26 trillion for 2016 to 2030, when measures to counter climate change are included. That’s $1.7 trillion each year.

Traditional infrastructure financing approaches, including from sovereign sources and multilateral development banks like ADB, will not provide enough resources to meet the region's infrastructure investment gap. We therefore need the private sector to step in and pay for around half of all regional infrastructure spending through to 2030.

But the private sector will only back projects that are bankable – projects that are likely to generate a sufficient return to justify the risk taken. Private capital is competitive, and priced on risk. When global opportunities are available, private capital will normally flow to opportunities that reduce their investment risk and maximize commensurate returns.

Risk perception is a mix of numerous factors, including financial and especially revenue models, legislative and regulatory frameworks, and implementation practicalities. The higher the risk, the more expensive the private capital, so investments become less attractive, and projects don't take off.

Blend concessional, non-concessional finance

To meet Asia’s infrastructure investment needs, we need to better leverage concessional sources of financing through blended finance.

While fairly new in the development lexicon, blended finance essentially builds on an investment banking and project financing approach to structure projects for commercial financing. It is a collaboration between concessional finance and private or commercial finance sources, each taking on those project risks they are best suited for.

  Private infrastructure finance not just about PPPs

“Private” finance is also not just about public-private partnerships (PPPs). While PPPs are important, especially in enhancing efficiencies and technologies, there are many other sources of private finance—such as capital markets, commercial banks, private equity, insurance and pension funds—that can and should be tapped. Each source will have its own risk perceptions, which need to be mitigated in the blended approach.

This type of partnership reduces overall project risks as well as the cost of capital from commercial sources, catalyzing more private sector financing to a project.

Triple approach for sustainable infrastructure financing

Blended finance therefore places bankability at the heart of infrastructure development: no project bankability means no private finance.

To deliver bankable or sustainable financing project models for Asia’s infrastructure, project officers should:

  1. Target a blended financing plan that explores various sources of private or commercial capital and advanced technology solutions for a project.
  2. Develop innovative financial model structures that maximize revenue from both direct (e.g. consumers) and indirect (e.g. government) sources, applying concessional finance to increase bankability and reduce risk perception.
  3. Proactively target aggressive multiples of private finance catalyzed for every dollar of concessional finance applied.

Innovative projects are those that mitigate risk

Blended finance is the best way to make infrastructure projects in Asia more bankable, and—with a wider range of financing sources—more scalable.

Development finance professionals need to ensure that sovereign or concessional funds are best leveraged for creating bankable project structures. The main objective should be to mitigate both direct and indirect risk factors by developing financially sustainable projects over a lifecycle period that includes operations and maintenance expenditures.

  Innovative project structures can reduce investment risk

To reduce risk, we must develop innovative project structures that go beyond traditional approaches to risk mitigation.

For instance, if direct revenues through tariffs in an urban transit project are too low, let’s look at indirect revenues from properties benefiting from the project, levies on fuel usage, or from performance-linked minimum revenue guarantees committed to by the government.

Prioritize bankability, catalyzing funds

The success of development finance should thus be measured not just by its capacity to finance assets or by amounts disbursed, but also by the additional dollars of private finance it can catalyze.

This approach is a paradigm shift for concessional development finance.

The triple approach can be applied universally, so that at least the right questions are asked and project roadmaps developed by a government or a project officer which prioritize bankability and the catalyzing of private finance sources.  

This mindset change is critical to ensure access to a deeper range of financing sources to develop Asia’s infrastructure. It’s time to set aside the norm, think beyond old approaches, innovate, and collaborate.