37542 noTE no. 6 ­ may 2006GRIDLINES Sharing knowledge, experiences, and innovations in public-private partnerships in infrastructure Lifting constraints to public-private partnerships in South Asia The way toward better infrastructure services Bhavna Bhatia and Neeraj Gupta F or countries in South Asia, bridging gaps in infrastructure is key to achiev- investment commitments, far short of commit- ing goals for growth and poverty ments in the leading regions of Latin America reduction. Over the years governments and East Asia (figure 1). India accounted for have underinvested in infrastructure assets much of that activity, with 152 projects and and especially in maintaining them. Private US$42 billion in investment (76 percent of the investment has also been limited. Today poli- total), followed by Pakistan (16 percent) and cymakers increasingly recognize that public- Bangladesh (4 percent). private partnerships in infrastructure offer Investment flows in the region remained mostly the most promise for developing infrastruc- steady over the 15-year period, by contrast with ture and improving services. How to ensure the steep declines seen in 1997­99 in East Asia that such partnerships can succeed? Act on and Latin America as a result of currency and critical policy, regulatory, and institutional economic crises (figure 2). Indeed, investment reforms, pay close attention to the design of flows in South Asia have been gradually rising transactions, and tackle key constraints to since 2000 and surpassed investment in East private participation. Asia in 2004. Countries in South Asia face a dual challenge in Most private investment in South Asian infra- infrastructure: many households and businesses lack access to services, and those that do have structure has gone to telecommunications access suffer from unreliable and poor-quality and power generation. In telecommunications service. Power cuts and shortages impose huge the introduction of competition in fixed and costs on consumers, with the biggest burden on mobile services and the partial divestiture of industry and poor people. No city in the region government-owned companies brought invest- has water available 24/7. Choked sewerage and ment commitments of US$27 billion in sewage-polluted water systems pose serious 1990­2004. Annual investment grew to a peak of health hazards. Neglected maintenance of roads US$4.4 billion in 1997, driven mainly by mobile causes congestion, many accidents, and excessive service licenses granted by India. wear and tear on vehicles. And congested ports and poorly maintained highways hamper trade. In the electricity sector governments awarded 104 Short of resources to meet the demand for infra- projects to the private sector during the period, structure, governments are evaluating options for bringing investment of US$24 billion (mainly for involving the private sector. independent power producers, or IPPs). Annual investment peaked at US$4.6 billion in 1996 Modest private investment with the award of several IPPs in India and Paki- in South Asia stan, then declined sharply as some of these IPPs South Asia has relatively low levels of private went into distress. PUBLIC-PRIVATE INFRASTRUCTURE ADVISORY FACILITY participation in infrastructure. In 1990­2004 the region's 224 infrastructure projects with private Bhavna Bhatia is the regional program leader, and Neeraj participation attracted about US$55.4 billion in Gupta the program officer, for PPIAF in South Asia. Helping to eliminate poverty and achieve sustainable development through public-private partnerships in infrastructure PUBLIC-PRIVATE INFRASTRUCTURE ADVISORY FACILITY East Asia & Pacific Latin America & Caribbean South Asia Sub-Saharan Africa FIgure 1 South Asia lags far behind the leaders Investment in infrastructure projects with private participation, 1990­2004 (US$ billions) Latin America & Caribbean East Asia & Pacific Eastern Europe & Central Asia South Asia Middle East & North Africa Sub-Saharan Africa 0 50 100 150 200 250 300 350 400 450 Source: World Bank and PPIAF, Private Participation in Infrastructure (PPI) Project Database. In transport, private participation has been Partnering to improve services concentrated in ports and highways. India, Driven by governments' objective of raising Pakistan, and Sri Lanka awarded 17 port devel- additional resources, most private participation opment projects in 1990­2004, attracting about in South Asia has been in greenfield projects. US$2.2 billion in investment commitments from Indeed, 83.5 percent of the projects awarded to both national and international players. In high- the private sector in 1990­2004 were greenfield ways only India has succeeded in raising private operations. The rest were port concessions and investment (about US$1.6 billion), through divestitures in telecommunications and power. innovative financing models and limited build- Governments have a wide variety of options for operate-transfer (BOT) projects. Bangladesh, partnering with the private sector, however--in ways that bring not only new resources for infra- India, and Private investment in water supply and sanitation has been negligible, and attempts to award water structure but also knowledge and experience for Pakistan are concessions in India, Nepal, Pakistan, and Sri Lanka sustained improvements in service delivery. The models for public-private