WORLD BANK TECHNICAL PAPER NO. 501 Worlk in progro*s WTP50I for public discussion April 2001 Private Infrastructure in East Asia Lessons Learned in the Aftermath of the Crisis A W U~~~~~ri A/d -o Baietti WORLD BANK TECHNICAL PAPER NO. 501 Private Infrastructure in East Asia Lessons Learned in the Aftermath of the Crisis A/do Baietti The World Bank Washington, D.C. Copyright C 2001 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing April 2001 1 2 3 4 04 03 02 01 Technical Papers are published to communicate the results of the Bank's work to the develop- ment community with the least possible delay. The typescript of this paper therefore has riot been prepared in accordance with the procedures appropriate to formal printed texts, and the World Bank accepts no responsibility for errors. Some sources cited in this paper may be informa ! docu- ments that are not readily available. The findings, interpretations, and conclusions expressed in this paper are entirely those of the author(s) and should not be attributed in any manner to the World Bank, to its affiliated oiganiza- tions, or to members of its Board of Executive Directors or the countries they represent. The World Bank does not guarantee the accuracy of the data included in this publication and accepts no responsibility for any consequence of their use. The boundaries, colors, denominations, and other information shown on any map in this volume do not imply on the part of the Worlc Bank Group any judgment on the legal status of any territory or the endorsement or acceptance of such boundaries. The material in this publication is copyrighted. The World Bank encourages dissemination of its work and will normally grant permission promptly. Permission to photocopy items for internal or personal use, for the internal or personal ise of specific clients, or for educational classroom use, is granted by the World Bank, provided t iat the appropriate fee is paid directly to Copyright Clearance Center, Inc., 222 Rosewood Drive, Dan- vers, MA 01923, U.S.A., telephone 978-750-8400, fax 978-750-4470. Please contact the Copyi ight Clearance Center before photocopying items. For permission to reprint individual articles or chapters, please fax your request with complete information to the Republication Department, Copyright Clearance Center, fax 978-750-44;'70. All other queries on rights and licenses should be addressed to the World Bank at the ad dress above or faxed to 202-522-2422. ISBN: 0-8213-4936-8 ISSN: 0253-7494 Aldo Baietti is a senior private finance specialist for the East Asia Private Sector Develoj ment unit at the World Bank. Library of Congress Cataloging-in-Publication Data has been applied for. Contents Foreword v Abstract vi Overview 1 The Economic Context 3 The Crisis 3 Economic Recovery 4 Private Participation in Infrastructure 6 Impact of the Crisis on Infrastructure 7 Trends in Private Participation in Infrastructure Investment, 1994-99 9 Sector by Sector Overview 11 Power 11 Telecommunications 12 Tlransport 13 Water 13 Financing Structure and Terms 14 The Status of Reforms in East Asian Countries 1 5 Indonesia 1 6 Malaysia 1 7 The Philippines 17 Republic of Korea 18 Thailand 19 Viletnam 2 1 Lessons from the Crisis: How Should the Countries Respond? 23 Policy Lessons 2 3 The need for fundamental reforms 2 3 The choice of modalities for private participation in infrastructure 24 Finance or ownership? 26 Domestic financial markets and financial discipline 28 Management of contingent liabilities 29 Accountability 30 Foreign exchange planning and management 30 Lessons for Investors 31 The financing gap 31 Alternative models and cost-sharing partnerships 31 Risk mitigation 32 iii Notes 33 Annex Country Profiles 35 Annex Notes 73 References 81 Figures 1. Investment trend in private infrastructure in East Asia, 1994-99 10 2. Investment in private infrastructure projects in East Asia, by country, 1994-99 10 3. Number of private projects closed in East Asia, by country, 1994-99 11 4. Investment in private infrastructure in East Asia, by sector, 1994-99 12 5. Number of private infrastructure projects in East Asia closed, by sector, 1994-99 12 6. Tradeoff between private financing and private participation in infrastructure 26 Tables 1. Indicators of economic growth and private infrastructure investments before and after the crisis 8 2. Private investment in infrastructure in East Asia, by sector, 1994-99 11 iv Contents Foreword In 1996 the Bank estimated East Asia's infra- in light of increased investment risk and structure needs over the next decade to be sharply rising costs. A broader issue is the cur- enormous. The region would need to invest rent financial status of the public utilities- $1.2-1.5 trillion, the equivalent of 7 percent with or without private participation. Their of GDP, to sustain current and expected lev- deterioration in the wake of the crisis can pro- els of economic growth (World Bank 1996). foundly affect private sector activity in the These massive requirements were driven by various sectors, as well as the fiscal condition the region's rapid economic expansion, pop- of governments. ulation growth, and urbanization; the need This report is part of an ongoing review for transition economies to make up for pre- of the models adopted in East Asia to promote vious underinvestment; and the expansion private participation in infrastructure (PPI). of trade and the globalization of the world It analyzes the impact of the financial crisis economy. It was clear that the governments on investment trends by private sponsors that had funded about 90 percent of these and assesses the strengths and weaknesses of investments in the past could no longer rise PPI models in six East Asian countries: to this challenge alone. The private sector Indonesia, Malaysia, the Philippines, the would have to increase its role in financing Republic of Korea, Thailand, and Vietnam. and managing infrastructure services. The report then draws lessons from experi- W&hile initially cautious, private develop- ence in these countries to strengthen pri- ers and lenders responded enthusiastically, vate sector provision of infrastructure and making a substantial contribution to the infra- make a case for continuing fundamental structure needs of the region. From the early reforms to improve the delivery of infra- 1990s private investment flows in infrastruc- structure services and soften the impact of ture rose steadily to an all-time high of$16.9 potential future shocks in the region. It is billion in 1996. Private investtnent expanded hoped that governnent leaders and PPI prac- in all infrastructure sectors, but principally for titioners will find this contribution useful. power generating plants and telecommuni- Aldo Baietti led the research for this cations systems. Lesser gains were made in the report and was the principal author. transport sectors and in water and sanitation. Recognition should also be extended to a The financial crisis that emerged in mid- number of other World Bank staff and con- 1997 threatened to undermine much of the sultants involved in the work-Tomoko Mat- progress East Asia had made over the decade sukawa, Alberto Forchielli, Patricia Tse, in mobilizing private investment and financ- Mehrnaz Teymourian, Paolo Curiel, Ki-Jun ing for infrastructure. Investment levels have Chang, Wanda Ternau, Niro Rasanayagam, declined since the crisis, and many private Robin Sharma, J. P. Singh, Sati Achath, and projects have been reevaluated and cancelled PricewaterhouseCoopers, LLC. Javed Harnid Director Private Sector Development East Asia and Pacific Region v Abstract Private participation in infrastructure has made in applying this second model tc mobi- taken two distinct forms in the developing lize private investment and financi ng for world. The first model, applied primarily in infrastructure. Latin America, focuses on privatization of This report describes the background of existing infrastructure assets. The second, the 1997 financial crisis in East Asia ind its applied largely in East Asia, focuses on retain- impact on private investment in the r. gion's ing existing assets in the public sector but infrastructure. It then analyzes lessons learned seeking private sector involvement to aug- in the aftermath of the crisis in six coun tries- ment capacity through new greenfield invest- Indonesia, Malaysia, the Philippines, the ments. The financial crisis that emerged in Republic of Korea, Thailand, and Viet:-am- East Asia in mid-1997 threatened to under- and explores how these countries can respond mine much of the progress the region had to the new challenges. vi Overview Private participation in infrastructure in the tomers. More important, the private sector developing world has taken the form of two investor takes on market risk. distinct models. The first focuses on priva- In 1996 the World Bank estimated East tization of existing infrastructure assets and Asia's infrastructure needs over the coming has been applied primarily by countries in decade to be enormous. The region would Latin America. Privatization is generally need to invest between $1.2 and $1.5 trillion- accomplished through concessions and full or an equivalent of 7 percent of GDP-to sus- partial divestitures-outright sale of assets. tain current and expected levels of economic The privatization model is successful largely growth (World Bank 1996). These massive because transparent ground rules have been requirements were driven by the region's established for entry, exit, and conducting rapid economic expansion, the need for tran- business in a given sector and because inde- sition economies to make up for underin- pendent, nonpoliticized regulators oversee vestment in the past, rapid population growth this activity. and urbanization, the expansion of trade, and The second model focuses on retaining globalization of the world economy. It was existing assets in the public sector, but seeks clear that governments, which had funded private sector involvement to augment capac- about 90 percent of infrastructure invest- ity through new greenfield investments. ments in the past, could no longer rise to this These investments are typically achieved challenge on their own and would need the through build, operate, and transfer schemes help of the private sector to finance and man- and variants founded mostly on contractual age infrastructure services. arrangements to support off-balance sheet At first cautious, private developers and financing. The East Asian countries have lenders responded enthusiastically. Within resorted mainly to this second approach, with several years they had made a substantial greenfield projects operating along the contribution to the infrastructure challenge perimeters of state-owned enterprises. in the region. Since the early 1990s private Both mnodels involve a public-private investment flows in infrastructure had risen interface, but they differ in many aspects of steadily to an all-time high of $21.3 billion form and substance. In the privatization in 1997. Private investment expanded in all model the primary interface with the private infrastructure sectors, but especially in sector is the independent regulator who over- power-generating plants and telecommu- sees economic activity in relation to compe- nications systems. Lesser gains were made tition, tariff setting, and adjustments, and in the transport sectors and in water and san- service quality and coverage, and who pro- itation. tects the public from potential monopolistic The financial crisis that emerged in mid- abuse when competitive forces cannot inter- 1997 undermined much of the progress that vene. The private sector investor in these East Asia had made over the previous decade cases normally assumes the full operation, in mobilizing private investment for infra- including supply and distribution aspects as structure. Investment and financing levels well as the commercial relationship with cus- deteriorated, and many private projects were 1 reevaluated and cancelled because of increased can respond to the new challenges. The investment risk and sharply rising costs. report has benefited from earlier stti dies on This study describes the general back- the economic impact of the crisis n these ground of the 1997 financial crisis in East Asia countries, particularly the Asian D 2velop- and its impact on private investment in East ment Bank's report on the effects on private Asian infrastructure. It then analyzes lessons infrastructure investment in the reg on and learned in the aftermath of the crisis in six the report by the East Asia Analytical Unit countries-Indonesia, Malaysia, the Philip- of the Department of Foreign Affairs and pines, the Republic of Korea, Thailand, and Trade of the Australian Government on pri- Vietnam-and focuses on how these countries vate infrastructure in Asia. 2 Overview I The Economic Context E < ast Asia's economic development Massive capital inflows had been attracted and growth record over the two to the region because high economic decades before the 1997 crisis was growth and political stability had instilled spectacular, and was accompanied confidence in foreign investors. Liberal- by notable welfare gains. Poverty declined, ization of the financial sector had also and life expectancy, infant mortality, and lit- made it easier for banks and domestic eracy indicators all improved. corporations to tap foreign sources for This outstanding performance was both debt and equity capital. mainly a result of government efforts to keep * The easy flow of funds and the push from inflation low and exchange rates competi- international capital markets into the tive through conservative macroeconomic poorly regulated local capital markets policies, and to encourage high savings rates encouraged heavy borrowing by the by keeping interest rates positive in real terms financial and corporate sectors. The result and effectively protecting deposits in finan- was a dramatic increase in short-term cial institutions. Governments also promoted debt as a percentage of overall external absorption of foreign technology and invest- debt during the crisis. Institutions became ments in education. The combination of highly leveraged and began to finance rapid growth, low debt ratios, and a history long-term investments with short-term of sound macroeconomic management debt capital. attracted foreign capital. The tightening of the money supply to limit credit expansion led to rising domes- tic interest rates and a widening differ- The Crisis ential between domestic and foreign rates. The larger spread between domestic and After some two decades of uninterrupted foreign interest rates had the perverse economic growth, the East Asian countries effect of attracting more capital inflows, were hit by a financial crisis in mid-1997, as investors borrowed abroad to fund local driven by the following factors: investments. 3 * Exports had slowed as world demand most-affected countries moved up by more began to fall in 1996. The substantial than 40 percent. Even the transition ( conomy drop in export growth-from about 20 of Vietnam continues to grow at ;i steady percent to about 4 percent in U.S. dollars pace. The real exchange rate remain depre- in one year-was further compounded ciated by 15-25 percent relative tc that in by the depreciation of the yen, a signifi- mid-1997. The depreciated exchange rate cant decline in the prices of some export has helped export performance, as has the products, and the appreciation of real recovery in the internal electronics market. effective exchange rates in some of the Korea, where investments during the boom countries. were oriented more toward tradables, has The East Asian countries were affected benefited the most from the rebound in elec- to varying degrees.i The macroeconomic tronics. But Malaysia and Thailand have also imbalances hit Thailand the most severely, but received a boost. Indonesia has b nefited all the other countries of the region were from the rise in international oil pri -es. affected in a chain reaction. The financial The recovery has also been unde-pinned and economic impacts were tremendous, in by the turnaround in consumption. During many respects unlike anything that had been the crisis consumption among midc le- and seen before in the modern industrial era. upper-class income groups fell because of the loss of wealth from the decline n capi- tal markets and property values. But because Economic Recovery of the lower interest rates and a fiscal stim- ulus, by early 1999 consumption -ose in East Asian economies began to recover by the Malaysia, Korea, and Thailand. In I ndone- end of 1998. The recession in the five countries sia and the Philippines, in the abser ce of a hurt most by the crisis-Indonesia, Malaysia, serious fiscal stimulus, the recovery ias not the Philippines, Korea, and Thailand-began been as impressive. to turn around after mid-1998 for three rea- The restoration of investor con idence sons. First, changes in macroeconomic policy contributed to positive development; in the as the exchange rate stabilized allowed inter- balance of payments. Even though private est rates to fall and consumption to recover. banks and other creditors contin ied to Assertive structural adjustments helped restore reduce their exposure in 1999, portfolio credit flows and boosted consumer and investor investment rebounded in the second half of confidence. Finally, the regional recovery, 1998 and nearly reached pre-crisis kvels in sponsored by strong growth in the United 1999. Rising portfolio inflows and if e will- States and Europe, bolstered external demand. ingness of savers to invest in financi I1 mar- With the economic recovery in these kets facilitated the recovery of equities. By countries have come stable currencies, replen- the end of 1999, stock market capital zation ished foreign exchange reserves, rising gov- was more than 50 percent higher i l U.S. emnment revenues, lower interest rates, and dollar terms than in September of th it year low and unthreatening inflation. Some finan- for all five countries. cial markets are even above their pre-crisis In 1999 gross private inflows incr eased. highs. In 1999 equity markets in the five Korea was the largest beneficiary, receiving 4 Private Infrastructure in East Asia net inflows. Foreign direct investment rose payment of debt service. There is a danger sharply in Thailand, probably because of its that investment will remain dampened over restructuring efforts, and in Korea, because the long term by the overhang of property of its liberalization of foreign direct invest- investment and the weakness of financial ment. Korea also received a sharp upswing in intermediaries. equity flows in 1999 following its liberaliza- Fourth, the recovery is still vulnerable to tion of portfolio and long-term capital flows. shifts in market sentiment and external events. But despite the recovery, the East Asian Governments that depend on healthy rev- countries have many challenges to overcome. enues to service debt might suddenly have to The first is the increase in debt. The five cut back on social and other important spend- crisis countries have yet to complete writing ing. Investors have become more alert and down their national balance sheets, restruc- ready to flee at the slightest provocation, turing debts and absorbing the associated and the poor and near-poor may be less capital losses, and undertaking operational patient with governments that ask them to and ownership restructuring. Banks are sad- sacrifice more. dled with nonperforming loans that at the end To sustain the current recovery and the of 1999 hovered around 35 percent in economic expansion, it is essential that the Indonesia, 10 percent in Malaysia, 20 percent East Asian countries put in place macroeco- in Korea, and 40 percent in Thailand. Gov- nomic and structural policies for capital flows ernment debt-driven by financial bailouts that encourage stability. Without a healthy and deficit spending to jump-start demand- financial system, the recovery will be subject has risen to 35-50 percent of GDP in Korea, to sudden portfolio shifts by foreign investors Malaysia, and Thailand, and to 90-100 per- wary of corporations' capacity to service debt. cent in Indonesia and the Philippines. Without corporate workouts and operational Second, the increase in insecurity is espe- restructuring, potentially viable corporations cially pronounced among low-income and will not be considered creditworthy. More- urban households. In the five crisis coun- over, new loans will not be available for pro- tries the number of people living below the ductive uses when there are adverse long-term international poverty line ($1 a day in 1993 implications for growth. purchasing power parity terms) has jumped Finally, economic recovery in the East significantly. Unemployment, though down, Asia region can be facilitated by investments is still unacceptably high in the five countries in infrastructure, especially investments by the and is rising in Vietnam. private sector. The next section provides Third, investment, particularly in prop- background information on private invest- erty, remains depressed. Onshore and off- ment in East Asian infrastructure, highlights shore investment finance is limited by weak trends in private participation in infrastruc- institutions and cautious external lenders. ture in the region, and describes the status of Working capital and investment are largely reform in the infrastructure sectors in each being financed internally, in part by non- country. The Economic Context 5 2 Private Participation in Infrastructure Private investment in East Asian are designed to reflect the preferre: basis of infrastructure is dominated by risk allocation among these parties. For pri- greenfield projects. In these proj- vate participation, the private compony must ects a private entity or a public- assume operating risk during the o .erating private joint venture builds and operates a period or assume development and operat- new facility under a build, operate, and own ing risk during the contract period. Moreover, (BOO) or build, operate, and transfer (BOT) the operator must consist of one or more contract. BOO- and BOT-type greenfield corporate entities with significant private projects are simple to understand, structure, equity participation that are separate trom any and implement, and are less politically diffi- government agency. cult than outright privatization. Since such The nature of these transactions, along projects operate on the perimeter of the with their requirement for con ractual established network of state-owned enter- arrangements, creates the need for a num- prises, they require no fundamental structural ber of enhancements, typically in the form reform of the state sector. of guarantees to make these projects "bank- In the model typically seen in East Asia, able." These enhancements depenc. on the the private sector enters into an agreement deal structure, the nature of the pro ect, the with a state-owned enterprise to provide bulk private participation in infrastructur e (PPI) supply under specified terms and conditions. modality selected, and the financia stand- State enterprises act as single buyers and ing of the public enterprises and of the gov- commit to purchase products or services ernment. In adverse conditions-,;uch as from private producers under long-term con- the crisis in East Asia-these interfaces have tracts, usually between 10 and 30 years. In the become the main source of conflicts, finan- absence of a regulatory framework in a given cial stress, and contractual disputt s. East sector set by national law, a set of contracts Asian governments have provided a wide are developed to regulate the relationship variety of guarantees to support PPI, includ- among the private sector, the state enter- ing market or demand guarantees; guaran- prises, and the government. These contracts tees on contractual obligations of state 6 enterprises; guarantees for political risk, providers, in committing funds in long- such as foreign exchange variability con- term infrastructure projects. vertibility and policy changes; and guaran- The impact of the crisis varied from one tees for financial market disruption and country to another and from one sector to fluctuations. another. For example, Indonesia and the East Asian countries have had more suc- Philippines were the countries most severely cess than other developing countries in affected in the power sector, mainly because attracting private investment in infrastructure. foreign currency obligations of PPI projects- Between 1990 and 1997, Indonesia, Malaysia, as a result of foreign borrowing and foreign the Philippines, and Thailand accounted for currency-denominated power purchase about a third of the total private power proj- obligations-were much higher than in ects contracted in the developing world. Malaysia and Thailand, where local funds Between 1994 and 1999, 261 private infra- were mobilized to finance long-term proj- structure projects reached financial closure in ects and power purchase obligations were Indonesia, Korea, Malaysia, the Philippines, denominated in local currency. and Thailand. The combined value of the The crisis profoundly affected the infra- total private investment in these countries was structure market in several ways: about $75 billion.2 * Private investor confidence collapsed. During the first half of 1997 investments in pri- vate infrastructure projects in East Asia Impact of the Crisis on Infrastructure were stalled. Total investments in these sectors dropped from $16,977 million in The East Asian crisis markedly decelerated 1996 to $ 11,435 million in 1997 and private investment in the region's infra- $7,352 million in 1998 (table 1). structure. Deteriorating macroeconomic * Financing for infrastructure projects dried conditions and credit standing of sovereign up. With unprecedented losses in the governments increased risks to the private banking sector attributed to nonper- sector, especially in committing funds to forming corporate accounts, financing long-term projects. Moreover, project for infrastructure projects vanished. economies deteriorated because of excessive Bankers in the region diverted the little currency devaluation, coupled with lower liquidity they had left to financing losses growth scenarios. Currency devaluation also and refinancing and restructuring exist- weakened the financial credibility of local ing corporate loans rather than to new contractual parties such as state-owned util- issues, particularly risky infrastructure ities. A weakening domestic financial system deals. While the financial sector crisis did diverted lcical resources to debt manage- not affect some countries as adversely as ment that otherwise would have been avail- it did Indonesia, Korea, and Thailand, able to finance new projects. Thus, overall, most financing for PPI activities had the crisis substantially diminished the proj- emanated from regional and international ect economies and the financial viability of offerings, not local ones. With little public utilities-thereby reducing the inter- progress toward the development of local est of foreign financiers, particularly debt capital markets in the region, financing- Private Participation in Infrastructure 7 Table 1 Indicators of economic growth and private infrastructure investments before and after the crisis (millions of dollars unless otherwise indicated) GDP growth Netprivate Investments in private (percent) capital flows infrastructure Country 1996 1997 1996 1997 1996 1997 1'98 Indonesia 7.8 4.9 16,167 10,863 7,341 2,910 A46 Korea, Rep. of 7.1 5.5 21,057 13,069 - 1,491 3,428 Malaysia 8.6 7.8 12,804 9,312 5,385 2,572 E75 Philippines 5.8 5.2 4,988 4,164 2,468 3,171 1,984 Thailand 5.5 -0.4 13,563 3,444 1,578 1,151 F19 Vietnam 9.3 8.8 2,107 1,993 205 140 - Not available. Source: World Bank Central Development Database and PPI Database. particularly through long-term debt- and procedural bottlenecks. For exam- became extremely scarce for new green- ple, contract renegotiations betwe en state field projects. enterprises and private investors--because - Overall new investment activity in various of excessive currency devaluation, a infrastructure sectors stalled. At first largely decrease in demand for services, and the financial, the crisis spilled over into the deteriorating financial health of state infrastructure and industrial sectors, with enterprises-were lengthy and painful in noticeable downturns in new investment Indonesia and Thailand, where private activity. Activity in the transport sector operators were contracted to build and dropped significantly-by 75 percent from operate telecommunication asse:s under its 1996 levels-and no new investments joint venture or revenue-sharing a,rrange- were made in the water sector. The ments with state enterprises. In compet- pipeline of greenfield projects in power itive markets where many play ers had also declined markedly. Decline in demand varying financial positions, such as in and lower widespread industrial output led Malaysia and the Philippines, thie crisis to substantial excess capacity in the power accelerated a trend toward indus ry con- and transportation sectors. Existing port solidation. operations faced similar problems from * Demandfor infrastructure services decreased, the decline of interregional trade activity. and excess capacity grew, especialiy in the * Demand for telecommunications servicesfell, transport and power sectors. The economic and the cost of technology rose. The crisis slowdown also made it more dif;icult to also hurt the demand for telecommuni- raise tariffs. The need to cover th: effects cations services, increased the cost of tech- of the currency devaluation on rojects nology (for example, handsets), and with a sizable foreign exchange -ompo- saddled some operators with a higher debt nent further eroded the ability of t-ariffs to burden. Countries with significant state cover the economic cost of servicer.. More- involvement in private telecommunication over, shrinking household spendin.r capac- schemes took longer to adjust to the cri- ity made people less willing and less able sis because of weak institutional response to pay for infrastructure services. 