44396 noTE no. 31 ­ May 2008GRIDLINES Sharing knowledge, experiences, and innovations in public-private partnerships in infrastructure Recent trends in private activity in infrastructure What the shift away from risk means for policy Clemencia Torres de Mästle and Ada Karina Izaguirre I n 2006, private participation in infrastructure percent average during 1996­2000. This stabil- continued its recovery for the third consecu- ity mainly reflects the rapid growth of GDP in tive year from the steep downturn of the late low- and middle-income countries in 2003­06. 1990s. Activity was more evenly spread across This suggests that recovery was driven at least in all developing regions. However, it became part by the need to expand capacity to keep up more concentrated in less risky subsectors, with demand for infrastructure. reflecting a lower appetite for risk among private investors. Greater selectivity has facili- Projects reaching financial or contractual closure tated private sector's renewed interest, but it increased in 2006 to around 270. This was 36 also raises questions about how governments percent more than in 2002 (the lowest number can best tap private operators' abilities in high- of the past decade), but 25 percent less than the need, high-risk areas such as water and elec- 1997 peak. Project size also grew: the median rose tricity distribution. Recent projects in these from $20­40 million in 2002­05 to more than areas indicate that the public sector--together $70 million in 2006. with the international financial institutions-- remains the main source of investment funding. In contrast with the 1990s, when new projects As governments create arrangements to attract accounted for 70 percent of investment, invest- private participation, they also need to ensure ment in 2006 was divided between existing an equitable distribution of benefits among projects (52 percent) and new ones (48 percent). investors, taxpayers, and service users. This has been a typical distribution since 2001. In 2006, investment commitments to infrastruc- ture projects with private participation (hereafter, Telecom and transport lead the investments) in low and middle income countries recovery grew by 10 percent in real terms, reaching $114 billion. The increase, while modest, marked the Telecommunications and transport drove growth third consecutive year of growth, confirming the in investments and transactions in 2006 (figure reversal of the downward trend of 1998 to 2003. 1). Telecommunications, which has dominated Investment in 2006 was just 20 percent below the investments claimed 55 percent of the total in 1997 peak and more than 70 percent above the 2003 level, the lowest of the past decade. Invest- ments in physical assets (excluding payments to Clemencia Torres de Mästle is program leader for global governments, such as concession fees or dives- knowledge in PPIAF and Ada Karina Izaguirre is an titure revenues) drove the recovery. In 2006, it infrastructure specialist in the World Bank's Finance, amounted to $90 billion, close to the 1997 peak. Economics, and Urban Development Department (FEU). This note is a product of the Private Participation in Infra- Investment, however, has remained stable rela- PUBLIC-PRIVATE INFRASTRUCTURE ADVISORY FACILITY structure (PPI) Project Database, a joint initiative of PPIAF tive to gross domestic product (GDP) since 2003, and FEU in the World Bank's Sustainable Development Vice averaging about 1 percent, down from a 1.5 Presidency. Helping to eliminate poverty and achieve sustainable development through public-private partnerships in infrastructure PUBLIC-PRIVATE INFRASTRUCTURE ADVISORY FACILITY was focused on projects with limited commercial risk for private investors, such as new generation FIGuRe 1 plants with long-term power purchase agreements Telecoms dominant, transport growing fast (Tenenbaum and Izaguirre 2007). Investment commitments to infrastructure projects with private participation in developing countries by sector Electricity distribution accounted for 12 percent 2006 US$ billions of investment in 2001­06, though less than half 140 went to projects that closed in that period. Most 120 Total of the investment in new distribution projects 100 related to divestitures in Eastern Europe and Central Asia, where accession to the European 80 Telecoms Union has been a key driver of reform. 60 40 Energy Transport Investment in water and sanitation has remained 20 below $2 billion every year since 2002 except Water 0 2004 (when the $2.5 billion Syabas concession 1990 1995 2000 2006 closed in Malaysia). Even so, the number of new projects was up in 2004­06; an average of 52 proj- Source: World Bank and PPIAF, PPI Project Database. ects a year reached closure, the highest number Note: The investment data refer to commitments and include private and public contribution. since 1990. This pattern reflects the little or no investment in water projects, typical for manage- ment or affermage contracts. It also suggests that small private operators have entered the market. 