New private activity continued to take place in developing countries in August-December with projects being developed, tendered, and taken to financial close, but at a rate that was about 40% lower than in the same period in 2007.
The slowdown reflects an initial impact of the financial crisis which has made financing more onerous and difficult to secure as access to capital markets and bank lending has been reduced or halted and risk perception increased. Projects are facing higher cost of financing, but the major impact to date is projects being delayed or canceled.
Many projects that reached financial closure from August onward were at an advanced stage of raising finance or able to switch to some (or a mix of) local public banks, export credit agencies, and bilateral and multilateral agencies. Where possible, some PPI sponsors opted for local currency denominated debt since major devaluations in many developing countries made foreign-denominated debt too expensive. It is unlikely that local, bilateral and multilateral financing institutions will have the capacity to replace other sources of financing. Consequently, the trends in increased costs, delay, and cancellation are expected to continue.
It is too early to assess the full impact of the crisis on new PPI projects. Many investors and financiers are in a wait-and-see mindset and are likely to be so for several more months or until the breadth and depth of the crisis’ impact become clearer. When financial markets bottom out or start to recover, project-financing levels are likely to remain affected over a significant period if the trends shown in previous financial crises are repeated.
As the “flight to quality” sets in for banks and other financiers, the likely impact will be more stringent financial conditions, not only via higher cost of financing, but also with lower debt/equity ratios and more conservative structures. The expected economic downturn in developed and developing countries is also likely to reduce demand levels and have a significant impact on project revenues, and consequently on projects’ financial viability.
Recently gathered data on new infrastructure projects with private participation have shed some light on the short-term impact of the financial crisis.
1. PPI projects continue to reach financial closure but at a lower pace than that of 2007: From August-November 2008, 31 PPI projects reached financial closure involving investment commitments (hereafter investment) for US$17.2 billion in 21 developing countries. Such level of investment in new projects represents a decline of about 40% compared with the level in the same period in 2007. As in previous years, new projects have been mainly in electricity and transport. By region, those projects have been primarily in LAC (U$8.3 billion), MENA (US$2.9 billion), and EAP (US$2.8 billion).
2. Projects are being impacted through higher cost of financing, project delays and cancellations: The slowdown is linked in part to increased financing cost. So far, increased cost of financing is quoted as a major impact of the crisis in only 3% of surveyed projects by investment. These data may underestimate the impact of increasing financing costs as the information to date is limited and sometimes hard to get. As projects are being negotiated, there is a natural reluctance from private sponsors to release financing information or acknowledge difficulties on raising financing.
The data also show that numerous projects are being postponed or canceled due to the crisis in the financial markets, confirming the evidence of a significant slowdown in PPI projects reaching financial closure. Around 27% of surveyed projects by investment have been delayed (22%), canceled (2%) or are at risk of being canceled (3%). In addition, 47% of projects by investment are at risk of being delayed if financing is not put in place in the coming months.
Projects delayed and at risk of being delayed amount to US$82 billion and are primarily in South Asia (28 projects for US$24.9 billion), ECA (25 projects for US$24.1 billion), LAC (16 projects for US$17.1 billion), and EAP (20 projects for US$13.8 billion). For reference, 288 new projects involving investment of US$73 billion reached financial closure in 2007. A similar trend of project delays was experienced after previous financial crisis. Investments in private infrastructure projects in East Asia and Latin America declined substantially after the late 1990s crises in developing countries and had not recovered their pre-crisis levels by 2007.
There is a growing pipeline of PPI projects which are trying to raise funds or will do so in the next 6-12 months and could be affected if financial markets do not recover by then. Around 44 projects involving investment of US$34.7 billion, which were not able to secure financing by November 2008, are expected to continue looking for finance. There are 73 additional projects with investment of US$42.3 billion which will be trying to raise financing in the next 6-12 months. Those projects were recently awarded or their tender processes are close to being finalized. Competition to attract financing will increase among projects as a growing number of them attempt to raise financing.
3. Local public banks as well as multilateral, bilateral and export credit agencies have been key finance providers. Projects in Brazil and India, countries accounting for a large share of private activity, have sourced financing largely from public sector banks. Local banks were also key for providing local currency denominated financing. In several developing countries, major devaluations against the dollar over the last few months have made foreign currency denominated debt too expensive.
Funding from multilateral, bilateral and export credit agencies was also mobilized for many projects. Of the 31 projects that reached financial closure, these agencies provided direct financing to 12, which totaled investment of US$6.9 billion. The agencies are also working in a growing number of new projects. Of the 60 projects looking for finance, these agencies are evaluating funding for 16 which total investment of US$16 billion. This growing participation is not surprising since bond markets are inactive, the syndication market has collapsed, and the cost of financing is unprecedentedly high.
4. Countries continue to implement PPI programs but investors’ appetite for new deals seems to be declining: The surveyed projects show that 21 developing countries awarded 57 projects which involved US$27.7 billion in investments. Those projects have been in all developing regions, but primarily in LAC (22 projects for US$10.7 billion) and ECA (18 projects for US$12.3 billion). There is anecdotal evidence that some tenders have had disappointing results while others have been canceled due to low investor interest. So far, tenders for 9 projects have been either delayed or canceled representing US$15 billion.
Conclusion
Although it is still too soon to assess the full impact on new PPI projects, there is strong evidence of lower rates of financial closure and projects being canceled and postponed. The extent to which such trends persist or intensify will depend on the depth and breadth of financial crisis and the consequently economic downturn. This preliminary analysis will need to be further refined in the coming months to assess whether earlier trends continue and whether conclusions can be drawn on a sector or regional basis.