The global economy awaits a project finance infrastructure boost worth one trillion dollars, though less than 10% of investments are actionable in the short term, according to a study by Freshfields Bruckhaus Deringer.
The study claims that over 90% of projects are years away from implementation.
Calls by the world’s leaders for an infrastructure-led global economic stimulus to help pull the world economy out of recession are in large part dependent on a pipeline of 1,397 global project finance deals collectively worth a US$999.6bn.
However, just over 8% of these can hope to see the light of day this year or next, with the majority currently years away from being implementable and therefore a long way from triggering the desired economic bounce, says the new study conducted by the international law firm.
Of all global infrastructure pipeline projects, just 8.3% or US$83bn are in finance (with banks mandated and terms of financing agreed, and projects estimated to be between six months and 2.5 years from commencement); 71.9% or US$650bn worth of projects are in tender (with projects approved and selection of participants underway, and projects likely to be between six months and five years from commencement); and 19.8% are in pre-approval (with projects announced but at an early stage, with commencement expected anytime between three years and 10 or more years).
Edward Braham, co-head of Freshfields’ global infrastructure and transport group, comments: “From Obama to Brown, world leaders have called on the infrastructure industry to get the world economy motoring again, and while direct government intervention and the unblocking of some key projects will go some way to jump start the world’s economic system, the trillion dollar stimulus that project finance could contribute is in large part years away from entering the real economy. Less than 10% appears ‘shovel ready’ and in most cases the diggers will remain idle for some time yet.”
The International Monetary Fund (IMF) estimates that the G-20 group of developed and emerging economies will pump US$1.48tn into the world economy in 2009 and 2010, of which two-thirds or US$987bn will come in the form of spending, the rest in tax cuts. While not all spending will be on major infrastructure projects the headline figure of almost US$2tn of direct G-20 spend and project finance infrastructure pipeline deals would represent 3.5% of the world’s entire economic output in 2009 (US$5tn) as forecast by the IMF.
“The problem is that in the best case scenario, only US$83bn worth of global private sector investments are within six months of delivery, equivalent to just 0.15% of the world’s total economic output; a sum unlikely to deliver an immediate kick-start to the economy,” Braham continues.
Europe vs US
While in the short term, both Europe and the US can expect a similar infrastructure boost of US$19.2bn and US$19.9bn respectively, the study notes that Europe appears better placed to benefit from the infrastructure bounce over the medium term as it is waiting on over US$241bn worth of ‘in tender’ projects compared to the US’s much more modest US$45bn.
“The US has by far the highest proportion of projects – 62%, or US$106.5bn – still stuck at the pre-approval stage, of which more than US$71bn is made up of four railway projects. This is more than three and a half times the number of pre-approval projects, by value, than Europe. Only the Czech Republic in Europe and Sudan and Senegal in Africa have a larger log jam at that stage,” says Braham.
The US’s predicament is partly due to the fact that the use of project finance has only emerged as a significant tool for delivering infrastructure projects in recent years. Until recently, the US had a poor track record in the public private partnership (PPP) arena in key areas such as transport. It was not until 2004 that infrastructure project finance really came of age in the US.
“With falling tax takes due to the global recession/downturn, private sector funding will be even more important to delivering the infrastructure stimulus. Infrastructure projects do take time to develop but there are financial and political logjams that could be addressed to speed up the system,” says Braham.
“Despite the best efforts by governments to underpin banks and reduce real market interest rates, sources of finance for project finance remain tightly squeezed. The monoline-wrapped bond market which, by value raised, was the main source of debt for PFI deals, is effectively closed to new transactions. This has put more pressure on the banking sector, yet banks’ capacity to provide new lending in the market is constrained as they seek to strengthen their balance sheets,” Braham adds.
Political logjams
The study highlights the fact that infrastructure projects often have a longer life span than governments, and as such certainty in infrastructure orientation, if not political leadership, can play a major part in persuading investors to commit to a contract that may last for a number of decades.
The need for planning approval is an important part of the democratic accountability of such projects.
The public sector often lacks skills in contract negotiation and project management and its practices are often subject to inconsistency of approach across different government departments, with officials applying different rules, approaches and practices to the procurement of essentially similar requirements.
Sector composition
Transport assets and energy projects remain the most present within the global infrastructure pipeline. Almost two-thirds of the US$1tn in the pipeline (US$659.2bn) involve traditional infrastructure, of which US$186.2bn are for roads and US$168.4bn for rail. Power generation projects account for 16% and natural resources projects such as the production and distribution of oil and gas comprise 12%.
Although ‘green’ projects make up a tiny share of the global total, there is clear evidence that countries are developing specialist areas. In the case of wind farms, of 34 projects globally worth US$13bn, Western Europe accounts for 18 projects with a value of US$9.9bn, 53% by number and 76% by value, reflecting the high political priority put on alternative energy generation. Meanwhile, in Latin America, several governments have made renewable fuels a priority, reflected in their 25% share of the US$28.9bn industry.
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