A study of project finance in Asia with emphasis on private infrastructure project finance

Project Finance (PF) has been increasingly used in Private Infrastructure Projects (PIPs), particularly in developing economies in the 1990s. In Asia, this phenomenon has been largely reflected in bank-led syndicated financing of power project transactions. However, the application of PF for PIPs in Asia is characterized by several issues pertaining to both the non-recourse characteristics and the institutional environment of the transactions, including insufficient attraction of private debt capital for PIP finance, the apparent necessity for external guarantees or assurances to enhance debt financing for PIPs, and comparatively higher transaction cost in organizing PF arrangements in PIP compared to that in stable environments. While this background initially motivated this research, relatively limited studies on PF also inspired exploration of the theoretical underpinnings of PF. Therefore, a structured approach consisting of three interrelated and analytically distinct domains, namely substantive, conceptual, and methodological, was used to answer and confirm the principal theoretical and empirical nature of research questions in this thesis. The contribution of the research is mainly reflected in two aspects. First, PF is treated as a financial mechanism rather than a procurement approach, unlike the approach commonly found in many studies on PIPs. Second, the traditional consideration of PF in finance is expanded in this research. The corporate finance view of PF is expanded, from the perspective of institutional economics, to establish a generic PF model. This is used to explain the fundamental causes of the identified issues and provide theoretical explanations and empirical analyses in the credit transaction environment to confirm these explanations. Methodologically, case studies and multiple regression analysis were used to test hypotheses about the institutional environment and transaction governance mechanisms within which PFs were arranged in six Asian countries. The case studies identified and confirmed hypothesized conditions that influence the organization of the PF arrangements and their financial structure, while regression analyses confirmed hypothesized determinants of debt capacity in PF and the transaction cost of organizing PF arrangements. The conditions that affect the organization of PF arrangements together with determinants of debt capacity and the transaction cost are revealed by institutional environment and transaction specific variables. It is concluded that PF arrangements are typically organized under a transaction specific structure, which indicates the level of riskiness of the transaction for non-recourse finance. In response to the particular level of riskiness, transaction specific variables lead to different PF structures. Favorable institutional environments and adequate measures pertaining to agency and information problems help to achieve higher debt capacity and control of TC in. PF. In weak institutional environments, as represented by the PF transactions in Asia, project specific institutions function to address information and agency issues to raise the required debt, which is shown to result in higher TC. Control of the TC and due consideration of governing variables of PF arrangements function to achieve effective transaction governance in weak institutional environments. While the research adds new findings to the body of PF literature from the perspective of institutional economics, the findings from the credit transaction environment further strengthens the body of empirical work on this particular financial mechanism.