43135 noTE no. 30 ­ Mar. 2008GRIDLINES Sharing knowledge, experiences, and innovations in public-private partnerships in infrastructure India leads developing nations in private sector investment But the region needs more investment to meet demands Clive Harris I ndia has had the most success attracting services. Incremental reforms have borne fruit more private investment in infrastructure over time, however, and private participation has in 2006 than any other developing country. grown in recent years. Long-standing policies in most other South Asian countries are beginning to bear fruit as well. Nevertheless, delivering the infrastruc- Recent trends in private participation ture services needed to sustain and accel- erate growth in South Asia remains a major South Asia has seen a recent surge in investment challenge. Estimates suggest that closing the commitments to infrastructure projects with gap in service provision and meeting future private participation. Indeed, of total commit- needs will require infrastructure investment in ments in 1990­2006, almost half came in the last the range of 7­8 percent of GDP a year. The three years of the period (figure 1). private sector can do more to help close the region's infrastructure service deficit. But first Moreover, South Asia is receiving a greater share the region's governments will need to close of the investment commitments going to all devel- the infrastructure policy deficit, manifested in oping countries. While it attracted only 5 percent many sectors in distorted pricing, poor gover- of the total in 1995­2000, its share grew to 13 nance and accountability, and weak financial percent in 2001­06 (table 1). In 2006 its share and operational performance. was 19 percent. South Asia's impressive economic growth, aver- Telecoms driving much of the growth aging more than 6 percent a year over the past Telecommunications accounted for 64 percent of decade, has occurred not because of the quality investment commitments to infrastructure proj- of its infrastructure but despite it. World Bank ects with private participation in South Asia in investment climate surveys routinely show that 2001­06, a big increase over its 39 percent share South Asian businesses perceive infrastructure, in 1996­2000 (table 2). This large and growing particularly power and transport, as a major role of telecommunications is much like the over- constraint. A larger share of firms rely on genera- all trend for developing countries. But the trend tors in South Asia than in China and Southeast in South Asia is somewhat more extreme. Asia. No South Asian city can supply water 24/7 to its residents. And businesses in South Asia While India has seen the most dramatic growth hold larger stocks of inventory on average than do in private investment in telecommunications, all those in Brazil or China, a reflection of the poor countries in South Asia have benefited. Afghani- state of the region's transport network.1 stan has received around US$700 million in foreign direct investment in telecommunications The problems of poor infrastructure have long PUBLIC-PRIVATE INFRASTRUCTURE ADVISORY FACILITY been recognized in the region. In the mid-1990s Clive Harris is a lead infrastructure specialist for South governments started to open infrastructure sectors Asia in the World Bank's Sustainable Development Vice to private investment and operation to improve Presidency. Helping to eliminate poverty and achieve sustainable development through public-private partnerships in infrastructure PUBLIC-PRIVATE INFRASTRUCTURE ADVISORY FACILITY Some long-term road capacity contracts, known fIGuRE 1 as annuity contracts, have also been used. Both South Asia has seen a big increase in private these contractual models have proved attractive participation in infrastructure to the private sector and to financiers. 2006 US$ billions Activity has also been on the rise outside of roads. 27 Projects 60 In 2006 the Indian government concessioned the 24 Delhi and Mumbai airports, and it is now devel- 50 21 oping a private investment program in the rail 18 40 sector. As a result of the surge in 2006, investment 15 commitments to transport projects in India were 30 12 roughly equal to those in telecommunications. 