Between 2009 and 2012, they doubled their lending to infrastructure projects globally from $ to $ However, is more lending the solution? Despite a doubling of their lending in the last three years, they only contributed 16% of project debt financing volumes globally in 2012. Conceptually, a more efficient way to utilise their financial resources may be in the form of risk mitigants such as credit or risk guarantees. The G30 Working Group on Long-Term Financing has in fact recommended that governments and MDBs should provide risk mitigation instruments to help lower the higher risks involved, especially during the early phases of long-term projects. 2  BIS central bankers’ speeches  This is definitely worth considering. Given their status, MDBs and export credit agencies are seen as very credible counterparties that can provide risk mitigants. It is probably harder for the private sector to play such a role, especially given the long tenor of project finance. I would add that MDBs and export credit agencies already have guarantee products that mitigate credit and political risks for project loans. The issue at hand is how to extend these products to say capital market instruments to “crowd in” participation by a broader group of institutional investors. For instance, the Credit Guarantee & Investment Facility or CGIF, established by the Asian Development Bank and ASEAN+3 nations, recently completed its first guarantee transaction on a 3-year Thai baht bond issuance by Noble Group.
Hence the balance of financing sources will eventually have to shift. Policy makers have recognised the need for broader private sector participation. Long-term investors such as insurance companies, pension funds and sovereign wealth funds can be alternative sources of financing, as the life cycles of infrastructure assets match their long-term liabilities. However, these investors are not participating actively enough in the infrastructure space, especially in debt financing. I am sure we all recognise that there are many reasons including a lack of familiarity with the asset class and bespoke nature of infrastructure projects. Some see higher perceived political risks in Asia, and a limited range of investment instruments relating to infrastructure. To catalyse broader private sector participation to complement the traditional bank lending space, a few things could be considered. Firstly, we recognise that investors have varying risk appetites, and that the expertise to evaluate and undertake greenfield project risks still resides mainly with banks. Banks should therefore consider bringing in different types of capital at different stages as the risk profile of a project changes over time. For instance, transactions could be structured such that banks finance the construction stage of projects using their balance sheets, and the bank loan is then refinanced in the bond market post-construction. This way, institutional investors gain exposure to a steady stream of cash flows from operating projects, while banks can recycle capital to lend to new greenfield projects. There have been precedents in other parts of the world.