306 35669 privatesector P U B L I C P O L I C Y F O R T H E NUMBER NOTE 2006 Rebuilding Infrastructure MARCH Jordan Schwartz and Policy Options for Attracting Private Funds after Conflict Pablo Halkyard Postconflict countries have had difficulty attracting private Jordan Schwartz investment in infrastructure, and their growth and stability have (jschwartz3@worldbank.org) is a senior infrastructure suffered as a result. But the success of a few countries hints at policy specialist in the Finance, initiatives that governments could pursue to close this destabilizing Private Sector, and Infrastructure Department gap in investment. The emphasis should be on making sure that of the World Bank's Latin PRESIDENCY sector reforms go far enough, getting the timing and sequencing of America and the Caribbean the reforms right, reducing investor risk, and recognizing the VICE Region. Pablo Halkyard (phalkyard@worldbank.org) importance of small-scale providers. is a private sector development associate in the Countries emerging from conflict face an cessful. Their experiences point to policy deci- World Bank and urgent need to reestablish basic infrastructure sions and investment approaches that can DEVELOPMENT International Finance services, but they lack the public revenue, gov- speed private participation in infrastructure Corporation's Private Sector ernment capacity, and investor interest to do and thus the contribution of the private sector Development Vice Presidency. SECTOR so. Although donors often generously support to reconstruction and growth. This Note summarizes a the early phases of reconstruction, postconflict discussion of policy governments are generally unable to efficiently Traditional policy responses PRIVATE options from a paper by absorb this aid. And in the face of urgent pol- Because postconflict countries tend to have lit- Jordan Schwartz, Shelly icy priorities in the immediate postconflict tle capacity to absorb aid, most early infrastruc- Hahn, and Ian Bannon period, governments rarely focus on establish- ture projects take the form of donor-driven (2004). A companion ing a welcoming investment climate. Thus for construction contracts for rehabilitation, often GROUP Note reviews trends in the first few years after conflict, countries con- with provisions for interim or emergency oper- postconflict flows of aid front a bitter paradox: they can neither make ations. These projects usually are not linked to BANK and private infrastructure full use of the donor funds suddenly available long-term strategies for service provision. investment (Schwartz and for reconstruction nor attract much private Moreover, once the initial contract has run its Halkyard 2006). investment for infrastructure.1 course, they typically rely on preconflict legal While the challenges of reconstructing arrangements and market structures. WORLD infrastructure are enormous, a few conflict- In such countries as Afghanistan, Bosnia and affected countries--El Salvador, Guatemala, Herzegovina, and Iraq early bilaterally spon- THE Mozambique--have been comparatively suc- sored infrastructure contracts have generally R E B U I L D I N G I N F R A S T R U C T U R E P O L I C Y O P T I O N S F O R A T T R A C T I N G P R I V A T E F U N D S A F T E R C O N F L I C T been managed through military procurement, for authorization. And when the two countries disconnected from the advisers, donors, and privatized their national operators, neither evolving public agencies that seek to establish offered an exclusivity period. By contrast, long-term regulatory structures. Once the envi- Nicaragua established several restrictions on ronment stabilizes, government agencies and market entry, such as exclusivity in fixed lines for state-owned enterprises are often reintroduced the incumbent and a 49 percent cap on foreign to take over operational responsibility. It is often ownership. The result: Nicaragua's incumbent only at this late stage that a postconflict govern- operator had a much lower price per line value ment begins reviewing market structures (seeking than those in the other two countries. 2 competition, unbundling utilities, separating The experience of these countries suggests oversight from operations, asking agencies to two main lessons for postconflict countries: elim- retrench), puts regulatory agencies into place, inate as many regulatory risk factors and barriers and seeks private investors. Pushing through the to entry as possible; and avoid complex bidding reform agenda can be more difficult at this later arrangements meant to maximize the revenues stage because new vested interests will have from licenses, concessions, or asset sales. emerged. Senior officials may have gained politi- While reconstruction generally coincides with cal leverage, and public servants will have gained a period of low revenue collection, the temptation opportunities for corruption through mispro- to use privatization for budgetary windfalls may be curement, nepotism, and extortion. Whether misguided. Infrastructure investors will have to manifested in the exorbitant cost of moving cargo "fund" these up-front transfers through lower through Sudan's