Infrastructure Financing: Applying International Standards to Raise More Capital
Infrastructure projects that offer the highest developmental impact in lower income countries are experiencing many challenges in raising capital. The technicalities and logistics of developing infrastructure projects, the underlying country and political dynamics, and the multifaceted structures involving various stakeholders to deliver the projects contribute to a level of complexity and risk that need to be overcome, mitigated and managed.
A way to combat this is to apply international, proven standards to a project. This approach is championed by various international organisations, notably by the World Bank and the International Standardization Organisation, partnering to enter Memorandums of Understandings to help increase countries’ awareness and involvement in the development, adoption and use of international standards that promote open, fair and transparent trade. Broadly the application of international standards can make industry more efficient and reduce technical barriers to international trade. When used to make a project comply, it can lead to increased trade, support sustainable and equitable growth whilst protecting health, safety and the environment. On a fundamental level, when a project complies with international standards, it improves the underlying bankability of a project and increases the ability to raise required funds.
GuarantCo champions the application of international standards to infrastructure projects and sees three clear benefits and opportunities to doing this.
1. International standards make it easier for large banks to be able to commit to providing finance
International financial institutions are large and complex, and projects need to pass many numbers of internal assessments and committees in order to qualify for funding. The application of international standards to any project, regardless of jurisdiction, increases the ease of review and the likelihood of gaining approval for funding. International standards allow for direct comparison to other projects, ease communication between institutions syndicating a transaction and with other parties involved in the delivery and output. The reality of underwriting business in lower income countries which often face political economic and social insecurity instability, is that associated risks can be difficult for financial institutions to overcome and mitigate. When a project is in compliance with international standards, it provides reassurance to financial institutions that the highest level of standards will be met including issues such as health, safety, environmental and social (HSES) aspects, as well as technical. Such issues can otherwise be difficult to assess and are especially relevant for lower income countries. Ultimately compliance with international standards will strengthen the reputation and credibility of underlying projects and borrowers and open up doors to funding. The benefit to borrowers and governments who apply international standards to their projects can therefore continue in the long run as they build up a strong track record and reputation in the market.
2. Complying with standards can open up access to a new pool of investors
The application of international standards can also increase a project or country’s integration into other markets globally, particularly after gaining a certification. This was demonstrated recently (October 2019) when GuarantCo provided a partial credit guarantee to investors in the Acorn Holding KES 4.3 billion (USD 43 million equivalent) note programme to fund the construction of accommodation for 5,000 students in Nairobi. Construction of this affordable student housing project complies with an internationally recognised green building certification and hence qualified for a green bond issuance. This was a landmark transaction in the market since it was the first to achieve green certification in Kenya and opened up the borrower to a new pool of green investors as well as importantly contributing to reducing carbon emissions.
Another example is GuarantCo’s partial credit guarantee of a USD 129 million (INR and PHP equivalent) green bond issuance for Sindicatum Renewables Energy Company in August 2018, following an initial issuance in January 2018 which was the first international corporate Indian Rupee Green Bond in Asia. Ensuring that Sindicatum’s underlying projects complied with the requirements of green bond, eligibility criteria and standards allowed the issuance to reach a wide group of impact investors. Tapping this new market for the borrower allowed Sindicatum to diversify its lender base, refinance existing debt and to fund new solar and wind power projects in India and the Philippines. GuarantCo hopes that these issuances will act as catalysts to encourage other potential corporate issuers looking to secure long-term funding for infrastructure related initiatives to consider similar approaches.
3. Commitments to apply international standards can lead to additional funding through grants
Through Private Infrastructure Development Group Technical Assistance, grants can be provided to support PIDG companies’ initiatives. Grants can be provided to meet a range of needs associated with investment opportunities, develop capacity and capability of host country partners and local investors as well as supporting construction phases to deliver strong development impact whilst achieving affordability. In 2019, GuarantCo provided a guarantee to support a 15-year USD dual currency financing solution on behalf of Technaf Solartech Energy Limited (TSEL), the first utility-scale solar project in Bangladesh. As part of this transaction, opportunities to further improve the projects standards were identified, and a PIDG Technical Assistance grant of USD 107,000 was provided to fund and undertake technical and HSES due diligence and prepare a comprehensive action plan under IFC Performance Standards.
Fundamentally, applying international standards increases the underlying credibility of a project, increases the potential pool of investors and can help lead to developing a stronger reputation and track record for developers and governments involved. In addition, applying international standards improves critical project elements such as HSES and development impact longevity. International organisations should continue to advocate for the application of recognised standards and work with lower income countries to build their capacity, increase their participation in international standardisation and fully exploit the value of the standards. Enhancing international standards capacity provide lower income countries across Africa and Asia with the opportunity to participate in global trade and contributes to economic development, social progress and protection of the environment.
Author: Sophie Gaze, Analyst at GuarantCo.