44508 noTE no. 3 ­ May 2008 Updated GRIDLINES with 2005 and 2006 data Sharing knowledge, experiences, and innovations in public-private partnerships in infrastructure The role of developing country firms in infrastructure New data confirm the emergence of a new class of investors Michael Schur, Stephan von Klaudy, Georgina Dellacha, Apurva Sanghi, and Nataliya Pushak D eveloping country investors have 2003). Many multinational investors began reduc- emergedasamajorsourceofinvestment ing their exposure in developing countries, leaving finance for infrastructure projects with behind about 153 canceled or distressed projects private participation. This update of the article in 1990­2006.2 In a 2002 survey of 65 interna- originallywrittenbyM.Schur,etalin2006,shows tional investors in the power sector, about half that, indeed, during 1998­2006 these investors reported being less interested in or retreating from accounted for more of this finance in South developing countries (Lamech and Saeed 2003). Asia and East Asia and Pacific--and for more in transport across developing regions--than New players from developed countries have did investors from developed countries. emerged. In the water sector, for example, they Even though the policy implications are include Aquamundo of Germany, Acea of Italy, not yet fully clear for policy makers, this Aguas de Bilbao, Aguas de Portugal, and municipal development suggests a need to rethink water utilities from France and Germany (Harris the criteria used in selecting investors in 2003). But these companies have engaged far schemes for private participation, which less in developing countries than their earlier have been biased toward large international counterparts. operators. Meanwhile, local and regional operators and inves- In the early 1990s, after decades of poor perfor- tors from developing countries have become more mance by the public sector, developing countries prominent.3 In southern Africa such companies as increasingly sought to involve the private sector NetGroup (South Africa) and Electricity Distribu- in providing infrastructure services through wide- tion Management (Namibia) seek to extend their spread privatization, deregulation, and structural experience in low-cost rural electrification projects reform. The efforts proved fruitful: developing into broader investment and management oppor- countries saw investment commitments of nearly tunities in southern and East Africa (NetGroup $781 billion in more than 2,100 public-private won the Tanesco management contract in Tanza- partnerships in infrastructure during the 1990s.1 nia in 2002. In 2004, Alusa Engenharia from Brazil Large corporations from developed countries engaged in four electricity transmission projects played a big part in this wave of activity. Among in its home country, and Chilean groups Solari, the most active were such companies as AES, Elec- Luksic, and Consorcio Financiero dominated tricité de France, Enron, Suez, Veolia, Telefónica, France Telecom, and Deutsche Telekom. Stephan Von Klaudy is a lead infrastructure specialist in the World Bank's Sustainable Development Network Vice But the optimism evident early in the decade was Presidency. Apurva Sanghi is senior economist in the World dimming by its end. An estimated 40 percent of Bank's Global Facility for Disaster Reduction and Recovery. the contracts for infrastructure projects (exclud- PUBLIC-PRIVATE INFRASTRUCTURE ADVISORY FACILITY Georgina Dellacha and Nataliya Pushak are consultants ing telecommunications) were being renegotiated for the World Bank. Michael Schur previously worked with (World Bank, Private Sector Advisory Services PPIAF. Helping to eliminate poverty and achieve sustainable development through public-private partnerships in infrastructure PUBLIC-PRIVATE INFRASTRUCTURE ADVISORY FACILITY the policy implications. This note reports find- ings from the first phase of a PPIAF-funded study FigurE 1 commissioned to do so (Ettinger and others 2005). Developing country investors now a major source of infrastructure finance The results presented here focus on the origin of Private investment commitments to developing country the investment commitments that materialized in infrastructure projects by type of investor, 1998­2006 1998­2006 for 2,524 projects reaching financial 80 closure during 1990­2006.4 l tota 60 of A larger role--but varied 40 centage Developing country investors have become a per 20 major source of finance for developing country infrastructure projects (figure 1).5 These investors 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 mobilized about 44 percent of the private invest- ment committed to infrastructure projects with developed developing local developing foreign private participation during 1998­2006. Most (32 Source: Ettinger and others 2005, updated to include years up percent) came from local companies investing in to 2006. projects in their own country ("developing local" investors); of the rest (12 percent), almost all came from investors from nearby countries (together with cross-regional investors, "developing foreign" five of six water concession contracts secured in investors).6 But there are striking differences in the Chile. That same year the Indian consortium of level and pattern of participation by developing Rites and Ircon International won the contract country investors across types of projects, sectors, for restoring and managing Mozambique's Beira and regions. rail system. Across types of projects In 2006 more local investors made commitments in Developing country investors contributed more than half the private investment in concessions Developing their own country. In India, Lanco Group invested in five new electricity projects, and GMR Group in (55 percent) during 1998­2006, half in build- country five new transport projects. In China, Chongqing operate-transfer (BOT) and other