Privatesector P U B L I C P O L I C Y F O R T H E Note No. 196 September 1999 Neil Roger Recent Trends in Private Participation in Infrastructure This Note draws on the The trend of liberalizing and privatizing infrastruc- This Note provides an overview of recent hard work of the PPI ture activities that began in a few countries in the trends in private participation in infrastructure Project Database team. More sector detail is set 1970s and 1980s turned into a wave that has swept in developing countries by drawing on the out in their Notes: Gisele the world in the 1990s. Developing countries have World Bank’s Private Participation in Infra- Silva, Nicola Tynan, and been at the crest of this wave, pioneering better structure (PPI) Project Database. This database Yesim Yilmaz, “Private Participation in the Water approaches to providing infrastructure services, tracks about 1,700 projects, newly owned or and Sewerage Sector” reaping the benefits of increased competition and managed by private companies, that reached (Viewpoint 147, August customer focus, which have led to higher efficiency financial closure in 1990–98 in water, transport, 1998), Ada Karina Izaguirre, “Private and the easing of fiscal constraints. Market leaders telecommunications, and energy (electricity, Participation in the among developing countries—such as Argentina, and gas transmission and distribution). Electricity Sector” Chile, and Hungary—have gone further in priva- Counting private projects and investments is a (Viewpoint 154, September 1998) and tizing infrastructure than all but a few industrial challenge for many reasons, and the general “Private Participation in countries (New Zealand, the United Kingdom, and trends warrant more confidence than the num- the Transmission and the United States). bers do (table 1; box 1). Distribution of Natural Gas” (Viewpoint 176, April 1999), Nicola Tynan, “Private Participation in TABLE 1 INVESTMENT IN INFRASTRUCTURE PROJECTS WITH PRIVATE PARTICIPATION IN the Rail Sector” (Viewpoint 186, June DEVELOPING COUNTRIES BY SECTOR AND REGION, 1990–98 1999), Dick Sommer, 1998 US$ billions “Private Participation in Port Facilities” 1990 1991 1992 1993 1994 1995 1996 1997 1998 Total (Viewpoint 193, September 1999), and Sector forthcoming Notes on Telecommunications 6.6 13.1 7.9 10.9 19.5 20.1 33.4 49.6 53.1 214.0 telecommunications, toll Energy 1.6 1.2 11.1 14.3 17.1 23.9 34.9 46.2 26.8 177.1 roads, and airports. Transport 7.5 3.1 5.7 7.4 7.6 7.5 13.1 16.3 14.0 82.2 Water and sanitation 0.0 0.1 1.8 7.3 0.8 1.4 2.0 8.4 1.5 23.3 Region East Asia and the Pacific 2.3 4.0 8.7 15.9 17.3 20.4 31.5 37.6 9.5 147.2 Europe and Central Asia 0.1 0.3 0.5 1.5 3.9 8.4 10.7 15.3 11.3 52.0 Latin America and the Caribbean 12.9 12.3 17.1 18.0 18.4 19.0 27.4 45.1 66.3 236.5 Middle East and North Africa 0.0 0.0 0.0 3.3 0.3 0.1 0.3 5.2 3.6 12.8 South Asia 0.3 0.8 0.1 1.2 4.3 4.0 11.4 13.7 2.3 38.1 Sub-Saharan Africa 0.0 0.0 0.1 0.0 0.7 1.0 2.0 3.5 2.3 9.6 Total 15.6 17.4 26.6 39.9 44.9 52.9 83.3 120.4 95.3 496.2 Note: 0.0 means zero or less than half the unit shown. Data may not sum to totals because of rounding. Source: PPI Project Database. The World Bank Group ▪ Finance, Private Sector, and Infrastructur e Network Recent Trends in Private Participation in Infrastructure BOX 1 PPI PROJECT DATABASE: PROJECT CRITERIA AND DATABASE TERMINOLOGY Database coverage includes build-own-transfer and build-own-operate contracts ▪ Projects that have reached financial closure and directly or as well as merchant power plants. indirectly serve the public. ▪ Divestiture. A private consortium buys an equity stake in a ▪ Projects in water, transport, electricity, telecommunications, state-owned enterprise. The private stake may or may not and natural gas, but excluding movable assets, incinerators, imply private management of the company. stand-alone solid waste projects, and small projects such as windmills. Definition of financial closure. For greenfield projects, and for ▪ Low- and middle-income developing countries in 1996, as operations and management contracts with major capital expen- defined and classified by the World Bank. diture, financial closure is defined as the existence of a legally binding commitment of equity holders or debt financiers to pro- Definition of private participation. The private company must vide or mobilize funding for the project. The funding must assume operating risk during the operating period or assume account for a significant part of the project cost, securing the development and operating risk during the contract period. A construction of the facility. For operations and management con- foreign state-owned company is considered a private entity. tracts, a lease agreement or a contract authorizing the com- mencement of management or lease service must exist. For Definition of a project unit. A corporate entity created to operate divestitures, the equity holders must have a legally binding com- infrastructure facilities is considered a project. When two or mitment to acquire the assets of the facility. more physical facilities are operated by the corporate entity, all are considered as one project. Recording of investments. Investments and privatization rev- enues generally