state-owned river ports or cor- investments, higher tariffs, or both. This basic rupt procurement for El Salvador's water sector tradeoff between cash and exclusivity on the one construction contracts, the opportunity cost of hand, and investment on the other, is common delayed reform is passed on to the citizens and across all sectors. The priority for postconflict businesses of postconflict countries. governments should be to move quickly to create a regulatory environment that promotes private Goal of reform: investment and efficiency, investment, competition, and consumer benefits. not cash Emerging from conflict in the early 1990s, El Getting the timing and sequencing right Salvador, Guatemala, and Nicaragua all intro- The timing of reforms may also be crucial. duced reformed telecommunications legisla- Stepped arrangements in the immediate post- tion by 1996. A comparative analysis of these conflict period in conjunction with quick moves to reforms provides several lessons about the establish sectoral legal and regulatory frameworks importance of timing and approach in infra- can help. Stepped arrangements could include a structure reform in postconflict countries.2 plannedprogressionfrommodestformsofprivate El Salvador and Guatemala opted for rapid participation in infrastructure (such as service or deregulation, while Nicaragua chose a slower, management contracts) to deeper forms (such as staged liberalization. Partly as a result, El Salvador leases with investment contributions, concessions, and Guatemala have been able to mobilize more orpublic-privatepartnerships).Thefirststepsgen- private investment than Nicaragua, and that has erally involve little investment risk for private oper- led to higher service penetration. El Salvador and ators and may be particularly attractive to national, Guatemala implemented legal and regulatory regional, or diaspora-owned companies. frameworks that gave investors greater protec- The arrangements that define the rehabilita- tion from government intervention. Their reg- tion program should reflect the long-term inter- ulatory entities were granted more autonomy ests of the sector. If a government accepts a large than Nicaragua's and have operated under the loan from a donor--even at a highly conces- principle of minimal regulation. sional rate--to rehabilitate a port cargo termi- El Salvador and Guatemala also eliminated nal, it may be wise to ensure that the loan most regulatory barriers to entry once reforms agreements do not preclude future private par- began. Potential investors needed only to apply ticipation in the port. The port's improved effi- ciency will have a far greater value to the coun- Establishing an early track record in attracting try's economic future than the interest rate sav- private investments can have a positive demon- ings on a concessional loan. stration effect for future investments. Since telecommunications operators are often the first Reducing investor risk investors to arrive in conflict-affected countries, Infrastructure investments are more sensitive to reforms and regulatory approaches should facili- country risk than is general foreign direct tate their entry so that they may begin to influence investment--and they are especially sensitive to investor perceptions. country risk in postconflict countries (see 3 Schwartz and Halkyard 2006). Accordingly, Encouraging small-scale private providers donors and governments should work together Small-scale providers of infrastructure services to address the elements of political and eco- should also be encouraged, or at the very least nomic risk within their control or influence. not constrained or regulated out of business. One possible way to reduce investor risk is to Unregulated small-scale providers commonly "package" investment opportunities for dollar- emerge in conflict-affected countries to meet earning tradable businesses (such as mining, the pent-up demand of poor, rural, and peri- forestry, or gas and oil) with related infrastructure urban communities, especially in electricity and investments. In Mozambique the government's water supply. A recent study identified 49 coun- packaging of infrastructure investment opportu- tries with small private electricity providers, and nities with the multibillion-dollar Mozal smelting 32 with small-scale water providers; more than plant had tremendous success despite the risky half were conflict-affected countries (Kariuki post­civil war environment. The port had to be and Schwartz 2005). rehabilitated for the benefit of the new plant, but These providers can play a key role in the guaranteed access for third-party cargo ensured absence of established public utilities or major that the benefits spread through the regional private operators. Their role can be especially economy. Rail, road, electricity, and eventually important in postconflict countries, where telecommunications investments followed--all large-scale electricity projects, for example, typ- triggered to varying degrees by the anchor Mozal ically take six or seven years to materialize investment. (figure 1). In Cambodia small-scale private elec- Large industrial and natural resource