Attractive infrastructure investment opportunities in Sri Lanka could draw local and foreign capital which could help underpin future growth, said Cynthia Howells, director of Global Infrastructure & Project Finance at Fitch Ratings New York.
"Private investment frees up governments to focus on the most difficult projects while the more straightforward but important ones can be funded by the private sector," she told a Fitch forum on infrastructure financing in developing countries.
"It could maybe accelerate the process of infrastructure development if many entities support different infrastructure projects at the same time," Howells said.
"We know from experience elsewhere in the world that governments can't do it all," she said.
Howells acknowledged that it may be cheaper for sovereigns to borrow and finance projects in the early phase of a country's infrastructure modernisation but noted private financing may be needed later on.
"The global experience is that governments can't do it all alone."
An important disadvantage of such funding models was their higher financial risk, if not backed by sovereign credit ratings.
Howells said that investment grade ratings would be required to attract private finance, citing Fitch's experience grading Latin American infrastructure projects with mostly local and not sovereign ratings.
"If the ratings are not investment grade even on a local scale, it's very hard to get those projects financed."
Credit agencies like Fitch all have well developed methods for analysing risks in infrastructure asset debt with experience across the globe involving both private and government sectors.
Howells said Fitch had no infrastructure analysts in Sri Lanka despite the huge infrastructure requirements in country.
Recent power cuts showed the demand for more power plants, while there was also demand for high-traffic roads outside Colombo and expanded rail travel along with additional airports, hospitals, schools and public housing.
Many infrastructure projects are in the planning stage in Sri Lanka or under construction. These include ports, airports, power plants, highways and rail networks.
Most such projects are funded by loans or grants from foreign governments and international aid agencies, but some have been delayed owing to difficulties in getting funds, government officials have said.
Howells said Sri Lanka could consider adopting the commercial bank loan and bond models for infrastructure debt financing used elsewhere in the world.
"Can Sri Lanka's business sector apply the financing structures which are successfully used in the rest of the world to attract capital needed in Sri Lanka?" she asked.
Typical terms for such infrastructure projects were 80 percent debt, consisting of loans or bonds, and 20 percent sponsor equity.
Investors are mainly institutional, such as government and corporate pension funds, insurance companies, and forward looking corporates like information technology firms.
Lending terms were usually 20-30 years which means investors were looking at long term prospects for debt repayment.
Cash flows from such projects go directly to special purpose vehicles set up for borrowing and are only used to repay debt.
Fitch rates only the debt instruments to fund infrastructure and the likelihood of default and not the project itself, Howells said.
Key rating drivers were completion risk, operational and revenue risk, debt structure, and debt service and counter-party risk
Howells said Sri Lanka's recent sovereign bond issue showed the rate was enough to attract private companies.
She said the private sector could consider whether it is possible for Sri Lanka to use financing structures found elsewhere, such as government finance combined with private debt, to build infrastructure like toll roads.
A planned expressway linking the capital Colombo to Kandy in the central hills could be a toll road as well as a proposed southward extension of the island's first toll expressway from Colombo to the southern port town of Galle.