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    The Impact of the Global Financial Crisis on Public-Private Partnerships

     

     
     
    International Trade Forum - Issue 4/2009

    The global financial crisis has transformed the outlook for infrastructure projects with private participation in developing countries. In the second half of 2009 developing economies are seeing some light at the end of the tunnel, with the crisis easing and investment flows returning. But as was the case with the 1997 Asian financial crisis, it is clear that the downturn of 2008-2009 will leave a lasting impact on the outlook for private participation in infrastructure long after the crisis has receded.

    As the global economic climate trends toward recovery, governments will have to adjust their strategy on public-private partnerships to account for an attenuated risk appetite, lower debt-to-equity ratios and the need for clarity on contingent liabilities.

    Onset of the crisis

    Before the second half of 2008 private activity in infrastructure looked set to continue the encouraging trends of the previous half-decade. Investment, once heavily concentrated in profitable telecommunications projects, had become more evenly distributed across sectors. It had also become more diverse geographically, with larger shares than ever before going to low-income countries, particularly in sub-Saharan Africa and South Asia. And investment was growing robustly. In 2007 (the most recent year for which comprehensive data is available) investment exceeded the 1997 peak for the first time. Investment rose in all developing regions except Africa, where it hovered near record levels. In Central Asia and Europe it grew by a staggering 80 per cent.

    The global financial crisis has disrupted these trends. Investment in Central Asia and Europe fell by 54 per cent between July 2008 and March 2009. Some other regions saw investment fall as well. The Asian financial crisis that began in 1997 was followed by a similar downturn in infrastructure investment. The global fallout from that downturn led to a transformation in private investment in infrastructure as investors became far more risk averse. Private operators opted for contracts that were free of the risks associated with customers' willingness and ability to pay for services or that had a variety of risk mitigation arrangements, often paid for by governments and donors.

    After years of focus on risk mitigation, infrastructure investment is suffering somewhat less collateral damage this time around. Other factors also point to a better long-term outlook for infrastructure. This time there is broader consensus that maintaining infrastructure investment is critical for recovery and long-term growth. And improvements in fiscal management since the last crisis mean that many countries are better prepared to support investment.

    In contrast to past crises, when governments and the private sector retreated in tandem, this crisis seems to have aligned the interests of investors and governments in favour of infrastructure. New private money continues to be earmarked for infrastructure. Institutional investors such as pension funds, burned by toxic securities, are shopping for investments that generate stable, long-term returns. Nevertheless, there are still major obstacles of bankability and financing blocking the flow of private money to new projects.

    Effects of the crisis on investment

    Fewer infrastructure projects with private participation are reaching financial closure in developing countries. The investment represented by projects reaching closure in July 2008-March 2009 was down by 15 per cent compared with the same period a year earlier. More significantly, projects that had been delayed or were at risk of being delayed over the same period accounted for investment amounting to US$ 54.5 billion.

    A higher cost of financing was a significant source of these delays, and the trends of increasing costs, delays and cancellations are expected to continue through the rest of 2009. International project finance is now much more expensive and difficult to arrange because lenders have less money and are more risk averse in selecting projects and markets. For international lenders, the potential for exchange rate fluctuations further complicates the risk picture. The loan syndication system that made possible the dramatic growth in project finance since 2002 has largely broken down. Normal bank syndications for large infrastructure projects have now been replaced by "club" arrangements involving a time-consuming series of bilateral negotiations between the borrower and multiple lenders.

    These developments affect project finance more directly in developed economies than in emerging markets. But international lenders had played a growing role in infrastructure project finance in developing regions over the past five years, either by lending directly to projects, as in Eastern Europe and Latin America, or by lending to local banks to help them offer amounts and tenors that make large infrastructure projects possible, as in Africa and Asia. Of course, countries vary widely in their reliance on international banks. In India, for example, the banking system is less dependent on foreign banks for financing and guarantees than those in many other developing countries. But in most emerging economies projects that reached financial closure in the last four months of 2008 were either well along in development or relied heavily on a mix of local public banks, export credit agencies and bilateral and multilateral agencies for finance. These financing institutions, however, are unlikely to be able to fully fill the gap left by departing private international lenders.

    Some encouraging signs

    While the 1997 Asian financial crisis led to a precipitous decline in infrastructure spending in many countries, this time around countries are increasingly recognizing infrastructure investment as an important tool for dealing with the economic downturn. Many are considering, or have already put into place, some form of stimulus package in response to the financial crisis, often highlighting infrastructure. Bilateral and multilateral donors are also adopting the infrastructure agenda as part of their crisis response packages.

    Another encouraging sign is that governments are less willing to blame the private sector for problems than they were ten years ago. At that time some public officials perceived the private sector as reneging on commitments to infrastructure projects in distress. This time around many public officials in developing countries are taking a more pragmatic view, suggesting that the public-private partnership model is under less threat in today's crisis than it was a decade ago. 

    The Public-Private Infrastructure Advisory Facility (PPIAF) is a technical assistance facility created to help governments in developing countries improve the quality of infrastructure through partnerships with the private sector. The PPIAF web site includes comprehensive information about private participation and resources including the Private Participation in Infrastructure (PPI) Project Database, which contains global data on PPI trends and projects.


    For more information, visitwww.ppiaf.org

    Source: This article is an extract from the Public-Private Infrastructure Advisory Facility's (PPIAF) 2009 Annual Report, adapted by Trade Forum Editorial


    To download a copy of the PPIAF 2009 Annual Report visit www.ppiaf.org