New PPPs Flood Market, As Capital Remains Scarce

Competition for private capital is increasing across the infrastructure space. This is because an ever-growing number of countries are turning to the public-private partnership (PPP) model to develop new infrastructure to revive and support economies as well as take the financial burden off the public sector. PPPs, long confined to low risk developed markets, are increasingly gaining traction in emerging markets; however, higher risks are making them harder to promote. Using our Project Finance Ratings and our analysis of projects and financing trends, we highlight that the Asia region stands to be the major winner in the competition for private sector capital, whilst Latin America and Africa will continue to see mixed performances, with regulatory and financing improvements necessary for greater success.

Over the past 12 months, there have been a growing number of public-private partnership (PPP) opportunities coming to market in emerging markets. Some have been in the pipeline for a number of years, and are finally making progress; whilst others are in new countries that are taking their first steps into the PPP market. The end result is that the infrastructure space is flooded with PPP project opportunities in emerging markets.

This however does not mean that PPPs in emerging markets are universally embraced by the private sector. Many sponsors and developers are still calculating the risks associated with these projects, while financiers for high risk emerging market assets are still rare. At a time when project financing is constrained globally, this is creating high competition for capital amongst emerging market projects, with those offering the best returns in the most stable environment most likely to be successful.

On Track For An Average Year
PPPs Reaching Financial Close

Competition for private capital is increasing across the infrastructure space. This is because an ever-growing number of countries are turning to the public-private partnership (PPP) model to develop new infrastructure to revive and support economies as well as take the financial burden off the public sector. PPPs, long confined to low risk developed markets, are increasingly gaining traction in emerging markets; however, higher risks are making them harder to promote. Using our Project Finance Ratings and our analysis of projects and financing trends, we highlight that the Asia region stands to be the major winner in the competition for private sector capital, whilst Latin America and Africa will continue to see mixed performances, with regulatory and financing improvements necessary for greater success.

On Track For An Average Year
PPPs Reaching Financial Close

Over the past 12 months, there have been a growing number of public-private partnership (PPP) opportunities coming to market in emerging markets. Some have been in the pipeline for a number of years, and are finally making progress; whilst others are in new countries that are taking their first steps into the PPP market. The end result is that the infrastructure space is flooded with PPP project opportunities in emerging markets.

This however does not mean that PPPs in emerging markets are universally embraced by the private sector. Many sponsors and developers are still calculating the risks associated with these projects, while financiers for high risk emerging market assets are still rare. At a time when project financing is constrained globally, this is creating high competition for capital amongst emerging market projects, with those offering the best returns in the most stable environment most likely to be successful.

Developed Markets Still Appeal More
Average Project Finance Rating, By Region

According to BMI's infrastructure Project Finance Ratings, which assess the risk to raising and repaying financing over the life-cycle of a project, Western European and North American countries remain the most conducive destinations for carrying out PPPs. This is due to greater access to financing, the well established regulatory environment and the limited political and structural risks in these markets. However, of the emerging market regions, Asia is the outperformer. Whilst Asia includes a number of developed market players, such as Singapore and Australia - two of the strongest PPP markets globally, which provides some artificial elevation - all but three countries in the region (of 15) score above the global average, including Vietnam, the Philippines, Malaysia and Thailand.

A sia: Institutional Delays Slowly Improving

Despite Asia posing perhaps the lowest risk among the various emerging market regions, institutional weaknesses are still thwarting ambitious PPP plans from some of the region's major economies. In Indonesia, the slow issuance of a construction permit from the sub-sovereign government has caused delays in other pre-construction activities for the Central Java coal-fired power plant project, the largest PPP project awarded by Indonesia so far (see 'PPP Progress To Remain At A Glacial Pace', September 25 2013). In the Philippines, delays to its PPP Programme have been caused by the lack of sufficient institutional capacity to carry out pre-construction activities (e.g. documentation, spatial planning, feasibility studies, public consultation, permit issuance, land acquisition) to a level of detail desired by all project stakeholders - namely local residents, project developers and financers ( see 'PPP Programme Unlikely To Be Completed In Full', September 4 2013). These delays are reflected in our break down for the Asia region, where the construction phase is the area where the highest risk is noted, with permits, timeliness and cost overrun concerns all heightened.

