To get a sense of the size of the project finance market and the extent of project finance failures Table 3.1.1 shows the total number of 7,959 projects in the 1987 to 2014 period by industry. Table 3.1.2 displays the number of project defaults for the same period by
industry where we observe an average default rate of 9%. However, the telecom and media industry has the highest default rate (90.9%) and the industry with the least defaults is the transportation industry with 4% default rate.
Table 3.1.1 Total Projects by Industry, 1987–2014
Source: Annual Project Finance Default and Recovery Study 1980–2014. S&P Global Market Intelligence (June 2016).
Power 3022
Infrastructure 2298
Oil and gas 1108
Telecom and media 88 Metals and mining 420 Chemical production 174
Manufacturing 111
Transport 110
Leisure and recreation 88
Total 7959
Table 3.1.2 Defaults by Industry 1987–2014
Source: Annual Project Finance Default and Recovery Study 1980–2014. S&P Global Market Intelligence (June 2016).
Power 277 41.1%
Infrastructure 149 22.1%
Media and telecom 80 11.9%
Oil and gas 65 9.6%
Metals and mining 49 7.3%
Chemicals production 21 3.1%
Manufacturing 16 2.4%
Leisure and recreation 10 1.5%
Transportation 4 0.6%
Other 3 0.5%
Total 674 100.0
Table 3.1.3 gives another perspective of default rates for the 1987 to 2014 period by region and one gets an immediate impression that Western Europe and North American projects have the most defaults. This is not true when considering the large project finance deals in Western Europe and North America.
Table 3.1.3 Total Default Rates by Region, 1987–2014
Source: Annual Project Finance Default and Recovery Study 1980–2014. S&P Global Market Intelligence (June 2016).
Western Europe 246
North America 159
Asia Pacific 80
Latin America 71
Oceania 32
Africa and Middle East 20 Eastern Europe 16
Total 624
It is very instructive, however, to look at the reasons for project finance defaults across all projects during the same period in Table 3.1.4. Market exposure factors count for 26.5% of
bank loan defaults followed by 20.6% failures due to technical design issues, while
changes in host country regulatory changes are responsible for only 2.9% of default rates.
Table 3.1.4 Reasons for Project Defaults Across All Projects
Source: Ben MacDonald. “Lessons Learned from 20 Y ears of Rating Global Project Finance Debt,” Standard & Poor's Ratings Services Credit Week (January 21, 2015).
Market exposure 26.5%
Technical design 20.6%
Counterparty problems 18.0%
Structural weaknesses 17.7%
Operational issues 8.8%
Hedging/commodity exposure 5.9%
Regulation related changes 2.9%
A source of project finance defaults is Moody's survey of 1983–2013 project finance loans, which shows a cumulative default rate of 6.4% that is consistent with low investment grade corporate issuers (Davison, 2015). A different Moody's survey of 2,639 projects from 1983 to 2008 showed that 213 of the projects had a senior loan default, of which the ultimate recovery rate was 76.4%.
Table 3.1.5 shows default rates by industry based on Moody's review of 4,069 project finance loans and it is interesting to note that it shows a different view of project finance default rates by industry than the picture obtained from Table 3.1.2, explained mostly by the difference in the study's longer time period.
Table 3.1.5 Project Default Rates by Industry
Source: Thomson Reuters Project Finance International.
Manufacturing industry defaults 17%
Metals and mining projects 12%
Telecom and media projects 12%
Infrastructure projects 4%
Oil and gas projects 8%
Power generation projects 8%
PPP project defaults 2.6%
It is almost impossible to isolate individual factors causing project failures, but the results of a KPMG study of projects not project financed are instructive and may be comparable for project finance deals. In 2012, only 33% of projects reviewed by KPMG (2013) were delivered on budget and 65% of them delivered on time, but these statistics are not necessarily causes of project failures. Thus, one must be careful is assigning failure cause to a single dimension without taking into account all the project
stakeholders' perspectives.
There have been many project finance failures over the years, but a small sample of
projects considered failures and the main reasons for failures are shown in Table 3.1.6. It is instructive to examine the many and varied causes of project failures.
Table 3.1.6 Examples of Project Finance Deals and Reasons of Failures
Source: International Project Leadership Academy.
Project Reasons for Failure
Road Concession Program in Mexico
25% cost overruns and 30% revenue shortfall; government took project over.
Chad–Cameroon Oil Pipelines
Government diverted money from repayment to purchase weapons.
St. Helena Airport—UK Poor engineering and technical feasibility study.
Advanced Passenger Train—
UK
Wrong technical design and engineering.
Lesotho Highlands Water Project
Higher than expected electric costs, pervasive corruption.
Lake Turkana Fish
Processing Plant—Kenya
Unexpectedly high costs, plant shutdown.
Bolivia Cochabamba Water System
Excessive water bills lead to violence, consortium withdrew from the project.
Portugal PPP projects Lack of experience, government decision delays, cost overruns.
Tacoma Narrows Bridge—
US
Financial and time constraints, poor construction; bridge collapse.
The Millennium Dome—UK Overoptimistic forecasts, failure to attract enough visitors, and financial problems.
Denver International
Airport Automated Baggage System
Underscoped project, unrealistic time schedule,
unnecessary risks taken, airlines (customers) excluded from planning.
The Channel Tunnel—UK and France
Conflicting interests and objectives, 20% longer construction period, 80% over budget.