partnership (PPP) range all working have met with little success. Some private sector involvement has been introduced under service from management contracts to affermages, leases, to catalyze contracts, but the most recent attempts to award concessions, and divestitures.1 To select the one PPPs for management contracts to improve services have that best fits local needs and circumstances, a government must first be clear about the objectives infrastructure been stalled in India (Delhi) by strong opposition of private participation. Another key factor in the from stakeholders and in Nepal by political crisis. choice is optimal allocation of responsibilities and Encouragingly, local and regional investors and risks between the public and private partners. operators are beginning to play a larger role. The governments of Bangladesh, India, and Paki- As some traditional international operators stan have all initiated new policies and measures have retreated from large infrastructure proj- to catalyze PPPs for infrastructure development. ects, new players have emerged to fill the gap. In the transport sector, where ports, airports, While developed country investors accounted highways, and railways are mostly owned and for 34 percent of investment in 1998­2003, operated by the federal government, there is in the last four years of that period their share renewed interest in encouraging private partici- declined to just 18 percent. After more than pation. Governments are exploring BOT projects a decade of experience in infrastructure, local and other innovative models for using subsidy and regional investors are now better positioned support to improve the viability of projects. In to invest in the sector. In rural and remote water and electricity governments are likely to areas small-scale private service providers can adopt performance-based management, affer- also play an important role in meeting needs. mage, and lease contracts for utilities. In these Lifting constraints to PPPs in South Asia businesses the biggest constraint is lack of politi- increases and exclusion of the poor. To be politi- cal will and public consensus on the role of the cally acceptable, a move toward cost recovery is private sector. For all PPP programs the most likely to be gradual and must be accompanied critical elements for success will be the commit- by efforts to reduce inefficiency. In addition, the ment of and coordination among different levels design of PPP projects should include innovative of government. ways to deliver subsidies to the poor. What to do? Minimize constraints To ensure that PPP projects are viable, govern- How quickly public-private partnerships can be ments may need to provide some funding during implemented will depend on whether govern- the transition to full cost recovery through user ments adopt the right policy, regulatory, and charges. The Indian government's "viability gap institutional reforms. To ensure that such part- fund" subsidizes up to 40 percent of the capital Critical to nerships can succeed will require tackling several cost to improve commercial viability and facilitate success is key constraints. private participation. government Building consensus for PPPs Improving transparency commitment There is little consensus among stakeholders on Several South Asian IPPs awarded on the basis the benefits of involving the private sector in of memoranda of understanding in the 1990s to easing the infrastructure, especially in power and water utili- attracted criticism and went into renegotiations. constraints ties, in part because of ideological opposition and The award of mobile and fixed line telecommu- in part owing to limited experience with private nications licenses in India in 1993 and 1995 to private participation. Moving ahead successfully with encountered delays and lower investor interest participation PPP projects in the medium term will require because of a lack of clarity on bidding criteria and continued efforts to build awareness of the posi- the evaluation process. These problems point to tive experiences with PPPs, hold consultations a need to ensure that governments' procurement with policymakers and other key stakeholders policy encourages competition and transparency on the range of options for PPPs, and address for all stakeholders. It should make the objec- stakeholders' concerns up-front during the plan- tives of transactions explicit, use well-defined ning and design stage. selection criteria, and be designed to achieve fair, cost-effective, and timely outcomes. Moving toward cost recovery Prices for infrastructure services in South Asia Enhancing government capacity generally cover only a small share of the costs. Wide-ranging institutional structures have evolved Public and political opposition to involving the across the countries of South Asia to help procure private sector often rests on concerns about price private provision of infrastructure. But sector FIgure 2 But investment trends in South Asia are steady and rising Source: World Bank and PPIAF, Private Participation in Infrastructure (PPI) Project Database. ministries and their agencies tasked with develop- to mitigate lenders' risks. To help close the fund- ing PPP projects generally have limited capacity to ing gap, the governments of Bangladesh, India, design and implement those projects, particularly and