Project Finance

CHAPTER 8Emerging Markets, Project Finance Bonds, and Local Capital Markets

Project finance bonds and capital markets constitute a small but growing part of the financing rubric for infrastructure projects. More importantly, the relatively untapped capacity of institutional debt markets represents the greatest potential to close the widening infrastructure investment gap. As infrastructure gains greater traction and credibility as a desirable asset class offering superior risk-adjusted returns and traditional bank project financing is constrained by ever-increasing regulatory capital costs (Basel III), project bonds will play an increasingly important role in financing infrastructure projects and helping to bridge the infrastructure gap. According to McKinsey (“Bridging Global Infrastructure Gaps,” June 2016) there is approximately $120 trillion of assets under management by institutional investors (banks, pension funds, insurance companies, asset managers, sovereign wealth funds, infrastructure operators, private equity funds, etc.) and unlocking even 10–15% of this institutional capital would go a long way toward addressing the infrastructure funding gap. The key challenge matching investors and institutional capital to infrastructure projects is that $73 trillion (60%) of this investment capital derives from investors in the developed economies of US and Europe (with over 83% from high-income countries) while over 60% of infrastructure funding needs are in emerging markets. ...