Despite the ongoing financial and economic crisis, new private activity in infrastructure continues to take place in developing countries, says a recent World Bank assessment. New PPP projects are still being tendered and brought to financial closure, but at a slower pace. Between July 2008 and March 2009, the rate of project closure fell 15% by investment compared with the same period in the previous year.
Investment commitments to private infrastructure projects showed signs of some recovery in the first months of 2009, but this was driven by a few large priority projects in select countries. These projects were able to raise financing thanks to the backing of highly-rated sponsors and their priority status in their respective countries.
The financial crisis has made financing (both debt and equity) more difficult to secure, and has hampered the ability of governments to maintain their financial commitments to private infrastructure projects. These projects are facing higher cost of financing?a problem compounded by lower demand for infrastructure services that is beginning to impact some sectors. As a result, some planned private infrastructure projects are being delayed, restructured, and, to a lesser extent, cancelled.
Despite the overall slowdown, the energy sector showed slight improvement while transport is the worst affected. Energy saw 75 projects involving investments of $38.5 billion reaching closure between July 2008 and March 2009. This level of activity represents 9% increase by investment and the same level of activity by number of projects compared with the same period in the previous year. With this growth, energy maintained investment levels not seen since the late 1990s and accounted for most of the investments in the first quarter of 2009.
Telecom?for which new projects represent just a fraction of annual investments?had 12 projects with investments for $3 billion reaching closure, a level of investment similar to the previous years. However, existing telecom operators are starting to be affected by the financial crisis to varying degrees across developing regions. Fitch expects telecom operators to be more cautious on capital expenditure in 2009, which would result in broadly stable-to-declining investments in developing regions. The few exceptions are Sub-Saharan Africa, where investments are expected to increase by 10%, and the Russian Federation, which is expected to see major investment declines (up to 25% among mobile operators) due to a challenging macroeconomic outlook.
Transport is so far the most affected sector with 40 projects with investments of $11.8 billion reaching closure between July 2008 and March 2009. This low level of activity represents a 50% decline by investment and a drop of over 40% by number of projects compared with the same period in the previous year. Water and sewerage also saw much lower activity, with just 20 projects involving investment for $1.7 billion. That is a 37% decline by investment and a 60% drop by number of projects compared with the previous year.
The rate of project closure varies across regions with East Asia & Pacific and Sub-Saharan Africa attracting higher investments, South Asia reporting stable investments, and Latin America & the Caribbean, Europe & Central Asia, and the Middle East & North Africa seeing lower investments. The East Asia & Pacific region had investments worth $10.2 billion in July 2008-March 2009, a 27% increase compared with the level in July 2007-March 2008. Sub-Saharan Africa reported similar growth rates during that period, reaching investments of $3.3 billion in July 2008-March 2009. South Asia reported stable investments of $15 billion in those two periods.
Many projects that reached financial closure in the last three quarters were at an advanced stage of raising finance or able to secure finance from local public banks, as well as bilateral and multilateral agencies. However, it is unlikely under the current trends that local financing institutions together with bilateral and multilateral agencies will have the capacity to fully replace other sources of financing. The number of new projects tendered and awarded shows developing country governments? continuing commitment to their PPP programmes. However, the current financial and economic conditions are forcing governments and investors to reassess some projects. The ultimate extent of the financial and economic crisis is still unclear and, therefore, it is too early to assess the full impact of the crisis on infrastructure projects with private participation.
Commercial bank lending continues to be limited, bond and equity markets have yet to recover, and declining demand is starting to affect some infrastructure services. In addition, government budgets are becoming increasingly constrained. This might not only affect the government?s ability to honour its commitments to PPP schemes, but also make it more difficult for projects to raise financing as the perceived credit risk of governments is increasing. The ?flight to quality? is already affecting the choices of investors and financiers. Projects more likely to reach closure are characterised by strong economic and financial fundamentals, the backing of financially solid sponsors, and government support. The financial conditions for those projects are more stringent with lower debt/equity ratios, higher cost of financing, and more conservative structures (for example, banks are tightening the covenants in loans, transferring risk to borrowers).