299 34141 privatesector P U B L I C P O L I C Y F O R T H E NUMBER NOTE 2005 Private Infrastructure OCTOBER Ada Karina Izaguirre Ada Karina Izaguirre Emerging Market Sponsors Dominate Private Flows (aizaguirre@worldbank.org) is an infrastructure Investment flows to infrastructure projects with private participation specialist with the World in developing countries grew by 12 percent to US$64 billion in 2004. Bank's Infrastructure Economics and Finance Telecommunications investments drove the growth, rising by 35 percent, Department. while investment flows to other infrastructure sectors fell by 20 Drawing on the Private percent. Greenfield projects were the most common type of private Participation in PRESIDENCY participation, and management contracts became more frequent. Infrastructure (PPI) VICE Project Database, this In 2004 developing countries saw investment countries (Chile, China, and Mexico)--and Note reviews developments flows to infrastructure projects with private par- was focused on less risky projects than those of in 2004 and changes in ticipation grow for the first time since 2000 (fig- the 1990s. Water and wastewater treatment private participation in ure 1).1 But the growth was driven by just one plants claimed 50 percent of the investment infrastructure since sector: telecommunications. Investment flows flows to the sector in 2003­04--up from 14 per- DEVELOPMENT 2001. The database is a to this sector grew by more than 35 percent to cent in 1995­2000, when private activity in joint product of the World reach US$45 billion,2 a level just 15 percent water was at its peak. Unlike water utilities, Bank's Infrastructure SECTOR lower than the peak in 1998, when Brazil which depend on bill collection for their rev- Economics and Finance Department and the divested the entire Telebras system.3 enues, water and wastewater treatment plants Public-Private Investment flows to telecommunications PRIVATE Infrastructure Advisory grew in all developing regions except Sub- Investment in infrastructure projects with Facility (PPIAF), a Saharan Africa, where they declined after private participation in developing multidonor technical peaking at US$4.7 billion in 2003. Stand-alone Figure countries, 1990­2004 1 assistance fund mobile operators drove the growth in telecom- GROUP US$ billions (http://www.ppiaf.org). munications, accounting for more than 50 120 For information percent of the investment flows to the sector. BANK on the database, go to In all other infrastructure sectors private 80 Total http://ppi.worldbank.org. activity remained subdued. In water, private activity grew by more than 30 percent but from 40 Telecoms a very low level, with investment flows amount- Other sectors WORLD 0 ing to US$2 billion in 2004 (table 1). This lim- 1990 1995 2000 2004 ited activity was strongly concentrated--90 Source: World Bank and PPIAF, PPI Project Database. THE percent of investment flows went to just three P R I V A T E I N F R A S T R U C T U R E E M E R G I N G M A R K E T S P O N S O R S D O M I N A T E P R I V A T E F L O W S Investment in infrastructure projects with private participation in developing countries, by sector or region, Table 1995­2004 (US$ billions) 1 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Sector Energy 21.7 30.0 46.3 29.3 21.1 27.4 15.6 19.2 17.6 12.7 Electricity 18.2 27.4 43.3 23.3 18.3 24.9 14.1 10.3 14.7 12.1 Natural gas 3.6 2.6 3.0 6.1 2.7 2.5 1.5 8.9 2.9 0.6 Telecommunications 17.2 24.6 39.9 51.8 36.1 48.9 45.2 33.0 33.2 45.0 Transport 8.2 15.7 19.4 17.5 8.2 9.1 8.1 3.6 5.0 4.5 Water and sewerage 1.5 1.7 8.4 2.2 6.5 4.8 2.4 2.0 1.4 1.9 Region East Asia and Pacific 18.8 28.0 34.9 9.7 13.1 14.3 11.0 9.7 13.0 8.7 Europe and Central Asia 8.1 10.5 14.2 12.1 9.4 25.0 12.3 16.8 12.2 12.5 Latin America and the Caribbean 17.1 25.8 49.3 71.2 37.3 38.7 33.7 19.6 15.8 17.4 Middle East and North Africa 0.1 0.3 5.1 3.1 3.0 4.1 4.4 1.6 6.2 10.9 South Asia 3.8 5.8 6.3 2.3 4.6 4.4 4.6 6.0 3.4 9.6 Sub-Saharan Africa 0.8 1.7 4.3 2.5 4.6 3.7 5.3 4.2 6.5 4.9 Total 48.7 72.1 114.1 100.9 72.0 90.2 71.3 57.8 57.2 64.1 Note: Data refer to projects reaching financial closure in 1990­2004. Source: World Bank and PPIAF, PPI Project Database. usually secure project revenues through water There were 4 airport projects: the partial divesti- purchase (or payment) agreements with public ture of Airports of Thailand, a BOT contract for utilities. Water utilities attracting private capital a terminal in Turkey, a lease contract in China, in 2004 were smaller than those doing so in the and a concession for a small airport in República late 1990s. Investment commitments in water Bolivariana de Venezuela. There were 2 railway utility projects in 2004 averaged US$60 million, concessions, in Chile and Mozambique. less than half the US$190 million in 1998­99. In energy and transport, investment flows fell Diverging stories to levels not seen since the early 1990s. As in ear- Private activity in 2004 confirmed that telecom- lier years, the private activity in energy was munications is the most successful sector in directed mainly to electricity projects in a few attracting private investment. The sector large developing economies, such as Brazil, accounted for 70 percent of annual investment India, Malaysia, Mexico, and Thailand. Power flows. In striking contrast, the water sector plants accounted