PROJECT FINANCE DEVELOPS NEW RISKS
Project finance is in the deepest of troughs. To survive, contractors are being asked to work more and more in the private sector and to assume greater risk, such as taking equity and running completed plants.
Business contractors can no longer be choosers and are willing to pay fees to any bank that can cobble together a competitive financing package.
This is a reversal of the situation in the early part of this decade when banks were clamouring to offer financial services and gain their share of a thriving market. There has been about a 60% drop in world construction and the value of contracts has dropped by about a third, according to Hovey Clark, vice chairman of the finance division of the US construction giant Bechtel.
When the boom of the 1970s ended the international tightening of credit made loans hard to come by and governments unwilling to provide the guarantees required for infrastructure projects. Most recently, the fall in demand for commodities has knocked the once buoyant oil and mineral sector.
To compete effectively, contractors are assuming ever greater proportions of risk which can mean "build, operate and transfer" (BOT) schemes, by which contractors not only take equity but end up owning and running completed plants for periods of 18 months to 15 years.