invest- tricity providers were established throughout ments provide important and reliable demand the conflict period. The government's role in for infrastructure. They can also be used to handling such providers can prove crucial to demonstrate good contractual faith and to stim- poor and isolated communities. ulate reform of banking, property, and corpo- rate laws and regulations that in turn benefit Some conclusions infrastructure operators and investors. Of Restoring basic services to households and busi- course, blending regulated and nonregulated nesses is a defining challenge of postconflict businesses and guaranteeing third-party access reconstruction. For a government or donor-led to dedicated infrastructure raise regulatory strategy to succeed, it must recognize the haz- challenges, and these will require the attention ards of delays and false starts in sector reforms of postconflict governments and donors. and the risk perceptions of potential private Governments can also help reduce country investors. Several policy options exist: risk by, for example, respecting payment obli- I Use large investment opportunities in trad- gations for publicly contracted goods and ser- able sectors to mobilize investments in infra- vices and implementing regulations that allow structure. This can be done by selectively the repatriation of capital. Donors can assist in packaging business licenses with (reason- reestablishing or deepening short-term finance, able) obligations for service provision. banking, and other capital markets. For risks I Work to reduce country risk ratings by mak- that can only be mitigated, not reduced, donors ing contractual payments on time, enacting can provide guarantees and insurance products. regulations that allow capital repatriation, R E B U I L D I N G I N F R A S T R U C T U R E P O L I C Y O P T I O N S F O R A T T R A C T I N G P R I V A T E F U N D S A F T E R C O N F L I C T Figure Energy projects and conflict 1 Large-scale energy projects with private participation Cumulative annual establishment of small-scale electricity providers implemented in postconflict countries by year in Cambodia, 1990­2000 after conflict viewpoint Small-scale providers in existence as a Number of projects percentage of those existing in 2000 Year 0 2 4 6 8 100 0 is an open forum to 1 Armed conflict, 80 encourage dissemination of coup d'état 2 public policy innovations for 3 60 private sector­led and 4 market-based solutions for 5 New elections development. The views 40 6 published are those of the 7 authors and should not be 20 8 Peace accord attributed to the World Electricity distribution Electricity generation Bank or any other affiliated 0 Gas distribution 1990 1992 1994 1996 1998 2000 organizations. Nor do any of the conclusions represent Note: Left-hand chart based on data for 10 countries that have emerged from war since 1990 and for which eight years of consistent data were available: Azerbaijan, Cambodia, El Salvador, Georgia, Lebanon, Mozambique, Nicaragua, Rwanda, Tajikistan, and the Republic of Yemen. official policy of the World Source: For left-hand chart, World Bank, Private Participation in Infrastructure (PPI) Project Database; for right-hand chart, Enterprise Development Cambodia 2001. Bank or of its Executive Directors or the countries and establishing an early track record in Bank, East Asia and Pacific Region, Energy Unit, they represent. attracting private investment. Washington, D.C. I Use guarantees and insurance products to Kariuki, Mukami, and Jordan Schwartz. 2005. "Global To order additional copies mitigate risks ranging from revenue and traf- SPSPSurvey."Public-PrivateInfrastructureAdvisoryFacility, contact Suzanne Smith, fic risk on the commercial side to expropria- Washington, D.C. managing editor, tion, currency inconvertibility, war and civil Room F 4K-206, Schwartz, Jordan, and Pablo Halkyard. 2006. "Post- disturbance, and even breach of contract on The World Bank, conflictInfrastructure:TrendsinAidandInvestmentFlows." 1818 H Street, NW, the policy side. Viewpoint series, Note 305. World Bank Group, Private Washington, DC 20433. I Recognize the importance of small-scale pri- Sector Development Vice Presidency, Washington, D.C. vate service providers. Possible ways to do Schwartz, Jordan, Shelly Hahn, and Ian Bannon. 2004. Telephone: this: provide support to financial intermedi- "The Private Sector's Role in the Provision of 001 202 458 7281 aries to extend financing, assist in developing Infrastructure in Post-Conflict Countries: Patterns and Fax: licenses and other contractual arrangements Policy Options." CPR Working Paper 16. World Bank, 001 202 522 3480 that legitimize these businesses, and train Washington, D.C. Email: community-based or local oversight bodies. ssmith7@worldbank.org Produced by Grammarians, Inc. Notes 1. For a detailed discussion of this issue, see Schwartz Printed on recycled paper and Halkyard (2006). 2. For detailed data on these country examples, see Schwartz, Hahn, and Bannon (2004). References Enterprise Development Cambodia. 2001. "Survey of Rural Energy Enterprises." Report prepared for World 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