8 Private Infrastructure in East Asia * The cost of total investments increased. The mercial risk guarantees and foreign exchange region's large currency devaluations indexing obtained from governments on past increased the cost of investments and transactions. The devaluation of the domes- future operations of projects with sizable tic currencies in East Asia made the acquisi- foreign exchange content. That meant tion of assets much more attractive to foreign that many planned and ongoing projects buyers, and many infrastructure multina- were not financially viable without sig- tionals saw in the crisis opportunities to enter nificant tariff increases. or expand their positions in East Asia. Thus * Governments became overexposed to risks. while the crisis made it difficult for govern- The guarantees and contractual obliga- ments to continue pursuing their PPI agenda tions governments had assumed in pro- through greenfield projects, it allowed pri- moting private projects made them vatization of existing assets and fundamental vulnerable to various risks. To build structural reforms. investor confidence in infrastructure, gov- ernments in some cases entered into guar- anteed take-or-pay contracts, thus bearing Trends in Private Participation in most of the retail demand risk in private Infrastructure Investment, 1994-99 sector water and electricity production projects. In other cases governments pro- Total private investment in infrastructure in vided extensive credit guarantees to the six East Asian countries increased by 57 investors in infrastructure projects, par- percent from 1994 to 1995 and by another ticularly in the power sector, thus bearing 24 percent in from 1995 to 1996 and then the commercial risk that should have been peaked at $20.2 billion in 1997 (figure 1). PPI left to the private sector. With the large was hit hard by the crisis, falling by 80 per- decline in demand after the onset of the cent in 1998 before beginning to recover in crisis, governments had to face up to their 1999, picking up by 24 percent to reach about commitments, which in several instances $5.5 billion-about one-fourth of the peak were sizable. Contractual liabilities and 1997 figure. Of the $75 billion in private losses were estimated at $11 billion in funds invested in infrastructure projects dur- Indonesia and $6 billion in the Philip- ing 1994-99, the Philippines, Indonesia, and pines. Other countries did not experi- Malaysia accounted for about 80 percent ence such severe fiscal impacts. Malaysia (figure 2). and Thailand were successful in negoti- The Philippines, Indonesia, Malaysia, ating many of their contractual agree- and Thailand accounted for about 91 percent ments in local currency. Korea and of the private projects that were closed dur- Vietnam, which did not have significant ing the period (figure 3). Korea and Vietnam PPI activities, had very little exposure to had the least private investment and the contingent liabilities. fewest private infrastructure projects. Despite the adverse developments, pri- Although Thailand had received only about vate investors still had a large appetite for 11 percent of the total combined private acquiring assets. The crisis actually bene- investment, it accounted for about 17 percent fited some developers because of the com- of the projects closed during the period. Private Participation in Infrastructure 9 Figure 1 Investment trend in private infrastructure in East Asia, 1994-99 Billions of dollars 25 20 15 10 5 0 1994 1995 1996 1997 1998 1999 Note: Data include India, the Republic of Korea, Malaysia, Philippines, Thailand, and Vietnam. Source: World Bank PPI Database, various years. Figure 2 Investment in private As in most other developing co intries, infrastructure projects in East Asia, by PPI in East Asia has largely been con ined to country, 1994-99 the power and telecommunications ;ectors, which received about $50.8 billion, or 68 percent of combined investment flows dur- ing 1994-99 (table 2). Power was the largest Thailand Vietnam recipient, with 40 percent of total private 1i 1 n investment, followed by telecommuni -ations, Republic _ Xdonesla7with 29 percent. Private investment M as low- est in the water sector, at $7.5 billion-10 per- cent of the combined total (figure 4,). Telecommunications also accour ted for the largest share of the total number f proj- ects closed during 1994-99 at 40.6 percent, followed by power at 33 percent. Water accounted for only 7 percent (figure 5). In 1998 project finance slowed signifi- Philippines alaysia cantly in East Asia. The decline was les; severe 280/o 25% in Korea and Vietnam because these countries had seen relatively little mobilization of pri- vate investment in infrastructure sectors. Most Source: World Bank PPI Database, various years. seriously affected were Indonesia and Malaysia, 10 Private Infrastructure in East Asia Table 2 Private investment in infrastructure in East Asia, by sector, 1994-99 (millions of dollars) Sector 1994 1995 1996 1997 1998 1999 Total Power 5,004 7,293 7,481 6,681 1,674 1,210 29,343 Water 90 163 530 6,053 157 551 7,544 Transport 2,150 2,770 4,942 3,855 668 1,732 16,117 Telecommunications 2,187 4,077 6,190 4,791 2,188 2,011 21,444 Total 9,433 14,303 19,144 21,381 4,688 5,504 74,453 Note: Data may not sum to total shown because of rounding. Source: World Bank PPI Database. which had received significant private capital utilities undertook to buy electricity in bulk in the infrastructure sector in 1996-about under long term take-or-pay contracts. These $12.6 billion, more than 20 percent of the developments were driven mainly by: combined total infrastructure investment in * The need to increase capacity to accom- those countries. By 1998 private investment modate growing demand. in infrastrmcture in 1998 was onlyabout 13 per- * The absence of a need for fundamental cent of the 1996 level in Malaysia and 6 per- reform of the structure of the public sec- cent in Indonesia. In Thailand and the tor, since such projects operate on the Philippines, private investrnent flow in 1998 perimeter of the established network of averaged about half of that in 1996. state enterprises. Figure 3 Number of private projects Sector by Sector Overview closed in East Asia, by country, 1994-99 This section considers PPI investment trends in the power, telecommunications, transport, Vietnam and water sectors in East Asia. 2% Power 23onsi Most power utilities in East Asian countries Republic are vertically integrated and publicly owned of Korea entities. As the demand for electricity in the 8% region increased, private investors were allowed to enter the electricity generation market, leaving distribution and transmis- sion to the public sector. During 1994-99 private investmnent in the power sector totaled Philippines alaysia about $29.3 billion (see table 2), or almost 40 percent of total private investment in infra- structure over the period. The private sector financed, constructed, and operated greenfield power-generating plants, and state-owned Source: World Bank PPI Database. Private Participation in Infrastructure 11 Figure 4 Investment in private * Little or no market risk and the possibil- infrastructure in East Asia, by sector, ity of minimizing other risks through power purchase agreements ant: govern- ment guarantees. * The relative simplicity of under,tanding, Water structuring, and implementing the plants. Transport Power Telecommunications 22% 39% Telecommunications was the first infrastruc- ture sector in the East Asian countrit s to suc- cessfully attract substantial private capital. During 1994-99 private investinent in telecommunications totaled abouit $21.4 billion-about 28 percent of the tot;al private investment in the region's infrastrucaure dur- ing the period. Between 1994 and 1 998, 106 Telecommunications private telecommunication projects were com- 29% mitted or concluded. As in the power sector, more tha:i 80 per- Source: World Bank PPI Database. cent of the projects were BOO- or BOT-type greenfield projects, which also represented about 83 percent of the total private in vestment Figure 5 Number of private infrastructure in telecommunications during the period. Tech- projects in East Asia closed, by sector, nological improvements, high growth poten- 1994-99 tial, consumer willingness to pay for services, relatively short payback periods, and the poten- tial of foreign currency earnings cortributed WVater 7% to successful private participation in tlie sector. Owing to these industry characteristi,2s, coun- Trans Power tries were able to attract private capital in _9% telecommunications without providing sig- nificant sovereign guarantees. Most countries have merely had to open the sector to private investors to see private capital inflou The structure of private participation in telecommunications in the region is mixed. State enterprises in Thailand and Vietnam have monopoly rights in the telecom munica- Telecommunications tion business, and the private sector csmpetes 41% for the market and operates through revenue sharing and joint venture arrangements with Source: World Bank PPI Database. state enterprises. In contrast, in Malaysia and 12 Private Infrastructure in East Asia the Philippines the private sector competes rates are high during or after implementation. with state enterprises in the market. In Korea For example, in the Bangkok Second Stage domestic services, both local and long dis- Expressway, the lack of well-defined proce- tance, are state monopolies, while interna- dures for land acquisition, toll rate adjust- tional and cellular services are competitive. ments, and efficient conflict resolution resulted in lengthy disputes between private Transport developers and the government (Japan Min- Compared with that in the power sector, pri- istry of Construction and World Bank 1998). vate investment in the transport sector in Only in Malaysia has a large proportion East Asia is limited. During 1994-99 private of private investment-more than 45 percent- investment in transport made up only about gone into roads. PPI in the Malaysian road 22 percent of the total investment in infra- system has been relatively successful because structure. Rail accounted for the highest of government-directed lending (local share of private investment in the sector- currency-based soft loans) to road projects about 45 percent-and ports for the lowest- through state-owned financial and nonfinancial about 16 percent. The largest number of enterprises, equity participation by public sec- projects-17 out of 29-were in roads, fol- tor entities, and government willingness to lowed by 8 in ports and 4 in rail. provide minimum revenue guarantees and With the exception of a few road projects, consider and negotiate unsolicited proposals. most private transport projects were BOO- or BOT-type greenfield projects. Transport Water projects-especially greenfield road projects- In East Asia water was the sector least attrac- have unique features that make them complex tive to private investors, in terms of both dol- to structure and implement, and thus not very lar amount ($7.5 billion during 1990-99) and attractive to private investors. These include number of projects. Other than the Manila and high initial costs for project development, the Jakarta water concessions, no definite PPI difficulty of acquiring land and right of way, structure has emerged, and the sector is dom- the lengthy process of environmental clear- inated by state-owned enterprises. Between ance, the unpredictability of geotechnical con- 1994 and 1999 private investrnent in water was ditions, frequent cost overruns, and the 10 percent of the total dollar value invested in uncertainty of demand because of competing infrastructure, and only 7 percent of the total transport modes and other available alterna- number of PPI projects committed or con- tives. The only advantage roads have over cluded in the region. Of total private invest- power or telecommunications is that they are ment during the period, about 55 percent was less technology intensive. invested in BOO- and BOT-type projects. Worlclwide experience shows that con- In contrast to the power sector, where pri- siderable time is needed to conclude negoti- vate participation is mostly in generation, in ations for successful private participation in the water sector private participation is gen- road and rail projects. Some projects never erally in distribution concessions rather than come to fruition, such as private participation BOT-type bulk water production and supply in toll roads using the BOT approach in plants. Depending on the type of agreement, Indonesia (Van der Ven 1996), and failure the concessionaires take over the replace- Private Participation in Infrastructure 13 ment, management, expansion, and mod- foreign debt in total financing of a typical ernization of water distribution systems. This power project was close to 57 percent. Heavy model was recently introduced in the Philip- financing through foreign debt is very risky pines and Indonesia. Unlike in greenfield in many PPI transactions, particu arly in BOT agreements, in which the off-takers, power, water, and most transport I:rojects, mostly state-owned utilities, bear market because earnings are mostly in local cur- risks, in water distribution the concessionaires rency, and a currency mismatch :xposes generally assume market (demand) risks and projects to sizable exchange rat:: risks. revenue collection risk. For example, con- Telecommunications and port projt;cts are cessionaires in the Manila water concessions less sensitive to such risks because t-tey also assume market risks by selling water directly have foreign exchange earnings. to consumers. In the Jakarta water conces- Traditionally commercial banKs. have sions, the management fee is based on the vol- provided project finance. In East Asi l banks ume of water billed and collected. Hence were more willing and able than other debt some degree of market reform-including providers to structure debt packages, match- the elimination of subsidies-is necessary for ing project complexity and risks. Mos: recent significant private participation in the water private projects in a sample of 29 reviewed sector. This need increases the difficulty and for this study in terms of their financi2l struc- complexity of designing PPI projects. ture sourced funds from commercial banks, Malaysia has BOT-type bulk water sup- and about 32 percent of debts were uncov- ply contracts similar to greenfield power gen- ered. Covered loans were advanced in der the eration arrangements to supply water in bulk political risk insurance coverage of export to local water authorities. The government has credit agencies and multilateral agen -ies. In also contracted out the management and addition to providing risk coverage, export operation of state-owned water treatment credit agencies and multilateral agencies plants. By 1996 more than 50 percent of have also directly lent to private infr istruc- Malaysia's potable water production capacity ture projects. Direct lending by expor : credit was under private management (Haarmeyer agencies and other bilateral agencies and Mody 1997). The major limitation of accounted for about 16 percent of tl e total BOO- and BOT-type private water schemes, debt in the projects reviewed. Bond financ- such as those in Malaysia, is that they provide ing comprised less than 10 percent of total little opportunity for replacement, improve- debt, including refinancing. ment, and modernization of antiquated water The two most important sources of for- distribution systems and equipment. eign loans for these projects were Eur opean and Japanese financial institutions. Eu: opean institutions accounted for about 28 ( f total Financing Structure and Terms lending, and Japanese institutions for about 20 percent. About 30 percent of lending by In many PPI transactions reliance on for- foreign financial institutions was chanineled eign debt was a major constraint in East Asia, through domestic financial institutions. The particularly in projects with large imported reasons may be that domestic financial insti- components. During 1994-98 the share of tutions need to be active in infrastructure 14 Private Infrastructure in East Asia lending, and that inexpensive foreign money had a maturity of 8.5 years, with an interest rate was available from the interbank market. of LIBOR plus 200 basis points. In contrast, Since the crisis, nonperforming loans have in the Salak Geothermal power project the been a major problem for domestic com- $100nmillioninuncovereddebthadamaturity mercial banks. These loans have not only of 10years and an interestrate of LIBOR plus dried up liquidity in the domestic financial 125 basis point. Similarly, Palembang secured markets, affecting fresh lending to new proj- $S110 million uncovered debt for 12 years at an ects, but also contributed to the failure of sev- interest rate of LIBOR plus 162.5 basis points eral large commercial banks in the region. (Capital Data Project Financeware 1999). As many studies now show, the Asian The proportion of foreign debt in the economic crisis had its roots in the plentiful total debt of independent power producers supply of cheap foreign credit, which created was much higher in the Philippines (97 per- bubbles in stock markets and real estate and cent) and Indonesia (86 percent). As a result resulted in overexpansion of the industrial the impact of the crisis was severer in these sector. The infrastructure sector was not countries, mainly because of excessive deval- immune to this euphoria, as it had access to uation. Although the state-owned utilities in easy financing terms. the Philippines and Indonesia could have Competition among international banks absorbed some exchange losses by passing for a share of investment in East Asian coun- through tariff increases, this was politically and tries was intense. Lenders resorted to aggres- socially unacceptable to the governments. In sive cre(lit pricing and favorable loan contrast, the much lower proportion of for- packaging in structuring various transactions. eign debt in total debt of independent power Competition was stronger in the second half producers in Malaysia (10 percent) and Thai- of 1996 and in 1997. For example, the Paiton land (25 percent) minimized the impact of power project in Indonesia, which closed in devaluation. In Malaysia government policy July 1996, was the first large independent to furnish soft loans through public and quasi- power producer in the country. It accounted public financial institutions was instrumental for about 60-70 percent of debts covered by in reducing the need for independent power export credit agency insurance and less than producers to rely on foreign debt. 20 percent of uncovered debts. In contrast, the country's Salak Geothermal and Palem- bang independent power producers, which The Status of Reforms in East Asian closed in 1996-97, accounted for about 60-70 Countries percent of uncovered debt, without any polit- ical risk coverage. Although Salak Geother- All six countries in this study have plans to pri- mal and Palembang are smaller projects, vatize state infrastructure enterprises and move these investments signal aggressive risk tak- toward more competitive markets by reform- ing by international debt providers. ing the infrastructure sector. But to date there Lending competition among international has been minimal reform activity. Some of debt providers was also reflected in longer the reform programs that have been imple- maturity and tighter margins. In Indonesia mented are limited in the size and value of the the $180 million commercial debt to Paiton I transaction or limited to a particular sector. Private Pairticipation in Infrastructure 15 Most reform activities in all countries have below the market. Most power projects, been in the telecommunications sector, with including some that had reached fi nancial other infrastructure sectors yet to take off. disclosure and begun construction, w re sus- The status of reforms in the six study coun- pended4 or cancelled by presidential (lecree tries is summarized below. Greater detail is in late 1997. provided in the annex. In 1998 a cross-sectoral regulation was issued in the form of a presidential (decree Indonesia (Keppres 7 of 1998) and implement-d by a Indonesia has made significant strides in decree of the Minister for State Pli.nning. expanding private participation in infra- While there has been much discussioni about structure. Since the early 1990s the private how this decree would be applied in inlividual sector has been allowed to invest in power sectors (gas, ports, power, telecomn-Lunica- generation activities or toll road BOTs. The tions, toll roads, and water), anticipated sec- first independent power producer power pur- toral implementing regulations have not been chase agreement for Paiton I was signed in developed. Future implementation has been February 1994. In the power sector private confused by a major restructuring of r espon- sponsors were also allowed to submit unso- sibilities in the central government anc by the licited proposals to develop generation plants. imminent implementation of the law on By December 1997 the state power sector regional autonomy (decentralization). At the enterprise had signed 26 power purchase central level, the broad powers given t ie new agreements with private investors,3 though State Ministry of Public Works inclu le pri- only one independent power plant was in vate infrastructure provision in sectors out- operation by end-1997. side those normally associated with public Indonesia was hard hit by the crisis. From works ministries. The Ministry of N itional 1994 to 1999, total private investment in Planning and the National Planning Agency Indonesian infrastructure was more than $20 (Bappenas) have been demoted from minis- billion, with $7.3 billion in 1996 and $3.6 bil- terial rank, and the State Ministry of Public lion in 1997. There was no investment in 1998 Works is seeking to take over the role estab- and the country had only $429 million in 1999. lished for it by Keppres 7. Progress iit some The crisis led to plummeting demand areas is impeded by differences of C -inion for infrastructure and related services. Traf- about sector restructuring and privatization fic over the state telecommunication enter- policy between sector ministries and th d State prise's local access network fell by about 23 Minister for Investment and state ente; prises, percent, and demand for cellular subscriptions and by slow progress in settling on i.ppro- decreased significantly after the crisis when priate policies for tariff regulation. handset prices more than doubled. Input The new Telecommunicationm Law price guarantees by state infrastructure enter- approved by the parliament in Sept -mber prises resulted in severe cash flow shortages. 1999 is scheduled to come into force by the State enterprises sought to amend power end of 2000. This law should open th door purchase agreements and BOT and BOO for more active private sector partici )ation agreements to pay producers or service and competition. Other new laws expected to providers in local currency at a rate well expand the role and clarify processes for pri- 16 Private Infrastructure in East Asia vate investment in infrastructure are being The most significant initiative to help drafted. These include laws for electric power, finance ongoing projects is the establishment oil, and gas. The country is increasingly rec- of the Infrastructure Development Corpo- ognizing the need to attract private invest- ration, which is to be merged with the gov- ment and hence to establish appropriate ernment's development bank to form the regulatory policies and institutions. Development and Infrastructure Bank of Malaysia. Other recent developments are the Malaysia forthcoming consolidation of mergers at Port Infrastructure development has been a high Klang; the accumulated debts of many pri- priority in Malaysia over the past two decades. vatized companies, such as Tenaga and Prime Power and transportation were identified as Utilities, and in the telecommunications sec- critical infrastructure sectors for private par- tor and public transportation in Kuala ticipation, often under BOT or BOO Lumpur; the revival of some infrastructure schemes. By early 1996 about 165 privatiza- projects, such as the monorail and the train tion and private participation projects were station at Brickfields to connect to the Kuala completed. The Seventh Malaysia Plan cov- Lumpur International Airport; and two water ering 1996-2000 envisaged private sector companies privatized in May 1999 through contributions of $27.2 billion, or 78 percent concessions. of total infrastructure spending during the To attract foreign investment, the gov- plan period. The broad policies under this emient announced in 1999 an increase in the plan were designed to: ceiling on foreign ownership in telecommu- * Provide full government support to pri- nications companies, from 30 to 61 percent. vate participation schemes through This will be allowed only on a case-by-case finance through soft loans, equity invest- basis and will be valid only for the next five ments, and directed lending through years. Foreign investors will have to scale banks and provident funds, as well as back their ownership to 49 percent. explicit or implicit guarantees.5 * Foster maximum local participation in The Philippines infrastructure development, especially by The Philippines is the most advanced of developing capital markets through the six countries in this study in reform of involving quasi-government institutions infrastructure sectors. By 1994 the govern- such as pension funds or the Employee ment had already introduced independent Provident Fund6 and by permitting infra- power producers in power generation (there structure power companies to be listed on are now 33), relaxed foreign ownership the Kuala Lumpur Stock Exchange. restrictions, deregulated the telecommuni- In 1996 total private investrnent in infra- cations sector, and revised and modified the structure in Malaysia was about $4.3 billion. BOT law, the first in Asia in 1990. These This fell to $3.76 billion in 1997, $1.3 billion revisions facilitated private participation in 1998, and $393 million in 1999. Although through several variants of BOT schemes, new agreements in the power sector were streamlined project approval, and allowed concluded in 1997 and 1998, not all of them the consideration of unsolicited project pro- have progressed. posals. Work is in progress to develop a Private Participation in Infrastructure 17 regulatory authority for the water sector, * Government reluctance to assume addi- and a power reform bill to reform and pri- tional liabilities (BOT law restricts the vatize the National Power Corporation is government in extending explic it guar- pending. antees). Total investment during 1994-95 was * The lack of effective competition poli- $20.7 billion. Investment decreased from cies and restrictions on privatc sector $2.9 billion in 1997 to $1.7 billion in 1998 and entry. $647 million in 1999. The country's need for investment in infrastructure over the next Republic of Korea 10 years is estimated at $36-S$45 billion, about The Republic of Korea has yet to take sig- 7 percent of the annual GDP. nificant steps to mobilize private investment There have been some major invest- in infrastructure. During 1994-99 private ments in the power and the water sectors, investment in infrastructure was only about and the almost complete privatization of 9 percent of the total private invest:-nent in telecommunications, but development in the region. In 1997 private capital rilows to other infrastructure sectors has been slow. infrastructure projects were only $3.7 bil- With the exception of the Manila Water- lion. Flows decreased to $1.1 billion in 1998 works and Sewerage System, a significant and then rose to $1.52 billion in 19'.'9. achievement, only the Light Rail Transit Infrastructure in Korea is narrowl) focused has been noteworthy. About half of the on transport-related facilities, such as airports, country's total private investment in infra- highways, railways, roads, and seaports. Infra- structure is in the power sector. The structure development is still dominated by National Power Corporation and existing state-owned enterprises, local governments, independent power producers are respon- and the national government, with public sible for power generation, while distribu- monopolies and local governments de livering tion is predominantly managed by the services and line ministries dealing with legal, private Manila Electric Company. The dis- policy, and regulatory issues. The poNver sec- tribution of electricity is also handled by tor is dominated by the Korea Electric Power smaller power utilities and by public sector Corporation, and the water sector by the Korea rural electric cooperatives. Water Resource Corporation and lo( al gov- Some serious and significant reform ernments. The telecommunications sector is efforts have materialized in the Philippines, partially competitive, with cellular, lcng dis- but much more effort is required to increase tance, and international services now open to private participation and introduce financial the private sector, but local services are srill con- discipline in other infrastructure sectors, such trolled by the state-owned Korea Telecom. In as transport and telecommunications. The 1997 British Telecom invested about $396 mil- slow pace of reform can be attributed to: lion in a mobile phone company, LGT lecom. * A faulty decentralization process that lim- In 1994 the Private Capital Inducement its the negotiating capability of local Promotion Act was introduced to encourage authorities. private participation in infrastructure, pri- * Weak and inadequate regulatory systems marily for greenfield investments in transport. and institutions. The government targeted 40 primarv infra- 18 Private Infrastructure in East Asia structure facilities for private participation in in its program that are particularly important the sector. But because of a number of weak- for cohesiveness in the sectors. nesses in the act and the opaque selection On March 9,2000, the Ministry of Plan- process, only five of the targeted trans- ning and Budget announced eight PPI proj- portation projects are in the construction ects, all in the transport sector (two roads, two phase. bridges, one rail, one light-rail transit, and In July 1998 the Planning and Budget two ports), and subsequently established eight Committee announced policies to: project task teams within the Private Infra- * Privatize 11 state enterprises, including structure Investment Center of Korea Korea Telecom, the Korea Electric Power (PICKO). Each team will be supported by a Corporation, and the Korea Gas Corpo- relevant ministry official along with PICKO ration. staff and will be responsible for front-line con- * Create a regulatory framework for private tact with the private sector. participation. * Introduce competition in the market. Thailand * Address labor issues. During 1994-99 total private investment in * Find optimal privatization techniques. infrastructure in Thailand was more than Except for the sale of some shares of $8.0 billion, and 44 projects closed. Invest- Korea Telecom to the general public, little ment fell from $2.2 billion in 1996 to $1.24 progress has been made on these initiatives. billion in 1997, declining further to $600 The government has opened the power gen- million in 1998 and $191 million in 1999. eration market to the private sector to set up Declining private investment and the independent power producers that will com- ongoing financial problems of the country's pete with Korea Electric Power Corpora- utilities have had a severe impact on Thailand's tion spinoffs. Five independent power PPI program. As a result most new infra- producers have been awarded licenses to structure development and investment pro- develop power plants and sell electricity to the grams have been revised. Future power Korea Electric Power Corporation for 20-25 demand projections were lowered by about 20 years at negotiated prices. Only one plant is percent, and several independent power pro- operating, and the others are searching for ducers were either delayed or deferred at financiers., least until 2002-03. The Electricity Gener- In April 1999 the Private Investment Act ating Authority of Thailand revised the stan- replaced the Private Capital Inducement dard power purchase agreement that was part Promotion Act. The act aims to encourage of its independent power producer program private investment, including foreign capital and sought to renegotiate its terms. Private in all infrastructure sectors-airports, gas, developers of independent power producers ports, power, telecommunications, trans- cancelled six power projects because they portation, and water and sewage facilities, were unable to raise finance locally. provide tax and other incentives to private Thailand is proceeding with its privati- investors, and improve investment selection zation agenda. The Corporatization Act processes. But the act still lacks the full man- passed in 1999 facilitates corporatization and date to include existing infrastructure assets private participation in state enterprises. Private Participation in Infrastructure 19 Detailed restructuring plans for the telecom- sentiments and resistance from employee munications and energy sectors are ready. unions. In spite of these drawbacks, the pri- Upcoming transactions include the strate- vatization agenda has been steadily imple- gic sale or public offering of a stake in Thai mented. But some areas, such as tl e water Airways International, the Airports Author- sector, have lagged behind, and eriployee ity of Thailand (regional airports), the Petro- issues have yet to be addressed sy, temati- leum Authority of Thailand, the Ratchaburi cally. Remaining legal reforms are likely to Power Plant, the Communications Author- move slowly, and institutional capaci ty, espe- ity of Thailand, and the Telephone Organi- cially in regulation, remains a key is,ue. zation of Thailand. The government has made pro,-ress in While the country is fully committed to the legal framework to facilitate stat~ enter- privatizing state-owned enterprises to prise reform and divestiture. Its einphasis improve their efficiency and improve the has been on creating a strong regulatory quality of services offered to the public, it has framework and independent regulatc ry bod- also placed a high priority on modernizing ies free of political intervention to (:nsure a and strengthening its regulatory framework stable investment environment and h lip pro- and institutions. Thailand's commitment to tect consumer interest. The State En terprise reforming state enterprises and implement- Corporatization Act was passed in December ing a divestiture program is articulated under 1999 to allow the government to corporatize the 1998 Privatization Master Plan, which individual enterprises without further par- aims to improve the economic efficiency of liamentary involvement. The 199') Alien key industries including energy, telecom- Business Act and the Act on Leasing ( f Prop- munications, transport, and water. The pri- erty for Commerce and Industry promote vatization efforts are designed to enable direct investment and greater liberal zation. competitive markets to emerge in these sec- The State Employees Labor Relations Act tors within a framework that stimulates pri- repeals restrictions on the rights of state vate investment, protects consumers, and enterprise workers to unionize and strike. provides a basis for Thailand's long-term In the telecommunications sector, the competitiveness in the global economy. Frequency Management Act will alk w for a Progress on privatization and state enter- National Communications Commission to prise reform had been slower than antici- facilitate the establishment of an independ- pated when the Privatization Master Plan ent regulator in the telecommunications sec- was passed. Reasons included the govern- tor by October 2000. The Telecom Bill ment's heavy reform agenda; a weak legal providing guidelines for this regulator should framework and inadequate institutional capac- be presented to the parliament byJul 7 2000. ity to implement the agenda; the lack of a Converting existing BTO concession con- strongly articulated strategy or campaign to tracts is one of the most challenging issi es fac- build consensus among stakeholders, espe- ing full liberalization of the sector. The cially state enterprise employees and con- cabinet recently issued guidelines f r con- sumers, on the benefits of privatization; and version concessions, and a committee has the failure to mount a systematic public infor- been formed to oversee the conx ersion mation campaign, which led to antiforeign process by mid-2001. 