Bridging the financing gap for sustainable transport infrastructure in emerging Asia

by Simon Booker and Edward Clayton

In the global pursuit of net-zero targets, sustainable transport infrastructure has become a critical focal point for policymakers, investors and financiers. After all, the sector is responsible for approximately one quarter of greenhouse gas emissions and 57% of global oil demand. Transport CO2 continues to rise in most regions, with Asia being the largest emitter in absolute terms.¹

Alongside this urgency, a significant financing gap looms, particularly pronounced in emerging Asian markets. The Asian Development Bank (ADB) estimates that approximately US$1.7 trillion will have to be invested annually in infrastructure across Asia through 2030 if the region is to maintain economic growth, battle poverty and mitigate climate risk.² Our own research revealed that the middle- to low-income territories in Asia Pacific, including India, Indonesia, the Philippines, Thailand and Vietnam, are where 60% of new infrastructure investment for green transition is needed.

The problem is that few governments can afford it, or have the institutional capacity or know-how to manage the sustainability aspect. Blended finance — an approach that combines capital from different sources, typically blending public, private and philanthropic funds — is a potent solution that can bridge the gap and accelerate sustainable development. The novelty in blended finance is that it aligns investors and investment tools (or ‘instruments’) to achieve financial goals alongside social and environmental impacts guided by the principles of the United Nations’ Sustainable Development Goals (SDGs).

Much has been written about this before. In this article, we want to focus on the underlying reasons for this financing gap and what the blended finance organisations can practically do to accelerate the use of it. We will also show real-world examples of how it has worked well, for all parties, in driving sustainable development forward.

Three pillars of blended finance

Why is there a financing gap in emerging Asia?

The availability of finance is not the principal issue on a global scale. There is sufficient availability of finance for quality infrastructure projects. Rather, the ability to attract finance into particular markets and projects is the problem. Private investors are cautious in emerging markets where risks are considered comparatively high, mainly due to shifting political, macroeconomic and environmental factors. There are four main barriers:

• Lack of bankable projects
  One major hurdle is the scarcity of viable, investment-worthy projects at scale. Emerging markets often struggle to present projects that meet the stringent criteria set by investors. This includes the absence of a rigorous planning and budgeting process underpinning the need for the project, so its value is harder to assess. In addition, there are often political pressures to keep costs to the public down, which can make projects unbankable.
• Volatile macroeconomic conditions
  Upheavals brought by events like the COVID-19 pandemic prompted investors to reassess strategic, non-project risks. This leads to a more conservative approach, making it harder to secure financing for ambitious infrastructure projects.
• A shifting political, legal and regulatory environment
  Political uncertainty, an underdeveloped legal environment and fluctuating regulatory frameworks can spook investors, casting doubts on the stability and viability of ventures. Without clear revenue streams and funding sources throughout an asset's life cycle, confidence and a willingness to invest, maintain, update and decommission infrastructure, wanes.
• Lack of data and technology
  There’s little policy or advocacy around gathering data. How much traffic is there? What’s the consumption? What are the population figures now, and projected? In particular, the lack of data on emissions or carbon pricing makes it challenging for private investors who are held accountable for the sustainability credentials of project delivery. It should also be said that this is not helped by a lack of standardisation — internationally — on data capture and what is ‘meant’ by sustainable transport.

In short, emerging markets are often not considered a level, comfortable playing field for international capital. But when they do dip in, the deal can require an equity premium and that generally makes investment largely unaffordable.

Practical steps organisations can take to accelerate the use of blended finance

1. Ensure there is a well-defined project at the outset
A well-defined project with clear economics and a business planOpens in a new window at the outset of a blended finance project is crucial for attracting investors, ensuring project viability and maximising development impact. It helps align the interests of public and private sector stakeholders, mitigates risks, and enhances the likelihood of project success. A solid business plan instils confidence in investors by demonstrating the project's financial viability and potential for returns. Investors are more likely to commit capital when they have a comprehensive understanding of the project's revenue streams, cost structure, risks and financial projections. Underpinning this has to be a well justified demand forecast.

2. Combine multiple blended finance instruments to address more risks
Each blended finance instrument tends to mobilise a different amount of private capital in different ways and magnitudes – making some instruments more catalytic than others. Blended finance is often most catalytic when instruments are combined to address multiple risks at once. This can be seen in the table below – the instruments on the left combined to address risk-return profile of the investment.

Risks addressed by blended finance instruments

^{Source: International Development Finance Club (Blended Finance: A Brief Overview)}

3. Leverage Multi Development Bank (MDB) balance sheets as instruments too
Aside from using standard project-level instruments, broaden to use MDB balance sheets as instruments themselves. Using both approaches is a way to maximise resources and deliver the SDG agenda.

This would allow private investor participation in MDBs’ capital structure through mechanisms like bond or senior debt issuance available for purchase by private investors, hybrid capital instruments or ownership of non-voting shares. This effectively unlocks new private investment which can be deployed into qualifying infrastructure projects, but in a way that uses the balance sheets of MDBs to de-risk investment that would otherwise not have been forthcoming.

PwC's 'dual-approach' view of blended finance

^{Note: DFIs: Development finance institutions}

4. Capacity building and technical assistance
MDBs can also provide technical assistance and capacity-building support to governments and local institutions to enhance their ability to structure and manage blended finance transactions effectively. This includes training in financial modelling, risk assessment and project management.

5. Public sector to consult early in the design stage with the private sector and mitigate risk
At present, public sector entities are designing blended finance structures without always consulting with the private sector on what works for it and on which risks can be absorbed within an optimal and efficient capital structure that delivers value to all parties. For example, the private sector is sometimes asked to take on all project level risks, even when some may be outside of their direct control. This can erode the efficiency of financing solutions. Instead, it actively wants to take on certain types of project-related risks because it believes it's good at managing them. As a result, some projects that lack an appropriate allocation of risks between parties best able to manage them, repel private investors instead of attracting them.

6. An improved enabling environment
Policymakers can streamline bureaucratic processes and reduce regulatory barriers to investment.

The procurement process must also be transparent and well-organised and incentivise a strong competitive bid process – which is key to securing value. This is crucial for promoting accountability, fair competition, risk mitigation, market confidence and long-term sustainability. If done right, it fosters trust among stakeholders and enhances confidence in the project's integrity. The Public-Private Partnership (PPP) Code of the Philippines (Republic Act No. 11966)Opens in a new window is a good example of progress being made in this regard. It sets out a PPP code for the procurement and operation of PPP projects – with a view to leveraging greater foreign investment into infrastructure projects, by reducing risks.

7. Develop standardisation and share best practices
Developing standardised documentation, processes and sharing best practices for blended finance transactions can reduce transaction costs and enhance transparency. MDBs can play a crucial role in establishing industry standards and disseminating knowledge about successful blended finance models.

8. Consider local currency financing
Encourage local currency financing to reduce currency exchange risks for investors and borrowers in emerging markets. MDBs can facilitate local currency lending by providing hedging facilities or partnering with local financial institutions.

9. Improved data and information sharing
Improving data collection and transparency around blended finance transactions can help build investor confidence and attract additional capital. MDBs can support efforts to collect, analyse and disseminate data on the performance and impact of blended finance projects. Demonstrating tangible social, environmental and economic outcomes is crucial for attracting future investment, scaling successful models and supporting the accreditation of projects for green and sustainable finance – unlocking more efficient sources of capital.

The ongoing monitoring of the performance of sustainable infrastructure projects should also not be overlooked. All too often, projects suffer from operational stage attrition in management and delivery practices, which presents subsequent refinancing risks.