for 75 percent of investment attracted just 3 percent. This outcome is not sur- flows to the sector, followed by stand-alone trans- prising: around the world mobile phone firms mission facilities and distribution companies outperform water utilities in financial returns, (each with 9 percent). In natural gas, private service provision, and cost-recovering tariffs. activity was limited to two countries, China and Why such differences in performance? The Bulgaria, which awarded build-operate-transfer reasons include differences in the technologies (BOT) contracts for distribution networks. of the two industries as well as in consumer expec- In transport, private activity was also highly tations.4 Mobile phone markets support compe- concentrated: three countries--Chile, China, tition. The fixed costs of entry and exit are and India--accounted for more than 50 percent relatively low. The market power of dominant of investment flows. In toll roads, the only sub- providers is usually controlled through competi- sector that saw some recovery, 10 projects with tion. Consumers have several options for private participation reached financial closure provider and price and so do not resist paying in 2004, with investments of US$2 billion. In sea- prices that include a fair return on capital. ports, 12 container terminal projects reached In contrast, water utilities are natural monop- closure, with investments of US$1.4 billion. olies, and governments regulate water prices. For sociopolitical reasons they usually set prices Among the other forms of private participa- below costs, immediately ensuring poor finan- tion, those transferring less risk to the private cial health for the utility. The political sensitiv- sector were also those less affected by the slow- ity of prices for water arises from its necessity for down in private activity. Management contracts life, its positive health externalities, and its his- became more common, increasing from 2 per- tory of being underpriced. cent of projects (35) in 1990­2000 to 7 percent (44) in 2001­04. They grew in number in all Income group trends regions and sectors, but most were for water Low-income countries benefited most from the projects. The share of lease contracts remained 3 recovery in 2004.5 Investment flows to this group at 2 percent of projects in both periods. grew to a peak of US$13 billion, driven by both Fourteen lease contracts were implemented in telecommunications and energy (figure 2). With 2001­04, most for water projects. seven power plants and a transmission line In contrast, divestitures and concessions reaching financial closure, India had the most declined as a share of both investment flows and growth in electricity. Lower-middle-income projects. Most investment flows to divestitures in countries saw the second consecutive year of 2001­04 went to projects that had reached recovery thanks to growth in telecommunica- financial closure in the 1990s. New divestitures tions, which more than compensated for a were limited to East Asia and Europe and decline in the other sectors. Flows to upper- Central Asia by 2003­04. middle-income countries remained constant, at US$26 billion, with a recovery in telecommuni- More canceled and distressed projects cations and water offsetting a drop in energy and In 2004, 10 projects, involving investment com- transport. mitments of US$1.3 billion, were canceled, increasing the number of projects canceled or Regional trends under distress in 1990­2004 to around 160.6 In Latin America private activity recovered for Those projects accounted for 9 percent (US$79 the first time since 2000, with investment flows billion) of the total investment flows slated for growing in all sectors except energy. In the infrastructure projects with private participa- Middle East and North Africa flows peaked for tion in 1990­2004. the second consecutive year thanks to telecom- Water and sewerage continued to be the sec- munications. South Asia saw a peak in invest- tor most affected, with projects accounting for 37 ment flows driven by both telecommunications percent of total investment flows to the sector in and electricity. But in East Asia flows fell to their 1990­2004 canceled or under distress by lowest level since the early 1990s, with all sectors December 2004. The high incidence of canceled affected. Sub-Saharan Africa also saw private and distressed water projects reflects the politi- activity decline, though from its highest level in cal difficulties of setting and maintaining tariffs 1990­2004. at cost-recovering levels in the sector. Canceled Greenfield projects dominant Investment in infrastructure projects In the 1990s the most common type of private with private participation in developing participation varied across sectors and regions. Figure countries, by income group, 1990­2004 2 But in the past few years greenfield projects have US$ billions become the most common type across infra- 80 Upper middle structure sectors--except in water, where con- 60 income cessions still dominate. They are also the most Lower middle 40 common across developing regions--except in income Europe and Central Asia, where divestures are 20 Low income still preferred. Greenfield projects accounted 0 1990 1995 2000 2004 for 56 percent of total investment flows and 60 Source: World Bank and PPIAF, PPI Project Database. percent