Washington DC December 8, 2008 WBG Post-Crisis Response For Public-Private Infrastructure Projects Jyoti Shukla Program Manager Public Private Infrastructure Advisory Facility PPIAF

Key Messages  Emerging markets severely affected, private capital flows set to decline from record levels of 2007  Financing of infrastructure will be strongly affected  WB and IFC are proposing a coordinated response

Until recently, strong growth in investment commitments to infrastructure – $160 bn in 2007

Crisis impact significant on emerging markets Equity markets plunge as investors retreat MSCI equity price indexes Emerging markets Mature markets Index (Jan = 100) Source: MSCI & IFC. Asian Pacific ex Japan

Sovereign bond spreads widened substantially Basis points Emerging-market bond spreads EMBI Jan 2007 – Dec 5, 2008 Source: JPMorgan

Also corporate bond spreads Basis points Emerging-market corporate bond (CEMBI) spreads Jan 2007 – Dec 1, 2008 Source: JPMorgan

$ billions (12-month moving average) Bond issuance …leading to a reversal of private capital flows … Bank lending, bond and equity issuance Jan – Oct Bank lending Equity issuance August 2007 Source: World Bank.

…FDI inflows still resilient in 2008 FDI inflows to developing countries (US billion) China/Brazil/Russia * Based on data in 25 developing countries Other Developing Countries

$ billions Net private debt and equity flows to developing countries , projected Percent Percent of GDP (right axis) But private capital flows expected to decline significantly going forward Source: World Bank.

Number of foreign banks (left axis) Market share of assets (right axis) Countries where foreign banks play a dominant role will experience significant impact on credit availability Percent Source: DEC Prospect Group based on data from Bankscope. Hungary 94% Mexico 82% Indonesia 28% Brazil 25% India 5% Thailand 5%

High bank borrowing renders the infrastructure sector vulnerable to global credit crunch Capital market financing for developing countries’ infrastructure $ billions Source: Dealogic

Bank lending to infrastructure has been largely to power sector Industry breakdown of developing-country infrastructure bank financing, * (percent) * As of October

Bank lending to energy-sector and total bank lending to emerging markets Energy sector borrowing Total bank lending $ billions * As of September..accounting for one-third of total international bank financing

...More important impacts will come from sharp declines expected in " real economy “ Real GDP (% change), Developing countries High-income countries

Preliminary estimates show up to $100 billion of projects being scaled back  Rapid scaling back of hedge funds  Private equity funds are holding back capital  Investors are demanding higher returns  Private investors focusing on largest markets, good policy frameworks, developing countries may get crowded out  Project delays today can have medium term implications due to long lead times

Evidence from PPI database: Aug-Nov 08  31 projects ($17b) reached financial closure – about 30 percent below similar level in 2007  29 projects ($23b) delayed by Nov  70 projects ($60b) potentially delayed if reduced financing continues

For private projects, proposed IFC Facility To act as a temporary substitute for non-available commercial financing  Expand resources available to increase pool of available funds  Investment objectives –Stabilize viable existing infrastructure investments at risk –Continue flow of new infrastructure investments

As the financial crisis becomes a fiscal crisis other effects emerge  Overall scaling back of government expenditures in infrastructure  O&M expenditures particularly likely to be hard hit  Financial assumptions on PPP projects come into question  Infrastructure pipeline delayed

Three Pronged Approach  Debt Facility  To rollover existing debt  Provide debt for new projects coming to market  Equity facility  Joint WBG Advisory Services

Advisory Service Component  Governments will need help on how to –Design projects considering new market realities –Handle crisis related stress of existing projects  Expected increased demand for advisory support  Facility to expand available funds for infrastructure advisory through IFC advisory services and WB teams funded through PPIAF

Complementary WB response  Scaling up of IDA/IBRD lending  To support public sector commitments of existing projects  To maintain a pipeline of new projects  Support PPPs through increased public sector commitment/risk enhancement mechanisms/innovative instruments