have been recorded on a commitment basis in Project types the year of financial closure (for which data are typically read- ▪ Operations and management contract. A private entity takes over ily available). Actual disbursements have not been tracked. the management of a state-owned enterprise for a given period. Where privatizations and new investments are phased and data This category includes management contracts and leases. were available at financial closure, they are recorded in ▪ Operations and management contract with major capital expendi- phases. ture. A private entity takes over the management of a state-owned enterprise for a given period during which it also assumes signifi- Sources. World Wide Web, commercial databases, specialized cant investment risk. This category includes concession-type con- publications, developers and sponsors, and regulatory agencies. tracts such as build-transfer-operate, build-lease-operate, and build-rehabilitate-operate-transfer contracts as applied to existing Contact. The database is maintained by the Private Participation facilities. in Infrastructure Group of the World Bank. For more information ▪ Greenfield project. A private entity or a public-private joint contact Shokraneh Minovi at 202 473 0012 or sminovi@ venture builds and operates a new facility. This category worldbank.org. What trends have emerged in private participa- Rapid growth in private activity tion in infrastructure in developing countries in the 1990s? Private activity—as measured by investment ▪ Private activity has grown rapidly, but the pub- flows to infrastructure projects with private lic sector still dominates. participation—grew dramatically between 1990 ▪ Private activity declined in 1998 from a high in and 1997, from about US$16 billion to US$120 1997, falling most in East Asia and in energy. billion (figure 1).1 It then declined by about a ▪ Telecommunications and energy have been fifth to US$95 billion in 1998, a result of the finan- the leading sectors in private participation, and cial crisis that began in Asia in mid-1997. Private Latin America and East Asia the leading activity in 1998, sustained by a US$19 billion regions. telecommunications privatization in Brazil, itself ▪ Almost all developing countries have some severely afflicted by the crisis, remained above private activity in infrastructure. the 1996 level. FIGURE 1 INVESTMENT IN INFRASTRUCTURE PROJECTS WITH PRIVATE PARTICIPATION IN DEVELOPING COUNTRIES, 1990 – 98 1998 US$ billions What is the relative contribution of this investment 120 in infrastructure projects with private participation 100 in total infrastructure investment? Aggregate data suggest that developing countries have invested 80 on average about 4 percent of their national incomes in infrastructure facilities, or about 60 US$250 billion a year. So the average annual investments of about US$100 billion in infrastruc- 40 ture projects with private participation over the 20 past three years accounted for about 40 percent of total infrastructure investment in developing coun- 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 tries. But these projects typically attract some pub- lic financing, and some public projects attract Source: PPI Project Database. some private financing. Estimates using other data suggest a private share of infrastructure investment FIGURE 2 CUMULATIVE INVESTMENT IN INFRASTRUCTURE financing averaging about 15 to 20 percent a year.2 PROJECTS WITH PRIVATE PARTICIPATION IN DEVELOPING COUNTRIES BY REGION AND TYPE OF ACTIVITY, 1990 – 98 Leading sectors 1998 US$ billions Telecommunications and energy have led the 250 growth in private activity during the 1990s. The Operations and management contracts with major capital expenditure expansion in private activity in these sectors has 200 Greenfield projects been spurred by technological change that has reduced sunk costs, allowed major reforms in 150 Divestitures market structure, and facilitated competition. Investments in telecommunications projects with 100 private participation grew continuously in 1990–98, from about US$7 billion to US$53 bil- 50 lion. Cumulative investments in telecommunica- tions amounted to 43 percent of flows to all 0 infrastructure sectors in that period. Investments Latin East Asia Europe South Middle East Sub- in energy projects with private participation, only America and the and Asia and North Saharan and the Pacific Central Asia Africa Africa about US$2 billion in 1990, peaked at about Caribbean US$46 billion in 1997 before declining sharply to US$27 billion in 1998. Energy claimed about 36 Source: PPI Project Database. percent of cumulative investments in 1990–98. Transport and water—where technological change has been less pronounced, political bar- activity during the 1990s. Latin America saw steady riers to reform can be strong, and subnational growth in investments in infrastructure projects governments often play a major role—lagged, with private participation in 1990–98, from US$13 together accounting for just 21 percent of cumu- billion to US$66 billion, and today has the most lative investments. But these sectors, too, have private infrastructure activity. In 1997–98 private seen growing private participation in the 