9 20 Energy and water lagging 6 10 The region has had less success in attracting 3 investment in the energy and water sectors. While 0 0 1990 1995 2000 2005 2006 investment commitments in energy accounted for Investment commitments 17 percent of the total in 2001­06, they have been Projects falling recently despite the rapidly growing energy Source: World Bank and PPIAF, PPI Project Database. needs. There has been no significant investment in the water sector. This record reflects the political economy challenges of reforming these sectors, since 2003. Today more than 2 million people which have weak governance, high and poorly in the country have access to phone service, allocated subsidies, and distorted pricing. compared with only 35,000 at the end of 2002. The region did see substantial investment in Transport increasingly important power generation in the 1990s, with a wave of Transport has also become an important sector, investment in India and Pakistan and some nota- attracting 18 percent of investment commitments ble procurements of independent power producers in 2001­06 and 34 percent in 2006 (figure 2). (IPPs) in Bangladesh. But the power sector's Private The main driver has been India's growing program continued financial weakness in most countries and the poor governance, including in procure- investment of public-private partnerships in transport, which ment of IPPs, have stymied further investments. reached financial closure on more than 40 projects is up--but All countries of the region are making renewed in 2006 alone. efforts to ramp up private investment in genera- more will be tion, with India pursuing a series of "ultra mega" A large share of the transport projects in India needed (8,000-megawatt) generation projects. have been public-private partnerships to expand the national highway system. Most of these are Both India and Pakistan have pursued private real-toll contracts, combining a long-term conces- participation in power distribution. In India power sion for an existing stretch of highway with a distribution has been privatized in Delhi and the requirement to expand capacity to four lanes or state of Orissa, and some states, such as Maha- more and, in some cases, a government subsidy. rashtra, are developing "franchise" models akin TABLE 1 Investment commitments to infrastructure projects with private participation in developing countries by region, 1990­2006 (percentage of total) Period East Asia Eastern Europe Latin America Middle East & South Sub-Saharan & Pacific & Central Asia & Caribbean North Africa Asia Africa Total 1990­95 34 8 50 2 5 1 100 1996­2000 23 16 49 3 5 3 100 2001­06 19 25 28 7 13 8 100 1990­2006 24 18 41 5 8 4 100 Source: World Bank and PPIAF, PPI Project Database. India leads developing nations in private sector investment TABLE 2 Sector distribution of investment commitments to infrastructure projects with private participation in South Asia and the rest of the developing world, 1990­2006 Water and Region and period Energy Telecoms Transport sewerage South Asia 1990­95 77 18 5 0 Closing the 1996­2000 53 39 8 0 2001­06 17 64 18 0 policy deficit Rest of developing world will be key 1990­95 33 39 22 6 1996-2000 33 45 16 7 to expanding 2001­06 24 57 15 3 private Source: World Bank and PPIAF, PPI Project Database. investment to lease contracts to bring in the private sector. duce management contracts in just a couple of Pakistan privatized distribution in Karachi. But zones of the city's water supply met with major the results of these initiatives have been mixed, opposition from consumers. reflecting the difficulties in tackling long-standing power theft in the sector. India, the leading destination India has attracted most of the investment commit- While there has been less progress in the water ments to infrastructure projects with private sector, some initiatives are going forward. In participation in the region. This is not surprising, India the state government of Karnataka, work- as India is by far the region's largest economy. But ing through a management contractor, is piloting it has also made the broadest and most sustained a scheme to improve water supply in the cities of efforts to attract investment. Thanks to the success Belgaum, Gulbaraga, and Hubli-Dharwad. Some of its reforms in transport and telecommunications, 25,000 households that before were receiving India attracted more investment commitments to water only every three to seven days now have infrastructure projects with private participation in 24/7 water supply. The state government plans to 2006 than any other developing country. Indeed, expand this approach to the entire water supply commitments in India were nearly twice those in system in each of these cities, covering 2 million its nearest rival, Brazil, and