Bankable Doesn't Mean Viable, the Difference That Kills Projects
The most instructive projects in emerging-market infrastructure over the past two decades are not the ones that failed to raise money. They are the ones that raised money and then failed. Toll roads that closed financing and then defaulted within five years because traffic never met the forecast. Power plants that closed financing and then defaulted because a state offtaker stopped paying. Water schemes that closed financing and then defaulted because tariff reviews did not deliver the assumed escalation.
Each of these projects was bankable at close. Each was not viable in operation. The gap between the two words is where a lot of infrastructure equity has been destroyed.
This piece sits under the m2 pillar on bankability and viability. It sets out the failure modes of bankable-but-not-viable projects, and it describes the signals a serious viability review should be looking for before the financing package is signed.
The definitional gap
Bankability is a lender's test. It asks whether a project's cash flows, security, sponsor covenants, and risk allocation are shaped in a way that a debt provider is willing to lend against. It is a question about the financing package: can the deal be closed, will it clear the credit committee, will it survive its documentation.
Viability is an operator's test. It asks whether the project, once funded and built, will generate enough cash on an ongoing basis to service its debt, cover its operating expenses, absorb reasonable shocks, and produce returns for its equity holders. It is a question about the underlying economics: will the plant, the road, the plan, the enterprise actually work under real conditions across the life of the asset.
The two overlap significantly but they do not collapse into one. A project can pass the bankability test while failing the viability test if its financial engineering satisfies a lender's covenants but its underlying economics do not survive contact with the operating years. The bankability analysis was correct as far as it went; it just did not go far enough (Yescombe and Farquharson, 2018).
Failure mode one, demand forecast optimism
The most common pattern of bankable-but-not-viable failure is a project whose demand forecast was systematically optimistic. The bankability analysis modelled traffic growth at four percent per annum, or electricity demand at a defined offtaker consuming a defined volume, or water demand from a growing municipal service area. The lenders accepted the forecast because it came from an appropriately-qualified traffic engineer, an appropriately-qualified energy consultant, or an appropriately-qualified urban planner.
The forecast turned out to be wrong. Not by a small margin, but by twenty or thirty percent. The project came online and generated cash flows well below the level required to service the debt on the schedule the lenders had structured.
The mechanism of the optimism varies. Sometimes the forecasting methodology was flawed (extrapolating historical growth into a future that no longer resembled the past). Sometimes the demand was captured by a competitor (a new road segment attracted the traffic the forecast attributed to the tolled route). Sometimes the underlying economic environment shifted (a commodity downturn suppressed demand across the entire region). In every case, the viability review that should have stress-tested the forecast against plausible alternative demand paths either did not happen or was overridden.
The corrective is to demand that revenue assumptions be triangulated against at least two independent sources, one of which is not commissioned by the sponsor, and to model the project explicitly under a "demand at 70 percent of forecast" scenario as part of the viability review. If the project fails covenants at 70 percent of demand and the sponsor cannot demonstrate that 70 percent is genuinely implausible, the project is not viable regardless of what the base-case model says.
Failure mode two, operating cost inflation exceeding revenue escalation
The second most common failure mode is a project where operating costs inflated faster than revenue over the operating life. The bankability analysis modelled operating costs escalating at headline CPI (South African CPI, or the local equivalent), and revenue escalating at a contractual escalator (CPI plus a margin, or a defined formula).
The project comes online. Wages escalate faster than CPI because of labour negotiations. Imported spares escalate faster than CPI because of currency depreciation. Electricity input costs escalate faster than CPI because of regulated tariff increases. Meanwhile, revenue escalates at contractual CPI as modelled. The gap between opex escalation and revenue escalation compounds year over year. By year eight or year ten, the project's cash flow position has deteriorated to the point where it cannot service its debt.
The corrective is to model opex escalation on a differentiated basis, using the actual cost drivers of the project (wages at wage-inflation rate, imports at currency-adjusted rate, electricity at regulated-tariff rate) rather than a headline CPI proxy. Where the differentiated escalation profile shows opex growing significantly faster than revenue, the viability review should require restructuring the revenue formula to close the gap.
Failure mode three, counterparty credit deterioration
The third pattern is a project whose bankability rested on the credit of a named counterparty (a state utility as offtaker, a municipality as toll authority, a strategic investor as guarantor). At close, the counterparty had adequate credit. Over the operating life, the counterparty's credit deteriorated to the point where they could not or would not meet their contractual obligations.
