Financing Infrastructure: The (non) concessionality of concessional loans (Presentation)

Abstract

Multilateral and bilateral borrowing is often favoured by governments such as Sri Lanka because such financing tends to have ‘concessional’ elements, relative to the international financial markets. However, the cost escalation that results from the widely accepted practice of ‘tying’ loans to procurement from contractors in the lending country can significantly erode the “concessional” grant element of these loans. This presentation includes research findings that measure the extent to which 22 such “concessional” loans, to the value of USD 7,750 million, taken by the Sri Lanka government, might be vulnerable to being non-concessional, due to the cost escalation on the tied elements of the loans. The research suggest that Sri Lanka may be overestimating the benefits of bilateral loans that are deemed as “concessional”, and provides a method to calculate and evaluate the value of concessional loans.