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 avail able) 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 longterm 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. …