As central banks begin to trim their balance sheets and interest rates trend upwards in 2018, governments across the globe are stepping into the breach to accelerate expenditure to upgrade and develop new infrastructure. In the Asia Pacific, the quantum of the financing gap is enormous: from US$1.5 trillion to US$1.7 trillion a year through to 2030 according to the Asian Development Bank. The region’s infrastructure requirement is not a matter of nice to have. Indeed, if the Asia-Pacific region is to sustain its growth as it lifts the quality of life of its populace, identifying and deploying the sources of finance to fill the gap will be crucial.
But first things first. Project sponsors will need to work closely with their bankers to be able to come up with a financing structure that works: in short, bankable projects. This is perhaps the most challenging part. Being able to design a financing structure that reflects adequate mitigation to the variety of risks in infrastructure projects is vital. With the advancement in technology, opportunity exists for projects to be better assessed such as using big data and advanced analytics to price risk into the entire project development and underwriting process.
In doing so, it can also resolve one of the biggest conundrums facing project financing: how to match long-term funds with infrastructure projects that have large capital requirements and a long gestation period. Liquidity in the region remains ample and in search of attractive yields, which is why sources of finance can be a combination of syndicated lending and/or eventually tapping the capital markets via project bonds.
Projects are plenty. The Belt and Road Initiative led by China is perhaps the most ambitious and runs through multiple jurisdictions and into Central Asia. There is also the green agenda as countries reflect on their approach to energy security while being cognizant of its impact on the environment.