Financeability versus Bankability in Project Finance, the Infrastructure View

The previous cluster in category m2 introduced the distinction between bankability (can the debt close) and financeability (is the whole financing package sustainable across the project's life). That piece treated the concept from the corporate finance perspective. This companion piece sits under the m1 pillar on what makes a large infrastructure project fundable, and walks through what the financeability discipline means for infrastructure sponsors.

The infrastructure lens is different from the corporate finance lens in three ways. First, infrastructure projects have long concession lives that expose sponsors to changes in fiscal, political, and market environments over decades. Second, infrastructure projects often depend on government contingent support, and the sustainability of that support is a first-class financeability question. Third, infrastructure equity returns are typically lower than corporate equity returns, and the market for equity exits at the terminal date is thinner. Each dimension requires the sponsor's financeability discipline to extend beyond the immediate transaction close.

The fiscal exposure of contingent support

Most large public infrastructure projects in South Africa and in comparable emerging markets depend on some form of government contingent support: a sovereign guarantee, a viability gap grant, a minimum revenue guarantee, a subsidy, or a tariff-adjustment mechanism. These instruments make projects bankable that would not otherwise attract debt.

The financeability question for the sponsor is: is that support sustainable across the concession life? Sustainability has three components (World Bank, 2017).

Fiscal capacity. Can the government honour the commitment at the scale required across the concession life? A guarantee scaled to R 5 billion of contingent exposure may be trivial for a large sovereign; the same guarantee for a smaller sub-sovereign entity may be a material fraction of its annual budget and may not survive stress scenarios.

Political durability. Will the commitment survive changes in government administration? Contingent commitments that depend on personalities or on shifting coalitions are less durable than commitments embedded in legislation or in binding intergovernmental agreements.

Portfolio aggregation. How much aggregate contingent exposure does the government carry across its infrastructure portfolio? A single R 5 billion guarantee is manageable; twenty similar guarantees aggregating to R 100 billion may not be, and each new project increases the aggregate risk to a point where any one guarantee could be renegotiated or withdrawn.

Sponsors preparing financeability analysis for their own boards, or for DFI participants who apply their own financeability discipline, should address all three components explicitly. Where any component is uncertain, the financeability position is fragile even if the bankability position is strong. Adendorff (2019) analysed this pattern in the South African infrastructure context: the government's aggregate contingent exposure grew across the 2010 to 2020 period to a level where individual guarantees were no longer as durable as their bankability positions implied.

Equity return sustainability

The second dimension of infrastructure financeability is the equity return question. Infrastructure equity returns are typically lower than corporate equity returns because the risks are lower (long-dated contracts, defined cash flow shape, low volatility relative to other equity classes). But the returns are not zero, and the exit environment for infrastructure equity holders differs from the exit environment for corporate equity.

Three sub-questions matter for infrastructure equity financeability.

Is the base-case equity IRR aligned with the market's actual expectations for the project type? Infrastructure funds have target IRRs (typically 12 to 18 percent for equity in African infrastructure, depending on the sector and risk profile). Sponsors modelling equity IRRs materially above those targets are producing projects that will not attract the equity at the terms modelled, and financeability fails at the equity layer.

Is the exit environment for the equity credible? Infrastructure equity exits happen through several channels: refinancing (where the equity is bought out by debt), sale to a strategic investor, sale to a specialist infrastructure fund, or hold-to-concession-end. Sponsors modelling exits through a channel that does not exist for the project type (a strategic exit for a project with no strategic buyers, for example) are modelling exits that will not happen.

Does the equity cash flow profile support the exit? Where equity holders need dividends across the operating life to meet fund distribution requirements, the project needs to generate distributable cash flow at the required levels. Projects that meet the debt DSCR but starve the equity of dividends fail the equity distribution test even where they succeed on the debt-service test.

Concession-life sustainability

The third dimension is concession-life sustainability. Infrastructure concessions typically run 20 to 30 years or longer. A financeability analysis for a 25-year concession has to consider how the project will fare not just in the first five years (when the transaction is closest to close) but in years 10, 15, and 20 (when the environment may have changed materially).

Strategic futures discipline (the subject of category m5) provides tools for handling this uncertainty. The Western Cape Strategic Infrastructure Intent (2026 to 2050) uses scenario-based planning to test infrastructure decisions against multiple internally-consistent future scenarios rather than against a single central forecast. Where the project's financeability position holds across all plausible scenarios, the project is genuinely financeable. Where it holds only under optimistic scenarios, the financeability is fragile.

Practically, a well-run financeability analysis for a long-concession project includes: scenario-based revenue and cost profiles across the concession life; stress cases for the counterparties and support instruments the project depends on; and a periodic review mechanism through which the financeability position can be re-tested as the environment evolves.

The interaction with the sponsor's own capital position

A dimension of financeability that gets under-analysed is the sponsor's own capital position. A sponsor whose infrastructure portfolio is concentrated (one sponsor participating in five projects with the same offtaker, for example) has portfolio-level exposure that reduces the financeability of each individual project.

Sophisticated sponsors and their DFI participants review the sponsor's whole portfolio when assessing the financeability of any individual project. Where the sponsor has already committed significant capital to related exposures, the financeability of a new project is judged against the incremental exposure to the sponsor's total capital, not just against the standalone project economics.

Cross-border considerations

Cross-border infrastructure adds dimensions to the financeability question. Multiple host governments carry contingent support obligations; the aggregate exposure of each government is affected by the others' participation. Multilateral participation strengthens financeability by adding a supra-national layer that survives changes in individual host governments.

For groups with operations across borders, the financeability analysis should address the interlinkages: which government's support depends on which other's, how currency and payment mechanisms are structured, and how disputes across jurisdictions would be resolved. The World Bank's PPP Reference Guide provides one framework for these considerations (World Bank, 2017).

What good looks like

A well-run infrastructure financeability analysis addresses fiscal exposure of contingent support, equity return sustainability, and concession-life sustainability as first-class disciplines. It uses strategic futures tools to test the position across plausible future scenarios. It integrates the sponsor's own portfolio position where the sponsor is materially concentrated. It presents the analysis in a form that DFI participants, National Treasury evaluators, and equity holders' credit committees can inspect.

A poorly-run analysis treats financeability as a synonym for bankability, focuses on transaction close without addressing concession-life sustainability, and produces projects that appear financeable at close but that require restructuring or bail-outs in the operating years. The historical pattern of financed-and-failed infrastructure projects in African markets shows the cost of the confusion.

The CentraSolve Large Infrastructure module supports the full financeability discipline: the fiscal exposure of contingent support, the equity return sustainability, the concession-life sustainability, and the scenario-based futures testing. Together with the m5 Strategic Futures module, the workflow integrates the financeability analysis with the futures work in a shape that reflects how sophisticated funders actually think about long-horizon infrastructure investment.

References

International framework sources

World Bank Group. (2017). Public-private partnerships reference guide (Version 3.0). Washington, DC: World Bank.

Yescombe, E. R., and Farquharson, E. (2018). Public-private partnerships for infrastructure: principles of policy and finance (2nd ed.). Oxford: Butterworth-Heinemann.

South African framework sources

National Treasury, Republic of South Africa. (2019). Budget Facility for Infrastructure: guidelines and templates. Pretoria: National Treasury.

Strategic futures sources

Adendorff, C. M. (2019). Infrastructure development scenarios for South Africa towards 2050. Prepared for the Presidential Infrastructure Coordinating Commission, Republic of South Africa.

Adendorff, C. M. (2019). The future of South Africa towards 2050. Port Elizabeth: Powerhouse Strategies.