20 Private Infrastructure in East Asia The cabinet has approved the regula- including divestiture of many enterprises, tory framework and market structure for the was identified as one of the government's energy and transport sectors, and independ- principal objectives. In reality, however, the ent regulators are expected by the end of government centralized state enterprisesop- 2001. A comprehensive Transport Sector erating in "key" sectors, including the Framework Reform Study completed in April Vietnam Posts and Telecommunications Cor- 1999 yielded a framework for improved pol- poration and the Electricity of Vietnam icy and planning, development of a modal Corporation.7 regulatory framework, and the direction of The impact of the East Asian financial reform for the 14 state enterprises in the crisis on public utilities was not as significant sector. The partial privatization of Thai Air- in Vietnam as in the other crisis countries, ways is expected in September 2000, and the which had much higher foreign exchange privatization of the Airports Authority of exposure and contractual commitments to Thailand is being accelerated. The state independent power producers. Public utili- expects to sell the Airport Authority's major ties in Vietnam have negligible foreign debts, airports this year and shares early next year. PPI activity is minimal, and there was less In the energy sector, the National Energy depreciation of the local currency. Nonethe- Policy Office is preparing a detailed plan for less, the impact of the crisis on the govern- transition to a power pool to be completed ment was severe as private investors became byJuly 2000. The partial privatization of the concerned about convertibility issues. Ratchburi Power Generating Plant is In early 1998 the government announced expected in September 2000. an ambitious equitization program to reform Reforms in the water and wastewater more than 1,500 state enterprises by the end sector have lagged behind, mainly because the of 2000. The program called for converting government has focused on other sectors, state enterprises into shareholding corpora- but there are plans to accelerate these tions, selling state enterprise shares to pri- reforms. vate investors, and allowing foreigners to buy shares in approved Vietnamese enter- Vietnam prises. As part of the program the govern- The public sector still dominates in all sec- ment approved privatization law, company tors of the economy in Vietnam, and infra- law, and foreign investment law to recognize structure is no exception. During 1994-99 private ownership of assets and facilitate total private investment flows in infrastruc- purchase of shares by foreigners. The pro- ture were only $360 million, less than 0.5 per- gram is still far short of the target. In August cent of the total private investment in the 1998 new regulations for investment in BOT region. In I1998 no private investments were projects were announced, although BOT made in infrastructure. projects are likely to proceed on an ad hoc In 1992 the government amended the basis as long as the following outstanding Law on Foreign Investment to facilitate BOT issues go unresolved:8 projects, but there is still little evidence of sig- * Private sector entry into some sectors- nificant PPI activities in the country. In Sep- airports, existing ports and railways-is tember 1997 state enterprise reform, still closed, and private ownership and Private Participation in Infrastructure 21 management of telecommunication oper- * The general business environmnent for ations is restricted. long-term investments is very riskv for pri- * Foreign investment in infrastructure is vate investors. still restricted, and domestic investment * There is still litde formal commnitment is limited by both financial and technical from the government to implement real constraints. reforms in the infrastructure sectors. 22 Private Infrastructure in East Asia LESSONS FROM THE CRISIS: HOW SHOULD 3 THE COUNTRIES RESPOND? he EastAsian financial crisis has America. For many of those nations, reform * yielded lessons that can serve as was the only answer in the wake of crisis, and a basis for setting future policy it was there that many of the developing A in the region. It has also high- world's infrastructure sector reforms have lighted issues of concern to investors that been enacted. Unlike their counterpart gov- must be adcdressed. ernments in Latin America, the East Asian economies relied solely on their past for- mula for economic success-an agile private Policy Lessons sector with a heavy export orientation. When the financial crisis hit, Indonesia, Thailand, The crisis showed the need for fundamental and especially the Republic of Korea were reforms in the infrastructure sectors, for heavily exposed, with sizable holdings in choosing which functions should be trans- public sector enterprises in both infrastruc- ferred to private operators, developing ture and industry. This vulnerability was domestic markets and financial discipline, compounded by a relatively weak state in managing contingent liabilities, dealing with each of the countries and the financial sec- accountability, and strengthening foreign tor's inability to exert corporate governance exchange planning and management. and banking supervision. In many cases national budgets still provided state utilities The need for fundamental reforms with large subsidies to sustain them financially The main lesson in the aftermath of the and politically. financial crisis is that fundamental reforms The exception was perhaps the Philip- should place a clear priority on sustained growvth pines, whose development pattern resembled in the infrastructure sectors. that of its Latin American counterparts more The long period of prosperity in East than that of its own neighbors. Since the Asia mitigated the urgency of substantive country had already gone through its own reforms in the infrastructure sectors, a lux- financial sector crisis and reform in the mid- ury not available to most nations in Latin 1980s,9 the newly elected Aquino and Ramos 23 governments openly embraced a wide reform through the development of domestic agenda, the most important aspect of which capital markets. was reforming the infrastructure sectors. By * Business environment reforms to depoliticize the end of the Ramos administration, the decisionmaking by creating and ::ostering Philippines had privatized most of its public independent regulatory bodies tc oversee corporations and made substantial progress in and regulate economic behavior in the bringing private sector participation into the infrastructure sectors, and to protv!ct legit- main infrastructure enterprises. imate operators and consumers from While the PPI agenda in the Philippines potential abuses. There are very f.,w inde- is not complete, the considerable progress pendent regulatory bodies in E ist Asia, achieved in the past decade could partly explain and where they exist, they are largely why the country was not affected as badly by ineffective. the crisis as some of its more prosperous neigh- * Ownership reform to introduce tl de essen- bors. The regional contagion resulting from tial element of corporate governa nce into the crisis is not surprising, since many infrastructure enterprises throigh the economies in the region had adopted similar disciplines of the market, and to redirect models for economic development-PPI was the role of government away frcm com- certainly no exception. After a decade of dis- mercial risks and toward its co -e func- appointing economic performance from the tions in the social sector and in regulation. mid- 1980s to early 1990s, the Philippines was beginning to provide the needed leadership in The choice of modalities for oDrivate promoting the PPI agenda in the region This participation in infrastructure effort has been greatly undermined by the The crisis showed that the success of PPI ini- recent political turmoil. tiatives does not necessarily rest pureiy on the The rest of East Asia has clearly PPI modality selected, but also on the act?ual activ- approached PPI as a solution to problems of ity assumed or transferred to a private p, oponent. financing rather than efficiency. As a result The success of PPI initiatives in a coun- they still have much work to do, particularly try should be assessed by scrutinizing whether in moving forceftilly toward four fundamental service-level functions of infrastructure enter- principles of reform: prises, rather than bulk supply alone, are * Market reforms to transform publicly transferred to a private operator. In PPI there owned state monopolies into competi- is an important distinction between t ie oper- tive market structures, while introducing ations that may actually be transferrw d to the transparent competitive bidding policies private sector. For a typical infras ructure to enhance competition for and in the service such as a water utility, the operation market. can be subdivided into bulk supply and serv- * Financial discipline to ensure cost recovery ice level. In many cases BOT contra cts with and returns on debt as well as equity greenfield investments are awarded -'r what through tariff reforms and improved is generally regarded as the far simpler bulk accountancy standards, and to reduce the supply operation, rather than the more polit- inherent financing risks in these sectors ically charged issues of retail rate setting and associated with the currency "mismatch" the technical, commercial, and financial inef- 24 Private Infrastructure in East Asia ficiencies related to distributing the services the financial merits of investments or the directly to consumers. Hence, true reform of strength of the state monopolies. the sector will mean that PPI transactions not Governments, on the other hand, took only involve bulk supply but also deal with the advantage of the perceived simplicity of these service level of operations. The main issue is schemes and-the low up-front cost of taking whether the commercial risk of the retail advantage of the off-budget financing oppor- operation--market risk in its many forms- tunities offered. But they did not tackle the has also been transferred to the private sec- most politically charged issues of service- tor, irrespective of financing or ownership level improvements and full cost recovery issues. This is because the crisis has exposed tariff setting. the typical BOT scheme, particularly for The crisis also provided additional insight bulk supply, to substantial weaknesses when into the weaknesses of BOT-type schemes retail tariffs cannot be readily adjusted. implemented without the necessary fiscal, On the one hand, investors and financiers financial, and regulatory discipline in the have shielded themselves with back-to-back market: offtake and supply agreements, government * Bulk supply in power and water do not guarantees or assurances to limit investment address the most common inefficiencies and financing risk, or at least the perception in these sectors-technical and nontech- that risks were effectively mitigated. Proper nical losses at the distribution or service investment due diligence by both the public levels-and have allowed governments to and private sectors of factors affecting avoid substantive reforms in the sector, commitments-demand forecasts, afford- such as setting cost recovery tariffs or ability, and ability to pay-may have been eliminating cross-subsidies. overlooked because of the perceived comfort * In bulk supply transactions with the pub- of contractual agreements backed by guar- lic interface, the public sector still has lit- antees. The sovereign guarantee may have tle accountability for overplanning. Strong kept many private sponsors and financiers evidence suggests that the crisis may have from scrutinizing the state monopolies' finan- accelerated, not created, the financial cial condition, policy toward cost recovery, problems, because of excess financial and existing and future supply commitments capacity now found in the power sectors that would affect their financial strength to in countries well along the independent honor commitments down the road. What power producer route. may have mattered most was the ability of the * As financiers and sponsors confronted the contractual cash flows to cover the cost of the crisis, BOT schemes founded on con- investmnent and earn a reasonable return over tractual enhancements designed to miti- its life. Private financiers were legitimately gate risks may have precluded the more concerned about governments' ability to fundamental aspects of project feasibility ensure convertibility of payments back into and due diligence. Sovereign guarantees foreign exchange, since much of the initial are little comfort when governments may investment and financing was in hard cur- not have the capacity to back them. rencies. With government guarantees on One-off limited recourse projects lack the both counts, private investors relied less on corporate presence of more substantive Lessons from the Crisis: How Should the Countries Respond? 25 privatizations, such as divestitures and modality in every respect is found in the concessions. Financing investments on a upper right-hand quadrant, which involves balance sheet basis not only substantially both private finance and private ownership. reduces financing problems, but also makes The purely public options in the lower left- more financing and management options hand quadrant have consistently declined in available in cases of severe economic acceptance over recent years but continue downturns such as the East Asian crisis. to recur. In some cases these options are even supported and financed by the World Bank. Finance or ownership? The two other quadrants of the matrix are The crisis may have yielded answers to the gray areas of the framework. The lower improving the hierarchy of PPI models so right-hand quadrant blends public finance that proper policy guidance can be given to and private management, which have typically government clients and the success of future been associated with leases, affermage, and PPI programs and transactions can be eval- management contracts. The upper left-hand uated. It forced a closer look at the tradeoffs quadrant represents transactions carried out between financing and efficiency in PPI mod- by public utilities with private financing. els that are not purely divestiture and fall These have mostly occurred in Malaysia, the into a gray area between public and private. Republic of Korea, and Thailand, where the These models include affermage, conces- financial markets have developed sufficiently sions, leases, joint ventures, and manage- for such transactions, but are seen through- ment contracts (figure 6). out the region. The matrix shows PPI modalities falling In the Philippines, for example, the Light within various finance and management and Rail 3 BOT has many of these features. Its ownership options. The most desirable PPI lease-back arrangement allowed for financing Figure 6 Tradeoff between private financing and private participation in infrastructure PPI Modalities i) @ E: | I E | ~~~~~~~Service level ., n1 11 cessioBn°s .: ul _ v _ B| 'U 5z ~~~~~Jof n1 2 e ~~Managem ! Public Private Management and Ownership 26 Private Infrastructure in East Asia from private sources, but the government time) or eliminate subsidies. In such cases, retained the management and the commer- allocating power generation to inde- cial risk. Vietnam has also relied heavily on pri- pendent power producers should only be vate finance to supplement public sources, accepted practice if appropriate reforms notably through its business cooperative con- are implemented in the public monopoly tracts in the telecommunications sector. These to reduce the financial risks to govern- contracts allow private operators to finance ments associated with these transactions. investments in new equipment and technol- * Private finance should be a complementary ogy. Investors then take a specified share of benefit, not an end in itself Private finance the total proceeds from the operations, but the should be an ultimate goal, but should operations are retained by the state. not drive decisions to the extent that other The oval ring around the four quadrants reforms conducive to PPI are overlooked, in the matrix encompasses schemes that com- as happened in East Asia. In many respects bine both public and private financing, typ- state utilities that have successfully tapped ically with private management. Examples the public bond markets have little excuse of public-private partnerships are private for transferring commercial risk, owner- hydropower schemes, off- and on-site devel- ship, and management through privati- opment of industrial zones, and many trans- zation to the private sector. In such cases port projects that cannot be financially all the preconditions for such transfer are sustained purely on a private basis. present except political will. Experience from the East Asian crisis * Transition models should bridgefinancing gaps suggests that viable PPI prescriptions should in markets. Given market circumstances, have the following attributes: tapping private financing sources for green- • Market risk should be transferred effectively. field investment in the form of equity or First and foremost, as much as possible of debt may not be possible. Where the mar- the business or commercial risk of the ket has not matured sufficiently to reduce operation should be transferred to the pri- investment risk, PPI modalities can serve vate sponsor. To promote any privatization as an effective transition to this end. of public infrastructure services, the gov- * Models for private participation in infra- emnment should promote sector reform structure must be sector specific. BOT to enhance payment capacity of end users schemes have been relatively successful in for infrastructure service. If projects can- the power sector, but not in the trans- not be financially viable purely as private port and water sectors. Many projects in undertakings, then explicit, transparent, the transport sector cannot be financially and closed-ended financial support may be viable as purely private ventures. In the appropriate government interventions. water sector different models need to be * Service-level inefficiencies must be addressed. developed for small geographic areas This should be done either directly where economies of scale are less than through transactions that bring in pri- optional. vate operators at the service level or These lessons show that there are far through government reforms that set cost fewer options for private infrastructure recovery tariffs (in some cases phased over investment than are commonly prescribed Lessons from the Crisis: How Should the Countries Respond? 27 by the best practice literature. Experience Domestic financial markets and financial with management contracts has been disap- discipline pointing. These contracts have consistendy The swift and steep devaluations th it arose fallen short of expectations and in practice are from the contagion of the East As a crisis not widely promoted as viable PPI models. underscore the need to resolve a nu:nber of Joint ventures in East Asia have been most financial problems in the infrastruct-ire sec- common in China. But these are limited tors across the region. because they do not fully remove the gov- * The needfor long-term domesticfi;tancing. ernment from the business venture and its Problems of financial managem 2nt and risks. Moreover, joint ventures continue to cost recovery created by the ciirrency allow governments to interfere politically mismatch between revenue and costs is a with the commercial operation of enterprises. principal financing issue for PPI. Account- Lease and affermage arrangements have ing rules have not helped in this regard, received less support, but they have valuable because they are not normally st!t up to attributes and can be important links for a accommodate fluctuations as wide as those viable roadmap in many countries in the region. resulting from the financial crisi ;. Some These arrangements are being tested in the governments in East Asia can buil I on the water sector in the Philippines as a way to advances made in Malaysia, the R epublic introduce private sector participation in rural of Korea, and Thailand and create viable towns where investment risk is high but there capital markets that can alleviate l-he mis- is a basis for private sector involvement to match problem by mobilizing more improve operational efficiency. If properly exe- financing through local sources. But other cuted, lease and affermage arrangements can countries in the region, particulai-lyViet- transfercommercial riskto private sector oper- nam, will require long lead times to ators, even though they do not bring their develop capital markets to finarnce such own risk capital and financing to the transac- investments. The development of local tions. finance sources is especially important Bulk supply BOTs have been by far the for water and transport projects, which most common PPI transactions in East Asia. typically have significant local C;ontent, As mentioned above, these have serious finan- but can apply to all projects that es,entially cial consequences unless proper reforms are earn revenues in local currency. TIhe goal in place to support the enhanced contractual of long-term domestic financing nvolves arrangements they entail. The last two PPI complexities beyond the immediate scope modalities, concessions and divestitures, have of PPI, and can only be implemented generally involved effective transfer of all over a longer-term horizon. But govern- operations to private sponsors. Concessions ments in East Asia should recog-lize the and divestitures require properly executed importance of instituting measures now reforms because they may not attract new to expand and deepen the mobilii.ation of investment easily, but these remain the most local funding sources for both public and desirable outcomes. They should drive gov- private infrastructure. Experience has ernments in their quest to expand infra- shown that improving the savings rate structure services for the public. and developing an effective contractual 28 Private Infrastructure in East Asia sector can contribute significantly to this dant and relatively cheap financing from goal. export credit, primarily intended to support The sub.idy mentality. Financial review of the exports of power projects. When the crisis utilities and infrastructure enterprises in occurred, most public utilities in the region the region indicates that governments have had to face harsh realities. They had not ade- not yet accepted that infrastructure services quately recovered costs through tariffs in the are economic goods that should be made absence of adequate foreign exchange risk available to the consumer public at their provisioning. Moreover, economic hardship cost. Until governments realize that tariffs exacerbated political pressures that made it must recover all operating and investment impossible to impose the tariff increases costs, there is little room to improve invest- needed to recover lost ground. Power utili- ment and financing prospects to accelerate ties with foreign currency borrowings and private sector participation. Subsidies in contractual liabilities tied to foreign exchange various forms-cross-subsidies; exceptional fluctuations suffered additional setbacks with- concessional lending terms and conditions; out adequate foreign exchange risk provi- and direct operating through operating and sioning. Clearly, this distortion also impeded financing subsidies-are widespread the development and strengthening of local throughout the region, and many finance capital markets, since local financiers would markets in some sectors have been severely have found it difficult to compete with such distorted as a result. Removing the sub- interest rate spreads and financing terms. sidy mentality is essential to improve infra- One possible way to approach the dis- structure finance markets. Even subsidies tortions in infrastructure finance is the for the lowest and poorest segments of the markup costing technique used by the Philip- population can be made available directly pines government to pass on official devel- and transparently rather than by distorting opment assistance financing to public important operating and financial funda- enterprises, utilities, and municipal govern- mentals of the infrastructure enterprises. ments. This technique applies a surcharge for * False notions of cost and risk from distortions foreign exchange cover offered by the gov- in the infrastructure finance markets. For emient and other related costs of financing, many years before the East Asian crisis, such as guarantee fees on foreign denomi- financing strategies for both public and nated debt, raising the cost of financing pub- private projects in the region were based lic enterprise much closer to local market on the false assumption that foreign rates. Special funds could be established to financing was far cheaper than domestic manage this activity transparently and com- financing and carried little added risk. In mercially to ease future financial shocks. a period when local currencies were essen- tially stable, there was no apparent reason Management of contingent liabilities to adjust for foreign exchange risks, and In the existing framework in East Asia, gov- the preference for financing generally fell ernments will still need to cover political risk heavily on the side of foreign debt. to ensure continued private investment and The perception of foreign financing as financing in the infrastructure markets. Such cheap and low risk was also fueled by abun- guarantees will be essential to close existing Lessons from the Crisis: How Should the Countries Respond? 29 stalled projects as well as to initiate new ones. for this purpose-separate from the rest of the Since the crisis, with its heightened risks, government finances-would be part of a international banks have become extremely move toward more professional management. reluctant to assume any form of political risk on PPI transactions. This posture will likely Accountability continue until governments and their public Another important lesson to be learned from institutions become more creditworthy and the crisis is the need for accountability in a stable business environment for private the infrastructure sectors. The I ack of operators can be secured through consistent accountability is most acute in the power and transparent regulations in each of the sector, where immediate sizable ove- capac- infrastructure sectors. Limited sovereign ity has intensified financial difficultic s. The guarantees will be inevitable if investment is lack of accountability reinforces the need to to continue in these sectors in the short term. move toward private infrastructure sul ported Governments can reduce the need for by independent regulators. such guarantees if they begin to create busi- ness environments that can minimize the con- Foreign exchange planning and cerns of bankers and sponsors. Proper management regulatory frameworks for settling disputes Financial prudence is especially critical for the and adjusting tariffs can assuage the concerns East Asian countries with extremely limited of investors, ensuring the level of revenues foreign exchange reserves. Even one PPI necessary to recover the cost of operation and project could draw down a fairly sizatble por- investment. Bold moves by governments to tion of total exchange flows in these remove the current distortions in their infra- economies. Such exposure could the:i force structure markets and to set a proper course governments to take inordinate fis-. al and for privatization of these services will further monetary remedial actions that would contribute to this end. Privatization substan- severely impact long-term economic growth. tially reduces political interference and puts Despite such potential consequences, * ery lit- these transactions in the hands of private par- tle has been done to develop best practices ties. The sooner governments can move closer to accurately reflect the long-term finiancial to this market condition, the sooner they can implications of PPI transactions in th. over- reduce the need for contractual guarantees. all macro planning process of governments. Sovereign guarantees will still be needed Nor has much been done to establish in ana- in the short term. Prudent governments will lytical framework for assessing and rianag- recognize this, as well as the likely implica- ing such risks to ensure financial pnidence. tions of continued cover support for their Since many PPI transactions are privately fiscal position. Governments should then financed, "off-the balance sheet" it, ms in respond by instituting a more professional government accounts, they are also regu- approach to managing contingent and con- larly overlooked in public finance reviews. tractual liabilities. At a minimum, this would More important, a better underst inding entail pricing, assessing the fiscal exposure, and of the financial limitations of goverr.ments making provisions for potential losses. Estab- would help frame recommendations lor fos- lishing a professionally managed fund solely tering PPI by setting priorities for PPI devel- 30 Private Infrastructure in East Asia opment in the various sectors, altering the The consequences of the collapse in con- choice of modalities that can be realistically fidence are clear and profound. With private adopted for structuring and financing trans- financing drying up, massive needs for new actions, and setting up time-bound action infrastructure will go unmet. This affects plans and strategies for overall PPI devel- investments not only for maintaining eco- opment. nomic growth, but also for sustaining past efficiency gains. Governments, too, are con- solidating their fiscal conditions in the mist Lessons for Investors of heavy contingent liabilities and increased requirements for subsidies to sustain public Policy reform is vital for sustainable growth, utilities. Transportation and water will prob- but by itself cannot adequately address many ably suffer the severest neglect, since these of the issues that surfaced in the wake of the sectors had already generated less private crisis to revitalize PPI in the short or medium investment enthusiasm than the power sec- term. Unless investor issues are considered tor. The water and transport sectors have as well, much of the progress attained in the seen little private participation, except per- past could be negated. haps in Malaysia, where local financing was more readily available. Today there is a wide- The financing gap spread perception that new opportunities One of the most important effects of the cri- are limited unless demand in the region picks sis on PPI was the inevitable and swift col- up and erases the excess capacity in many cur- lapse of confidence on the part of the rent markets. It would be unreasonable to investment and financial community. This expect substantial private financing of these created a financing gap that will be difficult sectors under the traditional risk-sharing to correct in the short and medium term. formulas. Sponsors are no longer motivated to invest in greenfield projects, and bankers' inher- Alternative models and cost-sharing ent aversion to risk has become more partnerships entrenched. Long-term private sector financ- Market projects, such as transport and munic- ing for these projects has dried up, and the ipal water distribution, require a better pub- outlook for private participation in infra- lic-private partnership framework because structure in East Asia-or Asia as a whole- commercial lenders are reluctant to take is grim. There have been some successful demand risks in these sectors. This is espe- projects, especially in the Philippines. But cially true for more than one-off private par- heavy losses seem certain in Indonesia and to ticipation in these difficult infrastructure some extent in Thailand. Moreover, sponsors sectors. On the issue of guarantees, the pri- are reflecting on the promotional and devel- vate sector would like to see stronger com- opment expenses wasted in countries such as mitment by host governments to honor the Vietnam. While interest in privatization can concession framework. Countries that still be rekindled under the right circum- urgently need new greenfield infrastructure stances, greenfield investments will be very investment may need innovative short-term difficult to revive in the short term. solutions to minimize the impact of private Lessons from the Crisis: How Should the Countries Respond? 