Funding the Preparation and Structuring of Infrastructure Projects
Some believe that the barrier to infrastructure development in the region is not the lack of financing capital, but the lack of well-prepared, bankable and investment-ready projects. Read more to learn about the funds that can support the preparation of projects initiated by governments and the private sector.
A well-prepared project is key in driving private sector investments
“In today’s context, project preparation for infrastructure projects is even more important to drive private sector participation and investment”, emphasizes Lynn Tho, Partner in Ernst & Young’s (EY) Infrastructure Advisory.
Lynn further expands that as governments in the region are faced with the challenge of driving post Covid-19 economic recovery, infrastructure investment and development will create jobs and deliver tangible assets that will fuel long-term economic growth. As such, there is a greater urgency to attract private sector support to the development of infrastructure.
It has been said for a while that the barrier to infrastructure development in the region is not the lack of financing capital, but the lack of well-prepared, bankable and investment-ready projects. Although private investors are interested in infrastructure in Asia as an asset class and are willing to invest, they face challenges navigating policies, regulations and project risks.
A well-prepared project1 is one that is structured to ensure good risk allocation and commercial viability. This gives investors the confidence to appropriately consider the risks and mitigating factors in determining its feasibility.
The unsolicited proposal conundrum- outsourcing project preparation
Since project preparation is important, a topic that is often debated is whose responsibility should it be to carry out this project preparation work.
Should it be the governments and their line agencies? They are the owners of the infrastructure projects, so they should ensure that the outcomes of the prefeasibility study are aligned with their intent. Or should it be the private sector investor who can bring in innovation and expertise to the project? The latter being known as Unsolicited proposals (USP), which usually require investors to be responsible for the pre-feasibility and feasibility studies.
In our interactions with the regional governments, we encounter reasons such as lack of technical capability, lack of time or lack of funding to explain the acceptance of unsolicited proposals. There are cases where although funding was available, the amount required was too high. Generally, governments have expressed that they are willing to explore other forms of funding to carry out the feasibility studies themselves to retain greater alignment in the pre-feasibility study.
As EY’s Lynn Tho points out, “Where an unsolicited proposal is received, what is important is a clear and transparent process where governments are able to assess the merits, costs, risks of such proposals, and if they offer value for money.”
The World Bank’s study2 on USPs recommends incorporating a competitive element when assessing an USP. One such option can be through a Swiss Challenge process whereby other proponents are invited to bid against the original USP proponent, but with the original USP proponent retaining the right to improve its USP. Other options can include opening a competitive process by either automatically shortlisting the USP offer or awarding it bonus points to recognize its early contribution to the process.
To plug the gaps in the USP process, governments can leverage private sector experts or even Multilateral Development Banks (MDBs) in the following areas: - 1) helping the government assess the USPs and their options; 2) benchmarking the USP against industry standards; and 3) incorporating and managing competitive elements.
Addressing the lack of funding for project preparation
Taking a step back, regardless of the procurement approach (unsolicited or tender), better regional infrastructure financing helps with setting out the building blocks that are needed to enhance the bankability and investability of a project.
To better support the regional governments and to develop projects that would appeal to international investors, Infrastructure Asia carried out a survey on the project preparation landscape. We spoke to over 50 possible funding sources to understand their interests in the region, types of funding available and criteria for application.
We found that there is a large diversity of funds that can support the preparation of projects initiated by governments and the private sector.
The available funds can be divided up into 3 broad categories.
All the fund types shown above have the view that the support of central government for the project is an important criterion as they would want the project to be aligned with the plans of the country.
A key difference is the interest of the funds post project preparation- MDBs and National DFIs tend to have an interest in financing the project after supporting the project preparation. DFs may be willing to take higher development risks, with a preference to equity injection for higher returns.
National DFIs also tend to have an additional requirement of country content to support their home countries’ companies, while MDBs, due to it being funded by different countries require for the content to be non-tied to any country.
An example of project preparation fund from an MDB is the Global Infrastructure Facility (GIF).
World Bank’s Towfiqua Hoque, Senior Infrastructure Finance Specialist, explains that, “The World Bank’s Global Infrastructure Facility (GIF) was set up as an open access platform for project preparation bringing together client countries, donors, all MDBs, as well as private financiers”.
