Here’s how project and ECA financing can help to fill Asia’s strategic infrastructure funding gap.
The region’s infrastructure funding gap is so large and strategic, there is a pressing need to identify and enable new sources of finance. That is where project financing and ECA financing can become important facilitators of international investments.
Developing Asia requires investment in excess of USD1.7 trillion a year in infrastructure spending if it is to maintain green growth and eradicate poverty by 2030.1 When seeking to finance this green infrastructure, businesses and public-sector organisations in the region may not be aware of the support available from export credit agencies such as UK Export Finance (UKEF), a longstanding partner of Standard Chartered. Such agencies can reduce the cost of finance and insurance, without the stringent conditions required by tied-lending.
UKEF is the Export Credit Agency of the British government. Its primary mission is to support UK exports, and ensure no viable export fails for lack of finance from the private section. UKEF also seeks to support UK policy goals, such as promoting transparency in global trade and the global transition to a low carbon economy.
The most important difference is flexibility. In order to apply for its finance, UKEF requires a minimum of 20% of a contract to be sourced from UK suppliers (though it will seek to bolster that percentage if possible). This is more favourable than the requirements of some other export credit agencies (ECAs) including the US equivalent, EXIM, which requires more than 50% of content to be sourced from the United States.2
Moreover, to account for the variety of services sectors that export from the UK, UKEF is relatively flexible about what constitutes “UK content”. Its emphasis is on activity that supports job-creation and value-add in the United Kingdom. This can include companies that are not domiciled in the UK but have facilities there. Finance is available in more than 60 currencies, reducing forex risk, and the agency prides itself on avoiding the bureaucracy that is sometimes associated with governmental bodies.
For large projects, UKEF also offers a Direct Lending Facility, loans of up to GBP200 million for overseas buyers to purchase from UK exporters, at fixed interest rates.3 Competition to access this facility is intense, as the overall pot is limited to GBP8 billion, of which GBP2 billion is reserved for clean growth projects demonstrating the UK government’s commitment to transition to cleaner energy.
Another product, UKEF’s Standard Buyer Loan Guarantee, is perhaps the most relevant product for the majority of organisations in Asia-Pacific. It insures a commercial bank loan to an overseas buyer, whether private, public or in a public-private partnership, to finance the purchase of UK services, capital goods and intangibles, of up to 85% of the contract value, typically within a range between GBP1 million and GBP30 million (USD42 million).
International finance has been likened in the past to borrowing an umbrella that you have to give back once it starts raining. UKEF states explicitly that this is not the case with its lending. The overseas buyer can choose to borrow at fixed or floating rates, and to re-pay the loan over an extended period. The financial institution involved in the transaction receives a guarantee from UKEF for the amounts due under the loan, while the exporter is paid as if they had a cash contract, which helps with their working capital requirements.
UKEF can also structure a facility on a line-of-credit basis, enabling the overseas buyer to make multiple purchases from different suppliers. However, this is more complex than financing an existing contract because it requires UKEF to do much more due diligence on the guarantor, the buyer and the supply chain as a whole.
How does this work in practice? In 2019, Standard Chartered worked with UKEF to help Serba Dinamik, a Malaysia-based engineering services group, to cover USD64 million-worth of imports from various smaller subcontractors, not all of them UK-based, for a range of small green-energy projects in Indonesia, which individually were not bankable. Under the framework, Standard Chartered extended a commodity-based Islamic finance facility (a commodity murabaha) to the borrower, Serba Dinamik Indonesia. This facility allowed the Indonesian company to strike an engineering, procurement and construction contract with the Serba Group’s UK subsidiary to work with other UK suppliers on energy projects in Indonesia.
UKEF has been the first ECA to engage with Islamic finance, and this was not its first sharia-compliant transaction. In terms of Asia-Pacific markets, its experience in this area may be particularly relevant to countries such as Malaysia and Indonesia, which are leaders in the formalisation and uptake of Islamic financial products.
Crucially, UKEF no longer extends support for energy products that undermine efforts to combat climate change. The flipside of this is that UKEF offers extended loan tenors (up to 18 years for renewable energy, nuclear and water projects, nearly double the usual 10-year outlook) and more readily available funding for sustainable energy projects.
In terms of the kind of projects eligible for UKEF's clean-growth financing, these can be anything from sustainable water and wastewater management, to biodiversity conservation, to eco-efficient buildings and transportation. It is not limited to clean-energy projects, although one such provides a good example of how UKEF participates: UKEF is one of six export credit agencies, among a syndicate of some 25 financial institutions including Standard Chartered, that are participating in the USD3 billion financing and insurance of the 589MW Changfang and Xidao offshore wind project off the west coast of Taiwan.
Given the appetite for green transformation in Asia, UKEF’s policy objectives cohere with those of many businesses and state-owned enterprises in the region. A poll conducted at a UKEF-Standard Chartered webinar on 27 April found that attendees saw South Korea as the country with the most potential for renewable energy, followed by Vietnam. Almost two-thirds of attendees had worked with an ECA in the past.
Standard Chartered has long been one of UKEF’s most active partners, and we share many of its goals, for instance by committing to provide USD40 billion in project financing services for infrastructure promoting sustainable development by 2024.4 For organisations considering projects that could include UK suppliers, and particularly those involved in the creation of green infrastructure, partnering with UKEF may in many cases help reduce the cost of financing and insurance, while giving project managers the freedom to source from a mixture of world-class contractors.
UK Export Finance is the UK’s export credit agency. It exists to ensure that no viable UK export lacks for finance or insurance from the private market, providing finance and insurance to help exporters win, fulfil and get paid for export contracts.