31 financing and help regain bankers' and spon- tal markets, such development wot ld take sors' confidence in the market. years. High interest rates of local debt would be major impediments tc, infra- Risk mitigation structure financing even if local de et were The East Asian crisis dramatically increased available. It would be relatively tasy to the need for risk mitigation cover. This can develop expertise in evaluating cre( it risks be approached by guaranteeing political and for sovereign and public agenci s and subfederal government risk and developing corporations, but not for private project local financial markets. finance. Even the capital market-, of the Political risk cover is now seen as indis- developed world-except perhaps in the pensable for short-term results, and untied United States-offer limited fu ids to multilateral support could be extremely high-risk and illiquid project f nance effective in complimenting tied programs. transactions, and only a few intern itional While recovering the stability of macro- banks take risks associated with li nited- economic conditions and local currency recourse infrastructure loans. If g vern- is a prerequisite for the successful attrac- ments are to be encouraged to invite tion of private infrastructure financing in foreign sponsors and international :inanc- the future, the market expects the ing to fill the gap, they will have i a con- economies in the Philippines, the Repub- ceive feasible measures to cushion the lic of Korea, and Thailand to take from two impact of excessive local currency deval- to three years to recover, and that of uation for infrastructure users. Indonesia, five to ten years. Private finan- * Guarantees for subfederal governmeitt risks ciers now demand political risk covers in are in high demand but are not l eadily the region, and will continue to do so in the available. Decentralization of infrastruc- near future. While export credit agencies, ture provision has been promoted, but bilaterals, and regionals have been active lack the credit standing and instititional in offering political risk guarantees, capacity to implement private pr:jects. insurance, and financing-and the Asian This has stalled such subfederal lparivate Development Bank has been somewhat projects as municipal water projects. active-untied covers will be widely Developing the credit capacity ard reg- needed. The few deals pending in 1999 ulatory frameworks of subfederal afi encies depended on the availability of Japanese would take years. In countries wh. re the and other public guarantees. central government has limited authority * Localfinancialmarkets and the availability and capacity to guide and support sub- of local finance are major long-term issues. federal governments in offering pirivate The East Asian financial crisis highlighted projects, these projects would be very dif- the well-known mismatch risk of funding ficult to finance. Export credit agencies projects with local currency revenues with and bilaterals would be willing t( offer offshore funds. While all the countries in covers for subfederal projects onl) if the the region have aimed at strengthening central government undertook munici- the banking sector and developing capi- pal regulatory and political risks. 32 Private Infrastructure in East Asia Notes 1. For a more comprehensive discussion of the 5. Guarantees on the minimum revenue or traffic economic impact of the financial crisis on East volume in transportation projects, and take-or-pay Asian economies, see World Bank 1998. contracts with minimum revenue levels in power 2. The World Bank PPI database used to compile generation projects. figures for 1]994-99 covers power, telecommuni- 6. This fund entered the market in 1993 and has cations, transport, and water and sanitation, and been central to the development of several inde- includes projects that have reached financial clo- pendent power producers and other big projects, sure and directly or indirectly serve the general such as Light Rail Transit and the Kuala Lumpur public. The figure includes investments in green- International Airport. Islamic financing, another field projects and operation and management con- popular mechanism for funding major projects, tracts (concession contracts for existing facilities was used in the privatization of Petronas Gas and under which the private entity assumes significant the Kuala Lumpur International Airport. commercial and investment risk) with significant 7. In spite of the reforms, the authorities contin- capital expenditure. Operation and management ued to favor a dominant role for state enterprises contracts includes build, transfer, operate (BTO), pursuing the goal of a socialist-oriented, mixed build, lease:, and transfer (BLT), and build, reha- economy operated on market principles. In 1997 bilitate, operate, and transfer (BROT) contracts the number of ad hoc measures introduced to as applied to existing facilities. Divestitures are support state enterprises rose considerably. Steps excluded because they mostly represent revenue back from commercially oriented lending, which from the sale of existing assets rather than incre- ultimately impaired the banking system, included mental new investment. the elimination of collateral requirements for 3. The power purchase agreement contracts state enterprises borrowing from a state-owned signed included provisions for the payment of commercial bank; permission of lending to loss- power in U.S. dollars. All projects were awarded making firms with sound business plans; and the on a BOO basis with terms from 10 to 30 years. rollover of outstanding credit to enterprises fac- Most of the new generation capacity for which the ing repayment difficulties. contracts were signed was for coal-fired plants. 8. Article 10 of Decree 62 (subsequently The power purchase agreements were supported amended and supplemented by Decree 02 in by the government's letter of "comfort," which was January 1999) states that the government may acceptable to the bond markets as a "full faith and nominate a government body to guarantee the credit" support. All independent power produc- performance of the financial obligations of Viet- ers except the IrianJaya project, which was com- namese enterprises under BOT contracts. But petitively awarded, were procured on a negotiated there are concerns about whether some gov- basis, with Paiton as the "template agreement." emient bodies could honor an obligation to pay 4. The short-term plans called for an 800- in foreign currency. megawatt nuclear BOT power facility to be in 9. Several public sector financial institutions were operation by 2003. A consortium led by West- bailed out because of large losses and nonper- inghouse secured agreement in principle to build forming loans. The country set up an asset pri- this plant at Mount Muria, but this project has vatization trust to dispose of the assets and stepped been postponed indefinitely. up banking supervision. 33 Annex Country Profiles eign exchange reserves, and contain infla- Republic of Korea tion through a tightening of monetary pol- icy and some fiscal measures. In addition, Crisis and Adjustment the program included a range of structural reforms in the financial and corporate sectors The Republic of Korea initially appeared lit- to address the root causes of the crisis. tle affected by the crisis in the region. The With roll-over of short-term debt down exchange rate remained broadly stable sharply, usable international reserves nearly through October 1997. However, with a high exhausted and the won in free fall, a tempo- level of short-term debt and only moderate rary agreement was reached with private international reserves, concerns about the bank creditors on December 24, 1997 to soundness of financial institutions and chae- maintain exposure, and discussions on vol- bol had increased significantly amid several untary rescheduling of short-term debt were large corporate bankruptcies earlier in the initiated. year. As Korean banks began to face diffi- In January 1998, signs of stabilization culties rolling over their short-term foreign emerged. Roll-over rates increased signifi- liabilities, the Bank of Korea shifted foreign candy after the agreement with the banks; exchange reserves to the banks' offshore usable international reserves stabilized, and branches and the government announced a the won appreciated moderately against the guarantee of foreign borrowing by Korea U.S. dollar. OnJanuary 28, 1998, the Korean banks. authorities reached an agreement, in princi- External financing conditions deterio- ple, with a committee of foreign banks on a rated significantly in late October 1997 and voluntary restructuring of the short-term the won fell sharply while usable foreign debt of 33 commercial and specialized banks exchange reserves declined rapidly.' Mone- (including their overseas branches) as well as tary policy was tightened briefly, but was certain merchant banks. The eligible debt, relaxed again in light of concerns about the amounting to some $24 billion, covered inter- impact of higher interest rates on the highly bank obligations and short-termn loans matur- leveraged corporate sector. By early Decem- ing during 1998. ber, the won had depreciated by over 20 per- Key elements of the government's cent against the US dollar and usable foreign approach include, inter alia, the following: exchange reserves had declined to $6 billion enhanced legal/regulatory support for cor- (from $22.5 billion at the end of October). porate restructuring; creation of the Finan- On December 4,1997, the Fund's Exec- cial Supervisory Commission (FSC), an utive Board approved a 3-year stand-by independent agency with the mandate to arrangement with Korea. Additional financ- restructure both the corporate sector and ing had been committed by the World Bank the financial institutions; a focus on volun- and the Asian Development Bank. The tary workouts for the chaebol that ranked "6 underlying program aimed to bring about to 64" in asset size; a longer-term approach balance in the current account, build up for- to restructuring of the Top 5 chaebol; and 35 special relief for small and medium enter- budget was under preparation to .upport prises (SMEs). As a result of the debt restruc- economic activity and strengthen th social turing, Korea's short-term debt declined from safety net. $61 billion at end March to $42 billion at end Structural reforms emphasized the ration- April 1998. The agreement with bank cred- alization and strengthening of the banl:ing sys- itors had helped to improve financing con- tem as well as corporate restructuring, which ditions, usable reserves increased, and the was to be broadened significantly with sup- won appreciated. port from the World Bank. However, there A new government took office in late is strong skepticism both in Korea an I inter- February of 1998. Soon after the current nationally about the willingness of th 2 Top 5 government took office, the National Assem- to restructure voluntarily. Without restruc- bly passed a series of acts to make the turing of the Top 5 it is clear to all of Fhe rel- legal/regulatory environment more con- evant stakeholders that the process of ducive to corporate restructuring.2 Market corporate restructuring and bank rest ructur- confidence in the new government's com- ing in Korea will be incomplete and wv 11 leave mitment strengthened. Korea successfully the large groups, the banks and the !'orean launched a global sovereign bond issue, and economy vulnerable to subsequent shocks, significant capital inflows into the domestic but the process remains quite comp ex and stock and bond market were registered. The more difficult than generally acknow.ledged sharp decline in economic activity, however, or presented. was weighing heavily on corporations. Inter- est rates were lowered cautiously, but mon- etary policy continued to focus on The Privatization Process: An Overview maintaining exchange market stability. In view of the weaker outlook for growth, the Private participation in Korea began, arly in fiscal target was lowered further to permit the nation's development and is now preva- automatic stabilizers to take effect. lent in a broad range of sectors. H,,nwever, In Korea, the financial sector accounted there has been heavy price regulatior aimed for the bulk of short-term foreign liabilities, at containing the overall price inde c. As a but unlike in Thailand, most of the short-term result, improvements and expansion in serv- debt (over half at end November 1997) was ices have been limited and existing facilities owed by domestic financial institutions have been inefficiently used in both publicly (including their overseas branches and sub- and privately owned utilities. sidiaries) and the geographical distribution of In July 1998, the Planning and Budget creditor banks was more dispersed. Committee (PBC), the new agency rnanag- Byjuly 1998, Korea had made substan- ing the privatization of SOEs and t le PPI tial progress in overcoming its external cri- reform process under the new gover nment sis. The won remained, however, broadly developed a program of privatization for 11 stable and appreciated vis-a-vis the U.S. dol- state-owned enterprises. Among th.,m are lar in July, permitting a further easing of Korea Telecom, KEPCO, and Kor !a Gas interest rates. Interest rates declined further Corporation. PBC also announced that 6 to pre-crisis levels, and a supplementary SOEs (of those 11 SOEs) were to be priva- 36 Private Infrastructure in East Asia tized over an extended period of time. PBC- 15 had been proposed by the private sector. driven reforms often collide with political Five went into construction, but all have interests, showing its limitation as a new been on hold since the East Asian crisis bureau. As a result, the privatization process erupted. Lack of private investment interest has been slow. PBC is working on address- has led to more lucrative clauses being ing several key issues such as creating an embedded in new laws. adequate regulatory framework, introduc- To further improve the private invest- ing competition in the market, addressing ment environment in infrastructure projects labor issues and finding an optimal privati- a new law became effective on April 1, 1999. zation technique. The Private Investment Act for the Social The Economic Planning Bureau (EPB)4 Overhead Capital (PIA) replaced the Private has primary responsibilities to coordinate Capital Inducement of 1994. The objective infrastructure development, conduct per- of the PIA is to increase the promotion of formance evaluations, undertake economic private investments including foreign cap- policy, facilitate budget approval, and handle ital by improving investment selection regulatory activities. process and eliminating restrictions on the On the PPI front, the Korea Research facilities. The main objective of the new Institute of Human Settlements (KRISH) is law is to stimulate more private participa- the research arm of PBC for PPI reform. tion in infrastructure, especially foreign Recently the Private Investment Promotion investors and contractors. Infrastructure Center was established within KRISH. sectors targeted by the law include power, While privatization of infrastructure in gas, transportation, airports, ports, telecom- Korea has gone far, the regulatory envi- munications, water and sewage facilities. ronment remains underdeveloped. Until a The law includes new incentives for few years ago, the EPB had primary respon- foreign investors: 1) exemption of 10 per- sibility for price regulation. However, Korea cent value-added tax upon completion of has started a forward-looking liberaliza- target facilities; 2) government guarantee tion program aimed at providing greater of up to 90 percent of operating revenue; incentives for private participation in infra- 3) bonus for early completion and permis- structure. sion for excess profit resulting from lower Private participation in public works than expected construction costs; 4) com- began in 1991. The government prepared the pensation for the loss due to exchange rates legal structure for private sector participa- movements; 5) acceptance of diversified tion in infrastructure (also referred to as development modes (BOT, BTO, BLT, Social Overhead Capital) and in 1994 passed ROT); 6) increase of the profit level the 'Private Inducement Promotion Act'. approved by the government from 10 per- Forty-five strategic infrastructure projects- cent to 18 percent; 7) a buy-out option in mostly large and burdensome to the Gov- the event of franchiser bankruptcy; 8) exclu- ernment of the Republic of Korea-were sion of the debt portion related to private immediately announced for private partici- infrastructure investment when the fran- pation with little attention given to eco- chiser's overall debt-equity ratio is com- nomic viability or regulatory reform. Only puted. Annex Country Profiles 37 The executive regulations of the Law The Government of the Repuiblic of were prepared under technical assistance from Korea has outlined its plans to introduce the World Bank. The regulations are designed competition gradually in the power genera- to promote transparency and efficiency. tion business. As much as 45,400 MW of the 67,851 needed (66.9 percent) could b devel- oped by the private sector under the I'llinistry Sub-Sector Profiles of Trade, Industry and Energy's (h OTIE) newly proposed "competitiveness policy." To Power generation and distribution date, four Independent Power Producers The Power sector is dominated by KEPCO, (IPPs)-LG Energy, POS Energy, Hyundai, the largest state-owned enterprise in Korea. and Taegu Electric Power-hav been Korea Electric Power Corporation (KEPCO) awarded licenses by KEPCO to deve lop pri- has been a dominant monopoly in generation vate power plants to sell electricity to KEPCO (94 percent), transmission(100 percent) and for 20-25 years. distribution(100 percent). The government According to the 'Power Sector F.estruc- has a direct 58.2 percent stake in KEPCO. turingPlan'recentlypreparedbyMinistryof Foreign ownership in KEPCO was authorized Commerce, Industry & Energy, KEPCO's in 1994, butinitially limited to 8 percent of total generating assets will be split into several equity. Foreign Investors now own 16.3 per- subsidiaries by the end of 1999 and by 2002, cent. While foreign ownership of KEPCO is KEPCO will separate its distributio a- assets restricted to a 30 percent cap, the sale of indi- into subsidiaries and gradually sell off these vidual generation and distribution assets are assets. The target is to open up the distribu- considered private investments and such for- tion market by 2009. eign investors can purchase up to 100 per- KEPCO is being advised by twO invest- cent KEPCO is considered a world class utility, ment banks on its internal restructuri ng into having the capability to design, build and oper- individual generation, distribution an I trans- ate various types of thermal, hydraulic and mission companies. These gencos will hold nuclear plants. KEPCO's thermal, hydro, gas, and cc al-fired At the end of 1998, power generating generators-the exact number is ye t to be capacity was about 36,000MW. It consists of determined. KEPCO's nuclear assets will be 31.8 percent nuclear, 57.8 percent fossil, and grouped together in a separate subsidiary and 10.4 percent Hydro. will continue to be held by KEPCO. Demand for electricity was projected to grow between 6.8 percent and 7.4 percent Oil and gas annually from 1997 to 2000. However, the Korea imports almost all supplies of oil and country's economic crisis has had a negative natural gas. The government is encouraging impact on demand. Of the 67,851 MW liquefiednaturalgasusetoreducedependence needed by 2010, 33.1 percent is expected to on oil and nuclear power.5 The Kort an Gas come from nuclear generating units, 27.3 Industry started in 1983. In that yea:; KGC percent from coal-fired plants, 32.1 percent (Korea Gas Corporation), which is engaged from either gas or oil-fired capacity, and 7.5 in the import and wholesale of LNG (Liq- percent from hydroelectric stations. uefied Natural Gas), was established. 38 Private Infrastructure in East Asia To date, KOGAS (Korean Gas Com- Transport pany) retains a monopoly over gas importa- Transportation services are delivered largely tion and distribution; pricing arrangements by the private or quasi-private sector, except are distorted by cross-subsidies and do not for rail transport and subways. The trans- assure investors of a market-oriented return. port services run by the private sector oper- Additionally, there is no independent regu- ate in a relatively competitive environment, latory body that regulates importation and and are generally considered to be effi- distribution. cient. However, transport services are KGC has monopolized import and greatly limited in their ability to improve wholesaling of LNG, while 32 general city their service because of restrictive price gas suppliers, which exclusively supply LNG controls. in each supply district, have monopolized Besides rail transportation and subways, resale. KGC is a public corporation which is the private sector or the quasi-private sec- owned by the central government, KEPCO, tor is largely responsible for transporta- and local governments. tion services in Korea. The government KGC has been a target of the Korean Pri- has been very successful in either intro- vatization Program since 1993. However, ducing the private sector, or encouraging the privatization of KGC has been post- beneficial private sector practices without poned to until after the national gas pipeline undertaking full-privatization, in a range of is completed. The government plans to com- infrastructure services. The Korean Air- plete privatization of KGC by the year 2002. port Management Corporation, the Pusan The City Gas Business Act is the basis Container Port Management Corporation, for regulation of this industry. This Act and the Korean Highway Corporation are classifies city gas business into two types: all examples of enterprises which remain wholesale gas supply business and general 100 percent government-owned but which city gas supply business. The City Gas Busi- are being run independently as if they were ness Act prohibits access and guarantees private entities. These SOEs are the vertical integration of LNG imports autonomous, with significant control over and transmission pipeline by KCG. The budgets, are allowed to operate like pri- Ministry of Trade is responsible for the vate firms, and benefit from little political licensing procedure of wholesale gas sup- interference. pliers and municipal governments are Road. The roads network is the sector responsible for the licensing of general city where most infrastructure projects have gas suppliers. When an applicant receives a been lined up. Korea believes that the main license to act as a general city gas supplier, cause of heavy logistic cost (about 17 per- it has a monopoly right to sell the city gas cent of GDP) is the direct result of poor road to its exclusive supply district. It also has a facilities. This sector will be the core area universal service obligation and is restricted in which Korea is most interested in induc- by price and quality regulation by the Min- ing foreign investment. istry of Trade. The Ministry has responsi- Port. Construction and management of bility for controlling M&A, exit, and ports are administered by the Ministry of extension of facilities. Maritime Affairs and Fisheries (MMAF). Annex Country Profiles 39 Each regional office is directly under the mented, mostly on a BTO or BOO basis. supervision of the Minister. The Ministry is Among these projects, five projects includ- very much interested in private participa- ing New Airport Expressway, New Airport tion in ports. Nevertheless, due to national Terminal, and Seoul Beltway, are cilrrently security concerns, privatization is far from being constructed on a BOT basis. T he gov- reality. ernment has guaranteed 80 percent of the Railway. High Speed Rail projects are estimated traffic revenues and financial sup- administered by the Ministry of Construction port through toll-rate and operation period and Transportation, while all other railways adjustmnents. For five projects includir g Pusan are administered by Korea National Rail- New Port Kyuang-In Canal, corcession road. Korea's High Speed Railway project agreement are being negotiated and financ- has been one of the most problematic proj- ing plans have yet to be closed. For another ects and suffers serious funds shortage. seven projects ranging from new pcrts, rail- Subway. Construction of Korea's subway ways, terminals to containers, "priori wv nego- system is administered by local city govern- tiating parties" have been designated and ments. The most distressing one is Seoul active negotiations are continuing. For the Metropolitan Subway Corporation(SMSC). rest of the projects, and some new itrojects, Tariffs do not cover construction costs, and the government plans to allow corsultants attempts to adjust tariffs have not been suc- from the World Bank to evaluate tl.e inter- cessful in the past. SMSC's known overseas national construction. borrowings amount to over $409 million and Overall investments in transportation 60 billion yen. have been low relative to Korea's et: onomic Light rail transit. Currently 3 projects are growth. Traffic congestion is a major prob- being administered by local governments. lem. Although car ownership has exploded No private participation has been shown due in the last decade as a result of gov, rnment to their unviability. policy to encourage the domestic auto sec- Airports. Privatization of airports is not tor, there has not been an accom Janying an immediate issue in Korea due to national improvement in the transport infrastruc- security reasons. GOK counterparts are ture. Whereas in 1985 there were 500,000 Civil Aviation Authority of the Ministry of passenger cars, by 1996 there was a tenfold Construction and Transport and the Min- increase to 7.5 million cars. Public t:ansport istry of Defense. Inchon International Air- has not been improved. Passenger coach port, to be located near Seoul, is to be built usage and public bus usage have d&creased under the BOOT method with significant as a result of the explosion in the nui mber of amounts of private capital. The airport proj- cars and the development of the Seoul rapid ect, to be constructed between 1997 and rail system. Railways, in contrast, hlave not 2000, will include a comprehensive busi- been affected as severely as a resu t of the ness complex with hotels, offices, exhibition explosion in cars. and conference centers, and a shopping complex. Telecommunications According to the master plan of the gov- The Korean telecommunications l ndustry ernment, 45 major projects are being imple- has undergone serious change in the 1990s. 40 Private Infrastructure in East Asia The vertically integrated monopoly by state- istry, after the Ministry announces a request owned KT (Korea Telecom) was broken up for proposals. when international and long distance serv- On December 23rd 1998, the govern- ice liberalization took place in 1991. Dacom, ment for the first time listed shares in Korea the second primary telecommunications Telecom. By early January share value had business operator, entered these two markets risen by 53 percent. This is just one step in in 1991 and 1996 respectively and now com- a lengthy and complex process. At present for- petes with KT. In 1997, local calls were lib- eign investors are limited to just 5 percent eralized and a second operator entered the ownership, while most of the 29 percent not market. owned by the government is not tradable The mobile phone segment (18 million but must be held for a fixed period. Even mobile phone subscribers) has attracted con- though the sector has been progressively lib- siderable FDI in spite of the economic cri- eralized since the early 1990s, the current reg- sis. Major foreign investments in this sector ulatory environment, especially affecting includes a $396 million stake in LGTelecom price regulation, interconnection, and uni- by British 'Telecom. versal service arrangements, remains inade- The niost important issue hindering quately defined. Additionally, there is a non greater involvement of the private sector in independent regulatory body. telecommunications sector is regulatory inde- Through year 2000, the government will pendence and the creation of a more level offer for sale part of its shares to employees and playing field. The GOK is presently in the institutional investors, increase international process of reviewing a public offering pro- participation to 18 percent, and issue 10 per- posal for Korean telecoms. cent of new shares to a strategic investor. After The Telecommunic'ations Basic Act and January lst2001, the government plans to sell Telecommunications Business Act contain the 33.4 percent of its remaining shares in KT. the fundamental rules of telecommu- nications regulation. The latter divides Water and sanitation operators into two classes, primary telecom- Korea Water Resources Corporation munications business operators, and sec- (KOWACO), a 100 percent state-owned ondary telecommunication business enterprise, is responsible for construction, operators. The primary operators provide maintenance and operation of water-related telecommunication service by establishing facilities, and for utilization of water resources. telecommunication circuit facilities and the Local municipalities control water distribution. secondary operators provide services by Although tariffs only cover 70 percent of leasing the telecommunication circuit facil- cost, no privatization or restructuring plan has ities from the primary operators. A primary been established. operator has to be licensed by the Minister The water sector, including irrigation, of Communication while secondary opera- flood prevention, and drainage were central tors are required only to report their entry to Korea's early developmental policies in into the business to the Ministry of Com- the 1960s when agricultural infrastructure munication. An application to be a primary was emphasized. However, focus on the water operator rnay only be handled by the Min- sector has recently been greatly diminished. Annex Country Profiles 41 In the 1980s a large dam was constructed in for centralization were the Vietnam Posts and response to the growing demand for water. Telecommunications corporation ;- nd the Electricity of Vietnam corporation. This new centralization was adopted under thie mis- guided notion that in order to mal:e these Vietnam large "strategic" corporations globaly com- petitive, they actually required prctection Crisis and Adjustment from competition. As a result, tht. SOEs became more inefficient than before. Before the 1997 crisis, Vietnam was one of the Vietnam's GDP growth rate for 1998 fell fastest growing countries in East Asia. The to approximately half the rate of the p revious rapid growth had been propelled by a surge year. Due to the collapse of regional riarkets, in investments and market mechanisms intro- export growth plummeted to one )ercent duced late in the Eighties. There was con- (from twenty-two percent in 1997); foreign siderable activity in private participation in investment inflows abated by around sixty infrastructure, mainly under the BOT scheme; percent in 1998 only. in the power sector alone the government In recognition of the need for -eform, was planning to raise investments by $6.5 ambitious targets were announced by the billion over the 1997-2001 period using pri- government in early 1998: 150 'equitizations' vate sector funds.6 (a form of divestiture) were schedulec to take In 1997 GDP growth (9.2 percent) main- place by the end of 1998, 400 by tht end of tained the pace of earlier years, the investment 1999, and 1,000 by the end of 2000. To date, to GDP ratio (25.4 percent) was still high, and while notable progress has been ach: eved in inflation continued to be low because of tight equitization, the reality has fallen far ,hort of monetary policy. However slower regional the announced intentions. growth and, starting from mid-year, large While the banks' direct exposure to for- devaluations in the currencies of several Asian eign exchange risk has been limited by pru- economies adversely affected Vietnamese dential regulations, the indirect exposure of export perfomance. The depreciation of the financial institutions is very high, as the state Dong raised import prices, and in an attempt enterprises have in most cases used foreign to redress some of the problems of the SOEs,7 currency loans for domestic operations, and the government banned imports of a number did not have access to instruments allowing of goods. hedging of exchange rate risk. The government that took office in Sep- Since the crisis erupted, infrastructure tember 1997 identified further reform of SOEs projects have moved forward slowly, due to (including the divestiture of many enterprises) Vietnam's low levels of foreign currency as one of its principal objectives. At the same reserves and its precarious balance of pay- time however, the government moved to cen- ments situation. tralize large SOEs8 considered to operate in The capital market is still undcrdevel- "key" sectors, such as energy, construction, oped. The government aims to establish a food export industries, and airports and sea- bond market and convert SOEs into limited ports. Among the 23 "special" SOEs chosen liability companies with tradable shares. 