PPIAF

December 15, 2008

PPIAF and the World Bank's Economics Team in the Sustainable Development Department quarterly assesses the short-term impact of the financial crisis on infrastructure projects with private participation in developing countries. Here is the first assessment.

New private infrastructure projects in developing countries have started being affected by the financial crisis

Summary: New private activity continued to take place in developing countries in Aug-Nov 2008 with projects being developed, tendered, and taken to financial close, but at rate that was over 40% lower than in the same period in 2007. The slowdown reflects the 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.

Many projects that reached financial closure in the last four months 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, many PPI sponsors opted for local currency denominated debt since major devaluations over the last few months in many developing countries made foreign denominated debt too expensive. Nevertheless, it is unlikely that local financing institutions together with 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, however, too early to assess the full impact of the crisis on new PPI projects. Many investors and financiers are in a wait-and-see attitude and are likely to be so for the next 3 to 6 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 impacted over a significant period of time if the trends shown in previous financial crises are repeated. The “flight to quality” from banks and other financiers is likely to translate into 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.

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