Gillian Frew

Bankability is key in the world of infrastructure and energy investment, as it indicates whether or not a risk is acceptable to third party lenders who are generally considered to be cautious by nature.

But the growing complexity caused by energy transition technologies and regulations leaves potential infrastructure financiers facing new challenges in assessing bankability – and the fact that a risk was “banked” in one factual scenario doesn’t mean it can always be banked.

The bankability of a project is generally determined by the technology, operational revenue stream, contractors and the sponsors involved. The simple expression carries significant weight, as it attempts to reduce to one word the complex investment and interface analysis that underpins global capital injections into infrastructure. Being “bankable” opens the doors to all manner of financing options.

In the UK, like many countries, vast amounts of private capital are needed in infrastructure, partly to reach net zero, because government borrowing is constrained and corporate balance sheets are often committed to higher growth opportunities.

Maintaining and upgrading the basic plumbing of any country – whether social or economic – is costly (and increasingly politically visible), but these lower-risk assets are not viewed as assets that should generate stellar returns. That premise is the basis of the regulatory systems that facilitate investment from lenders and investors across many asset classes within the infrastructure market, whilst seeking to control returns.

However, the infrastructure investment landscape can make lending decisions more complex. New energy transition technologies, such as carbon capture, hydrogen and energy storage, come with greater performance risk, whether technical or financial. In addition, regulators can intervene and upend the most careful assessments.

There are also risks linked to the potential insolvency from the so-called “tier 1” contractors, which are large companies managing large-scale projects from start to finish. The insolvency of a tier 1 contractor could leave clients and supply chains in huge difficulties. Increased global (and local) political risks are another area of concern to lenders and investors. Meanwhile, they need to navigate carefully the increasing costs and risks associated with carbon emissions as countries implement measures like carbon borders to impose carbon tariffs on carbon intensive products such as steel and cement.

With this background, not all investments can be done with lower-cost, lower-return senior debt. The financing market has continued to innovate to stay ahead and keep relevant. Increasingly infrastructure and energy investment will require a mix of debt products, with corporate finance, project finance, export credit, insurers, pension funds, development finance institutions and private debt funds all playing a role.

The debt products can align to match highly unlikely yet highly disruptive risks – such as protestor action – that are better managed by a government commitment to protect against the financial consequences.

Governments, including the UK government, will also face challenges, as value-for-money assessments will become more difficult. The demands for decarbonisation and rising energy costs could undermine the industrial core of many nations, highlighting the need for a mix of solutions that are socially and politically deliverable.

Gillian Frew is partner and infrastructure and energy finance specialist at Pinsent Masons