Banks need to get funding guarantees for big industrial and infrastructure programs from export credit agencies and international finance agencies, says a senior executive at Chemical Banking Corp.
Money for projects such as waste recycling and thermal recovery, transportation, telecommunications, mining, energy production and environmental controls also need to attract non-traditional investors, according to John R. Price, a Chemical managing director and president of the Washington-based Bankers Association for Foreign Trade, or BAFT.
Both the scale of the financing required for these projects and the proliferation of risks in the marketplace mean a wider array of techniques, including securitization, will be used to structure such deals.
Attractive But Complicated
Project finance is one of the more attractive but extremely complex areas of business for banks like Chemical, Chase Manhattan Corp., and Union Bank of Switzerland.
Although much of the growth in the business has come from Latin America and Asia as countries in those regions upgrade their industrial and economic infrastructures, demand for project finance is increasing worldwide.
China alone, analysts have estimated, will need hundreds of billions of dollars in the next 10 years to improve its infrastructure.
However, a recent survey by BAFT found fewer than 30 banks actively involved in project finance worldwide.
Hugging Their Expertise
Of those banks, many restrict their involvement to areas in which they have specific expertise needed to evaluate a project's financial viability.
Chemical, for example, emphasizes power, water, telecommunications, energy, metals, mining, pulp, and paper.
Speaking to the International Union of Credit and Investment Insurers, or Berne Union, in Montreal, Mr. Price said both Chemical's and BAFT's studies "underlined the need of the commercial banking community for far greater cooperation with export credit agencies and international financial institutions."
He added that improving financial guarantees for project finance is necessary for several reasons, including the move away from state and public-sector sponsorship of development projects and toward private-sector, limited recourse transactions.
Multinational Funding Seen
"The lines between public-sector accountability and purely commercial factors, in a perfect world, would be clear," Mr. Price said. "But in the transition period, many risks, which might have been covered by sovereign guarantees in the past, are daunting to private-sector sponsors and their financiers."
Equally important, Mr. Price noted, is "the sheer size of prospective requirements." This, he added, "means many projects will be multisourced, with components from many countries going into a single project."