42 Private Infrastructure in East Asia At present Vietnam is struggling to cope has been limited mainly because of discrepan- with both the simultaneous challenge of cies in enterprise valuation and accounting privatization and liberalization and the standards, opposition to reforms by the SOEs,12 effects of the Asian currency crisis. Almost and the lack of consensus on the details of the 70 percent of FDI in Vietnam is accounted equitization program among top officials. for by other Asian countries, so that the In August 1998 the government issued reduction in capital flows, which was occur- new regulations for investment in BOT proj- ring even before the crisis began, is likely ects through Decree 6213 (amended and sup- to continue. plemented by Decree 02, issued in January 1999). However there is still a lack of certainty and clarity in Vietnamese contract law, and The uEquatization- Program and the uncertainty as to the interaction between the Legal and Regulatory System Civil Code, the Commercial Code and the Economic Ordinance; BOT projects are The government took initial steps towards likely to proceed on a case-by-case basis with privatization in 1992 when it passed Decree many of the outstanding issues being indi- No. 202/CTr, which enabled the limited con- vidually solved during the negotiation stage. version of SOEs into shareholding corpora- tions, and allowed the sale of shares to private investors. However, the majority of shares in Sub-Sector Profiles the "equitized" company was to be held by the government and by company employees.9 Power generation and distribution Legislation dealing specifically with for- Electricity of Vietnam (EVN), established eign investment in Vietnam started with a law in 1995, has primary responsibility for gen- issued in 1977. With the advent of the eco- eration and owns the entire transmission nomic reform initiative doi moi in 1987, the network. The distribution of electricity to National Assembly passed the Foreign Invest- customers is managed through five region- ment Law (FIL)10 which allows foreigners to ally-based state agencies, which fall under hold equity in approved enterprises in Viet- the EVN umbrella. nam. Under doi moi policies, FDI increased The total installed capacity is 5,200 AIW from $400 million to over $20 billion between as of December 1998. Total electricity pro- 1988 and 1996. duction during 1998 reached 21,700 GWh, In 1990 the government approved the a growth of 13.4 percent over 1997; demand Law on Private Enterprises and the Law on remained with total sales at 19,880 million Companies which recognizes domestic pri- kWh, a growth of 16.24 percent over 1997.14 vate ownership of assets. In 1994, an attempt Current power tariffs of around 5 to revitalize the equitization program was made USc/kWh do not cover the full costs of power. through Decree No. 120/CP. The new decree The World Bank has actively encouraged allowed foreign investors operating under the ENV to raise electricity tariffs to the equiva- FIL to purchase shares and bonds without lent of $ 0.07 cents per kWh by the year 2000. prior approval from the Prime Minister." EVN reports to Ministry of Energy, However in the equatization program progress which still retains overall responsibility for the Annex Country Profiles 43 trial zone and doesn't fall under tie BOT framework; the company negotiated a PPA Project/Sponsor Unit Capacity with EVN only after the plant w is con- Quang Ninh MW 300.0 structed. Oxbow Power Vietnam's first privately financed power Ba Ria MW 120.0 project, the 300MW Quang Ninhi power Wartsila plant, was awarded to Oxbow Int'l Power of Phu My 2.2 MW 700.0 the U.S. in 1996, under a 20-year cantract. EdF consortium The plant is to come under operation in 1999 Phu My 3 MW 650.0 and it will supply power to EVN. .nother BHP consortium BOT project, the Ba Ria Vung Tau 120 MW Geothermal MW 50.0 power plant will be developed by WVartsila Ormat NSD Power.16 Wind power ( 2) MW 85.0 The first project that has follow d a for- mal competitive process is the Phu My 2.2 combined-cycle-gas-turbine plant, which also Source: AID Research/EVN. represents the first BOT power project that has drawn keen interest from the interna- power industry but has seen many of their tional community. functions passed to EVN since the 1995 re- The use of nuclear power, for tl-he long- organization. The Ministry of Planning and term supply of electricity, remains a priority Investment (MPI) is involved in the Build- for EVN. A feasibility study for a 61)0 MW Operate-Transfer program that allows pri- nuclear facility is under preparaticn. The vate sector investors to participate in the project is likely to be offered on .i Build- generation market. Operate-Transfer basis. EVN remains the dominant player in the EVN has traditionally relied upo 1 NGO generation market but there are some small financing for the development of powrer gen- players.'" The major new addition to capac- eration and transmission projects. EAVN has ity during 1998 was the commissioning of proposed, at various times, putting the major- the second and third units of the Hiep Phuoc ity of projects up for inclusion within the small power producer project. Build-Operate-Transfer program. As of the Vietnam's power comes mainly from of 1998, seven projects were propose d (table hydro plants. There are also coal-fired plants Al) to be financed on a BOT basis. in the North, while the existing and planned In addition to the projects listel above, gas plants are in the South. There is a EVN has also received a number cf unso- regional imbalance in generation capacity licited proposals to develop projects on a with substantial generation surplus in the BOT scheme. North. To date the major hurdles to thf devel- The only operating private power gen- opment of an IPP program hal e been erator is Hiep Phuoc, a 375 MW plant in regarded as: the South of Ho Chi Minh City. It was built * Electricity tariffs: resulting in low PPA by a Taiwanese company to supply an indus- rates being offered. 44 Private Infrastructure in East Asia * Government guarantees: the government the government relies heavily on PetroViet- has been unwilling to provide guaran- nam to perform functions reserved to the tees. authority. Vietnam's Petroleum Law assigns * Currency convertibility: difficult to con- to PetroVietnam the task to supervise con- vert local currency into foreign currency. tractors, monitor compliance with the work The opportunities for new private invest- programs specified in the contracts, and plan- ment in Vietnam's power sector will depend ning development and production after dis- on how quickly the economy recovers. A coveries. study by the World Bank, prepared after the Recent analysis indicate that future oil onset of the East Asian crisis, forecasts con- and gas discoveries in the Nam Con Son and tinuing rapid growth in the economy and Song Hong basins will have a reserve poten- even quicker growth in the demand for power. tial of some 520 million barrels and 355 bil- The forecasts imply that between now lion cubic meters of gas, in addition to the and 2010 Vietnam will need up to 10,000 already discovered reserves. Such an explo- MW of new generation capacity. The gov- ration program would cost about $950 mil- emnment plans to finance part of these invest- lion. An additional $7,850 million would be ments itself, using its own revenues and needed to cover the development of fields and borrowing as well as by requesting private infrastructure. firms to finance the rest. The proportions of Encouraging private investments is nec- public and private financing have not been essary in this sector. The challenge in the next decided and any decisions are likely to be years will be to provide sufficient incentives subject to change. and policy measures to induce international The government's plans to privatize exist- investment in exploration and development ing assets are less developed than are its plans of oil and gas resources. To increase inter- for private greenfield investments. The gov- national investments in exploration, the oil ernment is, however, interested in opening and gas sector urgently requires an efficient the distribution sector to private participation. and transparent system for awarding con- As a start, it is planning to equitize a couple tracts. A truly independent regulatory agency, of small distribution units, including part of separated from the formulation of energy the Hanoi and Ho Chi Minh City companies' policy, is also needed. distribution systems. Transportation Oil and gas To date, the Government of Vietnam has Vietnam's Petroleum Law"7 assigns upstream acted or announced its intention to involve oil and gas activities-exploration, develop- the private sector in the transport sector in ment, and production-exclusively to three ways: (1) BOT investments in ports, PetroVietnam, a state-owned enterprise. highways, and bridges; (2) equitization of PetroVietnam is responsible for conducting selected existing maritime assets; and (3) con- petroleum operations and entering into struction contracting to meet donor condi- petroleum contracts with other entities. tionalities for sectoral loans. Though the Law assigns a regulatory role to While the Ministry of Transport has the State Petroleum Management Authority, slated several engineering, design and con- Annex Country Profiles 45 sulting divisions for equitization, the con- There is no discussion for private partic- version of existing roads or bridges into pri- ipation in the airport sector either.19 On the vately owned or operated infrastructure does positive side, in 1997 a consortium of firms not appear to be under consideration at this from Singapore, Malaysia, and Taiw;: n were time. To date only few initiatives which awarded a 15-year license starting in 1995 to involve the private sector have been under- develop Vietnam's largest deep-sea porat Vung taken. Tau International Port worth $637 million. There are severe restrictions on foreign ownership and management of transport Communications infrastructure, as defined in Decrees 56 and Telecommunications is still seen as a strate- 28. Moreover, without access to local financ- gically important part of the country s infra- ing, and bond market (the stock market open- structure. Therefore there is no private ing as scheduled for 1999 has recently been foreign ownership and only limited Ic cal pri- postponed for at least another year), transport vate participation is permitted. projects in Vietnam suffer from currency mis- So far the state monopoly VietnaIn Posts matches and difficult exit strategies for and Telecommunications (VNPT) Vi Atnam's investors. Additionally it is currently very Petroleum Law20 has equitized only onie of its difficult for projects to reach financial closure many companies, and is currently planning to due to the lack of sovereign guarantees asso- equitize only four others (a hotel, a tclecoms ciated with Vietnam's transport projects. manufacturer, and two postal const-^uction Nonetheless, Ho Chi Minh City's gov- companies). ernment issued bonds to finance the Nguyen The government's restriction on Foreign Tat Thanh Road repair and upgrading proj- participation in telecommunications prohibit ect in 1994 and gave a BOT concession for one foreign investment in any telecomniunica- highway outside of Ho Chi Minh City. Other tion operational companies. In order to cir- BOT projects (among which are a ring road cumvent this restriction while allowing access around Hanoi, a toll road between HCMC - to much needed foreign capital and -xpert- Bien Hoa - Vung Tao Expressway) are under ise, revenue sharing agreements, or B usiness consideration. The government has also Co-Operation Contracts (BCCs) have been allowed for BOT participation in the Quan developed.21 Hau Bridge'8 across the Nhat Le River in The current BCC structure does not allow Quang Binh Province (National Highway 1). the foreign telecoms to setup a separate legal Currently there is no plan to introduce pri- entity. Rather, it allows the foreign investor and vate participation in any of Vietnam's Rail the VNPT to share revenues for a fixets. period operations. Although Vietnam Rail is a verti- of time.22 In this way, VNPT has the ulti- cally integrated entity (with ownership of assets mate leverage over foreign telecoms in vestors. ranging from traditional rail services to rolling The primary regulatory agency is the stock manufacturing, hotels, meal services and Department General of Posts and Tt lecoms even food manufacturing facilities), restruc- (DGPT). However, its actions are cow trained turing of the institution and equitization or by other governmental agencies, includ.1ing the divestment of ancillary services (except for one Department of Planning and Investment (DPI) hotel) has not yet been proposed. and VNPT. Due to the all-pervasive nature of 46 Private Infrastructure in East Asia VNPT in this industry, DGPT's regulatory operating companies; the formation of an role is modest and the development of any active stock market; and the removal of lim- form of competition is severely constrained. its on private investment, both local and Currently there is no competition in foreign. fixed line telecommunications. However as the government is committed to introducing Water and sanitation competition into the telecommunications Currently, there is some reluctance for con- sector, it has granted licenses to two other cessioning or equitizing existing assets in the organizations: Saigon Postel and Vietel. water sector. However, in 1998 the Binh An However, both of these organizations are Water Supply Company was licensed to build government agencies and the former has and operate a water intake and treatment plant VNPT as a major shareholder. Neither of on the Dong Nai river near Ho Chi Minh these organizations are offering services at this City; this represented the first BOT invest- stage as the DGPT has not defined the rules ment granted by the Vietnamese government under which they will operate. to foreign investors in the water sector.24 There is some degree of competition in At present, the majority of the population, cellular as there are three cellular providers. especially in rural communities, where 80 In 1996 in order to spur competition and percent of the Vietnamese population live, do deregulation, VNPT started up Vietnam's not have access to safe water supplies. Much third mobile phone network. It represented water is lost because of old, faulty pipes; Vietnam's first attempt to develop "embry- uncollected water reaches as high as 63 per- onic" telecommunications infrastructure cent in Hanoi. There are few wastewater without foreign involvement.23 However, treatment facilities. Currently water prices are VNPT is a major shareholder in all three. subsidized up to 40 percent. The goals outlined in the Accerlerated Inter Ministerial Circular (No. 02-TTLB) Telecoms Master Plan for 1995-2000 have states that the acceptable water loss ratio shall not been met. Additionally, demand for be set by the Chairman of the People's com- telecommunications services has declined mittee or the Mayor of the central cities, and significantly in the first half of 1998. Given be under 30 percent. However, decision mak- the current government telecoms policy ing structure in the water sector is highly regime and control over the industry, the dif- decentralized and the methodology set by ficulties in deploying WLL technologies, the circular, which is not a legally binding doc- and the impact of the currency crisis, it is ument, is not followed at the provincial level. expected that projections will not be real- ized. Pyramid Research predicts that there will be a net decline of 300,000 lines from the previous forecast of over 3.8 million Thailand total main lines by year 2000. To ensure private investment in the telecommunica- Crisis and Adjustment tions sector on a scale large enough to sup- port the governments plans will require From 1983 to 1996, Thailand had one of the significant progress in the equitisations of fastest-growing economies in East Asia, Annex Country Profiles 47 with an average 7 percent annual growth in ing investment priorities, privatiz .tion of per capita income. However structural prob- EGAT and the power distributors was lems, well known already in late 1996, such included as an IMF conditionality. However, as the absence of sophisticated financial and the new government adopted a slower capital markets, the reliance on financing of approach to privatization, preferring to pri- long-term investments with short-term debt vatize the most profitable enterprises later capital, the decline in demand for Thai once stability returned to markets.27 products (particularly electronics), and the In the fourth quarter 1997, EGA1J revised loss of wage competitiveness, added to the the standard PPA that it signs as pa rt of its pressure on the Thai currency and led to the IPP program. To reassure developers. EGAT collapse of the baht in July 1997. set a floor rate of 27 baht to the doll ir, with When the baht came under attack for provisions to compensate developer! for the the first time in May 1997, the government difference should the baht fall lower. In the intervened heavily to support the peg.25 As meantime six investments under he( Small investors' perceptions continued to sour, and Power Projects program (SPP) we -e can- the finance companies came under pressure, celed by developers unable raise fin;.ncing. the government kept defending the currency The financial sector restructurin g made and losing reserves. After the second specu- banks extremely cautious in extendin., loans, lative attack inJuly 1997, the Bank of Thai- while the cashflow of 32 percent (f non- land finally abandoned the peg and let the baht financial firms listed on the Stock Exchange float. The baht depreciated by about 15 per- of Thailand (SET) was insufficient to meet cent in the first week alone and the currency interest payments. Debt servicing difficul- crisis spilled over to other East Asian coun- ties were particularly severe in the rea. estate, tries, gaining further momentum in the later retail, and manufacturing sectors. part of the year. In early 1998 the financial positioiI of the Through December 1997, the Thai corporate sector worsened as a result of deep- economy experienced large outflows of cap- ening recession, exposure to foreign exzhange ital, steep depreciation of the baht and a losses, and relatively high interest rate s.28 flight of deposits from weak financial insti- Since April 1998, the governmtnt has tutions. In response, the government put in undertaken major initiatives to promnte cor- place a macroeconomic stabilization pro- porate restructuring in Thailand, lik, more gram with the help of the IMF and the World liberal tax treatment of debt restruc-uring, Bank.26 While the program helped restore new regulations on debt restructurinig and market confidence and maintain broad loan provisioning, and amendment of the exchange rate stability, high interest rates Bankruptcy Law. However during 1q98 the slowed economic recovery and investments. depreciation of the baht, high interes': rates, Given its dire need of cash and condi- difficulty in accessing credit, and -alling tionalities on IMF loans, the government was domestic and external demand further weak- expected to accelerate privatization and ened corporate balance sheets and rt duced encourage greater foreign participation in profitability. Corporate distress, in turii, con- the economy. Due to the high debt burden of tributed an increase in non-performing loans EGAT and a shortage of funds to meet exist- in the financial sector. 48 Private Infrastructure in East Asia To establish procedures for voluntary cor- portation and water-as well as in banking, porate restructuring, the government formed services and manufacturing. Many of these a Corporate Debt Restructuring Committee activities are generally considered to be out- (CDRC).29 'rhe Frameworkfor Corporate Debt side core government functions, and could be Restucturing in Thailand was announced by the delivered through private sector participation. Bank of Thailand at the end ofJuly 1998.30 In The Thai privatization program began in mid August 1998, the government announced 1988 with the implementation of the Sixth measures for resolving Thailand's banking Five Year Plan. Unlike many other East Asian crisis and restoring credit flows.31 economies, private enterprise has always been On a positive front, the crisis has not made encouraged in Thailand,34 even though SOEs the government averse to privatization. In had an important role in economic policy. 1997, the government formulated a Corpora- The State Enterprise Asset Transformation tization Act to guide enterprises interested in Act of 1992 set forth the legal framework for privatization to evaluate and transfer assets to privatization.35 anew corporation and on September 1, 1998, On 1 September 1998 the cabinet the Cabinet approved a Master Plan for State approved the privatization Master Plan, Enterprise Reform. The Master Plan lays out which systematically deals with the policies a comprehensive strategy and timetable for to develop and implement structural reform privatization in infrastructure, as well as for var- in four main sectors: communications, water, ious other state owned enterprises. transportation and energy. It also includes In March 1999 the Senate finally passed a framework for the privatization of 42 the Corporatization Law, which has been in SOEs encompassing other sectors, such as the works for several years,32 and passed crit- banking, industrial, commercial services. ical bankruptcy legislation. Bank restructur- The Master Plan is to provide a framework ing is slowly progressing, non performing for the long-term reform of SOEs, thus loans are still on the rise, and new lending is improving efficiency and international com- scarce. Thailand's recovery remains intrinsi- petitiveness, and contains a proposal for cally linked to global economic prospects legal reforms36 and a provision for the estab- and regional developments. lishment of independent regulatory bodies Recently, a more conducive macroeco- in each of the infrastructure sectors of nomic environment including a relatively telecommunications, water, transport and stable baht, falling interest rates and a flexi- energy. The function of regulators in each ble fiscal stance represent the first signs of sector will include: licensing, reviewing and economic recovery. setting tariffs, regulating service quality, competition regulations etc. The State Enterprise Policy Committee (SEPC), a The Privatization Program in the Infra- Cabinet sub committee, will monitor the structure Sector: An Overview privatization program. However, since IMF has eased up on Currently, 65 state-owned enterprises operate pressuring the government on privatization, in Thailand,33 primarily in four infrastructure the privatization process itself is proceeding sectors-energy, telecommunications, trans- more slowly now. The current focus is on Annex Country Profiles 49 Table . Electricit Medium andLThe National Energy Policy Office Te r m Plans Long (NEPO) has responsibility for all three com- panies, which are expected to be privatized Growth in supply and demand of energy until completely by 2002/2003. Significant private sector participation 1995 145,3628 13,809 has already taken place in the Thai ent rgy sec- 1997 16,960 14,193 tor, primarily through extensive use of Inde- 1998 18,261 15,315 pendent Power Producers (IPPs) and 2000 22,836 17,685 facilitation of privately owned distributed 2002 26,878 2,203297 generation facilities under the Smal Power 2003 28,376 21,440 Producer (SPP) program.39 2004 30,076 22,690 Between 1993 and 1997, electric ity pro- 2006 33,456 25,371 duction increased 49.1 percent at an average 2008 37,4056 28409 annual growth rate of about 10 percer t. Elec- 2009 39,318 30,044 tricity consumption in the same period 2010 41,618 31,749 increased 50.5 percent or about 10.2 zercent 2011 43918 33,532 annually. Source: National Energy Policy Committee. The crisis has been taken into account in the government's most recent Power Devel- fulfilling the prerequisites of privatization opment Plan (PDP 99-0 1, table A2). Conse- including working on regulatory frameworks quently, peak demand from the currenr: period and improving legislation relating to compe- through 2011 has been lowered from 36,482 tition, monopolies, and consumer protection. MW to 30,587 MW The IPP program has experienced the largest setback in terms of falling short of projected capacity.4t How- Sub-Sector Profiles ever, the government had estimated :hat by 2011 about 51 percent of the present energy Power generation and distribution supply will be sourced from IPPs.41 The electricity supply market in Thailand is As a result of the crisis, PPAs art being dominated by three SOEs: renegotiated. Due to lower than anticipated 1. The Electricity Generating Authority of demand and the ongoing financial prcblems, Thailand, EGAT,37 responsible for gen- EGAT is asking IPPs to delay projects at eration38 and transmission; it relies mostly least until 2002 or 2003. on its own plants, having only one IPP EGAT will be progressively privatized, providing it with power, the Electricity by spinning off separate generating flants42 Generating Company plc (EGCO). and selling stock in the new enterprises, with 2. The Metropolitan Electricity Authority, assets in generation sold first and the gov- MEA, responsible for distribution in emient retaining control of the transmis- Bangkok. sion network43 and a smaller number of 3. The Provincial Electricity Authority, PEA, generation assets. responsible for distribution in all other In third quarter 1998, EGAT issued a areas. $300 million bond due 2008-one of the first 50 Private Infrastructure in East Asia such offerings from Asia since 1997. Moody's of competition in gas supply and increase gave the issue an A3 rating because it is efficiency. backed by the World Bank and the Kingdom of Thailand. Transportation The next stage of industry transformation The transportation sector comprises fourteen will be the establishment of competitive mar- SOEs which are categorized in three major kets across all stages of the energy supply transportation modes or sub-sectors: land chain. According to the Privatization Master (road, rail and mass transit), water and air Plan, an Independent Regulatory Body, to be transportation. Overall, private sector par- known as the National Energy Policy Reg- ticipation could be substantially increased. ulatory Office, is planned to regulate the The Master Plan proposes that the pro- electricity industry to ensure full competition vision of transportation services be predom- under market mechanisms, to create confi- inantly the responsibility of the private sector, dence among private investors, and to pro- with reforms separating regulatory functions vide fairness to both investors and consumers. from policy responsibilities exercised by line government agencies. Regulatory bodies Oil and gas might be created at the sub-sector level (land, The oil and gas sector comprises a major water and air) or within sub-sectors. SOE, the Petroleum Authority of Thailand, At the enterprise level, immediate finan- PTT. Because of the crisis, Thailand's over- cial restructuring assistance is planned for all petroleum and gas consumption fell the State Railways of Thailand (SRT) and markedly in 1998. PTT is divided into three Bangkok Metropolitan Transit Authority business units, PIT Oil, PTT Gas, and (BMTA). The Board of Thai Airways Inter- PTT International. Accounting for over 90 national (THAI) has rescheduled the time percent of' profits, PTT Gas is the most frame for divesting more of the company's profitable. There is debate over whether shares on the Stock Exchange of Thailand PTT should be sold as a single units or as (SET) to July 1999 and for offering stakes in three separate units. The National Energy the company to strategic partners by Novem- Policy Office (NEPO) would like to break ber the same year. up PTT Gas into three units (transmission, High contingent liabilities in trans- processing, and distribution and marketing) portation, particularly for the State Railways prior to its privatization. The PIT Board of Thailand, make financial restructuring an opposes private participation in gas, prefer- urgent necessity. In 1997, SRT recorded a loss ring deregulation to take place prior to pri- of 1.76 billion baht ( $48 million), while vatization. receiving a government subsidy of 3.7 billion In the Master Plan two key issues are baht ( $ 100 million). Basic maintenance of addressed: the railways, and improvement of the safety 1. The separation of PIT's Gas Trans- record, are top priorities. Additionally, SRT portation and Trading Functions to pro- is considering new railway lines, and plans to mote competition. outsource several activities including main- 2. The third Party Access to gas transmission tenance of locomotives, rolling stocks and rail pipelines, to facilitate the development tracks. New projects could also give rise to Annex Country Profiles 51 Table A3 Bangkok Air Traffic Volume VolumelYear 1980 1990 2000 2010 International Passengers (in thousands) 4,138 3423 9,360 15,481 Domestic Passengers (in thousands) 452 Total 4,590 14,329 35,016 ' 5,949 Cargo (in thousand tons) 111 447 1,353 2,463 Flights (in thousands) 54 109 203 279 Source: Airports Authority of Thailand. property development opportunities and the munications and the postal service.. These provision of services. The Master Plan has enterprises have operational and retrulatory proposed for SRT a separation of infrastruc- authority over telecommunications in their ture, operations and real estate assets, with pri- respective areas, and are under the alithority vate sector participation in operations and of the Ministry of Transport and Conmuni- real estate. cations (MOTC). While CAT an ] TOT In the air transport sector, infrastructure compete in some areas such as cellu2lar, and is under the shared responsibility of the Air- paging services, they largely operate I n exclu- port Authority of Thailand (AAT) and the sive product markets. Both TOT44 and CAT Civil Aviation Department (CAD). Thailand are being privatized by 2000. Presently, the has six international airports and more than telecoms regulatory structure is confusing 29 domestic airports. The largest airport, and outdated. Don Muang, handles more than 12 million In accordance with a commitrnerit to the international and nearly 5 million domestic World Trade Organization to fully li eralize passengers a year. These volumes are expected the telecommunications market to foreign to more than double by the end of 2010 (table competition by 2006, as well as bec ause of A3), requiring additional capacity. Major air IMF loan conditionalities, Thailnd has transportation projects, feasible for private begun to open the sector to private :ompe- participation, include the Second Bangkok tition. This strategy is put forth in the International Airport (SBIA) at Nong Ngu Telecommunications Master Plan, alpproved Hao, the Global Transpark (GTP) at U- by the Cabinet in November 1997 which Taphao, and the Heavy AircraftMaintenance envisages a partial liberalization of the mar- Center (IAMC), also at U-Taphao. ket for domestic competitors followed by full liberalization. According to the Telecom- Communications munications Master Plan, the gove-nment Thailand has traditionally operated its intends to convert BTO concessio:is into telecommunications network through two BOO licenses, after which operators, includ- SOEs with the Telephone Organization of ing CAT and TOT, will pay license fees to Thailand (TOT) primarily responsible for a newly established National Comriunica- national communications and the Commu- tions Commission (NCC). Compenisation nications Authority of Thailand (CAT) from concession conversions will be iased to primarily responsible for international com- reduce service fees. 52 Private Infrastructure in East Asia Draft 1elecom and NCC Acts to regu- MWA and PWA currently serve as both pol- late the sector are currently being reviewed icy maker and regulators for the water sec- by the Juridical Council and the Ministry of tor. In the future, with increased private Transport and Communications which hopes participation, it is expected that these author- to launch the NCC by the end of 1999. ities will shed their policy making and serv- As regards the postal sub-sector, the exist- ice provision functions and be transformed ing MOTC: Plan proposes the creation of a into regulatory bodies. new Postal Act and the formation of a new public enterprise out of the current post divi- sion of CAT. The sector plan envisages a transitional market structure with restricted Malaysia competition of 2-5 years, while the open com- petition regime with greater product and Crisis and Adjustment functional market competition will commence in 2002 to 2005. Before the East Asia crisis erupted, Malaysia had been among the most vibrant East Water and sanitation Asian economies. Between 1991 and mid- Water supply and distribution systems in 1997, GDP growth averaged eight percent Thailand are primarily covered by three annually. Market capitalization at the Kuala state owned enterprises. The Metropolitan Lumpur Stock Exchange (KLSE) had Waterworks Authority (MWA), which deals grown from $64 billion in 1991 to $313 with the production and distribution of tap billion in 1996, becoming one of the largest water for Bangkok and the outlying urban in the region.46 Privatization, formally areas, the Provincial Waterworks Authority launched in 1991 under the Privatization (PWA), which treats and distributes tap Master Plan (PMP), was on a well-estab- water for regions outside of urban areas, lished course and by early 1996 a total of and the Waste Water Management 165 privatizations and project financings Organization (WVMO), which treats had been completed. Private participation wastewater. Municipal and private water in infrastructure had been particularly strik- companies also exist. ing in the areas of transport and power The Master Plan proposes two strategies generation and major projects undertaken for increasing private sector participation through mid-1997 were efficiently imple- in MWA, aimed at improving service qual- mented on a timely basis. ity and reducing the city's unaccounted for However, signs of increasing stress in water (40 percent of total production). Malaysia's economy became evident since Options include a long-term concession or 1994, as a result of increasing credit growth Corporatization and sale of shares to a strate- rates and slowdowns in exports. By early gic partner.45 1997 the stock market began to drop and For PWA, the Master Plan proposes the emerging excess supply in the property dividing the authority into several separate sector pushed down real estate prices. regional water utilities, with private sector After the Thai baht was floated in July participation initiated on a case by case basis. 