HSBC and Singapore-based Temasek aim to accelerate sustainable infrastructure development in Southeast Asia, via a newly formed financing arm called Pentagreen Capital.
HSBC (LSE:HSBC) and Temasek have invested $150 million in Pentagreen, which aims to deploy up to $1 billion over five years to fund projects that may have difficulty attracting investment due to a range of issues.
Clean transport, renewable energy and energy storage, and water and waste management development in Southeast Asia will be the initial focus. Future expansion beyond the region, and into climate adaptation, agriculture and land use is also envisaged.
The Asian Development Bank estimates the infrastructure investment gap in developing Asia (ex-China) is 5% of GDP, and will require reforms to attract both public and private sector finances. Recent climate change catastrophes in South Asia may make climate adaptation a higher priority.
The new venture seeks to fund ‘marginally bankable’ projects by deploying blended finance (different from PPPs), while also providing advisory and technical assistance services.
The venture has lured Marat Zapparov from the IFC to become its CEO, hoping to benefit from his tenure as head of the Asia Project Development and Investment unit. The focus of this unit was an early-stage asset and project development across the real estate sector.
Prior to the IFC, Zapparov founded Unity Development, an energy and infrastructure advisory firm, and also had roles at HSBC and Clifford Capital related to project finance. Clifford Capital and the Asian Development Bank (ADB) were advisors to HSBC and Temasek on this deal.
HSBC, Temasek and ADB addressing the issue of important but marginally bankable projects
Pentagreen will serve as a platform to fund projects that may find it difficult to attract financing from commercial banks and development banks. For commercial banks and regulated financial institutions, a bankable project is one that passes stringent credit risk assessment criteria, and typically direct involvement from export credit agencies and multilateral development banks.
So-called marginally bankable projects typically lack information transparency and metrics to evaluate their impact, which in turn stems from an inadequate pipeline of projects being brought to market. The terms of loans needed, and the creditworthiness, nature and location of the underlying project could all result in a lack of funding interest.
The platform was first announced in September of 2021, with an aim to address the gap to fund sustainable infrastructure needed to address the challenges presented by climate change. Private capital is seen as a solution to the bankability barriers facing these projects in the region.
Choosing blended finance over PPP: what’s the difference?
Pentagreen sees its value add in being able to provide blended finance solutions for marginally bankable infrastructure projects in Southeast Asia, in addition to also providing technical assistance. The areas of focus will be clean transport, renewable energy and storage, and water and waste management.
While definitions of blended finance vary, it basically involves combining private and public sources of funding in sustainable development. This is very similar to Public-Private private partnerships (PPP), except a generally accepted principle of blended finances is the willingness by one party to accept less-than market returns.
Global multilateral agencies, including the ADB, have identified a funding gap for sustainable infrastructure development in Asia that would require an estimated $1.7 trillion annually to 2030. Pentagreen’s aims appear to be a very small step in that direction, but given the reputation and standing of its stakeholders, could serve as a catalyst for other banks to launch similar platforms.