Multilaterals ‘key to mobilising private capital in emerging markets’

Of the private capital multilateral lenders have mobilised, only 3% has been invested in low-income countries, S&P finds.

While there’s “a wall of private capital” available to invest in infrastructure, investors are holding back, many of them unwilling to take on merchant or greenfield risk even in OECD countries, but even more so when it comes to emerging markets, a recent S&P Global Ratings report has found.

“Approximately 97 percent of total private capital investments mobilised by multilateral lending institutions (MLIs) occurred in high- and middle-income countries, according to the MLI community’s joint 2017 report Mobilization of Private Finance,” Michela Bariletti, analytical manager for Infrastructure Ratings at S&P, said in a two-part report.

The reason only 3 percent of MLI-mobilised private capital was deployed last year in low-income countries is due to the higher underlying investment risks in emerging markets.

According to S&P, those risks include political and regulatory uncertainty, currency-exchange risks, and policies that are less clearly-defined and therefore unpredictable.

It is these risks that MLIs can help mitigate through “private-sector catalysation”, which S&P defines as advisory services, support for policy reform, and capacity building.

“In this context, creating an environment and financing structure that encourages private investors to engage in a wider spectrum of risks and a wider number of geographies is critical and all the more necessary given constraints on sovereign fiscal resources,” Bariletti and her co-authors wrote.

In addition to private-sector catalysation, credit enhancement measures are also needed to mobilise private capital towards low-income countries.

“To be effective, we believe credit enhancements must offer a menu of risk/return options that are both suitable and useful to various types of investors and investments,” Bariletti said. These include liquidity instruments, such as A/B loans and letters of credit, which could prevent or delay a potential distress or default; instruments enhancing recovery prospects and reducing loss in the event of a default, such as partial guarantees and political-risk insurance; a combination of instruments; as well as guarantees.

But credit enhancement initiatives will not work on their own, Bariletti and her colleagues warned.

“Credit enhancement, in and of itself, will not transform non-bankable projects into bankable projects,” the report’s authors stated.

“While credit enhancement of a project’s financial structure may enhance the credit quality of senior debt, it cannot ensure the bankability of a poorly planned or prepared project. If an infrastructure project has a weak business profile, is exposed to a weak irreplaceable counterparty, and/or has a transaction structure that does not sufficiently protect project creditors, the presence of credit-enhancement facilities would at best only delay the project’s eventual demise,” they concluded.