Projects reaching financial or contractual closure face more difficult financial market

conditions. While infrastructure projects with private participation or PPP schemes continue to raise financing, they are competing with other projects and sectors for the reduced liquidity in the market. Some banks have partially or totally withdrawn from the project finance market. Deals take longer to close, and conditions are more stringent.

The syndicated loan market remains stalled, and deals are

closing as club transactions, which slows the speed of closure.

Financing usually involves lower debt/equity ratios, higher spreads and fees, shorter debt tenors, and embedded mechanisms to encourage refinancing. Surveyed projects reaching financial closure in the third quarter of 2009 report debt/equity ratios in the low to mid 70s/30s, well below the 80s/20s or higher that were available in the pre-crisis period. In addition, there is a high degree of selectivity on the part of banks and general lack of consistency in terms and conditions required by funders.

The increased cost of financing was highlighted as a major impact of the crisis in less than 1% of reviewed projects by investment. But this finding seems to reflect the limited publicly available information on the cost of funding rather than the actual impact of the crisis. The favorable credit conditions prevailing before the financial crisis are not expected to return.

Instead, tougher financial conditions—including higher borrowing costs—are expected to continue even after financial markets have stabilized or reached a new normal. Increased risk aversion, necessity for banks to recapitalize, increased borrowing requirements from high-income governments, and the fall into disrepute of many of the risk management strategies that contributed to boosting liquidity in the pre-crisis period suggest an increased cost of borrowing in the medium term.

The new market conditions are forcing governments and investors to reassess projects and in many cases to restructure them to improve financial viability. Among reviewed projects, about 4% by investment reported project restructuring as a major impact of the crisis.

Local state-owned banks as well as multilateral and bilateral agencies continue to be key

financiers, and infrastructure sponsors are looking for new sources of funding such as local financing. Local public banks have become one of the main sources of funding for private infrastructure projects. Of the 38 projects reaching closure in the third quarter of 2009, 7 projects, accounting for 25% of the investment committed in that quarter, had funding from local public banks. In the first three quarters of the year local public banks participated in the funding of 16% of the 163 projects reaching closure. These projects involve investment of US$32.7 billion, or almost half the total committed in the period. Public banks acted as lead arrangers in many cases.

Multilateral, bilateral, and export credit agencies are also taking a more active role, mobilizing funding for many projects. In the third quarter of 2009 these agencies provided funding to five projects, which represent investment of US$3.4 billion, or 24% of the total for the quarter. In the first three quarters of the year these agencies contributed direct financing to 18% of the projects reaching closure - projects representing investment of US$13.3 billion, or 20% of the total. These agencies are also working on a growing number of new projects. Of the 132 projects looking for financing at the end of the third quarter, 21 projects, representing total investment of US$17 billion, were being evaluated for funding by these agencies.

Given the lack of liquidity from commercial banks that would normally take part in loan syndications, this growing participation by local public banks and bilateral and multilateral financing institutions is not surprising. Nevertheless, these institutions are unlikely to have the capacity to fully replace commercial sources of financing.

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Greenfield projects continue to show growth in investment (and debt raised), while

concessions and divestitures show a decline. Greenfield projects (build-operate-transfer and build-operate-own projects and merchant facilities) have shown the most resilience in investment levels during the crisis. The 26 greenfield projects reaching closure in the third quarter of 2009 had investment worth US$10 billion—36% more than the level reported in the same period of 2008. In the first three quarters of 2009, 110 greenfield projects reached closure, with investment worth US$49.8 billion—twice the investment reported in the same period of 2008.

Large Greenfield projects accounted for the investment growth in the first three quarters of 2009 compared with the same period of 2008. Investment in projects of US$1 billion or more grew by 170%, to US$28.6 billion. Investment in projects of US$500 million–1 billion increased by 280%, to US$10.8 billion. By contrast, investment in projects of less than US$500 million remained stable, at US$10.5 billion. The number of greenfield projects reaching financial closure was 5% higher in the first three quarters of 2009 than in the same period of 2008.

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Greenfield projects continue to be best able to raise debt. Within the greenfield category,

energy projects, particularly power plants, have raised the most debt since 2008.

Concessions, by contrast, have not been able to raise much financing. Many reached contractual closure (with the concession contract being signed and the private operator taking over the assets) with the agreement that funding would be raised later. But many of the concessions reaching contractual closure in 2008 and 2009 experienced delays in securing required financing.

 Source: Public-Private Infrastructure Advisory Facility, World Bank Group