Bond financing in private infrastructure projects in developing countries

The popular application of project finance for private infrastructure projects (PIPs) in developing countries (DCs) has characterized week conditions for utilizing long term financial instruments. The absence of long-term local currency financing in PIPs has resulted in currency and maturity mismatches and hampers sustainability of PIPs. This underdeveloped financial climate highlights the importance of bond financing as an alternative form of borrowing in PIP finance in DCs. However, inadequate strength and week liquidity of the capital markets and the risk appetites reveal problems faced by DCs when raising finance through the bond issues. Within this background this paper presents an investigation into bond financing in PIP finance in DCs. While the research focuses primarily on Asian bond markets, country-specific experience is drawn from the Malaysian bond market with the support of a case study on the use of Islamic bonds in PIP finance. Empirical evidence reveals that application of bond financing works to mitigate currency and refinancing risks in PIPs and thus improves stability of PIP finance transactions. Findings highlight also that bond financing in PIPs would function as a financial intermediary transaction to strengthen domestic financial system. Successful evaluation of Malaysian Islamic bond market gives examples for domestic capital market developments in DCs in this background.