2008 Global Financial Crisis:
Its Effect on Private Sector Investment
and ODA (Multi/Bi-Lateral) Financing of Mass Transit Projects
Rommel C. Gavieta MA (URP), MSc (Eng)
Vice President, Metro Rail Transit Corporation
Research Associate, York Center for Asian Research
2009 Asia Pacific Rail Conference
Melia Hotel Hanoi, Vietnam
(1/6). Background on 2008 Global Financial Crisis
Projection Global GDP Slowdown
• World GDP growth is projected by IMF to
slow down from 5% in 2008 to 3% in 2009;
• Asia’s economy will probably be the most
resilient (though exports to US will fall); Latin
America’s economy will slow down, Africa’s
economy may end up in a recession
Global Economic Indicators
Infrastructure development will be driven by the private sector as the more predominant source of finance while
taking note of declining global trade, fall of major equity indices and decreased global consumption .
ASEAN Indicators in Relation to 2008 Financial Crisis
ASEAN Economic and Market Indicators still shows a sustainable economy stability or even growth. An economic stimulus
or pump priming programs may further invigorate the future growth of ASEAN economies.
Basis For Infrastructure as one of the Sectors that is Capable of
Leading the Global Economy Out of the 2008 Financial Crisis.
1. Public Sector Infrastructure Investment as part of Economic Stimulus Plans
Public sectors around the world, for so long under performers in infrastructure, will prime the pump by taking
leadership - selection, design, financing, operation & maintenance - of infrastructure projects.
2. Infrastructure Investment has been low over the last 10 years
Throughout the world, including in Latin America, North America, Africa and Eastern Europe infrastructure
investment never exceeded 2.0% of GDP, and was persistently well under this figure in many countries.
3. Sustained Demand for Market Driven Projects
There are infrastructure project that combines market driven characteristics, and high prices, job creation and long
term national competitiveness (power generation, distribution and telecommunication0
4. Bilateral & MDB Sectors Increase their Relevance
The World Bank, the EBRD, the Asian Development Bank, the Inter-American Development Bank, as well as
regional development banks (CAF, Islamic Development Bank, etc.) could easily pump $200 billion per year into
new infrastructure projects -- their capital requirements would have to be addressed, in extraordinary session,
something easily arranged.
National development banks (BNDES in Brazil, the China Development Bank, Vnescheconombank in Russia) could
easily invest another $200 billion. These monies, under the right conditions, would begin to be disbursed
immediately, and would be - again under the right conditions - fully disbursed within 12 months.
(2/6). Public Sector Options for Infrastructure (Mass
Transit Projects) Development to Mitigate the Effect of
the 2008 Global Financial Crisis
Infrastructure as Part of Economic Stimulus Plans
Although government stimulus programs includes infrastructure investment,
governments in Asia are cutting back on the use of public sector debt for public sector
expenditure. (source ADB key indicators)
Emerging Countries Could
Overcome The Crisis In A Relatively Short Period Of Time
• Epicentre of the crisis is in the developed countries. The crisis is unlike many of the previous
123 financial crises in that it comes as an exogenous shock and not because of inappropriate
domestic policies, as in the past.
• Developing-country banks have not been directly impacted as badly. Most developing-
country banks were only marginally exposed to the US subprime crisis, so that a direct impact on
their banking systems has been largely avoided.
• There is evidence of a measure of decoupling of growth rates in recent years. Te Velde
(2008) and Lin (2008), for instance, show that in the case of Africa and developing countries as a
group, economic growth rates have decoupled from those of the richer countries from the early
• Both advanced economies and a number of developing countries have introduced
significant countercyclical fiscal expansion packages. Barack Obama, as US President,
proposed a fiscal stimulus package intended to create 2.5 million jobs mainly through public
infrastructure investment.17 In Europe, the European Commission (EC 2008) urged a Euro 200
billion fiscal stimulus plan, and emphasized the importance of improving Europe’s competitiveness
through encouraging employment security and entrepreneurship.
• The fact that in Asia the financial crisis is a crisis of confidence rather than an actual crisis
also has significant implications for financial supervision and regulation even in the short
run. In particular, regulatory authorities should proactively encourage financial institutions to fully
disclose their exposure to and losses from the subprime crisis, perhaps through the threat of
punitive penalties for inadequate disclosure.
The US Financial Crisis, Global Financial Turmoil, and Developing Asia: Is the Era of High Growth at an End?, William E. James, Donghyun Park,
Shikha Jha, Juthathip Jongwanich, Akiko Terada-Hagiwara, and Lea Sumulong, No. 139 December 2008, ADB
Asian Governments needs to Balance Expansionary Monetary and
Fiscal Policy when Matching Project with the Source of Financing.
