Under the traditional model of infrastructure creation, finance used to be regarded as an ancillary function. Much of the spending for roads, railways, ports and most other major projects came directly from the public purse. Smaller projects are usually encapsulated into the infrastructure budget of the town or city in which they occur, while larger schemes may attract funding from a national treasury. This system is, however, now changing. This new business model proposes innovative and efficient mechanisms to consider a blend of Private Finance Initiatives (PFI) and Public Private Partnerships (PPP) and engage in development of local currency financing solutions through capital markets and currency swaps to meet the infrastructure development needs of particularly the emerging economies (Sagar, 2006).
Initiating project investment and implementation funding through private sector initiatives and public-private partnerships can be institutionalised through the medium of Special Purpose Vehicles (SPVs) that drive the processes. The SPVs allow private sector investors to channel funds into specific investments that will bear a positive return on capital. The three financing options available include:
- Grant Funds and Concessionary Loans; - Public-Private-Partnership; and
An example of this last category is the SPV created to finance a power generating plant in Mozambique - the US $30 million Mavuzi and Chicamba Project. A private sector Norwegian company, SN Power, arranged finance to build the generating plant and sells electricity to the national and regional grids at the market price on a Build-Operate-Own (BOO) basis (http://www.snpowerinvest.com, 26 April 2010). Public sector intervention is often required to ensure that regulations do not preclude this type of investment and perhaps to provide assistance in establishing the SPV (Chakwizira, 2009).
The recent financial crisis has meant that some countries have seen a marked decline in available funds for public spending. Greece has seen a year-on-year reduction in spending in the construction sector by over 15 percent for 2009, with the result that local construction firms have seen their share price fall by one third since October 2009. Under an agreement with the European Union (EU), Greece has to find the funds to partially match EU financing to claim some 26 billion Euros of development money. Greece absorbed just 3.6 percent of the funds available under the EU's National Strategic Reference Framework (NSRF) in 2009 and wants to increase that rate to 15 percent in 2010. It is preparing a law to cut red tape in approving NSRF projects. Greek GDP contracted 2 percent in 2009 versus the government's projections for a contraction of 1.2 percent, increasing the reliance of builders on public works projects. Construction accounts for about one tenth of Greece's GDP (Strupczewski, 2010).
The actual companies within the construction sector, however, appear to be remaining confident about industry conditions, despite the recent financial crisis.
This is according to the KPMG report “Navigating the Storm” which was released in November 2009 and which reflected the results of more than 100 interviews with senior leaders at engineering and construction companies in 30 countries worldwide. According to author Geno Armstrong (2009), the findings from the survey concluded that profit levels were expected to be maintained or increase by mid-2010. Armstrong states that there is a perception that the global financial crisis has devastated the construction industry, however, while it certainly has had a significant impact on the way these companies do business, the firms themselves view these conditions as an opportunity to get leaner. When the recovery does finally arrive, these companies should be well-prepared to succeed. More than half (54 percent) of global respondents said that their backlog volume of jobs had gone up or stayed level. The picture was similar with profits in the current order backlog with just 44 percent of respondents claiming a decrease. Contractors in Africa, Europe and the Middle East were hardest hit with 54 percent indicating their projected profit rates had fallen (Armstrong, 2009: 6-10).
In the 2008 KPMG global construction survey report entitled “Embracing Change?”, author Richard Wittington mentioned that companies spoke of having to turn work away due to a lack of capacity (Wittington, 2008: 3-8). Following several years of excess demand, the sector may have reached a temporary equilibrium. The length of most construction projects also means that many contractors may still be working off backlog contracts secured before the advent of the financial crisis.
Figure 3.3.2.1 overleaf, provides representation of the changes in backlog of projects within the construction industry for last 12 months, whilst Figure 3.3.2.2
shows changes in projected profit for the 2009 financial year versus the 2008 financial year.
Figure 3.3.2.1: Changes in backlog in the last 12 months.
(Source: Armstrong, 2009:9)
Figure 3.3.2.2: Changes in projected profit for 2009 versus 2008.
(Source: Armstrong, 2009:10)
There is some hope, but also some scepticism, regarding the impact of government initiatives to resuscitate global economies, especially in infrastructure projects. This caution is reflected in the 2009 KPMG survey findings, with only 15 percent believing that government intervention would give them significantly
greater opportunities over the following year, although the majority expected some kind of positive effect. From a regional perspective, the confidence in government packages was greatest amongst contractors in Asia Pacific. In Hong Kong and Australia, sizeable sums have been set aside for state infrastructure projects. Executives in the Americas, however, appear to be less certain over the benefits that such stimuli might bring (Armstrong, 2009: 11). Figure 3.3.2.3 below, demonstrates opinion of the construction sector towards the impact of government stimulus packages for the period November 2009 – November 2010.
Figure 3.3.2.3: Perceived impact of government stimulus packages to November
2010.
(Source: Armstrong, 2009: 11)