Credit Risk Assessment in Infrastructure Project Finance: Relevance of Credit Ratings

Proposed reasons for the mismatch between global long-term finance and private infrastructure investments include, among others, a lack of investable projects, improper risk allocation between private and public sectors, the complex nature of infrastructure projects, unclear credit risk assessments, and a lack of appropriate financing instruments. Inadequate credit information and lack of historical data at infrastructure project level can lead to a credit market failure in infrastructure project finance, resulting in the mispricing of risk and poor capital allocation to infrastructure in the economy. Infrastructure projects are considered risky by rating agencies, given that the cash flows arise from a single asset and the credit ratings for higher non-commercial risks are usually at BBB levels. The rationale for a higher risk grade for infrastructure public–private partnership (PPP) projects is not very clear, however, and given the lack of credible evidence, the financial sector regulators also provide for increased risk weights for infrastructure exposures. This article explores the relevance of credit ratings for infrastructure project finance, examines historical credit default data for infrastructure projects around on credit risk assessment, and assesses the implications for long-term infrastructure financing. The authors find that for the same rating grade, infrastructure debt exhibits lower defaults and lower credit losses relative to corporate debt. This research work could provide directions for policy makers, regulators, and lenders to reduce the use of external credit ratings for guiding investments in infrastructure projects. TOPICS:Project finance, other real assets, legal/regulatory/public policy, emerging