Under current financial crisis, the public sector needs a deep understanding of matching source of financing with
the type of project (market and non-market driven) while pursuing expansionary monetary and fiscal policy
Public Sector fiscal policy is judged:
• the golden rule: over the economic cycle, the Government will borrow only to invest and not to
fund current spending;
• the sustainable investment rule: public sector net debt as a proportion of GDP will be held over
the economic cycle at a stable and prudent level. Other things equal, net debt will be maintained
below 40 per cent of GDP over the economic cycle.
The government has provided no justification for a net debt target of 40 per cent of GDP – it could
just as easily have chosen 38 per cent or 42 per cent. The Maastricht Treaty, for instance, allows
UK gross general government debt of no more than 60 per cent of GDP, which is consistent with
net public debt being considerably higher than 40 per cent of GDP.
Public Sector needs to balance development of market driven projects and non-market driven projects
to minimize the socio-economic effect of the 2008 Financial Crisis. The sources of finance for the
stimulus packages all over the world can come from
• Tax generation (micro market driven projects)
• Multilateral or Bilateral Financing Companies (non-market driven projects)
• Private Sector (Equity investment and Commercial loans (market driven projects)
(3/6). Infrastructure Demand and 2008 Financial Crisis
Infrastructure Financing Gap
World Bank estimates, developing countries
currently invest annually 3–4% of their GDP
in infrastructure; yet they would need to
invest an estimated 7–9% to achieve broader
economic growth and poverty reduction
World Bank Estimates of Potential Pre-2008
Global Infrastructure Investment requirement is
US$ 20.0 trillion with a financing gap of US$
The Potential Pre-2008 Asian Infrastructure
requirement is US$ 608 billion with a
financing gap of US$ 220 billion.
PPI projects continue to reach financial closure,
but at a rate about 40% lower than Pre-2008
Financial Crisis Affecting
Global Rail Market and Private Sector Participation
Global Rail Market
Pre 2008 Financial Crisis Market volume and market segments € million (2007)
Region Infrastructure Rolling Stock Control Systems Services Total Open Market
Western Europe 6,307.00 9,495.00 3,486.00 14,084.00 33,372.00 77%
Eastern Europe 1,174.00 860.00 411.00 3,545.00 5,990.00 61%
CIS Countries 1,118.00 3,065.00 349.00 6,736.00 11,268.00 40%
NAFTA 5,376.00 4,465.00 740.00 11,651.00 22,232.00 87%
Rest of Americas 247.00 467.00 117.00 2,280.00 3,111.00 73%
Asia/Pacific 3,414.00 8,920.00 1,907.00 9,828.00 24,069.00 61%
Africa/Middle East 453.00 705.00 163.00 1,618.00 2,939.00 50%
18,089.00 27,977.00 7,173.00 49,742.00 102,981.00 69%
Post 2008 Financial Crisis as a result of Decline in Industrial/Utility Capacity Utilization fell by 25% in the US
Region Infrastructure Rolling Stock Control Systems Services Total Open Market
Western Europe 3,468.85 5,222.25 1,917.30 7,746.20 18,354.60 77%
Eastern Europe 645.70 473.00 226.05 1,949.75 3,294.50 61%
CIS Countries 614.90 1,685.75 191.95 3,704.80 6,197.40 40%
NAFTA 2,956.80 2,455.75 407.00 6,408.05 12,227.60 87%
Rest of Americas 135.85 256.85 64.35 1,254.00 1,711.05 73%
Asia/Pacific 1,877.70 4,906.00 1,048.85 5,405.40 13,237.95 61%
Africa/Middle East 249.15 387.75 89.65 889.90 1,616.45 50%
9,948.95 15,387.35 3,945.15 27,358.10 56,639.55 69%
• Globally, market for mass transit system went down from US$ 134.0 billion (Euro 103.0 billion) to US$ 75.0
billion (Euro 57.0 billion)
• In the Philippines, there are US$ 6.0 billion worth of non-market driven mass transit (4) projects and US$
2.5 billion worth of market driven mass transit (3) projects
(4/6). Multi-Lateral Financing, Infrastructure
Development and 2008 Financial Crisis
Multi-Lateral Financing and the 2008 Financial Crisis
Aid flows tend to be quite resilient to mild recessions (e.g., Bertoli et al., 2008).
However, there is the occurrence of a 30% average drop in ODA commitment by Norway, Sweden and Finland during
the 1993 Nordic banking crisis.
