PPIAF

September 28, 2009

New private infrastructure activity in developing countries recovered in the first half of 2009 thanks to the electricity sector, but the crisis continues to impact projects

PPIAF and the World Bank's Economics Team in the Sustainable Development Department quarterly assess the short-term impact of the financial crisis on infrastructure projects with private participation in developing countries. Read the latest update.

Summary. New private activity in infrastructure continues to take place in developing countries despite the financial and economic crisis. New projects are being tendered and brought to financial or contractual closure. Measured by amount of investment, the rate of project closure grew by 2% in the first half of 2009 compared to the first half of 2008, indicating a strong recovery from the decline of 48% experienced in the second half of 2008. This recovery, however, was driven by large projects.

Measured by number of projects reaching closure, the rate of project closure continues to be slower than before the full-scale onset of the financial crisis. The number of projects reaching closure in the first half of 2009 was 20% lower than the number reported in the first half of 2008. This trend suggests greater project selectivity. Indeed, those projects that are reaching closure are characterized by strong economic and financial fundamentals, the backing of financially solid sponsors and governments.

Developing country governments’ continuing commitment to their public-private partnership (PPP) programs is confirmed by the number of new projects tendered and awarded. However, current market conditions are forcing governments and investors to restructure projects to improve financial viability. Local public banks as well as bilateral and multilateral agencies continue to be active in project finance, providing a critical amount of funding. However, it is unlikely that these institutions have the capacity to fully replace other sources of financing. Not surprisingly, this means infrastructure sponsors are looking for new sources of private financing.

It is too early to assess the full impact of the crisis on new infrastructure projects with private participation (PPI). The crisis continues to make financing (both debt and equity) more difficult to secure, and hamper the ability of governments to maintain financial commitments to public-private infrastructure projects.

Increasing constraints on government budgets might not only affect the government’s ability to honor 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.

New projects are facing higher cost of financing—a problem compounded by the lower demand for infrastructure services that has impacted some sectors. Commercial bank lending remains constrained and the “flight to quality” continues to affect the choices of investors and financiers.

The financial conditions for projects able to raise financing are more stringent with lower debt/equity ratios, shorter tenors, and more conservative structures (e.g., banks are tightening the covenants in loans, transferring risk to borrowers).

As a result some planned private infrastructure projects are being delayed, restructured, and, to a lesser extent, cancelled. Transport continues to be the worst affected sector, while Europe and Central Asia is the most affected developing region.

You can also read the June 2009, March 2009, and December 2008 updates

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