The Need for New Approaches

The Need for New Approaches

In the coming decade, demand for infrastructure investments will
simultaneously increase in two different sets of countries…
1. That have undertaken macroeconomic adjustment with consequent
low investment levels
2. That whose rapid growth is now placing a heavy burden on
infrastructure.

Infrastructure investment in developing countries – 4 % of GDP

A special factor increasing investment demand in many countries is the
rapid pace of urbanization, requiring investments in water supply as well
as waste treatment & disposal.
 In Asia – The share of infrastructure investment in GDP is expected to
rise from 4 % today to more than 7 % in next few years
 China – had set a target of installing at least 5 million telephone lines
annually up to 1995 & at least 8 million lines per year thereafter
Private Entrepreneurship : Trends & Opportunities [P 8]

After decades of severe regulatory restriction, private entrepreneurship in
infrastructure bounced back in two ways during the late 1980s.
1. Through the privatization of state owned utilities
2. Through policy reform that made possible the construction of new facilities
in competition with, or as a complement to, existing enterprises.

Privatized telecommunications & electricity utilities in Latin America & Asia
are undertaking large and growing new investments.

Greenfield Projects – The road & electric power sector – Has grown
rapidly.

IFC – International Finance Corporation

Private finance is proportionately greater in Latin America than in other
regions & larger in telecommunications & electric power generation than in
other sectors.

Public private partnerships in some ways represent a return to the
nineteenth century, where infrastructure projects were privately financed
in much of the world while government support acted as stimulant.
The Spread of Project Financing : Achievements & Lessons

"Special purpose corporations" which brings together private sponsors &
other equity holders builds many new infrastructure projects in the private
sector.

Objectives of Project Financing
1. Providing funds to a project is an important objective
2. Monitoring by financial markets & institutions complements regulation
& competition in service delivery.
3. It provides another mechanism for investors to impose discipline.
4. Norms for devising incentive & penalty mechanisms to ensure
performance by private sector interests are becoming clearer.
5. Privately sponsored & financed projects measure their success against
contractually agreed targets for new capacity, construction costs and
time overruns and against indicators of service quality.
Concepts & Trends in Project

Established companies – Such as privatized telecommunications &
electric power utilities – have a credit history, a customer base & tangible
asses that can be offered as security to lenders.

New companies as in electric power generation, toll roads or
environmental infrastructure have only the prospect of a future earning
stream to support borrowings.

Non Recourse – The financing of a project when lenders are repaid only
from the cash flow generated by the project or in the event of complete
failure, from the value of the project’s assets.

Limited Recourse – Lenders may also have limited recourse to the
assets of a parent company sponsoring a project.

The use of non recourse or limited recourse financing also known as
project financing. Financing in this form can be complex & time
consuming, as the interests of various parties have to be secured through
contractual agreements.

The equity stake of private sponsors is typically about 30 % of project
costs & usually forms the limit of their liability.

Private performance guarantees from project sponsors.