1997, the government sought to support Annex Country Profiles 53 the ringgit by intervening in the exchange to lend. In august 1998 another agency, market and sharply hiking short -term inter- Danamodal, was established to assist in recap- est rates; after those measures proved to be italizing the financial sector and -acilitate inadequate, authorities allowed the exchange new lending activities. rate to depreciate. In December 1997, large To complement the role of D inaharta infrastructure projects (representing 22 per- and Danamodal, the central bank esi ablished cent of GDP), including the Bakun Hydro- the Corporate Debt Restructuring C'ommit- electric Dam, the second phase of the new tee (CDRC) to promote voluntary restruc- federal capital city, and the Kuala Lumpur turing between debtors and creditors.49 Linear City were indefinitely postponed. In the second half of 1998, fiscal austerity The government sought to reduce specula- was replaced by an expansionary strategy tive pressures through administrative meas- and monetary policy was eased. Despite ures, such as restraints on foreign exchange these measures, non-performing loins con- swap transactions, which regardless eroded tinued to rise, and the economic conditions investor confidence and intensified pres- deteriorated, with a GDP contraction rate sures in financial markets. Confidence was of 8.6 percent in 1998. further weakened by the proposed takeover To date there are signs of improvements of Renong by its subsidiary United Engineers in Malaysia's economy: interest rates have Malaysia (UEM).47 fallen significantly, the stock ma-ket has Notwithstanding the financial turmoil, risen more than 100 percent from its lows new deals in the infrastructure sector were in September 1998, foreign e:change completed in 1997, including the Kuala reserves have risen. The governmtent has Lumpur International Airport and the sale put in place a comprehensive corporate and of KTM, the national railway network. In the financial restructuring framework. 50 Secu- same year, major infrastructure concessions rities regulations and the Kuala l umpur were awarded, including the KL Elevated Stock Exchange listing requiremejits have Highway, the Pandan Corridor Highway, been amended to provide greater pratection Muar-Segamat-Tangkak Highway, Kajang to minority shareholders and forct corpo- Traffic Dispersal Ring Road, KL Airport rations to immediately announce defaults in Highway, the Powerton Resources IPP for debt payments. 120 MW, the Stratavest IPP for 60MW, and Currently a master plan for the: ational- the PowerCorp IPP for 30 MW ization and consolidation of the finar cial sec- Throughout the first half of 1998, eco- tor is being formulated and is expected to be nomic conditions continued to deteriorate; completed during the first quarter of 1999. late in the spring the government introduced Plans to reduce the number of finan ze com- more aggressive policies to strengthen the panies from 39 to 8 through a seriesof merg- financial sector and revive the economy. In ers were announced in early 1998, hlowever May 1998, under a special act, the govern- the rationalization process has been slower ment established Danaharta,48 an asset man- than anticipated due to difficulties rc lated to agement company, to speedily acquire and the economic contraction. manage non-performing bonds from bank- As regards the corporate sector, many ing institutions and to enhance their ability corporations are still facing difficulties in 54 Private Infrastructure in East Asia servicing their liabilities. However, relative aided by Malaysia's high domestic savings to other crisis struck countries the external rate and the government's compulsory pen- dimension of corporate distress is limited sion fund-the Employee Provident Fund because the bulk of corporate liabilities are (EPF).52 in domestic currency rather than in foreign In 1996, the government approved the exchange. listing on the Kuala Lumpur Stock Exchange of Infrastructure Power Com- panies (IPCs) to facilitate large privatization The Infrastructure Sector: An Overview projects to be financed directly by the cap- ital markets, provided the project meets Infrastructure development has been a high certain government and Securities Com- priority in Malaysia over the last two decades. mission requirements. The IPC listing was Due to the rapid growth of the Malaysian designed to encourage new strategic infra- economy, pressure on infrastructure was also structure projects. PowerTek, an IPP, and growing, particularly in electricity supply, Litrak, a toll-road operator, took advan- ports, highways, telecommunications and tage of their status as IPCs to go to market water supply. Power and transportation were in 1996. identified as crucial infrastructure sectors to The crisis in the region forced the post- be privatized (often under BOT or BOO ponement of several high-profile privati- schemes). zations and listings, among them the Bakun According to the Seventh Malaysia Plan, hydroelectricity/dam project, one of the covering the 1996-2000 period, the private world's largest privately-funded infrastruc- sector is expected to contribute RM68.3 bil- ture projects. Reportedly however, even lion ($27.2 billion) or 78 percent of total without the crisis, Malaysia's privatization infrastructure spending in the 1966-2000 program had started to slow down in 1997 period. However the government has been after five years of intense activity (table providing support through a number of A4). mechanisms, such as government soft loans, In 1998 the government approved three equity investments, directed lending through new major infrastructure projects-the KL banks and provident funds, and explicit and Elevated Highway, the Pandan Corridor implicit guarantees.51 Highway, and the Muar-Tangkak-Segamat Most major concessions have been Highway-but none of them have pro- awarded to local firms. The Malaysian gov- gressed. Projects involving neighboring emnment has emphasized local participation in countries, such as the Unity Bridge over the infrastructure development in order to reduce Straits of Malacca, have also been dropped. reliance on foreign funding and expertise, and To date, the most significant initiative also to promote indigenous industries. This has under way to help finance ongoing projects has been largely successful as Malay share of own- been the establishment, under the auspices ership in industry has increased from two per- of the Ministry of Finance, of the Infrastruc- cent in 1970 to over 40 percent in mid-1997. ture Development Corporation (IDC). In the The financing of infrastructures has first part of 1999, IDC is scheduled to merge been dominated by local capital markets, with Bank Pembangunan, the government's Annex Country Profiles 55 Table A4 Malaysia-Infrastructure Projects 1995 1996 1997 199E $ (m) no $ (m) no $ (m) n $ (mi n Energy and Power 220.00 1 1946.00 2 1362.46 3 717.0) 1 Oil Refinery/LNG & LPG Plants 0.00 0 1900.00 1 360.00 1 0.0) 0 Oil Exploration and Development 0.00 0 0.00 0 600.00 1 0.0) 0 Power 220.00 1 46.00 1 402.46 1 717.0 ) 1 Water 0.00 0 811.36 1 0.00 0 0.0) 0 Transport 3344.62 7 825.00 1 147.20 1 0.0 ) 0 Airport 0.00 0 825.00 0 0.00 0 0.0a) 0 Bridge 677.80 3 0.00 0 0.00 0 0.0 ) 0 Port 63.00 1 0.00 0 0.00 0 0.0) 0 Rail-Infrastructure 0.00 0 0.00 0 147.20 1 0.01) 0 Urban railways/LRT/MRT 2267.81 2 0.00 0 0.00 0 0.01) 0 Road 336.00 1 0.00 0 0.00 0 0.01) 0 Telecommunications 383.05 2 1388.18 2 0.00 0 0.01) 0 TOTAL 3947.67 10 4970.54 6 1509.66 4 717.01) 1 Source: CapitalDATA, Euromoney, ADB, years ending December. development bank, to form the Development system during peak periods, lower ele -tric and and Infrastructure Bank of Malaysia (DIBM). production costs to industry by as m-ch as 30 percent, and reduce power plant emissions. The government is seeking FDI a. a means Sub-Sector Profiles of helping the country weather the ci isis. But FDI remains a contentious issue in Mvalaysia Power generation and distribution and the government is likely to restrict :otal for- Malaysia's total installed capacity is 12,630 eign ownership of power sector assets. MW. Many of the recently built power plants TNB (the largest Malay electricity util- have been fired by gas and by 2000 as much ity, with installed capacity of 7,500 N W) was as 70 percent of installed capacity is expected partially privatized in 1992 but du to the to be gas-fired. volatility of its stock since then, the govern- The principal electricity suppliers are: ment has not attempted to float it atrain and Tenaga Nasional Bhd (TNB), Sabah Electric- continues to be the principal shareholder. A ity Bhd (SEB), and Sarawak Electricity Sup- separate company, Tenaga Nasional Gener- ply Company. Malaysia projections for power ation (TNG) now holds TNB's geiieration capacity needs are 16,500 MNW by 2005, and assets. TNG also acts as an IPP. 40,000 MW by 2020.53 However, short term Currently TNB is struggling to make pay- needs appear to be satisfied by the current ments to IPPs and is trying to renegotiate the capacity. Recently TNB and EGAT of Thai- PPAs. In 1998, Tenaga sold its 330MW gas- land have agreed to a 70 milie 300/kV HVDC fired plant in Malacca to Powertek,s4 and dur- interconnection between the two countries. ing the third quarter 1998, TNG est. blished The push for cogeneration is part of the a grid system as a step toward creating an government's drive to decentralize power pro- Independent Grid System Operator (IGSO) by duction, reduce governmentinvolvementin the 2000 that will manage the transmission and dis- electricity sector, lighten demand on TNB's tribution system. The creation of IGSO is 56 Private Infrastructure in East Asia part of the government's plan to separate gen- eration from transmission and distribution. It would also allow the purchase of electric- For financial year ending on August31, in RM ity from IPPs through a competitive pricing billion 1998 structure rather than relying solely on PPAs. Turnover 10.0 11.4 Tenaga's losses in 1998 have resulted Operating Profit 1.4 0.6 Foreign Exchange Loss (1.3) (3.5) principally from ringgit depreciation (expen- Loss After Tax (0.1) (3.1) sive foreign currency debt service, oil and coal Source: The Star, Nov. 1998. supply cost increases; table A5). Additionally, Tenaga is unable to raise tariffs because it is an SOE and the government has explicitly As of October 1998, there were 26 toll prohibited it from raising tariffs before 2000. bridge and expressway projects in Malaysia Revenue losses are also arising from meter for which concessions had already been tampering and theft. Tenaga recentlyswapped signed. Of these, 12 projects are open to a part of its dollar denominated debt into traffic, six are under construction, and the yen denominated debt,55 thereby reducing remaining eight are under negotiation. dollar exposure from 40 to 30 percent. Although the current financial crisis As regards SEB, the other major elec- affected many of the projects, some of the ear- tricity utility, during the 3rd quarter 1998, a lier roads, including the major North-South consortium formed by Tenaga Nasional Bhd, Expressway, have been financially successful, Petronas, and Sabah state government agreed even though since the eruption of the crisis to invest $394 million in SEB over the next three-quarters of revenues have been used to 7 years, as part of a deal to take control of the service loans. However, projects contracted 350 MW utility as of Sept. 1 1998. in more recent years are proving to be finan- cially unviable under the current economic Oil and gas situation. The principal player in the domestic oil sec- Kuala Lampur is a modern city served tor, Petronas, has been able to weather the by a network of rapid rail systems (STAR and ringgit fluctuations due to the fact that its rev- PUTRA light rail systems, and KTM com- enues are generally US dollar-denominated. muter rail) and high quality roads, mostly Given its strong financial position, Petronas built with private sector participation. The is confident of fulfilling its commitments, rapid pace of infrastructure and real estate which are primarily capital-intensive projects development has abated, due to the regional with long gestation periods. Currently, economic crisis. Additionally, serious prob- Petronas and Esso are working together on lems have emerged in the main components a major gas development project to develop of the KL transport sector, namely: finan- 22 gasfields in the northeastern coast. cial failure of urban rail mega-projects, and the attendant burdens on government; oper- Transportation ational and financial difficulties of the pub- Before the crisis, the transportation sector was lic road passenger transport regime; and promoted to support economic development increased congestion associated with inef- and grew quite rapidly. fective private vehicle restraint policy. Annex Country Profiles 57 All of the urban rail mega projects in KL recovers, competition among telcos with are facing severe financial difficulties. They are equal access will pick up. neither in a position to borrow or to pay inter- est. The government bears a considerable Water and sanitation financial exposure to capital costs for the five Since before the crisis, several water supply mega projects under consideration: STAR, and treatment projects have been con itructed PUTRA, KL PRT, ERL and Sentral Station. on a build-operate-transfer basis. However, poor collection rates are a critical ongoing Telecommunications problem complicated by the economric slow- The telecommunications market in Malaysia is down and lack of an effective enforcement one of the most competitive among the South mechanism. East Asian countries. Fixed line services account Prior to the awarding of the Inda i Water for the bulk of Malaysia's telecommunications Konsortium (IWK) concession, loral gov- business and for about 84 percent of telecom- ernments bore responsibility for providing munications industry revenues. Three are the sewerage services. However, in mcst cases major providers (Telekom Malaysia,56 Celcom, they lacked necessary financial or ti chnical and Binariang57). Besides there are two niche resources which resulted in poor main enance. players (DiGi Telecom58 and Time Telkom). Through the IWK's project (awarded in Most telcos have been seriously affected 1994), there has been a dramatic improvement by financial turmoil-Time Telkom has filed in the level of investment and in thc quality for Section 176 which provides court pro- of service. However, well before the crisis, tection from creditors. Binariang, as a result IWVK began facing serious difficulties that of its cash infusion from British Telecom, is threatened its financial viability, atid soon in the strongest position. It is expected that after the concession was awarded cotlsumers Telkom's fixed line growth will decline 5 per- protested against the rates charged; t ie com- cent or more in 1999-2000. pensatory arrangements were reestab ished in Equal access deregulation (which came 1997 at much lower levels. Moreove:, in mid into effect inJan 1 1999 and allows consumers 1998 the economic crisis prompted; further to choose from any of the five providers)59 is 30 percent reduction in charges to commer- expected to affect competition only in the cial sector customers. As a result of tf ese var- longer term, after 2000. ious factors, the government has had to make The cellular market in Malaysia has been more than RM 450 million in long-t ~rm soft one of the most progressive in Southeast loans to IWK, in addition to other ;upport. Asia. However, the crisis led to consolidation into fewer, albeit more powerful players. The government has responded to the cri- sis by increasing the foreign ownership limit Indonesia (from 30 percent to 49 percent) in an attempt to attract foreign funds into the industry. Crisis and Adjustment The outlook for the Malaysian telecom- munications industry remains bleak over the Before the crisis unfolded during mi d-1997, next one to two years. But as the economy Indonesia's economy appeared robust, sup- 58 Private Infrastructure in East Asia ported by tight fiscal policies and prudent tization projects in infrastructure, and the monetary policies. Privatization was pro- PPP Coordination Body, to develop and sup- ceeding smoothly,60 and key macro-economic port integrated policies for "cross-sectoral" indicators were stronger than in Thailand infrastructure development. Nevertheless, and other East Asian countries. The current in September 1997, the government issued account deficit had been modest and export a decree to review or postpone major infra- growth had been reasonably well maintained. structure projects.61 Nevertheless there was growing evidence Despite the IMF stabilization program, of private sector exposure to massive the rupiah depreciated 57 percent relative unhedged short-term external debt and weak- to the dollar in 1997. The Jakarta Stock eningin the financial sector. InJuly 1997, soon Exchange Composite Index was down 37 after the floating of the Thai baht, pressure percent for the year and the exchange rate fell on the rupiah intensified. Doubts rose about precipitously during December-January. Sev- the government's ability to defend the cur- eral banks were insolvent, or at least were suf- rency peg. Following a widening of the inter- fering from serious weaknesses, well before vention band in July, the rupiah was floated the crisis. The absence of a coherent strat- in mid-August 1997. By early October, the egy and the massive liquidity support from cumulative depreciation since early July the Bank of Indonesia ultimately led to a loss became the largest in the Region. of reserves. As a result, many IPOs planned In November 1997, the IMF approved a for 1997, among which Jasa Marga and PLN, 3-year stand-by arrangement with Indonesia were deferred until market conditions equivalent to $10 billion. Additional financ- improved. ing commitments included $8 billion from In early 1998, the government announced the World Bank and the Asian Development a stronger program to reverse the decline of Bank. The main elements of the policy pack- the rupiah. The program included a com- age included tight monetary policy com- mitment to tight monetary policy and a com- bined with exchange market intervention to prehensive package of structural reforms stabilize the rupiah, a plan to strengthen the prepared by the World Bank. Market reac- financial sector (including closure of non- tion was skeptical and the macroeconomic viable institutions), and an initial set of struc- program continued to lag, in part due to the tural reforms to enhance efficiency and preparations for the March presidential elec- transparency in the corporate sector. tion; meanwhile the economic downturn In order to demonstrate its commitment deepened, while inflation accelerated sharply. to the privatization program and to reassure After the re-election of the President investors, the government continued to grant and the formation of a new government, the new contracts for private participation in program was cast off track by severe civil infrastructure during the first months of the unrest, which ultimately led to the resigna- crisis. Proposals were made to establish two tion of President Soeharto on May 21, 1998. new institutions, the Public Private Part- Production, exports, and domestic supply nership (PPP) Center, responsible for advis- channels were disrupted, banking activities ing, training, and providing technical were paralyzed, unemployment was rising, assistance to stakeholders involved in priva- and food prices were soaring. Between June Annex Country Profiles 59 1997 and midJune 1998, the rupiah registered strides in expanding private participation in a cumulative depreciation of 85 percent. infrastructure. With the continued depreciation of the In 1988 Presidential Decree No. 5 pro- rupiah the external debt of the private sector vided the framework for improving the per- became an issue that had to be addressed.62 An formance of SOEs. A number of rieasures agreement with a steering committee of private were taken, including the flotation of minor- creditors was reached on June 4,1998 ("Frank- ity shareholdings in six companies on Indone- furt Agreement") and in September 1998 the sian and other stock exchanges; the use of a government announced a framework (the wide variety of reform tools such as restruc- "Jakarta Initiative") to initiate a market-based, turing, mergers, and other forms of private voluntary process of corporate debt workout.63 sector participation (including pub.ic share A new government entity, the Indonesian Debt offerings and direct placement or tra de sales) Restructuring Agency (INDRA), was estab- were authorized. Stress was pLiced on lished to operate the scheme and implement a accountability for adequate performs nce, and set of nonbinding guidelines for debt work-outs monitoring tools were strengthene:L. with domestic and foreign creditors, according Privatization per se was not men-ioned as to the Jakarta Initiative.64 a reform tool. However the Miristry of A revised bankruptcy law came into Finance, in 1989, published a reform pro- effect on August 20, 1998.65 The Frankfurt gram encompassing more than half the then Agreements, the Jakarta Initiative, and bank- 180 SOE's. The program was no: imple- ruptcy procedures are all complementary mented but a number of actions were under- parts of an integrated program to acceler- taken, such as changes in the status of some ate corporate debt workout and corporate SOE's. Over the following eight years, minor- restructuring. ity shares in six companies were floated on the In view of the deep Indonesian structural Jakarta and Surabaya (and in some cases the and balance of payments problems, additional New York and London) stock exchL nges. financing sources were provided by the IMF, None of the public flotations were pri- the World Bank, the Asian Development vatizations: management control rtmained Bank, and bilateral sources. 66 with the State, which continued to hold 65 In recent months, market sentiment has percent or more of the shares. Flotation did improved and the rupiah has appreciated sig- however require some prior restrncturing, nificandy, providing room for lower interest and opened the companies to public scrutiny, rates. However, political turmoil, and lack of audit and accountability. Over t}his same a clear transparent approach to reforms, con- period various Decrees encouraged private tinues to dampen economic conditions and sector majority joint ventures, including those prospects. in core sectors of the economy. A number of joint ventures were authorized, notably in the power and transport sectors. The Privatization Process: An Overview In November 1998 the Masterpl ,: n for the Reform of the SOEs was finally published. By the time the Asian contagion began in The Masterplan includes the government's mid-1997, Indonesia had made significant objectives, policies, methods, processes, and 60 Private Infrastructure in East Asia implementation agenda for privatization and gram began to take shape in the early 1990s restructuring. However, as a result of averse and provisions for the development of IPP market conditions, only six SOEs out of the plants were included within the 6th Plan planned twelve were slated for privatization (Repelita VI) covering the period 1994 in 1998/1999.67 It is unlikely that the gov- through 1999.70 The first IPP Purchase ernment will be able to privatize even these Power Agreement was signed in February six (only Semen Gresik has been completed 1994 for Paiton I.71 Additionally private spon- as of December 1998), even though the sors were allowed to submit unsolicited pro- MoSE is under considerable pressure to gen- posals to develop generation plants. erate revenues.68 However, by the end of 1997 PLN still The government is mulling over the idea maintained the monopoly in generation, of popular capitalism and is exploring oppor- transmission and distribution., with 98.7 per- tunities to have broader share ownership. It cent of the total installed capacity72; only is also considering using privatization pro- one Independent Power Producer had plants ceeds to fund SMEs over the long-term. in operation at the end of 1997. Additionally, Broadening share ownership may well in 1996 the responsibility to negotiate PPAs increase the population's support for priva- with private sector developers was trans- tization. However, privatization has become ferred from the Ministry of Mines and Energy highly controversial in Indonesia forcing the to PLN. government to proceed carefully. Because of However, as of December 1997, PLN overwhelming political uncertainties, the had signed 26 PPAs with private companies73 government is afraid to commit to the pri- and there were plans to privatize two of vatization program and the MoSE itself is PLN's subsidiaries (both in the generation highly divided. sector accounted for about 80 percent of PLN's 1996 total revenues). Because of the crisis several regulatory issues had to be Sub-Sector Profiles resolved before the privatization could take place, and thus plans were postponed. Power generation and distribution In late 1997 most projects were sus- PT PLN has primary responsibility for the pended74 or cancelled by presidential decree, provision of electricity within Indonesia and including some which had reached financial is accountable to the Ministry of Mines and closure and had begun construction. Fears of Energy.69 An ongoing restructuring process an over supply on the Java-Bali grid system has taken place since 1994 when four sepa- began to surface even before the crisis. rate entities were established to own and Suffering a severe shortage of cash flow, manage power generation activities. PLN, in desperation, sought to unilaterally Before the crisis, Indonesia has experi- amend PPAs by paying in local currency at enced strong growth in electricity demand a rate well below the market. Since that time, with an average rate of growth of 14 percent PLN has met its payment obligations to the pa from 1993 to 1997. Since 1985 the private small number of operating IPPs, while it sector has been allowed to invest in power negotiates with those which are expected to generation. The Independent Power Pro- come on-line in 1999 (including the Paiton Annex Country Profiles 61 plants). PLN's profitability has gone down form the basis of future electricity trade with drastically; i.e. from profits of Rp. 1.2 trillion Peninsula Malaysia. The catalyst for elec- in 1996 to losses of Rp. 0.6 trillion in 1997 and tricity trading with East Malaysia is ikely to Rp 14.5 trillion in the first half of 1998. With be the development of the Bakun hyc roelec- more than 9,000 MW of capacity under con- tric dam in the Malaysian state of S irawak. struction or at an advanced stage of develop- Through a 600 MW natural gas fired power ment, financial stress is likely to increase for plant on Batam, Indonesia could become a PLN over time. member of the electricity pool in Sin sapore. Based upon agreements with the IMF, Approvals for the construction of t:he new the government agreed to raise tariff levels by plant are currently being finalized. 20 percent in May, August and November 1998.75 However the increase for small con- Oil and gas sumers introduced in May 1998 was subse- In 1980-1981, the oil industry accouinted for quently reversed and the increases planned for over 70 percent of the governmen:-s total August and November 1998 were scaled back domestic budget revenue and for 82 ercent to 18 percent. Both increases have since been of export earnings. Since then the economy cancelled with the government citing social has diversified. In 1996-1997, oil inidustry issues and the prospect of civil unrest. products were still the single largest: source In 1998 in response to the problems raised of fiscal revenue and foreign exchange, by the currency crisis, the government devel- accounting for 23.6 percent of gove-nment oped a Power Sector Restructuring Policy to revenue and 12.7 percent of export e.1 rnings. restore financial viability, to increase compe- In recent years, however, production, capac- tition, and to stimulate private participation.76 ity, and investments have been -alling. The program envisages geographical Indonesia may become a net importer dur- unbundling of electricity supply as well as ing the next century. In 1997, Periamina, separation among generation, transmission, the oil and gas state monopoly, was identi- and distribution. An independent regulatory fied for privatization. However at present agency is expected to be established and there there is no plan for a public offering in the are plans to introduce a power pooling sys- short or medium term. tem for the Java Bali grid system.77 To reduce exploration costs of Per :amina, According to the Privatization Master while at the same time to reduce ris1s faced Plan, the restructuring objectives are to by foreign contractors, private conmpanies strengthen the balance sheet and cash flow of continue to be involved in oil and gas explo- PLN, and prepare PLN for privatization in2- ration. As of end 1]995, there were 193 oil and 3 years time. gas Production Sharing Contracts78 and 28 At present Indonesia neither exports or Joint Operation Arrangements79 b, tween imports electricity from neighboring countries Pertamina and private companies. in South East Asia. However this is expected The extensive gas reserves are being to change with the implementation of an developed in cooperation with private com- ASEAN wide electricity grid. Plans have been panies through contract mechanisms similar put forward for a large 5,000 MW coal fired to those in the oil sector. The sharing ratio plant, to be located at Cirenti, that would for gas, however, is based on a fixed formula 62 Private Infrastructure in East Asia that allows the contractor to retain an after- ruary 1999, Indonesia awarded a manage- tax income of about 30 percent of the value ment contract to operate Jakarta's largest of the gas. LNG is being exported to regional port authority to a private company. This trading partners. has been the first successful deal in quite Additionally, Indonesia has encouraged some time for Indonesia's stalled privatization private participation in the coal industry initiative. through the use of 30-year concessions. Sev- The liberalization of the shipping indus- eral licenses have been awarded to domestic try in recent years has resulted in efficiency companies for coal exploration and devel- gains. One component of these liberaliza- opment. Coal output increased from less tion measures in shipping has been to raise than 650,000 tons in 1983 to about 52 mil- the maximum allowed foreign equity hold- lion tons by 1997. ing from 80 percent to 95 percent. Addi- tionally, reforms introduced in 1994 enables Transportation a greater extent of private and foreign invest- At the end of 1997, the private sector had par- ment in airports, primarily through the BOT ticipated under a BOT system in construct- scheme. Garuda Indonesia, the international ing 148km (approximately 31 percent, of toll airline, and PT Pelabuban II, the port, are roads operated byjasa Marga80) while another slated for privatization in the next two to 236 km was in construction phase. three years. Indonesia has been one of the main East Asian countries implementing private toll Telecommunications road BOTs. In developing a framework for The domestic and international telephone private sector participation in roads, the Gov- systems are operated mainly by two pre- ernment of Indonesia has passed through a dominantly state-owned enterprises, PT number of development stages: Indosat and PT Telkom, which were partly * Toll roads financed, constructed and oper- privatized in October 1994 and November ated by a government body (1978-1983). 