Slowdown hits new private infra projects in developing countries

Written by Sanjay Jog | Mumbai | Updated: Dec 20 2008, 07:44am hrs
New private activity continued to take place in developing countries in August-November 2008 with projects being developed, tendered, and taken to financial close. However, the rate has slowed down and is 40% lower than in the same period in 2007.

According to the compilation by the World bank and the Public Private Infrastructure Advisory Facility, 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 project being delayed or cancelled.

From Aug to Nov 2008, 31 public private infrastructure (PPI) projects reached financial closure involving investment commitments (hereafter investment) for $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 Latin America and the Caribbean (LAC) LAC ($8.3 billion), Middle East and North Africa (MENA) ($2.9 billion), and East Asia & Pacific (EAP) ($2.8 billion).

The data also shows that numerous projects are being postponed or cancelled 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, 22% have been delayed, 2% are cancelled and 3% are at risk of being canceled. 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 $82 billion and are primarily in South Asia (28 projects for $24.9 billion), ECA (25 projects for $24.1 billion), LAC (16 projects for $17.1 billion), and EAP (20 projects for $13.8 billion).

As a point of reference, 288 new projects involving investment of $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

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.

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 mobilised for many projects.