However, progress is being seen. In the Philippines, two of the five packages (under phase two of the Philippines' PPP schools project) have been awarded. Whilst in Vietnam, significant interest was registered for the Dau Giay-Phan Thiet expressway project in Q3 2013. These developments should ensure at least partial realisation of PPP programmes and are supporting our view that investor interest is high for the region.

Construction Blockers
Asia Project Finance Ratings

Latin America: Flooding The Market

The Latin America region has some of the most ambitious PPP plans, with a number of countries looking to use the model for the first time. However, in general, risks across the region are some of the highest globally, and this will only be exacerbated by the nascent nature of PPP regulations in many countries.

Against this backdrop, we hold varying degrees of optimism for the region's PPP plans, and highlight that already, those offering less appealing terms for investors have struggled to attract interest, whilst the newer markets are experiencing delays in bringing projects to market.

Brazil, despite promising one of the largest concession programmes globally, will continue to face difficulties. Investor interest has been weak, with domestic companies dominating the bidding for the projects on offer. In addition, delays and additional regulatory changes continue to emerge which may act to further deter investor interest in upcoming concessions. Elsewhere in the region, we believe Central American countries will struggle to attract significant investor interest owing to uncertain returns and immature regulations.

Conversely, we hold a more positive picture for Peru and Colombia. Despite deep run delays in bringing projects to market, recent progress has seen encouraging international investor interest. Over 2013, Colombia launched tenders under its COP44bn 4G concessions programme, with a considerable number of Expressions of Interest (EOI) submitted for highway and airport projects - the concession for Baranquilla Ernesto Cortissoz Airport received 21 EOIs in September 2013, whilst five highway projects moved into the final tendering phases in October 2013, with a further three projects launched in late September 2013. In Peru, success has been less impressive, but progress is still notable. Whilst delays have plagued transport projects under the US$10bn concessions portfolio, energy and utilities concessions such as natural gas distribution and electricity transmission lines have been awarded - with Spanish companies winning the majority of these projects.

Latin America PPP Round-Up
Country PPP Updates
Source: BMI Research
Brazil US$235bn concession portfolio, including US$121bn in transport concessions.
Peru US$10.4bn portfolio of transport and power projects
Colombia US$20bn in highway concessions.
Mexico US$315bn NIP (2013-2018) will focus on PPPs for infrastructure
Chile Transport concessions
Paraguay New PPP bill currently being debated, hoping to attract US$30bn in investment over 10 years
Honduras Public-private promotion agency, Coalianza, released the tender for construction and operation of the Palmerola Airport, with a contract hoped to be awarded in September 2013
Guatemala Established a PPP agency in November 2011 is hoping to launch its first concession for Line 1 of the Guatemala City passenger railway in 2014
El Salvador A PPP will be used to develop the Cuscatlán International Airport and a wind farm
Trinidad & Tobago 12 social infrastructure projects selected for PPP model in August 2013

Sub-Saharan Africa: High Risk Prompts Different Approach

Sub-Saharan Africa (SSA) is also increasingly looking to attract private capital through the PPP model. Over the past year Tanzania, Kenya, Rwanda, Ghana, Cameroon and Namibia, amongst others, have registered an interest in pursuing PPPs. The most successful countries thus far have been Cote d'Ivoire, Cameroon, Ghana and Namibia. Cote d'Ivoire in particular is seeking out alternative and creative financing methods in order to open up financing to enable private sector players to take up projects.

Whilst opportunities remain attractive, and rewards could be substantial, risks in the region remain the highest globally (with SSA posting the lowest average Project Finance Rating). Given the long term nature of PPPs, this is a major deterrent for investors. Risks - both regulatory and political - are one of several hurdles, but the biggest and most immediate obstacle is financing. Therefore, it has been unsurprising that we have seen a number of initiatives to increase access to private sector capital in Africa. In addition to loan guarantees provided by multi-lateral agencies (such as the World Bank's MIGA), a new vehicle titled Africa50 is aiming to open up project finance for the region. The fund, which was launched in September, is hoping to raise US$500mn to provide bridge financing, direct loans and loan guarantees across the region ( see, 'Africa50 Aims To Tackle Obstacles To Infrastructure Growth', October 2 2013).

