- Development Finance Institutions (DFIs) and Export Credit Agencies (ECAs) poised for bigger role in emerging markets projects
- Bilateral policy lending growth outpacing multilateral
- Annual deal volume involving Chinese lenders up fourfold since 2012
- Chinese and US lenders set to compete for influence in African projects
- Commercial banks lending less alongside DFIs on deals; bond investors pull back
International lenders owned by sovereign states are playing a larger role in financing vital infrastructure projects in emerging markets and doing more deals on a bilateral, policy-driven basis, according to new research from Baker McKenzie and IJGlobal.
'A Changing World: New trends in emerging market infrastructure finance' surveyed 434 executives from ECAs, DFIs, commercial banks and project sponsors. It takes an in depth look at trends in infrastructure finance, such as the long term growth in bilateral policy lending, the essential role of ECAs and DFIs in funding infrastructure projects in Africa and the rise of Chinese outbound lending.
Nine out of ten respondents expect DFIs, policy banks and ECAs to grow their share of the circa $120 billion market for financing emerging market infrastructure beyond their current 20%. Government finances around the world are under pressure – and nowhere more than in emerging markets. Public debt in emerging markets and middle-income economies is now close to 50% of GDP – levels last seen during the 1980s debt crisis. For low-income developing countries, average debt-to-GDP ratios have been climbing at a rapid pace and exceeded 40% in 2017.
"A major reason for the growing influence of DFIs and ECAs over time is the stability they provide," said Michael Foundethakis, Global Head of Banking & Finance at Baker McKenzie. "They offer certainty through the economic cycle and political volatility - for example bond issuance for emerging market infrastructure has halved in 2018 - you just don't get those swings with DFI money. They can also go where commercial banks fear to tread because they have a different risk profile - in some emerging markets they are the only game in town."
Bilateral policy lending for a more bilateral world?
More than two-thirds of survey respondents also confirm creditor governments are increasingly focused on bilateral policy lending over multilateral lending. Multilaterals like the International Finance Corporation (IFC) or European Investment Bank have multiple sovereigns as shareholders, as opposed to national development banks, policy lenders and ECAs, which are owned by a single state. Bilateral policy lending accounted for almost 80% of development and export credit-backed loans to emerging market infrastructure projects in 2017, up from 56% ten years ago.
"Domestic fiscal constraints mean emerging market governments are increasingly seeking external assistance from DFIs, ECAs, policy and commercial banks to build the infrastructure they need," said Jen Stolp, Global Head of Project Finance at Baker McKenzie. "Multilaterals remain a vital part of the picture, although bilateral policy lending has grown much faster, driven to a large extent by Chinese outbound lending in support of the Belt & Road Initiative (BRI) and the great need for infrastructure development in Africa."
Greatest focus on Africa; greatest need in Africa
Out of all DFI and ECA investment flowing into African power projects in the past 10 years, Chinese lenders provided more than half of it (53%), followed by multilaterals (22%). China Exim Bank was the largest policy lender in Africa in the period 2008 - 2017 and China Development Bank was the second largest bilateral investor in this period. US-based DFIs and ECAs only contributed 3% of the funding, but survey respondents see big changes coming as the US ramps up interest in Africa, with views evenly split on whether US or Chinese DFIs and ECAs will be the most active lenders for African power projects – a critical part of infrastructure activity – over the next decade. The recent US decision to turn OPIC into the International Development Finance Corporation and double its lending ceiling to $60 billion is further evidence that the US is indeed reviving its interest in bilateral policy lending.
The report shows that survey respondents attribute the significance of DFI-lending in sub-Saharan Africa to the growing demand for infrastructure development (39%) and to the lack of availability of commercial funding for projects in the region, due to the perceived high risks associated with these investments (34%).
Stolp highlights three priorities which are key to reducing the financing gap: “First, a move away from traditional funding, and recognition that alternative structures and new financial instruments are needed; second, increased focus on project preparation funding and the creation of credible and predictable regulatory environments; and third, increased support for private equity investment.”
Belt & Road Initiative set for a bump?
Across emerging markets globally, annual outbound lending volumes with at least one Chinese lender doubled between 2008 and 2017, with Indonesia, Brazil (joining the BRI), Mexico (not yet part of BRI), Vietnam and Pakistan receiving most finance, according to IJGlobal data. Surprisingly, only 42% of survey respondents expect Chinese outbound policy lending to continue to rise, with a further 24% believing it will remain the same (although 63% of respondents in Asia expect increased lending). National government policy changes or increased competition from other lending nations are cited most often by those expecting a fall in lending.
While investment may not have an ever-upward trajectory, most observers believe the BRI is still in its initial phases: “It will take time to develop,” explains Simon Leung, partner at Baker McKenzie in Hong Kong. “Outbound investment - backed by lending - from China began to increase 10 years ago, with a focus on natural resources. Now attention has moved to infrastructure, such as power plants, roads, railway and ports. As development in BRI countries accelerates, industrial parks and new markets for Chinese suppliers and retail goods will open up, starting a new phase for the initiative.”
Sustainability a unifying force
One notable trend in infrastructure financing that unites most DFIs and ECAs is the growing requirement for the projects they fund to be sustainable. In renewable energy projects in emerging markets, bilateral DFIs and ECAs went from investing $271m in 2008 to $10.77bn in 2017. Meanwhile, there are increasing environmental and social provisions in DFI and policy bank loans - a trend expected to grow, regardless of the origin of the lender.
“Green bonds, like the recent IFC-supported BHP Billiton deal, which had interest payments payable in climate credits, will become increasingly important in the coming years,” concludes Baker McKenzie's Global Head of Projects, Jim O'Brien. “China’s commitment to the Paris Agreement is vital and will prompt other countries to follow and generate momentum in green financing for the long term."