1995 respectively, and by a privately owned * Toll roads financed with foreign devel- firm, PT Satelindo. opment loans (1983-1990). The State-run operators PT Telkom * Non competitive engagement of the pri- (Telkom) and PT Indosat (Indosat) have vate sector in toll road construction and exclusive rights to offer domestic and inter- operation through BOT projects (1987- national services respectively. The Basic 1993). Telecommunications Law No. 3, passed in * Open competition and tendering of BOT 1989, authorizes the participation of private toll road projects (1994-present). companies to provide telecoms services and Railways are state-owned. However, in infrastructure." Together with government 1994 Perum Kerata Api, the public company regulation No. 8/93 in January 1993, these started partial privatization by inviting pri- policies asserted the government's commit- vate firms to form service joint ventures on ment to the deregulation of the telecoms a profit-sharing basis. sector. Ports have been significantly developed, The private sector can proceed to provide particularly with foreign assistance. In Feb- non-basic services without the co-operation Annex Country Profiles 63 of either Telkom or Indosat, although a license percentage of installed lines (over 1.6 million form the MTPT remains a requirement. or 23 percent of Telekom's local access net- To achieve the fixed line targets of its work) do not have any traffic and thus do development plan, Repelita VI, the gov- not generate revenues. Therefore, cevelop- ernment introduced the "Kerjasama ing a marketing strategy to make the ;e oper- Operasi" (KSOs) or joint operating scheme ations more profitable must be a priority in formula. In 1995, five international con- 1999. sortia agreed to set up KSOs with Telkom. At the end of September 1997 there Each of five private consortia was awarded were 1,041,467 cellular subscribets com- development and operational responsibili- pared with 689,402 subscribers at th, end of ties in one of Telkom's regional markets. March 1997. Nevertheless, as a resu t of the The material terms of each KSO agree- economic crisis and sharp price inc ease in ment are essentially the same; each consor- handsets,83 Indonesia's mobile cellular oper- tium is treated as a division of Telkom, and ators have encountered a substantia; reduc- is managed and operated by the KSO tion in subscribers. Between Septeriber 30 investor on behalf of the national operator 1997 and September 30, 1998, tl- e total for a term of 15 years beginning in 1996. number of cellular subscribers decreased by Collectively, the KSO investors have been 26.8 percent. charged with the planning, engineering, In May 1998, government responsibility financing and construction of a minimum of for Telkom and Indosat has moved fr om the 2 million lines. Department of Tourism, Posts and Tt lecom- In mid 1998, the Indonesian government munications to the Ministry for State-, )wned. extended the deadline for KSO operators to To date, substantial work has been under- install telephone lines on behalf of PT Telkom taken to prepare a new draft law for the (from March 31, 1999 to March 31, 2003) in telecommunications sector and the new draft light of the economic crisis. regulations that will in part consolidate a At present, the government is working on large number of existing governmeri t regu- a telecommunications bill to open up the sec- lations, presidential decrees and miristerial tor to both foreign and local companies which decrees. wifl end the market leads of the two SOEs, PT Telkom and PT Indostat. The bill will allow Water and sanitation foreign and local firms to run domestic, long- A number of concessions have been a warded distance and international telephone systems. to the private sector to manage the water To date, liberalization has been limited only to supply and distribution network and tc imple- domestic basic line and cellular services. ment greenfield projects under the BOT Indosat is expected to be privatized in scheme, as reported in table A6. the near-term. Additional privatization of However more transparenci and Telkom82 will take much longer as corporate regional autonomy for sectoral phnning, re-structuring must take place before strate- implementation, and financing are required. gic investors will be interested. In the Miyazawa initiative document there Capacity utilization of both Telkom and are recommendations for a water sector KSOs improved in 1998. However, a large adjustment loan to implement water sector 64 Private Infrastructure in East Asia Table A6 Water Projects in Indonesia Year Project name Sponsor Location Amount Contract type 1996 Adhya Titra Biwater, Bangun Batam Island $200 expansion 25 concession Batam Cipta, Syanbata investment; $10 for water Cemerlang m initial supply investment. 1997 Medan Lyonnaise Northern $85m BOT, greenfield Sumatra project; 25 Province year contract; construction to be complete by 2003; 260,000 cubic meters per day. 1997 North Aceh PT Titra Putrall Lhokesumawe, Investments of 25-year BOT Industrial Pase North Aceh $52.8 m over concession; water supply project life capacity for 40,000 cubic meters per second; 1997 Sidoarja United Water of Sidoarja city $34.4m 25-year BOT Thames Water and concession; Compagnie capacity of Generale des Eaux 20,000 cubic meters per day. 1998 Jakarta PT Garuda Dipta Jakarta-Eastern $80 m initially 25 year BROT, Semesta of Salim District will amount to municipal Group and Suez $300 m by end concession; Lyonnaise de of concession. E uax 1998 Jakarta PAM Jaya, KT and Jakarta-Western $26 million 25 year BROT Kekarpola Airindo District initially; plans municipal (owned by Thames to borrow $80 m concession; water and Kekar in first five years; capacity of Plastindo) $276 total 291,800 cubic project cost. meters per day. reforms thus improving policies, budget gram which included privatization, trade lib- procedures, and public and private involve- eralization, and the involvement of the pri- ment arrangements. vate sector in the development and financing of major infrastructure projects. As a conse- quence of the economic and financial reforms, real GNP grew at 6.9 percent by 1996, Philippines poverty was reduced, FDIs almost tripled between 1991 and 1996, and market capital- Crisis and Adjustment ization multiplied six-fold in the four years to 1996. However, early in 1997, the rising After the economic and financial crises of trade deficit and the rapid pace of credit the late Eighties and early Nineties, the expansion led to anxiety over the Philippines' Philippines launched a robust reform pro- financial market; when the Thai crisis Annex Country Profiles 65 erupted, the Philippine economy was among There has also been an unprecedented the first hit in the region. increase in the number of firms seeking pro- Faced with a substantial attack on the tection from their creditors under the coun- peso after the Thai devaluation on July 2, try's quasi judicial process for dealing with 1997, the central bank (Bangkok Sentral Ng bankruptcy. This process is adminis :ered by Pilipinas-BSP) reduced its intervention in the SEC. A large number of profital-ile firms the foreign exchange market as of July 11, are facing liquidity constraints. 1997; consequently the peso devaluated sig- The commercial banking sector remains nificantly. At end of 1997, adjusted gross the dominant source of debt finan-ing. At reserves reduced by one-third to $7.6 bil- present there are restrictions on investment lion. Net inflows of foreign capital collapsed allocations for non-bank intermediaries and (from some $8 billion in 1996 to less than $1 constrains in debt securities issued bh private billion in 1997) and there was significant drop companies. Ongoing and proposed re forms in in the number of investment proposals pre- the contractual savings sector are expected to sented to the Board of Investments by the pri- enhance the role of non-bank financ al insti- vate sector. tutions in providing long term debt. Efforts Yet, the economic and social impact of the are underway to develop the capital market,86 crisis was restrained in 1997, with a 5.1 per- expand the pool of contractual savinigs, and cent increase of real GNP growth. The reces- reform the housing finance system. sion became more evident in 1998 due to At present the government's obj. .ctive is high interest rates, low domestic and exter- to maintain inflation under control, :o stim- nal demand, uncertainty in financial markets, ulate the economy through public de ficits to and the effects of el Nifio on agriculture be financed though international raeter than which led to an overall GNP growth decline domestic sources, and ease downward inter- at 0.7 percent, despite the successful con- est rates through reductions in reserve tainment of inflation at below 10 percent. requirements in order to stimulate batik lend- In the last months, the peso has strength- ing to the private sector. ened, in response to better than expected resilience in the economy. Early in January 1999, the Philippines became the first ASEAN The Legal Framework for PPI Projects country to re-enter the global bond market. Overall, the economic downturn has been In 1987 Napocor's (National Power Corpo- one of the least severe in the Region, and ration) monopoly in the power sec :or was there has been no need thus far for the gov- ended through Executive Order 2 5 (EO emnment to recapitalize private banks. While 215). In 1990 the government passed Repub- there is at present no systemic crisis in the lic Act 6957 (RA 6957), the first BO- law in banking84 and corporate sectors,85 Philippine Asia, which expanded the participatio:n of the banks and corporations are facing major private sector in infrastructure development strains. Non-performing loans among com- to sectors such as telecommunications, ports, mercial banks (which hold 90 percent of the toll roads, airports and water utilities. I!he pri- banking system assets) have increased to vate sector was allowed to operate tlfe facil- around 11 percent as of December 1998. ity and to charge user tolls, fees and rentals 66 Private Infrastructure in East Asia sufficient to earn a reasonable return on between $36 to $45 billion for the next ten investment. By the same act, the govern- years, approximately an average of 7 percent ment relaxed some restrictions on foreign of the Philippines' annual GDP. Due to the ownership and prevented the use of explicit lack of GOP budgetary resources and the government guarantees. massive infrastructure requirements there is In 1994, the BOT law was modified and still the need for private sector presence. a new BOT law introduced, Republic Act Foreign investments for infrastructures 7718 (RA 7718) so that a greater number of and facilities can also be attracted the devel- variants on the BOT scheme would be opment of an integrated package of policies allowed. In addition, the new law endorsed and streamlined procedures to be offered by a streamlined approval process and allows ecozones, which are integrated parts of indus- the consideration of unsolicited project pro- trial, commercial, or residential complexes.87 posals; direct negotiations could be carried The latest development in the Philip- out under certain conditions. pines private participation scheme favors the The BOT law was intended to promote Build-Operate-Own model instead of the private sector participation in infrastructure. Build-Operate-Transfer mechanism. The However, apart from some major invest- BOO scheme is popular given the difficulty ments in BOT power projects, the develop- in defining the correct transfer price and the ments in other areas have been slow and only uncertainty about the ability of the govern- two major projects, the Light Rail Transit ment to pay the transfer price at the expira- (LRT) line No. 3, and the privatization Met- tion time, as well as doubts about the ropolitan Waterworks and Sewerage System government's ability to take care of future (MWSS), materialized. Part of the delay can maintenance. be attributed to the decentralization process However, while the commitmnent to PPI which began in 1991 gave local governments is high at the senior central government level, the authority to promote infrastructure proj- it is more uneven and less clearly expressed ects but did not provide them means to nego- at the level of Local government Units tiate effectively the agreements. (LGU). Other constraints for private participation At present, there are many potential PPI stem from weak or inadequate regulatory sys- projects in various stages of development, tems and institutions, as well as government's but few are coming to closure. Moreover, own cautiousness with taking on additional lia- the East Asian financial crisis has adversely bilities. Additionally, lack of an effective com- affected the development of a future pipeline petition policy has heightened barriers to of projects. entry and adversely affected the efficiency of While the environment for FDI has the private sector. The new Securities Act, improved greatly, the economy is still under- which has been recently presented to Parlia- performing relative to its potential. The ment, would greatly enhance the possibilities Philippines may lag behind the other coun- for enforcing disclosure standards and protect tries in the Region in attracting FDI because the rights of minority shareholders. of uncompetitive investment incentives According to the latest Bank estimates, offered by the Board of Investment (BOI) to the country's need for infrastructure is attract foreign capital.88 Additionally the gov- Annex Country Profiles 67 Table A7 Summary of Installed Capacity as of December 1998 December year end Unit 1994 1995 1996 1997 1998 State owned/operated MW 5,634.3 5,997.2 5,993.3 5,992.9 6,168.7 percent of total percent 60.2 60.5 54.6 52.3 53.1 NPC owned - PO MW 2,024.5 2,074.5 2,134.5 2,104.5 2,104.5 percent of total percent 21.6 20.9 19.5 18.4 18.1 IPP power plants MW 1,702.0 1,834.0 2,843.6 3,370.5 3,344.8 percent of total percent 18.2 18.5 25.9 29.4 28.8 Total installed plants MW 9,360.8 9,905.7 10,971.4 11,467.9 11,618.0 Source: AID Research. ernment of Philippines has low financial and (table A7). Including those projects w 'iere the staffing resources earmarked for investment private sector operates power stations (indi- promotion. cated as NPC-PO in table A7), the IPPs The most recent Philippine National Plan, account for 46.9 percent of total i istalled Plan 21, promotes close collaboration between capacity. the GOP and the private sector in terms of plan- The Manila Electric Company (MER- ning, designing, and implementing infrastruc- ALCO) is the largest private distributor in the tures. Plan 21 recognizes that PPI enhances the country. The distribution of electricitr is pro- GOP's critical role of mobilizing the resources vided also by some 13 5 private investoi -owned for modern infrastructures that foster integra- distributors (IOD) or member-owned coop- tion of markets within the country and the rest eratives,89 all of whom have exclusiv rights of the world. However, the regulatory and pol- to provide medium and low voltage services icy framework will need to be clarified if within their franchise areas and are subject to progress with PPI is to be maintained. price regulation. Since 1993, the Philippines gove-nment has taken steps to achieve sufficient power Sub-Sector Profiles production capacity. In particular, the gov- ernment signed Executive Ordinance 215, and then developed a series of BOTs, in par- Power generation and distribution ticular in power generation, on the basi; of it90 The National Power Company (Napocor or After BOT law approval, the imriediate NPC) the largest state-owned company in needs in the power sector were succt!ssfully the Philippines, is responsible for electricity addressed, but at a significant cost to thie gov- generation and transmission. It also purchases ernment; the GOP assumed heavy contingent electricity from a number of Independent liabilities to offset part of the risks of Inde- Power Producers. pendent Power Producers (IPPs), ultimately The total installed capacity connected to translating these into high end-user ts,riff for the transmission and distribution network consumers. was 11,618.0 MW at the end of December The regional financial turmoil has exac- 1998, of which 28.8 percentis from IPP plants erbated the alreadyweak financial position of 68 Private Infrastructure in East Asia NPC. The major impact of the economic plants based upon gas findings on Fuga island downturn has been to defer the commis- and in southern Mindanao. sioning of new projects in the short to At present the majority of plants continue medium term. to use oil (fuel and diesel) and the objective A process of reformn is currently in progress of the program is to diversify the use of fuels and will lead to the eventual privatization of as well as cut down on imports. The princi- NPC which will leave the company with pal gas field to form the base for natural gas responsibility for the transmission network power stations is the offshore Camago field, only. Privatization plans for NPC assume that in the South China Morning Sea operated by after 2005 the company will source all new gen- Shell, which is seeking a long term gas sales eration capacity from the private sector. Once contract with the government. the privatization of NPC has been completed the State sector will own and operate less than Transport 10 percent of all generation assets installed. The Philippines transport sector is essen- NPC launched a one day sales program tially bi-modal: road transport and inter- at the end of 1998 as the first step towards a island shipping. Together, these account for fully fledged power pooling system in the almost 100 percent of freight and 97 percent Philippines. The advent of the Omnibus of passenger traffic. Electric Power Bill will provide further The road network is poor and rural opportunities for the private sector and will areas can be hard to reach. The objective of include a re-negotiation of the existing con- the Department of Public Works and High- tracts. ways is to increase the road density from 0.54 At present, regulation of the sector is km / km2 to I km /km2 in the year 2000. undertaken by the Energy Regulatory Board This implies construction of 139 000 km of and the key policymaking institution is the new roads. Department of Energy. In addition, there is a In terms of private investment in the National Electrification Administration respon- road network, the government has proposed sible for promoting the total electrification of 26 projects valued at more than $ 10 billion, the country. Implementation and monitoring although of these only three/four are under of the industry rules and regulations is carried implementation.9' Many projects might effi- out by the Energy Regulatory Board. ciently be turned over to the private sector through ROT92 or other forms of contracts. Oil and gas There are close to 100 ports, but the six In late 1998 the government announced its biggest account for 80 percent of commer- intention to privatize the Philippine National cial use. The main international ports are Oil Corporation-Energy Devpt Corpora- Manila, Cebu, and in the near future, Subic tion (PNOC-EDC). Bay. The Philippine Ports Authority (PPA), The Department of Energy has launched an autonomous agency under the jurisdiction an indigenous natural gas program that aimed of the Department of Transportation and to add 4,500 MW of new capacity between Communication (DOTC) owns and operates the period 1996 to 2005. PNOC-EDC is the majority of ports in the Philippines and reviewing plans for the development of power regulates the nation's port system. PPA ports Annex Country Profiles 69 have private operators with short-term lease Under EO 109, the companies granted agreements. cellular or international gateway (IGF) Warehousing, storage and cargo han- licenses were required to build local tele- dling are provided by both PPA and private phone lines in specific regions of -he coun- operators. Outside of the PPA system, private try95 in return for attractive license. s. In all, a operators continue to own and run termi- total of 11 licenses were awarded inder the nals associated with industry-specific cap- principle of 2 operators per regio l (PLDT tured cargo. The railroad system is almost plus one new licensee).96 nonexistent and cannot be used for trans- The current concern of the new players portation. There are only 840 km of rail- is the issue of interconnection bezause the roads. However, several projects are in the only nationwide telecoms backbone is oper- pipeline. A privately owned company is work- ated by PLDT and an interconnecti Dn fee has ing on a rail link between Manila and Clark. to be remitted to PLDT. As the PLDT's Additionally the government is involved in the interconnection fee is about ten tin- es that of development of its light rail transit system in the United States, Australia, Canada, Sweden Manila through private arrangements. One of and Britain, a company, Telicphil, owned by the most recent deals was the Build Lease the other operators, is setting up all alterna- Transfer contract to implement the Light tive network. Rail Transit line 3 (LRT 3).93 The mobile wireless segment is the most The airport sector is managed, operated dynamic in terms of growth, competition, and and regulated by the Aviation Transport Office technology. In 1992 there were only two cel- (ATO), an office under direct supervision of lular mobile telephone operators. Pilipino the Department of Transportation and Com- Telephone (PILTEL) and Express Telecom- munication (DOTC). To date no airports in munications (EXTELCOM) in th, cellular the Philippine have been sold, concessioned, mobile telephone industry. These wo were leased, or built on a BOT basis4 and there are joined by Smart Communications in 1993, and no plans for decentralizing Philippine's air- later by Globe Telecom and Isle Con lmunica- ports or restructuring ATO. tions, both using digital GSA techrnc logy. The Public Telecommunicatioiis Policy Telecommunications Act of 1995 formalized the role of the two PLDT, a private monopoly, has been the entities responsible for regulating the telecom- dominant provider of telephony service in munications sector in the country. T1 hese are: the Philippines until recently. In 1993, the (i) the Department of Transport arid Com- government decided to liberalize and open up munications (DOTC), and (ii) the :National the Philippine telecommunications sector to Telecommunications Council (Nil C). The competition through two Executive Orders DOTC is responsible for policy fort rulation, (EOs). EO 59 forced PLDT to interconnect while the NTC is charged with poliky imple- with other operators, thereby sharing the mentation, sector supervision, license issuance profitable long distance revenue stream as and tariff regulation. While both DOTC and well as offering other operators access to NTC are autonomous bodies, thcy come PLDT subscribers. EO 109 awarded local under the ultimate authority of the Depart- telephone exchange licenses to operators. ment of Telecommunications. 70 Private Infrastructure in East Asia Water and sanitation nities. DILG is responsible for oversee- The main water providers are: ing the capacity building of the local gov- • The National Water Resources Board ernment units. (NWRB) which oversees, coordinates and The major problem related to water infra- integrates water resource development structure in the Philippines is inadequate and management; water supply coverage. In addition to the low * The Metropolitan Waterworks and Sew- water supply coverage, service is concentrated erage System (MWSS), which supplies in the Manila metropolitan area only. water and sewerage services in Metro The government aims to bring the water Manila and the surrounding urban cen- supply coverage to 84 percent of the total ters and rural areas. population by the year 2000. Given the mag- * The Local Water Utilities Administra- nitude of the investment needed, the gov- tion (LWUA), which supplies water and ernment recognizes the urgency to develop sewerage services in the large provincial a framework to promote PPI in the water urban communities. supply and sanitation sector. * The Department of Public Works and As of end-1997, about $ 7 billion in BOT Highways and the Department of Interior projects took place in water and waste, and and Local Government, which provide more projects are being implemented (tables water and sewerage services to provin- A8 and A9). The Philippines water sector cial rural areas and small urban commu- made significant progress in 1997 with the Table A8 National BOT Projects Awarded and Under Construction as of End 1997 Estimated project cost Project Name Agency Proponent Scheme ($ millions) MWSS privatization MWSS Benpres Holding, Ayala Corp CAOM 7,000 (USA, France, Philippines) Subic Water and Sewage SBMA BiWater/DMCI JV 120 (UK, Philippines) Clark Water Supply and Sewerage CDC Kemayan/Ciriaco Corp JV 55 (Malaysia, Philippines) Table A9 National BOT Projects with Unsolicited Proposal Estimated project cost Project Name Agency Proponent Scheme ($ millions) Mananga Il Water Supply MCWD Johan Holding/G. Keng BT & BOT 160 (Malaysia) Bulacan Bulk Central Water Supply I LWUA Penta Capital Investment BOT 50 Corp (Philippines) Puerto Water Suppiy I PPCWD Lurgi Bamag GMBH/CAMS JV 24 Extension Project Asia, Inc (Germany) Metro Manila Solid Waste MMDA Jancom Intl, Dev BOT 270 (Australia)/First Int. W-E Mgrs, Inc (Philippines) Source: IBRD. Annex Country Profiles 71 privatization of the Metropolitan Waterworks vertically integrated water and sewerage oper- and Sewerage System in Manila (AIWSS). ations under a 25-year concession agreement The MWSS privatization took the form of awarded to two concessionaires. 72 Private Infrastructure in East Asia Annex Notes 1. With the onset of the economic crisis in and eliminates all existing cross guaran- 1997 and the upward spike in interest rates, tees by 2000; five major groups with a combined work Employment Insurance Act: temporarily force of 107,000 employees and assets of reduces the minimum contribution period 26.7 trillion won ($20.6 billion) quickly failed, and increases the minimum benefit period; unable to pay their debts. 18 of the largest 30 and groups were at risk of bankruptcy. The major * Labor Standards Act: legalizes employee banks (with government encouragement) layoffs as a result of mergers and acqui- provided a series of emergency loans ($1.5 bil- sition activity or to avoid financial distress. lion) to a number of major groups at risk * International Accounting Standards: which had not yet filed for bankruptcy. The Recently, the FSC has approved the adop- problems of the largest groups quickly spread tion of international GAAP for account- to small and medium enterprises (SMEs). ing purposes. 2. These were supported by SAL I and II. Key 3. The PBC is working in consultation with initiatives include the following: the Ministry of Finance and Economy * Tax Exemption and Reduction Act: pro- (MOFE) and the relevant line Ministries. vides tax breaks for restructuring of firms, 4. Led by the Deputy Prime Minister. * Bank Act: increases the ceiling on bank 5. To help offset the country's lack of signif- ownership of other firms' equity from 10 icant natural reserves, the Korea Petroleum percent to 15 percent, or higher subject Development Corp., Korea Gas Corp., and to FSC approval; the resource development division of Daewoo * Corporation Tax Act: advances removal of Corp. plan to construct a 3,125-mile natural- deductibility of interest on excessive debt gas pipeline to transport gas from eastern from 2002 to 2000; Siberia to Korea. In the oil sector, Daen Han * Foreign Direct Investment and Foreign Oil Pipeline Co. (as of April 1998, 48.8 per- Capital Inducement Act: permits cent government owned, not including 3.9 takeovers of non-strategic companies by percent held by Korea Petroleum Develop- foreign investors without government ment Corp.) is building a $780m oil pipeline approval and raises the foreign stock own- network throughout Korea. The GOK plans ership ceiling (subsequently raised to 100 to divest its equity in the company by the year percent for non-strategic listed compa- 2000. nies); 6. The new investments would be used to * Securities Exchange Act: liberalizes merg- upgrade and develop coal-fired plants in ers and acquisition activity by increasing northern regions, hydro plants in the central the portion of shares that can be acquired provinces, and gas-fired plants in the south. without board approval from 10 percent 7. According to the government's own esti- to 3 3 percent; mates, before the crisis three-fifths of approx- * Antitrust and Fair Trade Act: prohibits any imately 5,800 state-owned enterprises new cross (debt) guarantees amongst and (SOEs), were 'unprofitable' and the rest were between chaebol affiliates and subsidiaries experiencing difficulties, evident from declin- 73 ing profits and tax contributions. The SOEs' cal and regulatory treatment; and e ijoy tar- problems spilled over into the financial sys- geted trade protection. tem and since the onset of the crisis Vietnam's 13. Article 10 of Decree 62 contemp ates that state banks have carried a heavy burden of GOV may nominate a GOV body tc guaran- non-performing SOE loans. tee the performance of the financial ol-ligations 8. In spite of the reforms, the authorities con- of Vietnamese enterprises under BOT con- tinued to favor a dominant role for SOEs tracts. However, there are a number of con- pursuing the goal of a socialist-oriented, cerns about whether or not some GO V bodies mixed economy operated on market princi- could honor an obligation to pay in toreign. ples. During 1997, the number of ad-hoc 14. Electricity production and cons, imption measures introduced to support state enter- had grown, in GWh terms, by 79.3 percent prises rose considerably. Steps back from and 93.9 percent respectively over the period commercial oriented lending, which ulti- 1993 through 1997. mately led to impair the banking system, 15. An IPP at Hiep Phuoc sells power to included the elirnination of collateral require- EVN and to businesses in the Saigo i-South ments for SOEs when borrowing from a industrial zone. In addition, some compa- state-owned commercial bank; permission of nies, households, and rural communi ies gen- lending to loss-making firms if a sound busi- erate their own power. ness plan were presented; the roll-over of 16. MPI granted an investment li':ense in outstanding credit to enterprises facing repay- September 1997; EVN and the proj( ct com- ment difficulties. pany signed the PPA in November '997. 9. The equitization scheme, as the govern- 17. The Law was passed in 1993 and;- follow- ment calls it, is neither a complete privatiza- up implementation decree was p; ssed in tion scheme nor a full step towards a market December 1996. economy; rather, through equitization, the 18. The status of this project is uncer .ain and government aimed to reduce SOEs reliance the private financing is being sought domes- on the State while allowing the State to main- tically. tain some control over enterprises. 19. In the mid-1990s, the Southern Airport 10. The FIL has been changed three times Authority solicited qualification staten- ents for since it was enacted in 1987. The most recent a $200 million Build-Transfer, turn-key change, in late 1996, maintains that foreign expansion terminal for Tan Son Nhat Airport investment is crucial for the development of (Ho Chi Minh City), but that bidding process certain regions and industrial sectors. Yet, was eventually suspended. There is lio indi- the legal guidelines underlying FIL and its cation that the project will be rejuve lated. interpretation remain unclear to foreign com- 20. The Law was passed in 1993 and a follow- panies. up implementation decree was paosed in 11. Responsibility for the equitization pro- December 1996. gram was to be shared by the Ministry of 21. BCCs are essentially Build-Transfcr (BT) Finance and the State Bank. schemes. Joint ventures are permitte,1 in the 12. State enterprises still enjoy privileged manufacturing of telecommunications equip- legal status; receive explicit and implicit pref- ment, and several such companies ha-ie been erences in access to credit, land use rights, fis- established. 74 Private Infrastructure in East Asia 22. Before the crisis, in order to keep up the lead institution, be appointed early in with rising demand for telephone connec- the restructuring process to actively man- tions, which was rising about 35 percent age and coordinate the restructuring accord- annually, VNPT entered into revenue shar- ing to defined objectives and deadlines. ing agreements with foreign telecoms (Tel- 31. These measures comprise:(a) additional stra of Australia, NTT of Japan, Cable & Bank of Thailand interventions to accelerate Wireless of UK, France Telecom). consolidation of banks and finance compa- 23. The number of mobile phone users has nies; (b) private investment participation in jumped from just 200 in 1993 to over 35,000 the sale of two financial companies; (c) a in 1996. framework for the voluntarily removing of 24. The $30 million project has a designed bad assets from balance sheets. capacity of 100 000 cubic meters a day; the 32. The Law had met with serious opposition contractual agreement is to supply water to from employee groups, and eventually it was Ho Chi Minh City Water Supply Company passed because a number of compromises (a provincial level SOE) for 20 years. were made; the provisions include a require- 25. The central bank issued $23 billion in for- ment that a public hearing take place prior ward foreign exchange contracts at a time to corporatization and employees be repre- when reserves amounted to $25 billion. sented on the committee managing the 26. The underlying adjustment program was preparatory process towards corporatization. aimed at restoring confidence, reducing the 33. In 1998, these enterprises had total rev- current account deficit, reconstituting foreign enues of 884.2 billion baht ($ 24 billion) and exchange reserves, and limiting the rise in employed almost 340,000 people, just over 1 inflation. Upon approval of the program, percent of the labor force. Revenues of state Thailand drew$1.2 billion from the IMF and enterprises accounted for a significant por- received a further $4 billion from bilateral and tion of economic activity-approximately 14 multilateral sources. percent of 1997 GNP. 27. In particular the privatization of EGAT 34. Thailand privatization efforts date back through unbundling met stiff resistance from to 1961. the employees union for fears of major job 35. The framework included registering/cor- losses. poratizing companies, reducing government 28. The depreciation of the baht badly dam- share in selected companies to 70 percent or aged the corporate sector, with large debt less, and, as a final step, reducing government obligations denominated in foreign exchange, share to less than 50 percent so as to end com- much of it unhedged. panies' status as SOEs. 29. The CDRC is chaired by the Bank of 36. Among the proposals, there is the review Thailand Governor and include representa- of some existing laws, such as the Competi- tives from the Thai Bankers' Association, tion Laws B.E. 2532 (toprotectnewentrants Foreign Bankers' Association, Federation of and other enterprises from abuse of monop- Thai Industries, Chamber of Commerce, oly power); the NEC 281 (foreigners are not and Association of Finance Companies. allowed to hold more than one-half of the 30. The framework requires that a lead insti- total shares in privatized SOEs, with the tution, and a designated individual within exception of infrastructure projects approved Annex Notes 75 by the Board of Investment); Intellectual cent while 25 percent of shares will be listed. Property Laws; Private Sector Participation The plant will be re-named as Powe r-Gen 1. Act B.E. 2535 (conflicts with private offerings Other EGAT plants as they are p ivatized to strategic partners both in the objectives and will be called Power Gen 2, Power C en 3 and process); Company Law The Public Com- the process is to be completed by 2 001. pany Act B.E. 2535 ("Golden Shares" are 43. There is no electricity pooling s ,stem in not envisaged under Thai Law); Securities Thailand. Laws (acquisition or holding of 25 percent of 44. TOT employees are getting a 4 percent shares in a public company is deemed a "take share in the enterprise in return lor their over" and a tender offer is required). support of the privatization initiative. 