CEE And SSA Fall Behind
Number of Project Reaching Financial Close, By Region

Eastern Europe: Still Waiting For The Revival

Prior to the financial crisis, Eastern Europe was the next big region for PPPs; however, the market has never recovered this promise. Despite a desperate need for private capital for infrastructure, brought on by the regions' continued austerity drives, the weak economic climate means that returns on offer are unappealing, and therefore Eastern Europe is unable to compete for the limited infrastructure financing available.

Turkey is one of the few exceptions, playing host to one of the largest project finance closure in the year so far - namely the third Bosphorus bridge in September 2013 ( see, 'Domestically Funded Bridge A Positive Signal For Future Growth View Related Content', September 17 2013). However, in order to achieve this, the project had to be funded exclusively by domestic banks. Turkey's ability to go to the international market was dented by political risk and currency weakness, and we expect that for the remainder of the country's PPP projects, domestic capital will play a crucial role.

Western Europe & North America: Still Leading The Pack

Western Europe, in addition to Canada and Australia, remains the favoured market for PPPs; however, owing to a combination of diminished project pipelines and constrained project finance, only Canada has really managed to return to pre-crisis levels of deal making. The volume of PPPs has declined significantly in the region as banks have been unable to play the role they previously held in providing debt financing. Equity financing has also declined as corporates focus on debt reduction rather than asset expansion.

Conversely, deal flow in the secondary market has been strong, with the sale of existing PPPs and concessions rapidly expanding, particularly by cash strapped infrastructure companies to cash rich institutional investors. In Western Europe, they are typically high value and well established stable assets, such as airports and regulated utility assets, while in Australia, the sale of existing PPPs have primarily been toll roads that have failed to stay afloat due to overly-bullish traffic volume projections.

With the region's economy still struggling to recover, the returns on offer are questionable for PPPs especially in the periphery and this is deterring investors. In Australia, the numerous failures with existing toll road PPP projects has deterred investors from financing such projects, propelling the government to introduce alternative PPP models that reduces project risks to private investors ( see 'PPP Road Failures Prompt Risk Reallocation', June 28 2013).

Another prime example is Greece. Although the country had some success in the transport sector with the PPP model, the funding of projects remains a challenge as private finance has all but dried up in light of the severe economic instability. The issue is notable in our Project Finance Ratings, with the operation phase receiving the lowest score for Western Europe & North America, owing to an extremely weak outlook for revenues.

Indeed, financing in general is not the biggest obstacle, but rather the number attractive of opportunities on offer. Despite limited PPPs coming to market, of those that do, most attract significant interest, and therefore Western Europe still accounts for the majority of project finance deals over the past year. This is supported by new financiers entering the market to take a stake in low risk, stable assets coming to market - such as insurance companies AXA and Legal & General ( see, 'AXA Helps Insurance Fill The Financing Gap', June 21 2013).

Revenue Weakness
North America & Western Europe Average Project Finance Rating

In the US, a market offering more promising rewards than Western Europe, progress in introducing PPPs to the transport sector has seen only mixed success of late. Here, rather than financing or rewards, the obstacles are political and popular opposition to private operation of infrastructure. A prime example is the failure of the Midway Airport privatisation in September 2013. The project fell through due to unappealing terms as the Mayor tried to appease taxpayers, and failed to appeal to private companies ( see, 'Midway Grounded As Politicians Struggle To Find Middle Ground', September 17 2013). Despite this, our core view has been, and remains that we will see growing employment of the PPP model in the US, especially in highway projects. Investor interest is high, and financing, through various government funding programmes and a number of investment vehicles, is available. Indeed, in September 2013, Cintra and Meridiam Infrastructure closed financing on a concession to extend the North Tarrant Express in Texas.

Read the full article

This article is tagged to:
Sector: Infrastructure
×

Enter your details to read the full article

By submitting this form you are acknowledging that you have read and understood our Privacy Policy.