1990s. activity in Latin America was marked by large pri- vatizations in energy and telecommunications, Leading regions especially in Brazil. Investments in East Asian infra- structure projects with private participation grew Among regions, Latin America and the Caribbean rapidly in 1990–97, from about US$2 billion to and East Asia have led the growth in private US$38 billion, then plummeted to only US$9 Recent Trends in Private Participation in Infrastructure billion in 1998. Investments in East Asia are now and a return to trend growth rates (4.5 to 5 per- comparable to recent levels in Europe and Central cent) is unlikely before 2001. But while the crisis Asia, the third-ranked region. was unexpectedly severe, there has also been recognition that many of the affected projects allo- The leading regions have pursued different types cated risk in ways that left private sponsors and of private participation (figure 2). Latin America financiers—as well as governments and taxpay- and the Caribbean and Europe and Central Asia ers—unnecessarily exposed. Singapore’s prime have relied primarily on divestiture, often minister observed that “we were concentrating on accompanied by market structure and regulatory fast growth, quick infrastructure, but forgetting the reforms. By contrast, East and South Asia have fundamentals.”3 Getting the policy fundamentals preferred greenfield investments, often focused right will require a stronger focus on competitive on bulk supply facilities, such as independent market structures, cost-covering tariffs, and cred- power producers, delivering to unreformed state ible governance frameworks for private investors. enterprises. Policy announcements of promising reforms and competitive solutions in the much-watched Country trends power sectors of China, Indonesia, the Republic of Korea, the Philippines, and Thailand may In 1990–98, 154 developing countries had some presage a move to more sustainable private infra- private activity in one infrastructure sector, and 14 structure activity. These countries are likely to shift Viewpoint is an open had private activity in three or four sectors. away from the almost exclusive focus on green- forum intended to Middle-income countries have attracted most pri- field investment toward more comprehensive sec- encourage vate activity; among low-income countries only tor reform, including investments in privatizing, dissemination of and debate on ideas, China and India have attracted substantial private rehabilitating, and modernizing existing assets. innovations, and best investment. In other regions, notably Sub-Saharan Indeed, this is already beginning.4 practices for expanding Africa, the number of countries with projects with the private sector. The views published are private participation has been increasing, but pri- The slowdown in demand growth allows a move those of the authors and vate activity remains limited. to more competitive market structures in such should not be attributed sectors as power, and the fiscal crisis places a to the World Bank or any of its affiliated organiza- While private activity has been concentrated in premium on dealing with the poor financial per- tions. Nor do any of the relatively few countries, it is beginning to spread. formance of state enterprises. When growth conclusions represent In 1990 the top ten countries accounted for 97 resumes, there will be a need for more green- official policy of the World Bank or of its percent of all investments in infrastructure pro- field investment. But if governments follow the Executive Directors or jects with private participation in developing Latin American model, this investment will occur the countries they countries, but by 1998 they accounted for only 74 in a new environment with less public procure- represent. percent. The top-ten list varies from year to year, ment and with commercial risks borne more by To order additional but typically includes Argentina, Brazil, China, private players and users than by taxpayers. copies please call Hungary, India, Indonesia, Malaysia, Mexico, and Getting the policy fundamentals right should see 202 458 1111 or contact Suzanne Smith, editor, Thailand—which also account for most of the a return to rapid growth of private activity. Room F11K 208, developing world’s population and income. The World Bank, 1 All dollar amounts are in constant 1998 U.S. dollars. 1818 H Street, NW, Washington, D.C. 20433, Looking ahead 2 World Bank, Infrastructure Working Group, “Facilitating Private or Internet address Involvement in Infrastructure—An Action Program” ([http://www. ssmith7@worldbank.org. worldbank.org/html/fpd/infraact/infraact.htm], September 1997). The financial crisis in developing countries has 3 The Economist (May 15–21, 1999). The series is also available on line triggered a critical rethinking of prospects for pri- 4 Mary Watkins, “Crisis? What Crisis?” Project Finance (June 1999). (www.worldbank.org/ vate infrastructure. With deteriorating demand, html/fpd/notes/). many high-profile projects have been canceled or Neil Roger, Private Participation in Printed on recycled are in trouble. Recent growth forecasts for devel- Infrastructure Group paper. oping countries have been revised downward,