2006, $63 billion. Investments in physical assets (network expansion) grew by 9 percent to $52 Projects involving treatment plants became more billion, the highest investment level ever for the common in 2006. These accounted for more than second consecutive year. There were 15 divestitures half the investment in water and more than 40 in 13 countries in 2005­06, up from three trans- percent of the projects closed. actions in three countries in 2002­04, indicating a renewed interest in opening new markets. Private activity More balanced distribution has become Transport became the fastest growing sector in 2005­06. Investment doubled in 2005 and rose The 2006 data reveal three positive points. First, more evenly by another 30 percent in 2006, reaching almost investment has become more evenly distributed spread among $30 billion.1 The sector had fewer large transac- across developing regions. Declining investment tions (those for more than $800 million); these in Latin America and East Asia, the previous lead- regions accounted for 35 percent of investment in 2006, ers, may initially have driven this trend. However, and country down from 50 percent in 2005. Investments rose rapid investment growth in other developing substantially in all four sub-sectors--airports, rail- regions has become more important since 2004. income ways, roads, and seaports.2 With these growths, Europe and Central Asia had the largest share groups investment in roads saw its share in total transport of investment in 2004­06 (25 percent). Latin investment decline from roughly 50 percent in America followed; then East Asia and South Asia. 1996­2004 to 30 percent in 2005­06. Investment South Asia had about 16 percent in 2004­06, in airports and railways went mostly to a few large three times its share in 1996­2000. The Middle projects, while investment in roads and seaports East and North Africa and Sub-Saharan Africa saw was more widely distributed. similar growth, though from much lower levels. Investment in energy amounted to almost $20 Second, investment has become more evenly billion in 2006, within the $16­23 billion range distributed across country income groups.2 Low- prevailing since 2001. This represents a sharp drop income countries' share grew from 7 percent in from the peak of the mid-1990s. Electricity gener- 1996­2000 to 23 percent in 2004­06, reaching ation accounted for more than half the energy new peaks every year in the later period. Many investment in 2004­06, as it did in 1990­2003. low-income countries saw increases, though Moreover, it represented more than 70 percent India and, to a lesser degree, Nigeria and Kenya of the investment in new projects in 2004­06, accounted for most of the growth. Lower-middle- the highest share ever. Investment in generation income countries, which led the boom in private Recent trends in private activity in infrastructure FIGuRe 2 Private activity shifts toward contracts with lower risk Investment commitments to infrastructure projects with private participation in developing countries, 1995­2006 By project type or subtype By project type or subtype excluding telecommunications 2006 US$ billions 2006 US$ billions Contracts 160 100 140 reflect a lower 80 120 appetite for 100 60 80 risk among 60 40 40 private 20 20 operators 0 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Concessions BOT BOO/BLO Merchant projects Divestitures Leases Source: World Bank and PPIAF, PPI Project Database. Note: Investment data are for projects reaching closure in 1990­2006. BOT = build, operate, transfer. BOO = build, operate, own. BLO = build, operate, lease. activity in the 1990s, saw their share of invest- Changes in project type ment decline by 17 percentage points to roughly 40 percent. That share nevertheless remains the The recovery in investment in 2004­06 appears largest. Upper-middle-income countries have at first to include most types of private partici- maintained a steady share of about 36 percent. pation (figure 2). Nevertheless, a closer look at the data suggests a more nuanced picture. Only Third, private activity has became somewhat less telecommunications had a recovery in the deep- concentrated by country. The top 10 countries by est forms of private participation--divestitures investment attracted 70 percent of the total in and merchant projects, where the private sector 1990­2000 and 63 percent in 2001­03--but 58 assumes most operational and commercial risks. percent in 2004­06. Moreover, the top 10 list has Excluding that sector, the recovery was mostly become more diverse. It now includes countries in contracts that limit private involvement to from all developing regions except the Middle East the contract term and then return assets to the and North Africa. Other major changes between government. Concessions, build-operate-transfer 1990­2000 and 2004­06: India leapt from eighth (BOT) contracts, and lease contracts represented place to first, and the Russian Federation, Turkey, almost 60 percent of investment in 2004­06, 10 and Nigeria joined the top 10. percentage points more than in 1996­2000. The shift toward such contracts suggests a lower Developing country sponsors lead appetite among private investors for regulatory and political risk, as they reduce their long- Private participation in infrastructure is no longer term exposure in the market. In addition, BOT a business dominated by companies from devel- contracts limit commercial risk because they are oped countries. Firms from developing countries normally accompanied by long-term purchase mobilized 44 percent of private funds for projects agreements (often with take-or-pay clauses) in reaching financial closure in 1998­2006 (Schur et the case of power or water treatment plants and al 2008). There were also changes in the list of the by minimum revenue guarantees in the case of 10 