39135 noTE no. 16 ­ Jan. 2007GRIDLINES Sharing knowledge, experiences, and innovations in public-private partnerships in infrastructure Revival of private participation in developing country infrastructure A look at recent trends and their policy implications Michel Kerf and Ada Karina Izaguirre P rivate participation in infrastructure proj- 2005, though more modestly: at US$35 billion ects in developing countries plummeted in 2005, investment in the other sectors was a after the 1997 Asian crisis and followed a full 60 percent below its peak. broadly declining trend for several years after- ward. However, in 2004 and 2005 investment in such projects increased sharply. Meanwhile, Fewer transactions the distribution of investment across sectors and regions, and the allocation of risks between While investment increased in 2004­05, the public and private parties, were shifting. Private number of projects reaching financial closure sponsors started putting more emphasis on fell. In 2005, 163 transactions were concluded-- risk mitigation strategies. To take advantage among the smallest numbers since the early of private sponsors' renewed interest in infra- 1990s. Transactions declined in all sectors except structure projects, governments need to create water, where 41 projects reached financial closure risk sharing arrangements that attract private in 2005, the largest number since 1990.2 operators while also benefiting governments, taxpayers, and users. Two main factors explain the diverging trends in investment levels and transaction numbers. Total investment commitments to private First, recent investments were driven more by infrastructure projects in developing countries existing projects than by new ones. Since 2002 (hereafter, simply investment) grew by 70 percent projects reaching financial closure each year had in 2004­05, to reach US$95 billion.1 As a share accounted for around 40 percent of that year's of developing country GDP, investment increased investment, while "old" projects accounted for from 0.7 percent in 2003 to 1 percent in 2005. the other 60 percent. By contrast, until 1998 In nominal terms investment levels in 2005 were new projects had accounted for 70 percent, and close to their 1997 peak. Yet in real terms they old ones for 30 percent. were still about 30 percent lower (figure 1)--and as a share of GDP they were almost 50 percent Second, projects grew in size, with the median below the peak. But it was the first time since rising from a range of US$20­36 million in 1997 that investment rose two years in a row, and 2002­04 to US$60 million in 2005. In addition, by any measure, the growth was substantial. The growth was driven mainly by one sector: Michel Kerf is an infrastructure policy adviser in the telecommunications. Indeed, that sector had World Bank's East Asia and Pacific Region, Sustainable dominated investment since 1998, and its share Development Department, and Ada Karina Izaguirre is an in 2001­05 was substantially larger than in the infrastructure specialist in the Bank's Finance, Economics, 1990s (figure 2). In 2005 telecommunications and Urban Development Department. This note is a claimed 63 percent of the total; at US$60 billion, PUBLIC-PRIVATE INFRASTRUCTURE ADVISORY FACILITY product of the Private Participation in Infrastructure (PPI) investment in the sector was just 3 percent Project Database, a joint initiative of PPIAF and the Finance, below its 1998 peak. With telecommunications Economics, and Urban Development Department in the excluded, investment still rose in both 2004 and World Bank's Sustainable Development Vice Presidency. Helping to eliminate poverty and achieve sustainable development through public-private partnerships in infrastructure PUBLIC-PRIVATE INFRASTRUCTURE ADVISORY FACILITY Figure 1 Substantial new growth in investment Investment commitments to infrastructure projects with private participation in developing countries by sector, 1990­2005 2005 US$ billions 140 120 100 Total 80 60 Telecoms 40 Energy 20 Transport 0 Water and sewerage 1990 1995 2000 2005 Source: World Bank and PPIAF, PPI Project Database. projects of more than US$500 million accounted ment in 2005 at about 40 percent of the peak. for 12 percent of transactions in 2005, twice Upper-middle-income countries had their share their share in the previous three years. Large drop from 42 to 40 percent, with investment in transactions were most prominent in transport 2005 (about US$40 billion) close to the peak. and energy: the five largest projects in each sector Private accounted for 48 percent and 33 percent, respec- As a share of GDP the investment levels in 2001­ tively, of sector investments. 