of projects in 2001­04. P R I V A T E I N F R A S T R U C T U R E E M E R G I N G M A R K E T S P O N S O R S D O M I N A T E P R I V A T E F L O W S and distressed projects accounted for smaller, Grupo Solari and Grupo Luksic, took the lead though still substantial, shares of investment in in domestic projects. And two Malaysian water transport (13 percent) and energy (11 percent). utilities, PBA Holdings and Ranhill Utilities, saw In all three sectors canceled or distressed proj- their first investments in China as the beginning ects accounted for smaller shares of the total of their expansion into new markets.8 viewpoint number of projects, suggesting that larger ones had been more prone to cancellation or distress. is an open forum to New investors emerging Notes encourage dissemination of The landscape of companies pursuing infra- 1. The Private Participation in Infrastructure (PPI) public policy innovations for structure projects is changing. In recent years, Project Database includes only low- and middle-income private sector­led and as the large early sponsors from industrial countries, as classified by the World Bank. Country classifi- market-based solutions for countries--such as AES, EdF, and SUEZ-- cations and project information in the database are development. The views reduced their investments in developing coun- updated annually. The 2004 update includes upward revi- published are those of the tries, other sponsors from industrial countries sions for 1999­2003 in energy and telecommunications. authors and should not be emerged. But the new players never matched 2. All U.S. dollar amounts are in nominal terms as attributed to the World the earlier investors' level of engagement in posted on the PPI Web site (http://ppi.worldbank.org). Bank or any other affiliated developing countries. This reporting method differs from that used in earlier organizations. Nor do any of Corporations based in developing countries Notes based on the PPI Project Database, which reported the conclusions represent also emerged as important sponsors, with proj- investment in real U.S. dollars for the year of the update. official policy of the World ects accounting for 39 percent of investment 3. The PPI Project Database underestimates invest- Bank or of its Executive flows in 1998­2003.7 And half the top 10 spon- ments in telecommunications because of data gathering Directors or the countries sors for projects implemented in 2001­04 are problems. It relies on public information, but many oper- they represent. from emerging markets: Emirates Telecommu- ators do not release data on investments. nications Corporation (United Arab Emirates), 4. For more information, see World Bank, "Infra- To order additional copies Reliance Industries (India), Malakoff (Malaysia), structure Development: The Roles of the Public and Pri- contact Suzanne Smith, America Movil (Mexico), and Gazprom (Russ- vate Sectors" (Infrastructure Economics and Finance managing editor, ian Federation). Room F 4K-206, Department, Washington, D.C., 2005, draft). Emerging market sponsors were most promi- The World Bank, 5. For the 2004 update the PPI Project Database used 1818 H Street, NW, nent in telecommunications, claiming 9 of the the World Bank's country income classification published Washington, DC 20433. top 10 spots for projects implemented in in July 2004: low income, gross national income (GNI) 2001­04. In addition to Emirates Telecommu- per capita of US$765 or less; lower middle income, Telephone: nications Corporation, Reliance Industries, and US$766­3,035; and upper middle income, US$3,036­9,385. 001 202 458 7281 America Movil, the list includes MTN Group 6. Canceled projects are those in which private spon- Fax: (South Africa), Orascom (Arab Republic of sors sell or transfer their economic interest back to the gov- 001 202 522 3480 Egypt), Telemar Participações (Brazil), Wataniya ernment; remove all management and personnel; or cease Email: Telecom (Kuwait), Globalcom (Nigeria), and operation, service provision, or construction. Distressed ssmith7@worldbank.org Bharti Enterprises (India). projects are those under international arbitration or for Emerging market sponsors also became key which cancellation has been formally requested. Produced by Grammarians, players in energy, with 4 ranking among the top 7. For more on the emergence of developing country Inc. 10 for projects implemented in 2001­04: Malakoff sponsors, see Stephen Ettinger, Shelly Hahn, and Georgina (Malaysia), China Light and Power (Hong Kong, Dellacha, "Developing Country Investors and Operators in Printed on recycled paper China), Banpu (Thailand), and Sasol (South Infrastructure, Phase 1 Report" (Public-Private Infrastruc- Africa). In India local investors drove the recent ture Advisory Facility, Washington, D.C., 2005). revival of private activity in electricity. 8. See PBA Holdings' 2004 annual report at http:// In water, emerging market companies began www.pba.com.my/ and Ranhill Utilities' press releases at to appear among the main sponsors in both http://www.ranhill.com.my/. local and foreign markets in 2001­04. Local companies with little or no sector experience, such as the Russian Interros and the Chilean T h i s N o t e i s a v a i l a b l e o n l i n e : h t t p : / / r r u . w o r l d b a n k . o r g / P u b l i c P o l i c y J o u r n a l