Energy Infrastructure Projects Being Hit Hard

By Gordon Feller, Contributing Editor | March 2009 Vol. 236 No. 3

Photo by Christopher Rayan

New private activity continued to take place in developing countries in August-December with projects being developed, tendered, and taken to financial close, but at a rate that was about 40% lower than in the same period in 2007.

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 projects being delayed or canceled.

Many projects that reached financial closure from August onward 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, some PPI sponsors opted for local currency denominated debt since major devaluations in many developing countries made foreign-denominated debt too expensive. It is unlikely that local, 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 too early to assess the full impact of the crisis on new PPI projects. Many investors and financiers are in a wait-and-see mindset and are likely to be so for several more 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 affected over a significant period if the trends shown in previous financial crises are repeated.

As the “flight to quality” sets in for banks and other financiers, the likely impact will be 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.

Recently gathered data on new infrastructure projects with private participation have shed some light on the short-term impact of the financial crisis.

1. PPI projects continue to reach financial closure but at a lower pace than that of 2007: From August-November 2008, 31 PPI projects reached financial closure involving investment commitments (hereafter investment) for US$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 LAC (U$8.3 billion), MENA (US$2.9 billion), and EAP (US$2.8 billion).

2. Projects are being impacted through higher cost of financing, project delays and cancellations: 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.