05 were even more similar across income groups, investment in ranging from 0.8 percent in lower-middle-income infrastructure countries to 1 percent in upper-middle-income A more balanced distribution countries and 1.1 percent in low-income coun- increased tries. These compare with 0.6 percent of GDP substantially Unlike for sectors, the distribution of investment in low-income countries and 1.2 percent in both across developing regions became increasingly lower-middle- and upper-middle-income coun- in the past balanced. In 1990­2000 Latin America had by tries in 1990­2000 (figure 3). two years far the largest share of investment, with almost 50 percent. East Asia followed with 27 percent. Recent private activity also became somewhat Each of the other regions accounted for only less concentrated by country. In 2001­05 the a small share. In 2001­05, by contrast, invest- top 10 countries by investment accounted for ment was much more equally distributed. Latin 59 percent of the total, down from 70 percent in America remained in the lead, but with only 31 1990­2000. Even so, private activity remained percent. Eastern Europe and Central Asia followed highly concentrated: of the 110 countries with 27 percent, East Asia with 18 percent, and with private activity in 2001­05, 20 countries the other three regions doubled their shares. attracted 80 percent of the total investment. Investment also became more evenly distrib- uted across country income groups. Low-income A shift in project types countries raised their share of investment from 7 percent in 1990­2000 to 17 percent in 2001­05, Greenfield projects accounted for a growing reaching new peaks in the last two years of that share of investment in all sectors in recent years. period. Lower-middle-income countries saw their In telecommunications their share increased share decline from 51 to 42 percent, with invest- from 40 percent in the 1990s to 60 percent in Revival of private participation in developing country infrastructure of investment in all regions but one (Eastern Figure 2 Europe and Central Asia). This shift is particu- Telecoms attracting a growing share larly noticeable in Latin America: in 1990­2000 Sector distribution of investment commitments to greenfield projects represented only 25 percent of infrastructure projects with private participation in developing countries, 1990­2000 and 2001­05 investment in the region, while in 2001­05 their share had grown to 46 percent. Percent Water and sewerage 100 The focus on management and lease contracts risk sharing 6% 3% 11% Transport also grew somewhat. Management contracts 80 17% arrangements 25% Energy increased from 2 percent of projects in the 1990s 60 34% to 6 percent in 2001­05, while lease contracts are needed 40 rose from 2 percent to 4 percent. that attract 60% Telecoms 20 43% private 0 More diversification of sponsors 1990­2000 2001­05 operators Source: World Bank and PPIAF, PPI Project Database. The concentration of activity by private sponsor while also changed little: the top 10 sponsors had proj- ects accounting for 30 percent of investment in benefiting 2001­05, in energy from 54 to 59 percent, in 2001­05, similar to their share in 1990­2001. governments, transport from 36 to 50 percent, and in water But the list of top 10 sponsors changed substan- from 9 to 36 percent. tially, with only 3 sponsors (Telefónica, Telecom taxpayers, Italia, and France Telecom) appearing in the lists and users A similar trend is apparent across regions. In for both periods.3 Emerging market firms became 1990­2000 greenfield projects accounted for more prominent: 4 were among the top 10 in the largest share of investment in just three of 2001­05, up from only 2 in 1990­2001.4 the six regions (East Asia, South Asia, and Sub- Saharan Africa). In 2001­05, by contrast, green- The growing diversification of private sponsors field projects accounted for the largest share is even more apparent if the focus is limited to Figure 3 A more even distribution across income groups Investment commitments to infrastructure projects with private participation as a share of GDP by country income group, 1990­2005 Percentage of GDP 2.5 2.0 Upper middle income Low income 1.5 1.0 Total 0.5 Lower middle income 0.0 1990 1995 2000 2005 Note: Income classifications are by the World Bank. Low-income countries are those with a gross national income (GNI) per capita in 2004 of US$825 or less; lower middle income, US$826­3,255; and upper middle income, US$3,256­10,065. Source: World Bank and PPIAF, PPI Project Database. investments in projects reaching financial closure only limited benefits for the health of infrastruc- in 2001 onward (that is, if "old" projects are ture sectors. The emphasis on greenfield bulk excluded). In this case the investment share of facilities might not help with the maintenance of the top 10 sponsors falls from more than 30 existing networks. Moreover, where projects for percent in 1990­2001 to 27 percent in 2001­05. bulk facilities involve off-take agreements with a In addition, the