37539 noTE no. 3 ­ APRIL 2006GRIDLINES Sharing knowledge, experiences, and innovations in public-private partnerships in infrastructure The role of developing country firms in infrastructure A new class of investors emerges Michael Schur, Stephan von Klaudy, and Georgina Dellacha D eveloping country investors have behind around 160 canceled or distressed emerged as a major source of invest- ment finance for infrastructure proj- projects over the period 1990­2004.3 In a ects with private participation. Indeed, in 2002 survey of 65 international investors in 1998­2004 these investors accounted for more the power sector, about half reported being of this finance in transport across develop- less interested in or retreating from develop- ing regions--and for more in South Asia and ing countries (Lamech and Saeed 2003). Sub-Saharan Africa--than did investors from developed countries. For policymakers this New players from developed countries have development suggests a need to rethink the emerged. In the water sector, for example, criteria used in selecting investors in schemes they include Aquamundo of Germany, for private participation, which have been Acea of Italy, Aguas de Bilbao, Aguas de biased toward large international operators. Portugal, and municipal water utilities In the early 1990s, after decades of poor from France and Germany (Harris 2003). performance by the public sector, develop- But these companies have engaged far less ing countries increasingly sought to involve in developing countries than their earlier the private sector in providing infrastructure counterparts. services through widespread privatization, Meanwhile local and regional operators and deregulation, and structural reform. The investors from developing countries have efforts proved fruitful: developing countries become more prominent.4 In southern Africa saw investment commitments of nearly companies like NetGroup (South Africa) US$755 billion in more than 2,400 public- and Electricity Distribution Management private partnerships in infrastructure during (Namibia) seek to extend their experience the 1990s.1 Large corporations from devel- in low-cost rural electrification projects oped countries played a big part in this wave into broader investment and management of activity. Among the most active were opportunities in southern and East Africa such companies as AES Corp, Electricité (NetGroup won the Tanesco manage- de France, Enron, Suez, Veolia, Telefónica, ment contract in Tanzania). In 2004 Alusa France Telecom, and Deutsche Telekom. Engenharia from Brazil engaged in three But the optimism evident early in the decade electricity transmission projects in its home was dimming by its end. An estimated 40 country, and Chilean groups Solari, Luksic, percent of the contracts for infrastructure PUBLIC-PRIVATE INFRASTRUCTURE ADVISORY FACILITY Michael Schur is deputy program manager of PPIAF. Stephan projects were being renegotiated.2 Many von Klaudy is lead infrastructure specialist, and Georgina multinational investors began reducing their Dellacha a consultant, in the World Bank's Infrastructure exposure in developing countries, leaving Economics and Finance Department. Helping to eliminate poverty and achieve sustainable development through public-private partnerships in infrastructure PUBLIC-PRIVATE INFRASTRUCTURE ADVISORY FACILITY and Consorcio Financiero dominated five investors).7 But there are striking differences of six water concession contracts secured in in the level and pattern of participation by Chile. In the same year the Indian consor- developing country investors across types of tium of Rites and Ircon International won projects, sectors, and regions. the contract for restoring and managing Mozambique's Beira rail system. Across types of projects Developing country investors contributed Anecdotal evidence such as this suggests that more than half the private investment in developing country investors have improved concessions (54 percent) in 1998­2004, their position and are taking on a larger slightly less than half in greenfield projects share of infrastructure investments. Three (44 percent), and a smaller share in divesti- possible reasons for this: First, the broad- tures (30 percent). ening and deepening of capital markets in developing countries has enabled their inves- Across sectors tors to mobilize more resources. Second, the Developing country investors accounted growing experience of these firms with infra- for as much as 52 percent of the private structure investments, often as minority investment in transport and 46 percent in partners with developed country investors, telecommunications in 1998­2004, but has given them more expertise. Third, these only about 27 percent in energy and 19 Percentage of total companies might well be in a better posi- 80 tion to understand and therefore deal with 60 the political economy issues in developing Figure 1 Developing country investors now a major 40 country infrastructure projects with private source of infrastructure finance participation. Private investment in developing country infrastructure projects 20 by type of investor, 1998­2004 0 The evidence and assumptions outlined here 1998 1999 2000 2001 2002 2003 2004 Percentage of total justify analysis to more thoroughly assess the 80 Developed Developing local Developing foreign Developing role of local and regional investors and oper- 60 country ators in developing country infrastructure and to explore