In the case of Asia,, ADB plans to help developing Asia cushion the impact of the 2008 crisis by supporting:
Public Investment in non-market driven infrastructure that is supported by multilateral financing will
maximize short & long term socio-economic benefit under MDG
Regional infrastructure planning and financing facilitation
Increase ADB fund placement with Private Sector Infrastructure Equity Funds who is in the Asian market
Multilateral Financing for Domestic
and Regional Infrastructure Development
Fund Disbursement by the ADB 2007 Proposed Regional Infrastructure, Trade
and Logistics Development Framework by
ADB 2008 Annual Report
Future Role of Multilateral Institutions
Linking Regional Trade, Logistics and infrastructure Project Development.
Public-Private Interface Management. Role as a buffer between the public and private
sectors. Their involvement in a transaction can help to keep host governments from
abusing their powers (what the private sector refers to as “political risk”) and can help
keep global investment banks, contractors and infrastructure operators from picking plums
(what the public sector refers to as “greed and profiteering”).
Venture Financing of Micro infrastructure. The World Bank and other international
financial institutions have the potential to make early venture investments in micro
infrastructure projects and help to scale up these solutions.
Creating Transparent Legal and Regulatory Environments. Help countries create
enabling environments, implement reforms and create more transparent legal systems
that promote private sector development.
Lifelines in Times of Crisis. Assistance from the multilateral lending institutions has been
vital during times of economic crisis when other sources of financing become unavailable.
They will continue to play a fundamental role in this area in the future.
Debt Relief. Important role in resolving difficulties over debt relief. Until now, issues of
debt relief have been addressed by traditional donors in the context of the Paris Club.
However, as new lenders enter the market (primarily China, Brazil, India, Kuwait, the
Republic of Korea, the Russian Federation and Saudi Arabia) there is a need for a more
global approach to debt relief. This is particularly important because Paris Club donors
are going to be unwilling to restructure debts owed to them if debts owed to these new
lenders are being repaid in full.
(5/6). Private Sector Investment, Infrastructure
Development and 2008 Financial Crisis
Private Sector Investment in SE Asia and the 2008 Financial Crisis
Multilateral Fund Placement in Private Infrastructure Equity Funds
Infrastructure industries account for a rapidly
expanding share of the stock of inward FDI. Over
the period 1990–2006, the value of FDI in
infrastructure worldwide increased 31-fold, to
$786 billion, and that in developing countries
increased 29-fold, to an estimated $199 billion.
Increasingly, these funds are being directed
towards private infrastructure investment
Indicators for Private Sector to Invest in Infrastructure Development
Private Sector Infrastructure Projects and 2008 Financial Crisis
Project financing levels are likely to remain impacted over a significant period of time if the trends shown in previous
financial crises are repeated. Data from the Private Participation n Infrastructure Project Database shows the
effects of the financial crisis on PPI in developing countries includes:
• Many investors and financiers are in a wait-and-see mindset and are likely to be so for the next 3 to 6
months or until the breadth and depth of the crisis’ impact become clearer.
• As the “flight to quality” sets in for banks and other financiers, the likely impact will be more stringent
financial conditions, not only via higher cost of financing but also with lower debt/equity ratios and more
• The expected economic downturn in developed and developing countries is also likely to reduce demand
levels and have a significant impact on project revenues, and consequently on projects’ financial
PPI projects continue to reach financial closure, but at a rate about 40% lower than Pre-2008 Financial
• Projects are being impacted through higher cost of financing
• Need to separate market driven and non-market driven projects to be able to apply the most
appropriate corresponding source of finance.
New Sources of Private Sector Funds
• Growth of private sector equity infrastructure funds with multi lateral funds placement
• Growth of private sector equity infrastructure with public sector pension funds.
• Increase in the importance of dual firms; these are quasi-government, quasi-private firms that
have grown out of stalled reform processes and that own and operate infrastructure (Woodhouse,
2005). In several markets, dual firms have been able to acquire assets at low prices after
international investors have lost money and pulled out.
• Rise in the importance of South- South investors; that is, infrastructure investors from within
developing countries who are investing in local and regional projects. This has resulted in an
increase in local currency financing (Yanosek et al., 2007).
• Rise of BRIC country export-import banks. This refers to public financial institutions situated in
the BRIC countries that are rapidly expanding their trade and investment promotion functions
• Rise of petrodollars: as a result of supply-demand imbalances, national oil companies and
sovereign wealth funds have become key investors in energy infrastructure and ancillary
infrastructure along the extraction supply chain.
(6/6). Financing Mass Transit Development after the
2008 Financial Crisis
Proposed Financing Framework after 2008 Financial Crisis
• Create an enabling environment to attract
foreign direct investments or equity
• Balance sharing with private sector the
farebox and non-farebox sources of
revenues of mass transit projects
• Match public sector financing institutions
with non-market driven project such as
small-scale water treatment, irrigation and
electricity generation projects that
The End Thank You