Boom-bust proof features urged

PUBLISHED : Saturday, 20 March, 1999, 12:00am
UPDATED : Saturday, 20 March, 1999, 12:00am

Lenders are demanding more robust deal structures for private sector infrastructure project finance in post-crisis Asia, according to the International Finance Corp.

Declan Duff, a director of the World Bank unit, said in Hong Kong yesterday that many of the deals created before the crisis had been structured with features that tended to overlay underlying market trends.

These features included unrealistically high internal rates of return, arrangements with governments for guaranteed long-term purchases of services generated from the projects, price-fixing arrangements on those services or government guarantees for repayments of debts.

Speaking at a seminar hosted by the Hong Kong Society of Accountants, Mr Duff said infrastructure projects always spanned long periods of time within which the underlying economies might experience several boom-bust cycles.

He said it was essential to have features built into deal structures to withstand the strain from economic downturns.

He said some of these features originally designed to insure the lenders against market risks were ultimately found to be based on unrealistic assumptions.

These could make borrowers unable or unwilling to observe their contractual obligations upon the emergence of market risks.

Mr Duff said it was crucial that lenders assess commercial viability of projects themselves.

Lending decisions based only on the credit enhancement features like government guarantees for debt repayments or government-involved long-term service purchase agreements were risky because they exposed the lenders to political risks.

He said it would be inappropriate to assume that lenders would turn their backs on infrastructure project finance deals without credit enhancement features.

The volume of private sector project finance for infrastructure in East Asia was US$2.5 billion last year, about a fifth of the $13 billion for global emerging markets.

Mr Duff said as long as sound fundamentals and commercial viability were in place, lenders would be willing to put their money in.

He added that more lenders were willing to take equity in addition to pure loans to finance emerging-market projects, a development he considered to be very positive to the market.