In order to sustain economic growth,Armenia needs to invest in infrastructure – much of this ona commercial basis given the limited fiscal space availableand high level of public debt. The private sector hasactively participated in infrastructure investment inArmenia, notably by way of divestiture, concessions, lease,and management contracts. Beyond direct state funding fromcurrent tax revenues, infrastructure investment can becommercially financed through a mix of (a) public finance(borrowing guaranteed by the state), (b) corporate finance(loans to corporate borrowers), (c) project finance (loansto project companies repaid from future cash flows).Thisentails, successively: (i) identifying whether parts of aninfrastructure development program can be financed oncommercial terms; (ii) when commercial financing is notviable, undertake upstream reforms to strengthen policies,regulations, institutions and capacity; (iii) if reforms arenot sufficient, explore the possibility of deployingconcessional and public resources to strengthen thebankability of priority investments; and finally (iv) wherecommercial financing is not feasible despite sector reformand risk mitigation, mobilize public and concessionalresources. Armenia’s infrastructure finance agenda touchesupon three key dimensions: (a) the origination of anabundant, mature pipeline of bankable infrastructureprojects, (b) a business climateconducive to commercialinvestment in infrastructure, and (c) the availability oflong-term financing for infrastructure projects. The countryneeds to systematize its pipeline of infrastructure projectsand strengthen the origination of transactions. The existingregulatory framework needs to incorporate specificprovisions for PPPs, and practices need to be improved.Going forward, financing from multilateral and bilateralsources will need to be complemented by other sources,notably international and domestic commercial banks. Localbanks have increased long-term lending in recent years, butstill only have limited involvement in infrastructurefinance. Internationally, states have attempted varioustypes of interventions in support of infrastructure finance.First, the state may support priority projects that areeconomically viable, but whose financial returns are nothigh enough, or are sufficiently predictable, to attract theinterest of private sector investors. Such schemes,involving financial viability support (FVS), are generallyincorporated in the host country’s PPP framework, and cantake different forms, such viability gap funds (VGF) andavailability payment (AP) schemes. Given the size of theeconomy, and the dearth of bankable projects, priorityshould be given to assessing the feasibility of financialviability support, and possibly wholesale financialsectorinterventions, rather than retail interventions.
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