list of top 10 sponsors changes public buyer, they limit private operators' incen- almost completely between the two periods. tives to ensure that consumer tariffs are set at Only 2 sponsors (Electricité de France and Tele- levels that recover costs. Management and lease com Italia) appear in both lists. Further, emerging contracts may similarly limit such incentives, market firms become much more prominent: 6 since with these contracts private operators have appear in the top 10 for 2001­05, compared with no need to recoup the cost of major rehabilita- only 2 for 1990­2001. tion or new investments. In today's environment, where private infrastruc- Policy implications ture operators are willing to invest but are also more concerned about taking on risk, the onus The recent upward trend in investment in infra- is on policymakers to ensure that the investment structure projects with private participation climate promotes risk sharing arrangements that appears to be relatively robust: a more diversified attract private operators while also benefiting group of private sponsors (including many from governments, taxpayers, and users. emerging economies) is active in more regions and countries than ever before. Notes Recent trends also suggest that private spon- sors now put more emphasis than before on risk 1. Unless otherwise stated, the investment data in this note are mitigation strategies. First, the larger share of in real terms (2005 U.S. dollars). The data are from the Private investment going to telecommunications suggests Participation in Infrastructure (PPI) Project Database and include that sponsors are giving priority to sectors where projects that reached financial closure between 1990 and 2005. The consumer prices tend to be set at levels fully data refer to investment commitments (not disbursements) and covering costs and where undue political inter- cover sector expansion as well as acquisition of government assets. vention is relatively rare. Second, the focus on While the data here are in real terms, those on the PPI Web site are greenfield projects suggests that sponsors are in current U.S. dollars. Real investment data were adjusted by the seeking protection from some political and regula- U.S. consumer price index using 2005 as the base year. For more tory risks. Indeed, in energy and water, greenfield information, see the Web site (ppi.worldbank.org). projects primarily involve bulk facilities (power plants, water treatment plants) and include off- 2. For an analysis of recent trends in private participation in water, take agreements with a public party, shielding see Philippe Marin and Ada Karina Izaguirre, "Private Participation private operators from the politically sensitive in Water: Toward a New Generation of Projects?" Gridlines series, consumer market. Finally, the somewhat greater no. 13 (PPIAF, Washington, D.C., 2006). focus on management and lease contracts, which require no private investment, similarly suggests 3. For more information on top sponsors in 1990­2001, see World a desire to reduce private sector risks. Bank, Private Participation in Infrastructure: Trends in Developing Countries in 1990­2001 (Washington, D.C., 2003). GRIDLINES A healthy concern for risks among private sponsors, and the adop- 4. These data confirm the finding of a recent study that developing Gridlines share emerging knowledge tion of pragmatic strategies to country investors have become a major source of investment on public-private partnership and give an limit their risk exposure, are financing for infrastructure projects with private participation. See overview of a wide selection of projects from various regions of the world. Past notes can be certainly not bad things. But Michael Schur, Stephan von Klaudy, and Georgina Dellacha, "The found at www.ppiaf.org/gridlines. Gridlines are a governments need to realize Role of Developing Country Firms in Infrastructure: A New Class publication of PPIAF (Public-Private Infrastructure that limited forms of private PUBLIC-PRIVATE INFRASTRUCTURE ADVISORY FACILITY of Investors Emerges," Gridlines series, no. 3 (PPIAF, Washington, Advisory Facility), a multidonor technical assistance participation may provide D.C., 2006). facility. Through technical assistance and knowledge dissemination PPIAF supports the efforts of policymakers, nongovernmental organizations, research institutions, and others in designing and implementing strategies to tap the full potential of private involvement in infrastructure. The c/o The World Bank, 1818 H St., N.W., Washington, DC 20433, USA views are those of the authors and do not necessarily PHone (+1) 202 458 5588 FAX (+1) 202 522 7466 reflect the views or the policy of PPIAF, the World Bank, PUBLIC-PRIVATE INFRASTRUCTURE ADVISORY FACILITY generAl eMAilppiaf@ppiaf.org web www.ppiaf.org or any other affiliated organization.