Project Finance

CHAPTER 4Risks and Challenges of Project Financing in Emerging Markets

Project finance has proved to be effective when applied to countries with heightened political risks, underdeveloped legal and regulatory systems, and weak or nascent creditor rights. The successful execution of project financing transactions poses very specific and unique challenges in emerging markets. Political and cross-border risks present the biggest volatility factors and unpredictable risks, which can produce adverse outcomes for investors.

The bespoke nature of project finance in emerging markets and the required higher intensity level of customized risk mitigation to structure out political and cross-border risks makes it difficult to achieve the required standardization, scalability, and velocity of transactional volume to meet institutional investor appetite for infrastructure project finance assets. The sub-investment grade ratings of most emerging markets also make it difficult to access deeper and more liquid institutional investor pools of capital such as the capital markets.

TRACK RECORD OF PROJECT FINANCE IN EMERGING MARKETS—THE ASIAN IPP EXPERIENCE

The application of project financing techniques to infrastructure investments in emerging markets gained traction in the early to mid-1990s. Major infrastructure initiatives in Asia such as Pakistan's private power IPP program, which attracted over 25 private sector projects representing almost 5,000 MWs of installed capacity and $5 billion ...