37. EGAT was made solely responsible for 45. Two private sector participation options generation and transmission under the 1968 exist for MWA. The first option consists in EGAT Act. EGAT sells power to MEA and the horizontal separation, and creation of PEA. The EGAT act was amended on 1 East Bangkok Co. and West BangiKok Co. March 1992 to allow private electricity gen- Under this option, each compan) will be erators to produce and sell power. responsible for the range of activiti es, from 38. At present EGAT accounts for 85.3 per- bulkwater supply to distribution, billing and cent of total generation, with 16,142MW of metering. The second option involves the installed capacity, 46 percent of which is gas corporatization of MWA to form MNUVA Co., fired, 6 percent oil fired, 18 percent coal which in turn will take on a strategic partner fired, 19 percent hydro, and 10 percent alter- to undertake operation and management of native sources. the utility through a management contract. 39. The SPP program is more rapid requir- 46. In early 1997, the three largest pi ivatized ing only bilateral negotiation between private companies on the KLSE, Telekom Malaysia, producers and EGAT. The IPPs, on the other Tenaga (electricity utility), and Petrc nas Gas hand, will be awarded only after a public ten- together made up for 10 percent of to tal mar- der procedure. ket capitalization. 40. The phase II bidding round under the IPP 47. UEM purchased a controlling ;hare of program has been put off until the 2002/2003 Renong without making a general offer to all period. As a response to the recession, EGAT Renong shareholders, as required und r Secu- has either closed or reduced capacity in the rities Commission rules. The deal was ulti- older thermal plants, including the Mae Moh mately approved by the Foreign Inv stment plant. Additionally, oil-fired plants are being Committee (FIC), which reserves the right to converted into natural gas plants. approve all takeovers and mergers. 41. Thus far, EGAT has signed contracts with 48. Danaharta was enabled to appoin -: special seven IPPs to supply 5878 MW over 25 years. independent administrators to develop work- 42. EGCO was spun off of EGAT and is out proposals with borrowers. developing plants on its own. The privatiza- 49. The CDRC process is voluntary, a ong the tion of EGAT's 4600 MW Ratchaburi plant lines of the "London Rules" approach. The will begin in third quarter 1999 whereby goal is to reduce the legal costs as well as Ratchaburi will be transformed into Ratch- time associated with restructuring under court aburi Holding Co. EGAT will hold 33 per- protection and supervision. 76 Private Infrastructure in East Asia 50. Banks have been forced to recognize all cial situation and continues to have solid non-performing loans and to sell non-per- growth levels; it poses the largest threat to forming loans in excess of 10 percent of total Telekom Malaysia's market dominance. loans to Danaharta typically at a 30-50 per- 58. Formerly Mutiara; Mutiara improved its cent discount over face value. Danaharta strength forming a joint venture with Swiss- buys the non-performing loans by issuing com. zero coupon bonds guaranteed by the gov- 59. Equal access is currently available only on ernment. the fixed-line network, but it will be broad- 51. I.e. guarantees on the minimum revenue ened to include the cellular market. or traffic volume in transportation projects, 60. In 1995 the global initial public offering and "take-or-pay" contracts with minimum of Telkom (the largest Asian equity offering revenue levels in power generation projects. completed to that date) was undertaken. The 52. The EPF, which entered the market in climate for privatization was enhanced by 1993, has been central to the development of strong economic growth and a new several IPPs and other big projects such as the "superteam" of government officials com- Light Rail Transit, and the KL International mitted to expanding private participation in Airport. Islamic financing is another popu- the economy. In 1997 companies slated for lar mechanism of funding for major proj- privatization included Jasa Marga, the prin- ects. Islamic financing was used in the ciple toll-road developer/operator, and privatization of Petronas Gas and the KL Perusahaan Listrik Negara (PLN), the International Airport. national electric utility. 53. From International Private Power Quar- 61. Also in September 1997, the 49 percent terly, 4th Quarter 1998. foreign ownership restriction on publicly- 54. This is expected to the first of a series of listed shares was removed, thereby reducing generation asset sales by Tenaga to IPPs. the incentive for Indonesian firms to list Tenaga also plans to sell off its 1,500hMW overseas. Kapar power plant. 62. Talks with a steering committee of pri- 55. The yen debt carries a significantly lower vate bank creditors began in February 1998, interest rate. However having the yen weak- followed by meetings in April (New York), ened recently, Tenaga also takes on the risk May (Tokyo), and June (Frankfurt). A private of possible yen appreciation. external debt team set up by the authorities 56. Telekom Malaysia owns 98 percent of prepared and coordinated the negotiations the 4.8 million fixed lines in Malaysia. with assistance from outside consultants and Recently TM signed interconnection agree- in collaboration with the Fund, the World ments with three providers: Binariang, DiGi Bank and the Asian Development Bank. Telecom, and Celcom. TM is still under no 63. The "Jakarta Initiative" is an adaptation immediate threat to loose its dominant mar- of the "London Rules" to the Indonesian ket position, as it will take some time before conditions for the voluntary restructuring equal access, which kicked in in Jan 1999, of external obligations of the corporate sec- starts to erode TM's market share. tor, the restructuring of interbank debt, as 57. With the recent sale of a stake to British well as the establishment of a trade facility to Telecom, Binariang has improved its finan- help restore normal trade financing. The Annex Notes 77 agreement offered a government exchange MW would be commissioned duiring the guarantee to creditors and debtors who agreed course of the 7th Plan. to restructure their debt on the basis of cer- 71. Construction of the power plant started tain minimum conditions (a three-year grace in 1995 and it is expected to start c elivery of period and an eight-year maturity). electricity during the middle of 1999. Polit- 64. The purpose was to shift the associated ical risk insurance was offered by C'PIC. The foreign exchange risk of existing private cor- US EXIM provided the export credit financ- porate debts to the Indonesian government. ing for equipment purchases. The :'PA price INDRA would not take on commercial risk agreed for the project was to start off at $ but would ensure foreign payments to the 0.0856 cents per kWh and reduce tb $ 0.0554 creditor on the basis of rupiah payments perkWhforthefinalyearsofthe 3C'yearcon- received from the debtor, the latter being cession period. The project is expected to be determnined based on the most appreciated real completed after the re-negotiati n of the exchange rate during a specified period. PPA contract terms, although electricity sales 65. A special Commercial Court was inau- might be postponed until year 200). gurated August 21 to deal exclusively with 72. The total installed generation capacity bankruptcy cases that emerge in the corpo- was 19,191 MW. rate restructuring process. 73. The PPA contracts signed incltude provi- 66. In September 1998, an agreement was sions for the payment of power in l FS dollars reached on the rescheduling or refinancing of and all projects were awarded on a Build- Indonesia's bilateral external debt to official Operate-Own basis with terms ranging from creditors. 10 to 30 years. The majority of the new gen- 67. The six are: PT Semen Gresik (cement), eration capacity, for which PPA contracts PT Indosat (telcom), PT Aneka Tambang were signed, were for coal-fired pl;h.nts. The (mining), PT Peblido I (seaport), PTAngkasa PPAs were supported with the Goverment's Pura (airport), PTPN IV (plantation). letter of "comfort" which was acceptable to 68. The MoSE has not publicly stated what the bond markets as a "full faith and credit" its revenue targets are. support. Regarding procurement, apart from 69. PT PLN was established in 1961 as an the IrianJaya project, which was corn petitively operating division of the Ministry of Energy awarded, all IPPs were procured ort a nego- and acquired a separate legal status during tiated basis (with Paiton being the "template 1965. In 1972 PLN became a Public Utility agreement"). Company taking on also the formal role as the 74. The short term plans called also for a Electric Energy Authority for Indonesia. In 800 MW nuclear BOT power facility to be 1994 PLN was transformed in a full corpo- in operation by 2003; a consortium led by rate entity with limited liability and adopted Westinghouse secured agreement i ri princi- the current name, Perusahaan Perseroan ple to build this plant at Mount Malria; this (Persero) PT Perusahaan ListrikNegara (PT project has been postponed indefin tely. PLN). 75. In early 1998, the rupiah depreciation 70. This plan assumed 4,960 MW of new reduced PLN's retail tariff from 7 cent per capacity was to be contributed by the IPPs in kwh to 2 cents per kWh. Retail tariffs would the period to March 1999 and a further 3,845 have had to be raised over 200 ptrcent in 78 Private Infrastructure in East Asia order for PLN to cover project costs. A new Indonesia Classification of Telecommunica- tariff rate basis was introduced in May 1998 tions Services, 1998 to replace the previous standard for elec- tricity tariffs implemented five years earlier Basic services Non-basic services in November 1994. Local telephony Electronic mail 76. The restructuring program addresses six Domestic long Store ad forward distance telephony facsimile important areas: "1. industry restructuring, Fixed wireless Abbreviated dialing 2.introduction of competition, 3. tariff setting, Mobile cellular Multi-call address 2. ' Leased lines Electronic data cost recovery and subsidies, 4. rationalization interchange and expansion of private participation," 5. Packet switched data Paging Telex and telegraph Video conferencing redefine government's role, and 6. strengthen Vsat the regulatory and legal frameworks. The Telecast program is to be undertaken over a 5 year Source: Telecom, Pyramid Research. period. 77. The objective is to meet peak demand Private companies are allowed to offer through a power pooling system; basic and basic telecoms services, but only in co- 'medium' demand will be satisfied through operation with either Telkom or Indosat PPAs signed with PLN generation units or and pursuant to a license from the MTPT. IPPs. The law allows such co-operation through 78. PSCs were implemented in 1966 to joint ventures in which either Telkom or encourage foreign investment in the oil Indosat has a direct or indirect equity par- industry; foreign firms can finance explo- ticipation, joint operating schemes (KSOs), ration, development, and production costs and management contracts. in exchange for being able to retain a share 82. As of November 30, 1998, 24.2 percent of output. PSCs usually have a term of 30 of Telcom's common stock was held by the years. public and the rest held by the government. 79. JOAs are an abbreviated version of PSCs Telcom accounts for approximately 14 per- which perrnit the development of fields that cent of the total capitalization of the Jakarta have already been partially explored. Stock Exchange. Telcom's common stock is 80. Jasa Marga has partnerships with 40 pri- listed on the Jakarta, Surabaya, London and vate companies to develop toll roads; there New York Stock Exchanges. The listings on are plans for an IPO to float 25-30 percent the London and New York Stock Exchanges of its shares in the near-term. are in the form of American Depository 81. Under Law No. 3 of 1989 services have Shares (ADSs). been classified as either basic or non-basic. 83. Prices for the imported phones have more Services that involve the exchange of infor- than doubled from their pre-crisis levels. mation through a channel established in a net- 84. This is explained in part by relatively work between caller and receiver without strong pre-crisis capital positions and port- any processing or modification of the infor- folio quality among Philippine banks, a rel- mation are considered basic. Non-basic serv- atively strong banking regulatory and ices are services that use equipment or supervisory framework, and low debt-equity facilities to process or modify information. ratios by regional standards in the corporate Annex Notes 79 sector, as well as strong export growth and atives and IODs that have achieved losses remittance flows. below 15 percent. 85. In general, companies in the Philippine 90. The first BOT project, developed by have weathered the regional financial crisis Hopewell Holdings, was a 210 MWV single- relatively well. Unlike corporations in other cycle gas turbine power plant at Navotas. East Asian countries, most corporations in the The government bore all foreign zxchange Philippines entered the crisis period with risks and all NPC's risks were cov, red by a reasonable levels of total indebtedness and central government guarantee. manageable exposures to foreign currency 91. The Southern Tagolog Arterial Road debt. Furthermore, export sales continued (through a BOO scheme) has reachc d imple- to grow and domestic sales related to private mentation, while joint venture for selected consumption remained robust. projects (Metro Manila Skyway, Mani la-Cavite 86. Despite the increase in capitalization, Expressway and North Rail) have been formed turnover and investor interest, the number of and detailed preparation is underw; y. listed companies remains relatively small and 92. The private sector rehabilitates, operates the 10 largest index stocks account for a rel- and maintains the existing State owiied facil- atively hiigh 3 5 percent of market capitaliza- ity; the government retains owners lip upon tion. However, in recent months the expiration of the contract. Philippine Stock Exchange index has almost 93. A 17.8 km elevated light rail Iihie which doubled. will travel along one of the most congested 87. By the first quarter of 1998, the Philip- routes in the city. pines developed 87 ecozones, 61 of which by 94. In 1997 the government app:: oved an private developers. Local governments are unsolicited bid from local developer to build now looking for private sector joint venture on a BOT basis a new passenger ter minal at partners, since ecozones can be privately con- Naia. According to BOT law, the govern- structed and managed, reducing the financ- ment then allowed external bidders t: submit ing burden for the government. independent offers. Although a cormlpetitive 88. Such examples include: (i) allowances for bid was approved, the project has yet to come accelerated depreciation and loss carryovers; to financial closure. (ii) general fiscal package available to foreign 95. Each cellular company was required to investors; and (iii) promotion schemes for build about 400,000 lines by mid 1 98 in its attracting the regional headquarters of multi- service area whereas each IGF ope.r3tor was national companies. required to build about 300,000 lines by mid 89. They serve small towns and villages and 1998. their performance is judged to be from accept- 96. For the area of Luzon, there i. a third able by the poor. There are only 40 cooper- licensee. 80 Private Infrastructure in East Asia References Haarneyer, David, and Ashoka Mody. 1997. "World World Bank. 1996. Infrastructure Development in Water Privatization: Managing Risks in Water East Asia and the Pacific: Toward a New) Public- and Sanitation." London: Financial Tunes. Private Investment. Washington, D.C. Japan, Ministry of Construction and the World . 1998. East Asia: The Road to Recovery. Bank. 1998. Global Toll Road Study for Selected Washington, D.C. Asian Countries. Tokyo and Washington, D.C. . Various years. Central Development Data- Van der Ven, Joris. 1996. "Effective Private Par- base. Washington, D.C. ticipation in Toll Roads." Indonesia Discussion . Various years. PPI Database. Washington, Paper Series. World Bank, Washington, D.C. D.C. 81 Distributors of World Bank Group Publications Prices and credit terms vary trom CZECH REPUBLIC INDIA Eulyon Publishing Co., Ltd. PERU SWEDEN country to country. Cenoelt your USIS, NIS Prodeinu Allied Publishers Ltd. 46-1 Sunong-Dong Editoral Deoarroto SA Wennergren-Williams AS local distributor betore placing an Havelkova 22 751 Mount Road Jongro-Gu Apartado 3824, Ica 242 OC 106 P 0. Box 1305 order. 13000 Prague 3 Madras -600002 Seoul Im 1 5-171 25 Solna Tel: (420 2) 2423 1486 Tel: (9144) 652-3938 Tel: (822) 734-3515 Tel: (51 14) 285380 Tel: (46 8) 705-97-50 ARGENTINA Fax: (420 2 2423 1114 Fax: (9144) 852-0649 Fax: (622) 732-9154 Fax: (51 14) 286628 Fax: (46 8) 27-00-71 Worid Publications SA URL: http://www.nis.cz/ INDONESIA LEBANON PHIUPPINES E-madl: mailwni.se Av. Cordoba 1877 DENMARK Pt. Indira Limited Ubraine du Liban Intemational Booksource Center Inc. SWITZERLAND l2OCl: addde Buenos Aires SamfundsLitteratur Jalan Borobudur 20 P.O. Box 11-9232 1127-A Antipolo St, Barangay, Librairie Payot Service Institutionnel Te.: (5411) 48154156 RosenoernsAti 11 PD. Box 181 Beirut Venezuela C(tmtes-Montbenon 30 Fax: (54 11) 4815-8156 DK-1970 Frdetiksberg C Jakarta 10320 Tel: (961 217 944 Makatl City 1002 Lausunne E-mail: w/pbooksffinloni.com.ar Tel: (45 35 351942 Tel: (62 211 390-4290 Fax: (961 0) 217 434 Tel: (63 2) 896 6501; 6505; 6507 Tel: (41 21) 341-3229 AUSTRAUA, FUI, PAPUA NEW Fx: (45 3 57822 Fax: (62 21) 390-4209 E-mad: hsayegbhCibrairle-du- Fax: (63 2) 6961741 Fax: (41 21) 341-3235 GUINEA, SOLOMON ISLANDS, URL http:/ ww.sl.cbs.dk IRAN liban.com.lb VANUATU, AND SAMOA ECUADO Ketab Sara Co Publisiers URL: httpJlwww.librailie-do- Lnternational PublDshing Service ECOn ues O.A. Intemmatit o Services Libri Mundi Khaled Eslamboli Ave., 6th Street liban.com.lb Ul. Piekna 31/37 Ch. de Lacuez 41 648 Whiteborse Road Libreria Internacional Delafrooz Alley No. 8 MALAYSIA 00-677 Warzawa 0H11807 Binsv Mitcham 3132, Victoria RO. Box 17-01-3029 P.O. Box 15745-733 Unversity of Malaya Cooperative Tel: (48 2) 628-6089 Tel: (41S21(943 2673 Tel: (61) 39210 7777 Juan Leon Mera 851 Tehran 15117 Bookhop, Limi Fax: 48 1-7255 Fax: (4121)943 3605 Fax: (6 ,) 3 9210 7788 Quito Tel: (98 21 8717819; 8716104 RD Box 1127 E-ma: bookskipsolWkp.atm.com.pl TSALAND E-mail: service@dadirect.com.au Tel: (593 2) 521-606- (593 2) 544- Fax: (98 62 8712479 Jalan Pantai Baru URL: Centr URL: http:/www.dadirect.com.au 18 E-mai : kettb-sara@ineda.netir 59700 KuabLuma u htp:t/w ipseg.waw.piAps/expor Central BooksDistdbution AUSTRIA Fax: (593 2)L504-209 Tel: (60p3 756g pp o 300 Slom Road Gerold and Co. E-mail, librimul0librimundi5com ec Kowkab Publishers Tel (80i) 7550 PORTUGAL Banqkok 10500 Geibrnid an Cs6 E-mail: librimul@tibrimundi.com.ec P0 Boo 19575-511 Fax: (603) 755-4424 Llurarla Portugal Tel: 66 2(2336930-9 Weibborggasse26 E-maIl librlmo2ibrimundi.com.c TeWrain E-mail: umkoopfltn.netmy Apartudo 28, Rua Do Carm Fax: (62) 237-8321 TeA(3101 51-4-3- CODEU Tel: (98 21) 250-3723 MEXICO o 70-74 JNAD&TBG Tel:1043t} 5W 2 4en 31-0 Ruiz de Castilla 763, Edit. Expocolor Fax: (89 21) 258-3723 INFOTEC 1200 Lisbon TiNiDAD & TOBAGO Fax. (43 1) 512-47-31-29 Primer pine, 0f.12IRLN Av. San Fernando No. 37 Tel: '1' 347-4962 AND THE CARRIBBEAN URL: http:/Aowwgerold.co/at.online Qutot IREUND Col Todello Guerra Fax:(( 3474284 Systematics Studies Ltd. BANGLADESH Tel/Fax: (532507-383; 253-091 Gnovmment SapfPileo Agency 14057Me0284ORSt. Augustine Shopping Center Micro Industries Development E-mail: mpsat.ec D9 i 00or RSoad TIh Dir R 624M2d u AsitneSociety (MIDAS) EGP,AA EULCO uln2Fx 2 624-2822 ROMMNIA Trinidad & Tobago, Wean Indies House S, Road 16 EGYPr, ARAB REPUBLIC OF Dublin 2 E-mai: AotecOrt.nnet.mx Compani De Libraril Bucurest S.A Tel: (868) 845-8466 Dhanmouse RoAdr1 Al Ahram Distdbution Agency Tel: (353 1 661-3111 URL: http-lrtn.et.mx Str Lipcani no. 26, sector 3 Fax: (8r) 645-8467 Dbanmondi RIArea ' L'6ht8467 Dhaka 1209 Al Satan Street Fax: (353 1) 475-2670 /t.omxSrLsann.26swr3 E-ma l: tobe@trinidad.net Tel: (8802 326427Calr ISRAEL Munidi-Prensa Mexico S.A rim C V Bucharest 'el: (202 578-6083 YomotaLiteraturecLtd. Monuro, 141-Colonia Tel: (40 1? 313 9645 UGANDA 811188 FaxTe: V2 7-83PO oxmo Liteatur Ltd Cantemoc P o 97 ahaiBidn Fax (880 ~~~~~~~~~~~~~~~~~~~~~~ 2 ~~~~~~Fax: (40 1) 312 4000 Gototro Ltd. BELGIUM The Middle East Observer 3 Yohaoan Hasandlar Street 06500 Mexico OFA RUSStAN FEDERATION PDot Boo 99n, Mdu Joan On Laoxoy 41, Sberif Street Tel Aviv 61560 Tel:: (525 533-5685 isdatelstno Pot1r4Jni-d Av. do Roi 202 Cam.Fax:5 54-69 9a. Kopah PereulokrKmol 1060 Brussels Tel' (972 3i 6285-397 (5K)54-79 oocnaTl 2541, 251 467 Tel: 5russets Tel: (20 2) 393-9732 Fax: (972 ) 5285-397 NEPAL Moscow Fax: (25641) 251468 Fax (32 53 1 Fax: (20 2) 393-9732 R.O.Y. International es aernies Fai (7r095)t917 Serv9cesmall: (7 095 917 8 ) 538-Ml FINL'20 2iP93-73 EvtMd. laxt 7li 917rvl59E-mail: gusoswiltuganda.conm BRAZIL FINUND PO Box 13056 GP0 Box 5443 ozimarn0glasnet.ru UNITED KINGDOM Publicacoes Tecnicas internacionais Akateemlnen Krak"auppa Tel Aviv 61130 6Kathmandu SBNGAPORE TAiWAN,PCHINA McrnfoAltd. Ltda i Box10 Helnki Fo: 9723 649 9439 Tel: (9771) 416 026 MYANMAR; BRUNEI P.O.Box3,0 Park,Aiton, Rua Peixoto Gomide, 209 Tel: (358 0(121 4418 E-ma(I o 0y 3 Oetviuion.net.il Fax: (977 1) 224 431 Hemisphere Publication Services En bi G2nd 01409 San Pools, SR ~~Fax: (358 0) 121-4435 ~ URL: bttp:/Mvwv.trryit.co.lI 41 Kalien Pudding Road #04-D3 Enld Tel: (55 11) 259-644 ckann Pai Et NETHERLANDS Golden eel Building Tel: (441420 86948 Fax:. (55 11) 258-6990 Em :aalu0tcmnn aeUinAtol/idde On B UindeboonVlnlenratosnale Slegaore 349316 Fax: (44 1420) 88889 E-mail: postmaster@pti.uiol.bir URL: bttp:/Iwww.akateeminen.com Index Information S'rvices Pubticaties by.v- Tel: (85) 741-5160 E-maIl1: wbank@miinicrolnto.co.ok URL: hp//w.oo.br FRANCE R.OB. 19502.Jertosalemo RO. Box 202, 7480 AE Haaksbergen Fax: (66(742-9358 URL: bttp:/A/wwwmlcronint.co.u1k CANADA Editions Eska; DBJ Tel: (972 2) 6271219 Tel: (31 53) 574-004 E-mail: ashgateatsanconnect.com The Stationery Ottice Renool Publishing Co. Ltd. 750 reG Lusoac Fox: (972 2)6271634 Fax: (31 53) 572-928 SLOEIA 51 Nine Elms Lane 5369 Canotek Road 705Pno TL, IEI E-mail: Ilrideboo@worldonillne.nl GoopDarskd vestnik Publishing London SW6 SOR Ottaa, OtadoKlJ ,13 eI:(33-1l)55-42-73-00 Licosa Commissionarla Sansoni SPA URL httpilwwwwmordonnlie.n6-9in- Gin Tel: (44 171) 873-8400 Tel: (613)745-2665 ax 3- Via Duca Di Colabria, U deboo Fox: (4417 ) 873-242 Fax: (613) 745-7660 GERMANY Caseila Postale 552 1N000 D ubljca URL: natp:llww.the-stationery- E-mail: UNO-Verlag 50125Rrenze NEW ZEALAND Tel:9111321230 ofce.comW order.dept@renoutbooks.com Poppelsdorfer Ailee 55 Tel: (39 5) 645-415 EBSCO NZ Ltd. eFa: (386 61) VENEZUELA URL: hitp:// www.renoulbooks.com 53115 Bonn Fax: (39 SS) 641-257 New Market E-mail: repansekOjgvestnik.si Tecni-Ciencia Libros, S.A CHINA Tel:cial & Economic Fax: (489 ) 217492 0R8-mal: htcsawftbc.it Auckland SOrH AFRICA BOTSWMAN Centro Culdad Comerciai Tamanco China Ronancial & Economic Fa:(92)143UL tp/wwlbcllioa Tel: '64 9' 524-8119 For sinte tidles' Nivel C2, Caracas Publishing HouseURL: http:/Awww.ono-verIag.de JWAFx (4 2-87ofmtnvmt rs tohr Tel: (58 2) 89595547; 5035; 0016 Publishing House E-mail:onovedug@unl.om IandRenc JAatCA Fax: (64 9) 524-8067 Oxtord niwrsity Press Southern Fax: (58 2) 959 5636 a, Da Fo Si Dong Jie - unovedao ao .com Ian Randle Publishers Ltd. Arica Beijing GHANA 206 Old Hope Road, Kingston 6 Oasis Official Vasco Boulevard, Goodwood ZAMBIA Tel: (8610 6401-7365 Epp Books Services Tel: 876-927-2085 PO. Box 3627 P.O. Box 12119, Ni City 7463 University Bookshop, University of Fax: (86 1) 6401-7365 RO. Boo 44 Fax: 876-977-0243 Wellington Cape Town Zambia China Book imotOnr UC E-mail: irpl@coils.com Tel: (644) 400 1551 Tel: (2721) 586 4400 Great East Rood Campus China,800TeImport Centre Ac2c2ra 778ai3 JAPAN Fax: (64 ( 499 1972 Fax: (27 2i) 595 4430 P.O. Box 32379 Beijing Tel: 223 21 778843 ~~~~Eastern Book Service E-mrail: oasls@actrix.gee.nz E-mail: oxlord@oup.co.za Lusaka Selilno tsr Promotion ~Fax: 223 21 779099 3-13 Ho Fur subscription orders: Chinese Corporation Gor Promotion F l o 3-chome, Bunkyo-ku URL: httpJlww.oasisbooks.co.nzo Tel .(2 ) 2535 of Homaulides GEC Tko , NIGERIA nlntemtionat Subscription Service Fax,,,01 23 5 52, You Fang Ho Tong, Papasntidiou S.A. Tel: (81 3, 3818-0861 unvrP.PesOiitdR. Box 41005 ZIMBABWE Xan Ne D Jie 35 Stou tr Three Crowns Buildiso Jericho eraighall Academic and Baobab Books (Pvt.) 10 ~~~~~~~106 82 Athens E-maili: ordrs@svt-ebs.co.p Private MiBo505Johannesburg 2024 Ltd. T14!'(116 Og66072 94Tel: (30 364-1826 URL lbadan Tel: 2711)880-44B 4 Conatd Road, Groniteside Fax: (30 (364-8254 http:/Avww.bekkoameor.jp/-svt- Tel: (234 22141-135 Faxc 27 1 880-8248 RO. Box 567 COLOMBIA HAt eDs Fax: (234 22) 41-2056 E-maT:lssals.coza Harare tOt OI L Culture Diffusion KENYA SPAIN Td: 263 4 755035 Cnfrenrace L6 Na 5, Rue Capois Africa Book Service (E.A) Ltd. PAKISTAN Mundi-Prensa Libros, S.A. Fax: 263 4 781913 Apurrado ANreo 34270 C.R 257 Ouaran House, Mfangano Street Mira Book Agency Castello 37 Santafi de Sogtil, D.C. Port-au-Prnce RO. Box 45245 65, Shahrah-e-Quaid-e-Azam 28001 Madrid Tel: 571 285-273 Tel: (509) 23 9260 Nairobi Lahore 54000 Tel: (34 91) 4 363700 Fax: (57 ( 285-2798 Fax: (50) 23 4858 Tel: (254 2) 223 641 Tel: (92 42) 735 3601 Fax: (34 91) 5 753998 COTE D'IVOIRE HONG KONG, CHINA; MACAO F: (4 2s Fax: (9242) 578 3714 -mel it:ibreriaiBmundiprensa.es Center d'Edition et de Dihfusion Asia 2000 Ltd. L Books Oxford University Press Mndi-enarcelona Africaines (CEDA) Saleu & CIrculation Department Loita ouse BaaDrTonMdiPnsBrcla 04 B.R 541 302 Seabird House Mezzanine 1 Bngaroe Town Conseil de Cent, 391 Abid0Rn 04 22-28 Wyndham Stret, Central RO. BoX 68077 Sharox Fas3t 08009 Barcelona ATel:(22n 24610 461 Heon Kn Chin Nairobi PD Box6Karch 13503 Tnt: (34 3)488-3492 Tel: (225 246510:24 6511 Tel: 7852 2530-1409 Tel: (254 2-330853Tel: (92 21 446307 Fax: t odu3r 487-7659 Fax: (225) 25 0567 151, ~ ~ 5') -3385, 5162? Fax: (22 (250567 ~~~Fax: (852), 2526-1107 Fox: 85 566(4 Fax. (92 W)4547640 Emi:breoamnirnaa CYPRUS E-mail: sales@asia2t00.com.hk E-mail: Legacy@torm-netcom E-mail: ouppak@TheOffice.net SRI LANKA, THE MALOIVES Center for Applied Research URL: http://wwwasia2O93.cDm.hk KOREA, REPUBLIC OF Lake House Bookshop Cypmxs Ctere HUNGARY Dayang Books Trading Co. Pak Book Corporalion 100, Sir Chrttampalam Gardiner , woeans ree, ngomi Euro Into Service International Division Azkz Chambers 21, Dueen's Road Mawatha PNOicBoo 2008 Maroitozoet Europa Haz 783-20, Pangba Bon-Dong, Lahore Colombo 2 Tel: 3572 9-0730 H-1138 Budapest Socho-ku Tel: (9242) 636 3222; 6360885 Tel: (94 1) 32105 Fax: (357 2) 66-2051 Tel: (36 1 350 80 24, 350 80 25 Seoul Fax: (9242) 636 2328 Fax: (94 1) 432104 F*x: (357 2) 60-3051 Fax: (36 1) 350 90 32 Tel: (82 2) 536-9555 E-mail: pbc0dbraln.net.pk E-mail: LHLtOri.anka.net E-mail: eurointoOmail.matavhu Fax: (82 2) 536-0025 E-mail: seamrapOchollian.net Recent World Bank Technical Papers (continued) No. 449 Keith Oblitas and J. Raymond Peter in association with Gautam Pingle, Halla M. Qaddumi, and Jayantha Perera, Transferring Irrigation Management to Farmers in Andhra Pradesh, India No. 450 Andres Rigo Sureda and Waleed Haider Malik, eds., Judicial Challenges in the New Millennium: Proceedings of the Second Suimmit of the Ibero-American Sutpreme Courts No. 451 World Bank, Privatization of the Power and Natural Gas Industries in Hungary and Kazakhstan No. 452 Lev Freinkman, Daniel Treisman, and Stephen Titov, Subnational Budgeting in Russia: Preempting a Potential Crisis No. 453 Bartlomiej Kaminski and Michelle Riboud, Foreign Investment and Restructuring: The Evidence from Hungary No. 454 Gordon Hughes and Julia Bucknall, Poland: Complying with EU Environmental Legislature No. 455 Dale F. Gray, Assessment of Corporate Sector Value and Vulnerability: Links to Exchange Rate and Financial Crises No. 456 Salman M.A. Salman, ed., Groundwater: Legal and Policy Perspectives: Proceedings of a World Bank Seminar No. 457 Maiy Canning, Peter Moock, and Timothy Heleniak, Reforming Education in the Regions of Russia No. 458 Johni Gray, Kazakhstan: A Review of Farm Restructiring No. 459 Zvi Lerman and Csaba Csaki, Ukraine: Review of Farm Restructuring Experiences No. 460 Gloria La Cava and Rafaella Y. Nanetti, Albania: Filling the Vulnerability Gap No. 461 Ayse Kudat, Stan Peabody, and Caglar Keyder, eds., Social Assessment and Agricultiural Reform in Central Asia and Turkey No. 462 T. Rand, J. Haukohl, and U. Marxen, Municipal Solid Waste Incineration: Requirementsfor a Successful Project No. 463 Stephen Foster, John Chilton, Marcus Moench, Franklin Cardy, and Manuel Schiffler, Groundwater in Ruravl Development: Facing the Challenges of Supply and Resource Sustainability No. 465 Csalba Csaki and Zvi Lerman, eds., Strutiural Change in the Farming Sectors in Central and Eastern Europe: Lessonsfor EU Accession-Second World Bank/FAO Workshop, June 27-29, 1999 No. 466 Barbara Nunberg, Readyfor Europe: Public Administration Reform and European Union Accession in Central and Eastern Europe No. 467 Quentin T. Wodon with contributions from Robert Ayres, Matias Barenstein, Norman Hicks, Kihoon Lee, William Maloney, Pia Peeters, Corinne Siaens, and Shlomo Yitzhaki, Poverty and Policy in Latin America and the Caribbean No. 469 Laurian Unnevehr and Nancy Hirschhorn, Food Safety Issues in the Developing World No. 470 Alberto Valdes, ed., Agricultural Support Policies in Transition Economies No. 471 Brian Pinto, Vladimir Drebentsov, and Alexander Morozov, Dismantling Russia's Nonpayments System: Creating Conditionsfor Growth No. 472 lit B. S. Gill, A Diagnostic Frameworkfor Revenue Administration No. 473 Esen Ulgenerk and Leila Zlaoui, From Transition to Accession: Developing Stable and Competitive Financial Markets in Bulgaria No. 474 loannis N. Kessides, ed., Hungary: A Regulatory and Structiral Review of Selected Infrastructure Sectors No. 475 Csaba Csaki, Zvi Lerman, and Sergey Sotnikov, Farm Sector Restructiring in Belarus: Progress and Constraints No. 476 Katherine Terrell, Czech Repulblic: Labor Market Report No. 481 Csaba Csaki, John Nash, Achim Fock, and Holger Kray, Food and Agriculture in Bulgaria: The Challenge of Preparingfor EU Accession No. 482 Peter Havlik, Trade and Cost Competitiveness in the Czech Republic, Hungary, Poland, and Slovenia No. 483 Mojrnir Mrak, Communal Infrastructure in Slovenia: Survey of Investment Needs and Policies Aimed at Encouraging Private Sector Participation No. 484 Csaba Csaki and Laura Tuck, Rural Development Strategy: Eastern Europe and Central Asia No. 488 Nina Bubnova, Governance Impact on Private Investment No. 489 Tim Schwarz and David Satola, Telecommunications Legislation in Transitional and Developing Economies No. 490 Jesko Hentschel and Radha Seshagiri, The City Poverty Assessment: A Primer No. 492 Tuntivate Voravate, Douglas F. Barnes, and V. Susan Bogach, Assessing Marketsfor Renewable Energy in Rura! Areas ofNorthwestern China ,Lu THE WORLD BANK 1818 H Street, N.W Washington, D.C. 20433 USA Telephone: 202-477-1234 Facsimile: 202-477-6391 Internet: wwvwvworldbank.org E-mail: feedbackCa@worldbank.org 9 780821 349366 ISBN 0-8213-4936-8