Donor-intervention and debt capacity in private infrastructure project finance in developing countries

The popular application of project finance (PF) for private infrastructure projects (PIPs) in developing countries (DCs) in the 1990s has highlighted a number of issues and constraints, when arranged through bank-dominated financial systems with comparatively weak economic institutions in DCs. Multilateral and bilateral agencies' participation in PIPs works to ease these constraints and create an enabling environment for private financing of infrastructure in DCs. Their intervention gives incentives for mobilization of private capital for PIP finance. Based upon this premise, this paper empirically examines implication of donor-intervention on the debt capacity of PIPs arranged through PF arrangements. Econometric results confirm that the development agencies' instruments, namely credit support/enhancement and guarantees function to improve the debt capacity of PIP finance and thereby improve the viability of PIPs in weak legal, political and financial environments. These results shed light into the structuring of PF arrangements into PIPs and effectiveness of development agencies' participation towards a sustainable PIP finance in DCs.