Pakistan are establishing facilities to provide in assessing commercial issues, allocating risk, and long-term finance for infrastructure projects. managing procurement. Moving forward To address this constraint, several countries pursu- South Asian governments have set ambitious ing broad PPP programs have set up dedicated, targets for expanding access to services and improv- cross-sectoral professional units to support their ing their quality. Meeting these targets will require implementation, with responsibilities ranging from the right policy, regulatory, and institutional disseminating information and preparing guidelines reforms. As governments move forward with PPP to designing and implementing transactions. These programs, the factor most critical to success will be units can guide and complement the efforts of line their commitment to minimizing the constraints ministries and provincial governments in developing to private participation. Options for PPPs should frameworks for PPPs, methodologies for evaluating be evaluated through a comprehensive approach PPP options and associated fiscal costs, standard that includes an assessment of their benefits, risk contracts, guidance on managing the bid process, allocation, affordability, and value for money. and monitoring and evaluation tools. Building confidence among stakeholders will also be important, and that can best be done by success- Fostering effective regulation fully implementing some PPP projects in the short Private investors' perception of regulatory risk term and demonstrating efficiency gains. But to in South Asia has been among the main factors achieve all these objectives will require strengthen- limiting their investments in infrastructure. The ing institutional capacity to design, implement, region's experience with independent regula- and monitor PPP transactions. tors in power and telecommunications has been mixed. Concerns have often arisen about lack Note of clarity in roles, high levels of discretion, and 1 The definition of PPPs varies. In many countries PPP programs uncertainty in regulatory rules. To counter such center on projects for services traditionally provided by the public concerns, clear separation of policy and regula- sector, have the private sector bear significant risks, and also assign either substantial risk to the public sector or a major role tory functions and an institutional framework in purchasing services. that fosters independent and effective regulatory References oversight are critical. To enhance the effective- Asian Development Bank, United Nations Development Programme, ness of regulatory institutions, their autonomy, United Nations Economic and Social Commission for Asia and accountability, and independence should be writ- the Pacific, and World Health Organization. 2005. Asia Water Watch 2015: Are Countries in Asia on Track to Meet Target 10 of the ten into law. Also a priority is technical assistance Millennium Development Goals? Manila. to build regulatory capacity. Ettinger, Stephen, Michael Schur, Stephan von Klaudy, Georgina Dellacha, and Shelly Hahn. 2005. "Developing Country Investors Easing financing constraints and Operators in Infrastructure." Trends and Policy Options Financing infrastructure projects is a challenge in Series, no. 3. PPIAF, Washington, D.C. South Asian countries, where financial markets World Bank. 2005a. "India: Addressing Supply-Side Constraints are shallow and there are limited options for to Infrastructure Financing." South Asia Region, Finance and Private Sector Development Unit, Washington, D.C. financing long-term projects. To ease financ- GRIDLINES ------. 2005b. "India: Building Capacities for Public-Private ing constraints, key priorities include Partnership." South Asia Region, Energy and Infrastructure Unit developing longer-term bond markets; and Finance and Private Sector Development Unit, Washington, Gridlines share emerging knowledge developing investment policies and D.C. on PPP and give an overview of a wide regulatory guidelines that encour- ------. 2005c. World Development Indicators 2005. Washington, selection of projects from various regions of age banks, insurance companies, D.C. the world. Past notes can be found at www. ------. 2006. "The Power Sector in the South Asia Region: Country ppiaf.org/gridlines. Gridlines are a publication pension and mutual funds, and Briefs." South Asia Region, Energy and Infrastructure Unit, of PPIAF (Public-Private Infrastructure Advisory other financial institutions Washington, D.C. Facility), a multidonor technical assistance to participate in financing PUBLIC-PRIVATE INFRASTRUCTURE ADVISORY FACILITY facility. Through technical assistance and infrastructure projects; and knowledge dissemination PPIAF supports the efforts encouraging the use of inno- of policymakers, nongovernmental organizations, research institutions, and others in designing and vative financing instruments implementing strategies to tap the full potential of private involvement in infrastructure. The views are those of the authors and do not necessarily reflect c/o The World Bank, 1818 H St., N.W., Washington, DC 20433, USA the views or the policy of PPIAF, the World Bank, PHOne (+1) 202 458 5588 FAX(+1) 202 522 7466 or any other affiliated organization. PUBLIC-PRIVATE INFRASTRUCTURE ADVISORY FACILITY generAl eMAIlppiaf@ppiaf.org web www.ppiaf.org