Asian troubles affect investment in infrastructure deals worldwide

PUBLISHED : Wednesday, 14 January, 1998, 12:00am
UPDATED : Wednesday, 14 January, 1998, 12:00am

Project finance transactions have slumped dramatically in the past year, as the financial market turmoil which has erupted in Asia, has caused several key infrastructure projects to be abandoned or postponed.

Worldwide, lending by the private sector to transport, power, water and telecommunications projects have sunk by nearly 33 per cent, dragged down by a stagnation of activity in the region.

Last year, total project finance deals slumped to US$151.47 billion, after a record $223.9 billion. In the Asia-Pacific region, the value of project finance deals has more than halved from $76.26 billion in 1996 to $34.47 billion.

The figures - collected following a survey of 800 international banks by the London-based specialist publication Project Finance , reflect the dependency of the project finance industry on the once infrastructure-hungry Asia-Pacific region.

Bankers expect the slump in demand to have a knock-on effect on the project finance divisions of investment banks, which have in the past looked to Asia as a principal growth market, and may be now forced to rationalise.

The cancellation or postponement of several deals, including Hopewell Holding's $3.7 billion contract to build Thailand's mass transit system for congested Bangkok, and Malaysia's $4.6 billion Bakun dam project have served to severely dent the level of project finance activity.

Last year the largest single market, in terms of cash raised, was Britain, accounting for $16.6 billion of projects, under Britain's new private finance initiative, according to Project Finance .

Eastern Europe, which alongside the Middle East and Africa has become the favoured emerging market over Asia, attracted $18.36 billion worth of investment. Latin America accounted for $27.38 billion, but is still far behind Asia's $34.47 billion.

As in the equity and debt market, there is also increasing concern among bankers, over the risk of contagion from Asia's financial market turmoil spreading to other markets, particularly Latin America.

Brazil is scheduled to bring about $80 billion of state assets to the market, through privatisation, which is expected to spark a wave of project finance opportunities, but a souring of market sentiment risks slowing the flow of deals, and would provide a further blow to global project finance activity.

Deals which are funded in local currency are the hardest hit, as investors are reluctant to provide financial backing.

In contrast, projects which produce 'dollar assets' such as oil and gas projects are finding more support.

Bankers report, however, that international lending margins and spreads have become much wider, as investor sentiment becomes increasingly cautious, and investors assess more carefully the scale of risk involved.