the policy implications. This 40 investors note reports findings from the first phase of a 20 Percentage are taking PPIAF-funded study recently commissioned 80% 0 1998 1999 2000 2001 2002 2003 2004 on a larger to do so (Ettinger and others 2005). The 60% results presented here focus on the origin of Developed Developing local Developing foreign share of 40% the investment commitments that material- 20% Source: Ettinger and others 2005, updated to include 2004 data. infrastructure ized in the 1,200 projects reaching financial 0% investments closure in 1998­2004.5 Concession Divestiture Greenfield Management Percentage or Lease A larger role--but varied Figure 2 80% developed country investor developing country investor Developing country investors most important in Developing country investors have become a 60% transport and telecoms major source of finance for developing coun- Cumulative private investment in developing country 40% infrastructure projects by type of investor and sector, 1998­2004 try infrastructure projects (figure 1).6 For projects reaching financial closure in 1998­ 20% 80 64 61 2004, these investors mobilized about 42 0% 60 percent of the private funds. The large major- Concession Divestiture Greenfield Management 40 34 or Lease ity (29 percent) came from local companies developed country investor developing country investor 19 22 20 17 19 13 investing in projects in their own country 5 1 3 0 ("developing local" investors); of the rest 0 Energy Telecoms Transport Water (13 percent), almost all came from investors Developed Developing local Developing foreign from nearby countries (together with cross- 80 Source:64Ettinger and others 2005, updated to include 2004 data. 61 regional investors, "developing foreign" 60 40 34 Percentage of total 19 22 17 19 80 64 61 60 40 34 The role of developing country firms in infrastructure 19 22 19 20 17 13 5 1 3 0 0 Energy Telecoms Transport Water Figure 3 Across regions Developed Developing local Developing foreign Mixed trends across sectors South Asia had the largest share of investment Developing country investors' share of private investment in from local investors--55 percent of the region's developing country infrastructure projects by sector, 1998­2004 total in 1998­2004. Moreover, the share from Percentage of total developed country investors declined over the 100 period: while the average was 33 percent, it fell 75 to just 19 percent in 2002­04. Local investors 50 were the main sponsors in 62 percent of the 25 region's projects. 0 East Asia and Pacific also had very active 1998 1999 2000 2001 2002 2003 2004 local investors, accounting for 42 percent South Asia Transport Telecoms Energy Water of private investment in 1998­2004 and had the Source: Ettinger and others 2005, updated to include 2004 data. acting as the main sponsors in 36 percent largest of projects. Much of this investment was in telecommunications (where local investors share of percent in water (figure 2). In transport contributed 65 percent) and transport (48 investment the large share typically reflects a rela- percent). tively large number of local construction from local contractors, while in telecommunications In Sub-Saharan Africa developing country investors it reflects mainly the investments of a few investors accounted for 65 percent of private large firms such as America Movil and investment. But much of this came from the Carso Group, both from Mexico, and private investors in South Africa alone. MTN, from South Africa. The energy Latin America and the Caribbean had the sector remains dominated by large utility most private investment in infrastructure in firms from developed countries; the devel- 1998­2004--accounting for 59 percent of oping country players that have emerged the developing world's total--so its results tend to secure contracts for relatively small are strongly reflected in the global picture. power systems. This region also had the sharpest drop in The share of private investment from devel- private investment: in 2004 investment was only 9 percent of that in 1998. Developing oping country investors has been rising in country investors were the main sponsors of energy and water, but falling in telecom- projects as often as developed country inves- munications and transport (figure 3). tors were, but these investors accounted for Determining the exact reasons for these considerably more investment in 1998­ trends is difficult. But in the water sector the 2004. rising trend is explained at least in part by the involvement of local sponsors in several Developed country investors dominated in concession contracts recently awarded in Eastern Europe and Central Asia, with 78 Chile. Conversely, the reverse trend in tele- percent of investment and 72 percent of communications (particularly the sharp drop projects, reflecting in large part the prox- between 2003 and 2004) can be explained imity and interest of Western European by the participation of investors from two companies. Local firms have a significant developed countries, Kuwait and the United role only in transport, accounting for 45 Arab Emirates, in the acquisition of licenses percent of investment. to provide mobile services in Algeria, Jordan, The Middle East and North Africa had the Pakistan, and Saudi Arabia--transactions fewest investments, with most of these in accounting for 70 percent of total private telecommunications, making it hard to investment in the sector in 1998­2004. discern