Project finance in Asia and the evolving role of multilateral development banks - Michael Barrow
Op-Ed / Opinion | 10 October 2014
A couple of decades ago, as a cocky young project finance adviser at a now-defunct (more exactly ‘absorbed’) British merchant bank, I spoke on a panel at an eminent project finance event in Singapore. One of the questions posed was about the future role of multilateral development banks (MDBs) in Asian project finance. That cocky young British banker predicted, with great assurance, that the private sector project financing days of the MDBs were most definitely numbered. He confidently explained that the commercial banks now had pockets deep and appetites large enough to finance all the private infrastructure projects that the booming markets of Asia could throw at them.
A few months later, the Asian financial crisis struck, the commercial banks retreated and your British banker had to quickly transform himself into a restructuring expert.
I was never so rash as to again publicly predict the retreat of the MDBs from the project finance markets, but there have been occasions when I have again wondered if their remit might shrink. It has not happened, nor do I see our relevance much under threat for some time to come.
Eleven years ago I joined the private infrastructure team at the Asian Development Bank (ADB). Back then, we had a small team of around 30 people doing just a couple of hundred million US dollars of lending and investment a year, and still got noticed. Now we have almost five times as many staff and are doing almost 10 times as much business. And within the next five years or so, we expect our business to almost double again.
What has kept us, and the other MDBs, relevant and sought after as a core financier of private infrastructure projects in Asia? My view is that it is partly due to external factors and partly because we have adapted, refocused, and expanded our mandate to match the needs of the market.
The external factors are too well known and too well rehearsed for me to dedicate much time to here. Suffice it to say that the after-effects of the global financial crisis, global regulatory impacts and perceived, often negative, changes in riskiness of markets (particularly political risk) has meant that the cast of active project finance participants has changed fundamentally over the last few years. A change that can be summed up as, a general retreat of the West and a rise of the locals but with market gaps still apparent.
So how have ADB and the other MDBs sought to adapt, expand, and fill the gaps?
Go where others fear to tread
One of our priorities is the neglected project finance markets of Asia. The infrastructure needs of Asia are much discussed; US$800bn a year according to an ADB study1.There are, of course, overwhelming needs across Asia, but they are perhaps most acutely felt in the less developed markets where local banks are least able to respond and the international banks are hesitant.
ADB’s very different perception and management of political risk has allowed us to finance a telecom licensee in Afghanistan, a transmission line in Cambodia, and a multi-billion-dollar petrochemical plant in Uzbekistan, amongst many others. And where we can, we have used our products and our presence to entice in otherwise-hesitant commercial banks, as we did with our B loan and political risk guarantees for that cell phone company in Afghanistan.
Taking the early challenge
Going where commercial banks may fear to tread does not just apply to adventurous geographies. We also look to lead the market in areas that may initially be perceived as technically or structurally risky. Some recent examples: in India and in Thailand we have helped lead the solar project financing markets, lending to the first big photovoltaic solar farms and, very recently in India, the world’s largest linear fresnel concentrated solar power project. In Indonesia, we helped lead the financing of the first private geothermal project in that country for well over a decade. With that financing test case proven, several more geothermal projects are in the works. And just in the last month or so we have approved, together with the International Financial Corporation (IFC) and the European Bank for Reconstruction and Development (EBRD), the financing of a cross-border hydro power project between Georgia and Turkey, a vital, but structurally and contractually complex, deal that could not attract commercial bank debt.
Pushing the market
Financing projects is a key focus of what we do. But even as we expand our private infrastructure financing, our direct funding, while filling gaps and making projects happen, is still but a drop in the bucket of overall Asian project financing needs. What we increasingly measure ourselves by is not our own dollars but how many dollars of private money we mobilise, the first, co-financing, ‘+’ in the ‘Finance++ Bank’ that ADB is striving to be. This means mobilising money through our presence (that is, the ‘halo effect’ of perceived risk mitigation from our being in the deal), through our products (we are targeting much wider deployment of B loans, political and partial risk guarantees, and risk participations) and through selectively taking a different risk profile than the commercial banks (longer tenors, different slices of debt, early and wider use of equity and so on when project needs and banking constraints justify it). And it includes pushing beyond the commercial bank markets to stimulate the still-largely-dormant project bond markets, as we are doing in India, through our first loss, project bond guarantee facility, and as we are looking to do more widely in Asia.
Creating more and better projects
And we are working from the other end too. A topic much debated is whether there is a dearth of financing for private infrastructure projects in Asia or whether there is a dearth of good projects to be financed. Very often the discussants decide on the latter. For us, knowledge makes up the other ‘+’ in ‘Finance++’ at ADB. From making the political case for public private partnerships (PPPs), to helping set up PPP centres and enabling laws and regulations, to helping governments pick, structure, tender, and award private infrastructure concessions, we are substantially stepping up our work and focusing on the heavy lifting of stimulating quality project finance supply. And we will then continue to work with the market to finance many of those projects.
Many years ago, that cocky young project financier foretold the death of MDB involvement in private infrastructure financing because he believed that the private markets could fully take up the challenge. That has not happened and I do not believe it will happen for a while. The needs are too great, the challenges too many, and the gaps still too plentiful. However, one day, after he retires, I hope that young banker is proved right and we, the MDBs, can gracefully exit the project finance scene with the mission accomplished. But until then there is much that we can and still must do.
And we will keep adapting and stretching ourselves to do so.