well ahead of those in people. In Delhi, by contrast, an attempt to intro- China (figure 3). fIGuRE 2 Transport has become a key sector, 1990­2006 2006 US$ billions 27 24 21 Energy Telecoms Transport Water and sewerage 18 15 12 9 6 3 0 1990 1995 2000 2005 2006 Source: Correa and others 2006. Note: RGI-83 is a summary index measuring 83 attributes of regulatory governance; RGI-28 measures a subset reflecting actual practice. For the full names of the agencies, see Correa and others (2006). TABLE 3 Infrastructure investment needed to meet 7.5 percent annual economic growth in South Asia, 2006­10 (percentage of GDP) Electricity Telephone generation mainlines Paved Rail Improved Improved capacity and mobiles roads routes water sanitation Total new investment 1.8 0.7 2.0 0.1 0.3 0.4 5.4 Capital replacement 0.7 0.4 0.5 0.1 0.3 0.3 2.2 Total 2.5 1.1 2.5 0.2 0.6 0.7 7.6 Source: Chatterton and Puerto 2006. Note: Underlying data are in 2004 U.S dollars. Figures may not sum to totals because of rounding. The infrastructure policy deficit provide a substantial part of the additional funds needed for infrastructure investment (Devarajan Given the deficient stocks of infrastructure in and Harris 2007). Without better pricing, gover- South Asia, substantial investment in the sector nance, and financial performance, these sectors will be needed to sustain the region's rapid will have limited ability to mobilize private economic growth. Estimates from a World Bank financing--and will remain heavily dependent on study suggest that annual GDP growth of 7.5 government financial support. percent would lead to annual investment needs of about 5 percent of GDP to meet the increased References demand for infrastructure services along with Chatterton, Isabel and Olga Susana Puerto (2006): "Estimation of another 2 percent of GDP for capital replacement infrastructure investment needs in the South Asia region," mimeo. (table 3). Devarajan and Harris. 2007. Does India have an infrastructure deficit?" The India Economy Review October 2007. Raising investment to this level will be a big Notes challenge: annual investment commitments to Report No. 34580-IN. India Inclusive Growth and Service delivery: Building on India's Success Development Policy Review, May 29, infrastructure projects with private participation 2006. averaged only around 0.9 percent of regional GDP in 2001­06. The key will be to increase investment in sectors outside of telecommuni- fIGuRE 3 cations--in energy, transport, and water, where Investment in India reached record high investment commitments averaged only around Investment commitments to infrastructure projects with 0.4 percent of regional GDP in 2001­06. private participation in India South Asia's infrastructure service deficit stems 2006 US$ billions both from too few new investments and from 27 Projects 60 lack of proper maintenance of existing assets. 24 The region will be unable to bridge this deficit 50 21 as long as its "infrastructure policy deficit" 18 40 remains, manifested in distorted pricing, 15 GRIDLINES poor governance and accountability, 30 12 and weak financial and operational 9 20 Gridlines share emerging knowledge performance. The policy deficit 6 on public-private partnership and give an has had the biggest impact in the 10 overview of a wide selection of projects from 3 power and water sectors, where various regions of the world. Past notes can be 0 0 1990 1995 2000 2005 2006 found at www.ppiaf.org/gridlines. Gridlines are a a lack of creditworthy off-takers publication of PPIAF (Public-Private Infrastructure has limited private investment. PUBLIC-PRIVATE INFRASTRUCTURE ADVISORY FACILITY Investment commitments Advisory Facility), a multidonor technical assistance Estimates suggest that elimi- Projects facility. Through technical assistance and knowledge nating the financial losses in dissemination PPIAF supports the efforts of policy Source: World Bank and PPIAF, PPI Project Database. these two sectors alone would makers, nongovernmental organizations, research institutions, and others in designing and implementing strategies to tap the full potential of private involvement in c/o The World Bank, 1818 H St., N.W., Washington, DC 20433, USA infrastructure. The views are those of the authors and do PhoNE (+1) 202 458 5588 fAX (+1) 202 522 7466 not necessarily reflect the views or the policy of PPIAF, PUBLIC-PRIVATE INFRASTRUCTURE ADVISORY FACILITY GENERAL EMAILppiaf@ppiaf.org WEB www.ppiaf.org the World Bank, or any other affiliated organization.