greenfield investors are Kangda Environmental Protection committed to projects (50 percent), and a smaller share in dives- invest in six water treatment plants. In the Russian titures (29 percent). taking on an Federation, Rosvodokanal (RVK) committed about especially $370 million to three water utilities. Across sectors Developing country investors accounted for as large role in Such anecdotal evidence suggests that developing much as 58 percent of the private investment transport country investors have improved their position commitments in transport during 1998­2006, and and are taking on a larger share of infrastructure for 45 percent in telecommunications, 40 percent in investments. Three possible reasons for this: First, water, and 34 percent in energy (figure 2). In trans- the broadening and deepening of capital markets port the large share typically reflects a relatively in developing countries has enabled their investors large number of local construction contractors, to mobilize more resources. Second, the growing while in telecommunications it reflects mainly the experience of these firms with infrastructure invest- investments of a few large firms, such as America ments, often as minority partners with developed Movil and Telmex (from Mexico), Telemar Partici- country investors, has given them more expertise. pacoes SA (Brazil), and MTN (South Africa). The Third, these companies might well be in a better energy sector remains dominated by large utility position to understand and therefore deal with the firms from developed countries; the developing political economy issues in developing country country players that have emerged tend to secure infrastructure projects with private participation. contracts for relatively small power systems. The evidence and assumptions outlined here The share of private investment from develop- justify analysis to more thoroughly assess the role ing country investors has been volatile (figure 3). of local and regional investors and operators in Determining the exact reasons for these trends is developing country infrastructure and to explore difficult. The role of developing country firms in infrastructure ects. Investment commitments from local investors dominated all sectors, with those in water coming FigurE 2 exclusively from local companies. Developing country investors most important in transport and telecoms Cumulative private investment commitments to East Asia and Pacific also had active local inves- developing country infrastructure projects by type tors; they accounted for 56 percent of private of investor and sector, 1998­2006 investment commitments during 1998­2006 156 and acted as the main sponsors in 40 percent of Local 160 projects. Much of this investment was in telecom- munications (where local investors contributed 63 investors are 120 99 percent) and transport (58 percent). most active billions 80 80 US$ in South and 49 48 In Sub-Saharan Africa developing country inves- 2006 38 39 40 tors accounted for 50 percent of private investment. East Asia 13 16 10 5 Much of this (58 percent) came from private inves- 0 0 tors in South Africa alone. Energy Telecoms Transport Water Developed Developing local Developing foreign Latin America and the Caribbean had the most private investment in infrastructure during 1998­ Source: Ettinger and others 2005, updated to include years up 2006--accounting for 42 percent of the developing to 2006. world's total--so its results are strongly reflected in the global picture.7 Developing country inves- tors were the main sponsors of projects as often as developed country investors were, but the latter Developing country investors' share dropped for all accounted for 56 percent of investment commit- sectors except telecommunications during 2001­ ments during1998­2006. 02. Notably, the share fell to 10 percent for energy in 2002 and then quickly recovered to a high 58 Developed country investors dominated in East- percent the following year. The plunge in 2002 was ern Europe and Central Asia, with 73 percent of due mostly to large investment commitments by investment commitments, reflecting in large part three developed county sponsors, RWE and E.ON the proximity and interest of Western European of Germany and Gaz de France; these amounted companies. But these commitments went to only to $8.2 billion, 46 percent of the total for the 39 percent of projects. In transport, local firms sector that year. In 2003, by contrast, the largest play a significant role measured not only by the investment commitments were by two developing number of projects in which they participate, but country sponsors, Farsighted Investment of China and Malakoff Bhd of Malaysia. These companies committed more than $2 billion each in 2003, 25 percent of the total. FigurE 3 In the water sector a rising trend during 2001­04 Mixed trends across sectors Developing country investors' share of private is explained in part by the involvement of local investment commitments to developing country sponsors in several concession contracts awarded infrastructure projects by sector, 1998­2006 in Chile. Conversely, the slightly downward trend 80 in telecommunications after 2002 can be explained l by the participation of developed country inves- tota 60 tors from Kuwait and the United Arab Emirates of in the acquisition of licenses to provide mobile 40 services in Algeria (since 2004), Pakistan (since centage 2003), and the Arab Republic of Egypt and Tunisia per 20 (since 2006). 