She elaborates that this allows the GIF3 to co-ordinate the efforts of project preparation at the regional level of all MDBs and help consolidate the various efforts from diverse project development facilities. To obtain GIF support, governments can work with a GIF technical partner (i.e. any MDB) to initiate a discussion with the GIF and follow a simple application process. Aside from providing funds, GIF also functions as a platform to cross-fertilize and exchange experiences in project preparation.
Like some of the other project preparation funds, the GIF works on a revolving basis to ensure that its funding is sustainable. The project owner needs to pay back GIF when the project is successful. Repayment terms are project specific.
Diversity of funds to meet the needs of the different sectors
Our sector-wide analysis shows a wide diversity of funds to meet the different sectors’ needs. Energy and environment are the sectors with the highest coverage and choice of funds for project preparation. This is aligned with the current trends that place emphasis on climate change and sustainability.
The ASEAN Catalytic Green Finance (ACGF)4 Facility managed by the Asian Development Bank (ADB) is a unique facility to accelerate the development of green infrastructure. It does so by combining project preparation support with possible innovative financing to crowd in private capital.
The ACGF was launched in April 2019 under the ASEAN Infrastructure Fund, a dedicated fund established by the ASEAN member nations and ADB. The ACGF is managed by a team in ADB. Given this shared ownership and green focus, ACGF is able to identify, originate and structure projects for financial sustainablity as well as setting green indicators, across a range of infrastructure sectors and in all ASEAN countries. The added possibility of being able to receive uniquely structured concessional financing from ACGF (a two-step loan which provides an initial seven-year loan at a concessional rate) makes the ACGF’s support attractive to project sponsors.
Infrastructure projects initiated by the private sector can seek support from Development Funds
Development Funds (DFs) play an important role in supporting the private sector directly in developing infrastructure projects. An example is InfraCo Asia.
“The range of and access to financial tools differs for each development fund. InfraCo Asia is able to provide equity financing for early stage infrastructure development activities (including feasibility studies) for projects that fit its investment criteria. Along with this, we are able to leverage other sources of funding that enable technical assistance grants,” says Allard Nooy, CEO of InfraCo Asia.
Other than the additionality requirement (non-competition with other available private sector funds), development impact and commercial viability are also important factors to consider for InfraCo Asia. Development Funds tend to come in only after the bidding stage. In the event that they do help to prepare the project or even an unsolicited proposal, they would want to have some form of exclusivity or the “right to match” in the competitive tender stage. This is so that they have an opportunity to win the tender and continue to be involved up to Financial Close.
Allard Nooy comments that “InfraCo Asia has a track record of supporting local companies, such as the Singapore-based Sunseap Group and Darco Water Technologies, in their regional expansion plans in the solar energy and water treatment sectors. In providing our development and funding expertise, we are able to de-risk the projects in order to make them more viable for private sector players.”
Patience, Creativity and Nimbleness Required for Project Preparation
“Success in project preparation cannot just be measured by the ability of a project to achieve a successful bid award”, expresses Anouj Mehta, Unit Head (Green and Innovative Finance and the ACGF) at ADB’s Southeast Asia Regional Department.
Having been involved in the ACGF, Asian Infrastructure Centre of Excellence (AICOE)5, as well as ADB’s pioneering PPP initiative in India back in 2007-2012, he noted that a number of projects are often prepared with painstaking effort and cost. Unfortunately, not all saw the light of the day due to reasons which were often out of control of the project sponsor. However, the models created – whether leveraged finance, capital markets, sub-sovereign structure, etc. – in themselves can create a replicable model for further use. This has been the case in metro rail and Bus Rapid Transit (BRT) projects as well as waste to energy projects.
An excellent example of a successful project supported by the AICOE was the Cambodia National Solar Park Project. It took over two years, and required a mixture of skills from ADB’s public sector, the private sector and PPP teams to create a model project. This 60MW solar park project was heralded as a success because it received a final bid price of US$0.03877/kWh6, which is the lowest PPA tariff in Southeast Asia.
Investing in project preparation of projects such as the prefeasibility study can be likened to venture capitalists investing in start-up. The follow-through is long, and the success rates may not be high, but when done well, a well-structured project can bring about significant returns in time savings, cost savings and revenue generation over the next decades for all the parties involved.