most active sponsors (ranked by investment). new transport facilities. Recently there has also Only 3 of the top 10 sponsors in 1990­2000 were been an increase in short-term power plant rental still among the top 10 in 2001­06, and 4 of the contracts in countries facing severe electricity top 10 were developing country investors. shortages. In 2002­06 at least 18 such contracts were signed in 13 developing countries, mainly in Africa, for periods of one to four years. These and electricity distribution). Another emerging contracts usually involve much higher prices, more trend is the use of a mix of public and private government guarantees, and less transfer of risk to funds to finance investment programs while trying the private sector than traditional BOT contracts to ensure that user fees remain at socially and with power purchase agreements. politically viable levels. Concession contracts are also evolving to reflect Selectivity has aided the revival of private partici- private partners' lower appetite for risk. During pation in infrastructure. However, it has also raised the 1990s concessions usually involved large questions about how governments can best tap investment commitments that the private opera- private operators' abilities in the high-risk activi- tor were expected then to recoup from user fees or ties, such as water and electricity distribution. The revenues. In contrast, concessions signed in 2001­ public sector (and the international development 06 include a mix of public and private funding of institutions) remains a main source of investment investment. This has been a trend in electricity funding in their areas. It also underscores the need and water but is now increasingly visible in trans- to tap other resources, such as the private capi- port. Of the 108 transport projects closed in 2006, tal market. Indeed, public and official funding at least 27 percent had government funding to remains just a fraction of the resources needed to cover part of the project cost or provide project meet the demand for those services, particularly revenues through availability payments, revenue in low-income countries. gap payments, or shadow tolls. Where political or regulatory risk has proved to Another sign of the lower appetite for risk is the be too high to attract private equity investment, increase in management and lease contracts, from governments can still mobilize private sector 2 percent of projects in 1996­2000 to more than expertise to improve performance of public opera- 4 percent in 2001­06. Under such contracts, tors. Where the private sector is investing alone or the public sector retains much or all investment in partnership with the public sector, governments responsibilities and thus remains in charge of can choose among a range of contract designs that service expansion and the long-term sustainability balance the distribution of risks and incentives to of efficiency gains made under the contract. maximize private contributions while ensuring an equitable distribution of benefits among investors, taxpayers, and service users. Conclusions Notes The recovery in private activity in infrastructure 1. The data are from the Private Participation in Infrastructure (PPI) appears to be relatively robust, with invest- Project Database (http://ppi.worldbank.org) and include projects in low- and middle-income countries that reached financial closure in ment more evenly distributed across countries 1990­2006. The data refer mainly to investment commitments (not and private sponsors more diversified. However, disbursements). While the data here are in real terms adjusted by the recovery has been concentrated in less risky the U.S. consumer price index and with 2006 as the base year, those on the PPI Web site are in current U.S. dollars. activities. Investment grew in areas with booming 2. The PPI database includes light-rail and subway systems in the demand--in competitive markets (telecommuni- data for railways. cations) and in sectors crucial to competitiveness 3. This note uses the World Bank country classification published (transport). Investors also favored activities in July 2006. in which revenues can be secured through GRIDLINES References long-term contracts (generation or Tenenbaum, Bernard, and Ada Karina Izaguirre 2007. "Private water treatment plants), rather than participation in electricity: The challenge of achieving commercial Gridlines share emerging knowledge depending on payments from end viability and improving services." Gridlines series, no. 21. PPIAF, on public-private partnership and give an Washington, DC. overview of a wide selection of projects from users. In contrast, investment Shurm, Michael Stephan von Klaudy, Georgina Dellacha, Apurva various regions of the world. Past notes can be remained limited where social Sanghi and Nataliya Pushak, 2008, "The role of developing country found at www.ppiaf.org/gridlines. Gridlines are a and political difficulties have firms in infrastructure: New data confirm the emergence of a new publication of PPIAF (Public-Private Infrastructure hampered the introduction of PUBLIC-PRIVATE INFRASTRUCTURE ADVISORY FACILITY class of investors" Gridline series no. 35, PPIAF, Washington, DC. Advisory Facility), a multidonor technical assistance cost-recovery tariffs (water 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 eMAIlppiaf@ppiaf.org web www.ppiaf.org the World Bank, or any other affiliated organization.