Political Institutions and Global Project Finance Loans

Abstract

AbstractThis paper explores the link between political institutions and the size of global bank loans received to fund project finance (PF) transactions, a commonly used funding method for domestic infrastructure construction. We theorize that lenders’ political risk assessments lead to a prioritization of political predictability over other institutional features of host countries. This indicates that, all else being equal, full democracies and politically closed regimes have advantages in attracting global PF capital, while hybrid regimes are least likely to receive global funds for similar projects. Using the global PF deals reported by the DealScan database and data on political institutions and economic indicators, we show that the relationship between host country regime type and global bank loans is indeed U-shaped. Our additional analysis demonstrates that a greater PF investment is associated with a lower hazard rate of regime failure in host autocracies, particularly in the form of an irregular exit by a dictator. Overall, our findings suggest that global bank loans, mostly originating from economically advanced democracies, contribute to infrastructure funding in dictatorships that might not otherwise be available through domestic or sovereign borrowing channels.