The challenge in deploying project preparation funds
In Asia, the World Bank’s GIF has deployed about US$13M in project preparation funds. Of this amount, 57% have been deployed to the energy sector, 23% to the transport sector, and 20% to the water and sanitation sector. As GIF supports the project preparation for PPP projects, this shows the strong private sector interest in the energy sector and also the higher level of acceptance of private participation in the sector.
Some of the possible reasons for the lower numbers in transport, water and sanitation and other sectors, could be the public nature of these projects, increased complexity of such projects, the multiple stakeholders involved and even political leadership of the country. Other reasons for the lack of deployment of such funds include lack of understanding of the criteria application process; and fear of mismatched expectations in terms of timelines, appointment of consultants and reporting upon approval of funding.
Encouraging the use of project preparation funds to develop more projects for international investment
Infrastructure Asia, as a facilitation platform, has been working with the regional governments to explore the different project preparation funding possibilities. We identified three key ideas that can increase the usage of such funds, thus enabling more private sector investments into infrastructure projects:
1. Phasing or breaking up an infrastructure project into different sectors – Instead of attempting to do a large feasibility study involving multiple sectors (transport, environment, etc.), it might be more advantageous to study the different sectors individually. This could then increase the number of applicable funds, or make it more digestible for sector-specific funds to invest in.
Phasing each feasibility study and covering specific issues in each phase may also make the project preparation more nimble. This may include ensuring that the data used is more up to date (as compared to a large feasibility study which may take time, and by the time the feasibility study is completed, the underlying conditions may have changed).
In some cases, the project preparation may be phased based on the source of financing required for the project. For example, some infrastructure projects have a component that needs to be financed by public funds, such as land acquisition, dredging, building breakwaters or sewage systems. The public financing portion has to be resolved before the private sector is willing to finance the other parts.
2. Alternatives to direct sovereign support for an infrastructure project – Given the public good nature of the majority of infrastructure projects whereby consumer tariffs may not cover costs of delivery, private delivery of infrastructure projects may require direct or indirect sovereign support through schemes such as viability gap funds, availability payments, shadow tolls, and offtake guarantees.
One must be aware that sovereign support may not be always available for infrastructure projects at the city or provincial level. There are several MDB sub-sovereign initiatives such as the World Bank’s Cities Resilience Program or International Finance Corporation’s (IFC) Cities Program as well as the GIF or Asia Pacific Project Preparation Facility (AP3F) which can support sub-sovereign entities in preparing critical projects, including structuring viable financing schemes.
3. Increasing the communication with governments of the availability of such project preparation funds – This will allow regional governments to take this possibility into consideration when deciding on their procurement mode for the infrastructure project. Most governments are aware of some of the preparation funds and may be used to accessing some already (particularly from the MDBs).
However, our research reveals there are various sources of preparation funds. Hence, it may be useful to keep the regional governments updated about what the options are. This may increase the chance of getting the right sources of preparation fund to assist them, and consequently surface more better prepared projects to seek international private sector support.
As a government office, Infrastructure Asia hopes that the greater use of such funds will allow for more well-prepared infrastructure projects to increase private-sector involvement and investment in the development of the region.
1 There are many views as to what constitutes project preparation, depending on which part of the infrastructure value chain one is in. We refer to project preparation here as the efforts required to develop the project prior to implementation, including prefeasibility and feasibility studies, transaction advisory and professional services from consultants and lawyers to structure a bankable project which will be able to meet both public sector service obligations and private sector return requirements.
2 https://ppp.worldbank.org/public-private-partnership/sites/ppp.worldbank.org/files/documents/UnsolicitedProposals_PPIAF.pdf
3 https://www.globalinfrafacility.org/
4 https://www.adb.org/what-we-do/funds/asean-catalytic-green-finance-facility/main
5 Asian Infrastructure Centre of Excellence (AICOE), a project preparation platform set up with the Asian Development Bank (ADB) and the Government of Canada, to develop infrastructure PPP projects within ASEAN.
6 https://www.pv-tech.org/news/cambodia-solar-auction-draws-record-low-bid
This article was collated by Gayle Tan and Seth Tan and benefitted from the information and views shared by:
- Lynn Tho, Partner, Ernst & Young
- Towfiqua Hoque, Senior Infrastructure Finance Specialist, Global Infrastructure Facility, World Bank
- Anouj Mehta, Unit Head (Green and Innovative Finance and the ACGF), Southeast Asia Department, Asian Development Bank (ADB)
- Allard Nooy, CEO, InfraCo Asia