clear patterns. The implications? Still unclear Notes As large multinational utilities retreat 1 Data are from the Private Participation in Infrastructure (PPI) from big infrastructure projects in emerg- Project Database (ppi.worldbank.org), which includes projects only in low- and middle-income countries, as classified by the ing markets, especially in riskier and more World Bank. Country classifications and project information are politically sensitive countries and sectors, updated annually. Data in this note are in 2004 U.S. dollars. local and regional investors may be starting 2 Excluding contracts in telecommunications (World Bank, Private Sector Advisory Services 2003). to fill the gap. In some regions they are will- 3 Canceled projects are those in which private sponsors sell or ing to play as large a role as investors from transfer their economic interest back to the government; remove developed countries. all management and personnel; or cease operation, service provision, or construction. Distressed projects are those under international arbitration or for which cancellation has been The potential role of this investor class is formally requested. encouraging. For policymakers it suggests a 4 Examples here are from Harris (2003), updated to take account need to rethink privatization design, partic- of recent changes. ularly the criteria used in selecting investors, 5 The study, which drew on the PPI Project Database, chose 1998 as the starting point mainly because of data limitations relating which have been biased toward large inter- to 1990­97. In addition, 1998 appeared to be a good starting national firms. The growth in new private point for assessing the blend of investors willing to invest in developing countries. That year marked the effective end of the infrastructure firms also matters because it early enthusiasm for private participation in infrastructure, with should reduce the risk of collusion and other annual investment flows peaking in 1997, then falling sharply as several factors led to a reduction in both the size and the number anticompetitive practices. of projects. 6 Developing country investors are firms majority-owned or controlled Other implications are less clear. Are local by shareholders from low- or middle-income economies, developed and regional investors better equipped country investors by shareholders from high-income economies (as classified by the World Bank). than their developed country counterparts 7 The calculation of investment shares assumes that each investor to deal with the political economy issues accounts for a share in total investment that is equal to its share raised by private participation in infrastruc- in equity. ture, as they are often assumed to be? It is 8 Conversely, if local capital markets are developed, it can be presumed that they are as readily available to foreign firms as to too early to tell. Foreign participation can local ones. be politically sensitive, but consumers are References often equally concerned that local firms Ettinger, Stephen, Michael Schur, Stephan von Klaudy, Georgina are connected to the government and thus Dellacha, and Shelly Hahn. 2005. "Developing Country Investors susceptible to corruption. and Operators in Infrastructure." Trends and Policy Options Series, no. 3. PPIAF, Washington, D.C. Do local firms have advantages in financ- Harris, Clive. 2003. Private Participation in Infrastructure in Developing Countries: Trends, Impacts, and Policy Lessons. World Bank Working ing, as is also often assumed? They have Paper 5. Washington, D.C. better access to local currency equity capi- Lamech, Ranjit, and Kazim Saeed. 2003. "What International tal and could have an edge in mobilizing Investors Look for When Investing in Developing Countries: Results from a Survey of International Investors in the Power local currency debt and thus mitigating Sector." Energy and Mining Sector Board Discussion Paper 6. foreign exchange risk. But if local capital World Bank, Washington, D.C. GRIDLINES markets are undeveloped and local World Bank, Private Sector Advisory Services. 2003. Private Participation in Infrastructure: Trends in Developing Countries in term finance unavailable, these 1990­2001. Washington, D.C. Gridlines share emerging knowledge advantages will be relatively on PPP and give an overview of a wide selection of projects from various regions of modest.8 So while the recent the world. Past notes can be found at www. rise of local and regional ppiaf.org/gridlines. Gridlines are a publication of PPIAF (Public-Private Infrastructure Advisory investors should be consid- Facility), a multidonor technical assistance ered good news, neither PUBLIC-PRIVATE INFRASTRUCTURE ADVISORY FACILITY facility. Through technical assistance and its policy implications nor knowledge dissemination PPIAF supports the efforts of policymakers, nongovernmental organizations, its sustainability has been research institutions, and others in designing and clearly established yet. implementing strategies to tap the full potential of private involvement in infrastructure. The views are those of the authors and do not necessarily reflect c/o The World Bank, 1818 H St., N.W., Washington, DC 20433, USA the views or the policy of PPIAF,the World Bank, the World Bank, Phone (+1) 202 458 5588 FAX (+1) 202 522 7466 or any other affiliated organization. PUBLIC-PRIVATE INFRASTRUCTURE ADVISORY FACILITY generAl eMAIl ppiaf@ppiaf.org web www.ppiaf.org