Mending project finance

Global Finance, May 2003 by Johnson, Mark

The UK government has allocated L60 billion over the next decade for schools, hospitals and military facilities to be built under the Public-Private Partnership. PPP is a broad term for a whole range of private sector financing of public services, most involving elements of project finance.

Despite widespread perceptions of a capital-intensive, low-return business, participants point out that project financing can generate risk-adjusted rates of return of up to three times the 10% or so available on straightforward corporate lending.

That's tempting some lenders to swim against the tide. Brussels-based Dexia is building on infrastructure expertise honed "with European local authorities. GE Capital is an increasingly active player, say bankers, seeking to parlay its financial strength and its specialized industry expertise into a "winning hand. In September 2002, the Stamford, CT conglomerate bought the bulk of the structured finance business of Swiss-Swedish engineering concern ABB. GE Commercial Finance CEO Mike Neal said the move was aimed at extending the company's reach in energy, transport and infrastructure project financing.

Non-banks are free from the capital pricing straitjacket dictated by the Basle Committee (see below).

Some of the shortfall in conventional project financing may be filled by newer means. The market for Islamic financing is steadily growing, channeling funds from investors wishing to lend money without receiving interest, in accordance with Islamic shariah law.

US construction company Bechtel has already built a motorway in Turkey with Islamic finance arranged by Citigroup. Rumman Faruqi, CEO of the London-based Institute of Islamic Banking and Finance, says wholesale Islamic finance has traditionally been trade-related, but many participants are keen to move into infrastructure.

Bankers and project sponsors are working hard to bring in other sources of liquidity and support. That's particularly important in emerging markets, where commercial lenders increasingly fear to tread alone. Just a couple of years ago one prominent banker declared the role of the Export Credit Agencies as redundant. Now, when times are hard, they're proving their mettle.

"Official agency finance is a stable, counter-cyclical product," says Joseph Casson, a managing director in Citigroup's project finance group in New York. Official agencies come in a range of shapes and sizes, from national agencies charged with backing hometown companies such as Canada's Export Development Corporation through multilateral agencies such as the International Finance Corporation.

Some agencies lend money directly; others provide insurance to cover specifics such as political risk. In March, a group of UK, Portuguese and Swedish dock owners signed a 15-year concession to modernize and operate the ailing harbor in Maputo, Mozambique. "We believe that the full privatization of the role of the port authority is the first time this has been done in Africa," says Paul Biggs, a partner in the London office of law firm Cadwalader, Wickersham & Taft, advisers to the consortium. Sida, the Swedish International Development Corporation, provided the political risk insurance crucial to luring in commercial lenders to the $70 million project.