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 Across regions South Asia had the largest share of investment energy telecoms transport water from local investors--60 percent of the region's total during 1998­2006. Local investors were the Source: Ettinger and others 2005, updated to include years up main sponsors in 56 percent of the region's proj- to 2006. also as providers of investment capital, accounting recent rise of local and regional investors should for 44 percent of investment. be considered good news, neither its policy impli- cations nor its sustainability has been clearly The Middle East and North Africa had the fewest established yet. investments, with most of these in telecommunica- tions, making it hard to discern clear patterns. In Notes the water sector all investment commitments came 1. Data are from the Private Participation in Infrastructure (PPI) from developed country investors. Project Database (http://ppi.worldbank.org), which includes projects only in low- and middle-income countries, as classified by the World Bank. Country classifications and project information are updated annually. Data in this note are in 2006 U.S. dollars. The implications? Still unclear 2. Canceled projects are those in which private sponsors sell or transfer their economic interest back to the government; remove all management and personnel; or cease operation, service provision, As large multinational utilities retreat from big or construction. Distressed projects are those under international infrastructure projects in emerging markets, espe- arbitration or for which cancellation has been formally requested. cially in riskier and more politically sensitive 3. Examples here are from Harris (2003), updated to take account countries and sectors, local and regional investors of recent changes. may be starting to fill the gap. In some regions they 4. The study, which drew on the PPI Project Database, chose 1998 are willing to play as large a role as investors from as the starting point mainly because of data limitations relating to the investments committed during 1990­97. In addition, 1998 developed countries. appeared to be a good starting point for assessing the blend of investors willing to invest in developing countries. That year marked The potential role of this investor class is encourag- the effective end of the early enthusiasm for private participation in infrastructure; annual investment flows peaked in 1997 and then ing. For policy makers it suggests a need to rethink fell sharply as several factors led to a reduction in both the size and privatization design, particularly the criteria used the number of projects. in selecting investors, which have been biased 5. Developing country investors are firms majority-owned or controlled toward large international firms. The growth by shareholders from low- or middle-income economies, developed in new private infrastructure firms also matters country investors by shareholders from high-income economies (as classified by the World Bank). because it should reduce the risk of collusion and 6. The calculation of investment shares assumes that each investor other anticompetitive practices. accounts for a share in total investment that is equal to its share in equity. Other implications are less clear. Are local and 7. Latin America and the Caribbean also had the sharpest drop in regional investors better equipped than their private investment: in 2006 investment was only 35 percent of that developed country counterparts to deal with the in 1998, while for other regions it surpassed the 1998 level. political economy issues raised by private partici- 8. Conversely, if local capital markets are developed, it can be presumed that they are as readily available to foreign firms as to pation in infrastructure, as they are often assumed local ones. to be? It is too early to tell. Foreign participa- tion can be politically sensitive, but consumers References are often equally concerned that local firms are Ettinger, Stephen, Michael Schur, Stephan von Klaudy, Georgina connected to the government and thus susceptible Dellacha, and Shelly Hahn. 2005. "Developing Country Investors to corruption. and Operators in Infrastructure." Trends and Policy Options Series, no. 3. PPIAF, Washington, DC. Do local firms have advantages in financing, Harris, Clive. 2003. Private Participation in Infrastructure in Developing Countries: Trends, Impacts, and Policy Lessons. World Bank Working as is also often assumed? They have better Paper 5. Washington, DC: World Bank. access to local currency equity capital and GRIDLINES Lamech, Ranjit, and Kazim Saeed. 2003. "What International could have an edge in mobilizing local Investors Look for When Investing in Developing Countries: Results currency debt and thus mitigating from a Survey of International Investors in the Power Sector." Gridlines share emerging knowledge Energy and Mining Sector Board Discussion Paper 6. World Bank, foreign exchange risk. But if local Washington, DC. on public-private partnership and give an overview of a wide selection of projects from capital markets are undeveloped World Bank, Private Sector Advisory Services. 2003. Private various regions of the world. Past notes can be and local term finance unavail- Participation in Infrastructure: Trends in Developing Countries in 1990­ found at www.ppiaf.org/gridlines. Gridlines are a able, these advantages will be 2001. Washington, DC: World Bank. publication of PPIAF (Public-Private Infrastructure relatively modest.8 So while the PUBLIC-PRIVATE INFRASTRUCTURE ADVISORY FACILITY Advisory Facility), a multidonor technical assistance facility. Through technical assistance and knowledge dissemination PPIAF supports the efforts of policy makers, nongovernmental organizations, research institutions, and others in designing and implementing strategies to tap the full potential of private involvement in c/o The World Bank, 1818 H St., N.W., Washington, DC 20433, USA infrastructure. The views are those of the authors and do PhonE (+1) 202 458 5588 FAX (+1) 202 522 7466 not necessarily reflect the views or the policy of PPIAF, PUBLIC-PRIVATE INFRASTRUCTURE ADVISORY FACILITY gEnErAL EMAiL ppiaf@ppiaf.org wEb www.ppiaf.org the World Bank, or any other affiliated organization.