South African infrastructure has seen this pattern repeatedly in the last decade, particularly involving state-owned enterprise offtakers whose financial position deteriorated for reasons that had nothing to do with the project. The project was left with a legally-defensible claim that was practically uncollectable.
The corrective in project structuring is to require credit-worthy counterparties, and where the counterparty is a state entity of uncertain long-term credit, to layer treasury guarantees or credit-support arrangements over the direct contractual obligation. The corrective in viability review is to model the project explicitly under a counterparty-default scenario and confirm that the project has a workable path forward (an insurance recovery, a step-in right, an alternative offtaker) rather than collapsing when the counterparty fails.
Failure mode four, foreign exchange exposure
Projects with revenue in local currency and debt in dollars or euros can pass the bankability test at the exchange rate prevailing at financial close, and then fail in operation as the local currency depreciates. The project generates local-currency revenue that no longer converts into enough foreign currency to service the foreign-currency debt.
Hedging arrangements can mitigate the exposure but not eliminate it, and hedging is expensive. Natural hedges (revenue indexed to the debt currency, common in export-oriented projects) work better where they are available.
The viability review should model the project under a currency-shock scenario reflecting the historical volatility of the relevant currency pair, and confirm that the project has either an adequate hedge or an adequate cushion in the base-case DSCR to absorb the shock. Projects with unhedged foreign-exchange exposure and thin DSCR cushions are not viable regardless of their bankability position.
The reverse failure, viable but not bankable
The mirror problem is the project with genuine underlying viability that cannot attract debt because its risk allocation cannot be structured to satisfy a lender. Small independent power producers with genuine unit economics that would sustain going-concern operations often cannot secure off-take contracts that would allow project finance debt to close. The project would survive if it could be built; it cannot be built because it cannot be financed.
The corrective for viable-but-not-bankable projects is usually structural: aggregation of multiple small projects into a portfolio the lender can price, DFI participation to take risks the commercial lenders will not, government support instruments (viability gap funding, sovereign guarantees) to close the bankability gap.
The viability discipline
A serious viability review, distinct from the bankability workbook, has three components.
A demand stress test at 70 percent of forecast, modelled through the full project life, with the interventions (cost reductions, restructured payment schedules, alternative revenue streams) that would keep the project viable at that demand level. If none of the interventions is feasible, the project's viability is fragile.
An operating cost profile using differentiated escalation, with wages, imports, electricity, and other input categories escalating on their own trajectories rather than at a single CPI proxy. If the opex profile grows faster than the revenue profile at rates that consume the DSCR cushion, the project's viability is fragile.
A counterparty credit assessment updated across the operating life, not just at financial close. If the counterparty's credit is likely to deteriorate over the concession period, the viability review should either require credit support arrangements or should reject the project on the ground that it depends on a counterparty whose ongoing credit cannot be assumed.
Projects that pass all three components are viable. Projects that pass the bankability test but fail one or more of the viability components are the ones that appear on the historical list of financed-and-failed projects.
What good looks like
A well-run project appraisal is not a bankability analysis with a viability review pasted on. It is an integrated analysis in which the viability discipline sits inside the bankability workflow and produces the constraints under which the financing structure is negotiated. Where the two are done together, the project either passes both tests or the analyst identifies the weakness that needs to be corrected before financial close.
The CentraSolve Bankability and Viability module integrates the two disciplines through a workflow that runs the bankability workbook and the viability stress tests in parallel, and flags the tests where the viability position is fragile even where the bankability position is comfortable. The output is a project view that reflects both a lender's willingness to lend and an operator's confidence that the underlying business can perform.
References
Textbook and framework sources
Yescombe, E. R., and Farquharson, E. (2018). Public-private partnerships for infrastructure: principles of policy and finance (2nd ed.). Oxford: Butterworth-Heinemann.
Brealey, R. A., Myers, S. C., and Allen, F. (2020). Principles of corporate finance (13th ed.). New York: McGraw-Hill Education.
World Bank Group. (2017). Public-private partnerships reference guide (Version 3.0). Washington, DC: World Bank.
Editor's note. The failure patterns in this article are drawn from public information about emerging-market infrastructure projects. Individual projects are not named, but the patterns are drawn from real historical cases and should be recognisable to practitioners with experience in the sector.