PERs and Infrastructure

Clive HarrisInfrastructure Economics and

Finance DepartmentJanuary 2004

Overview of Presentation

Considerations with infrastructurePublic vs private in infrastructure financing and provisionProvision of public support The Bank’s Infrastructure Action Plan

Considerations with infrastructure

Infrastructure and growth

Investment climate surveys highlight infrastructure as a leading constraint (e.g. in South Asia, Africa)World Bank (1994): returns of around 19%-29%1/3 of output gap between Latin America and East Asia (80-97) due to differences in infrastructure

Some key issues

Move to private provision last 15 yearsPrivate provision brought about new costs (realized guarantees/ liabilities)Major public role still required in most sectors: but fiscal adjustment often leads to cuts in public investmentContinued need to prioritize and accurately account for public expenditure on infrastructure

Public vs Private

00.20.40.60.8

11.21.41.61.8

Telecoms Gas Power Water

Public Sector Legacy : mis-pricing

Ratio of revenue to costs

Source: WDR 1994

0

50

100

150

200

Subsidies throughmispricing

Costs of technicalinefficiency

Public investment

Public Sector Legacy : Inefficiency

$ bn annually

Source: WDR 1994

123

55

200

The rise and fall of private infrastructure?World Bank in early 1990s: “annual private investment in infrastructure might double to $30bn by 2000”: spectacular growth to nearly $130bn in 1997 aloneNear steady decline since to less than half peak levelsCancellation of high profile projects, renegotiations of manyAdverse movements in public opinion and investor sentiment

Investment in Infrastructure Projects with Private Participation, 1990-2002

Source: World Bank PPI Projects Database.

0

20

40

60

80

100

120

140

(2002 US$ billion)

Source: World Bank PPI Projects Database.

Regional Breakdown of Investment in Infrastructure Projects with Private Participation, 1990-2002

South Asia$46 bn.

Middle East and North Africa

$26 bn.

Sub-Saharan Africa$28 bn.

East Asia and Pacif ic

$198 bn.

Europe and Central Asia

$109 bn.Latin America and the Caribbean

$397 bn.Total Private Investment: US$ 805 billion

(in 2002 US$ billion)

Sectoral Breakdown of Investment in Infrastructure Projects with Private Participation, 1990-2002

Source: World Bank PPI Projects Database

Water and Sew erage

$44 bn.

Toll-roads$73 bn.

Railw ays$30 bn.

Seaports$21 bn.

Airports

$13 bn.

Natural Gas$44 bn.

Electricity$224 bn.

Telecom$356 bn.

Total Private Investment = $US 805 billion

(in US$ 2002 billion)

Investment in Private Infrastructure Projects in Low Income Countries, 1990-2002

Source: World Bank PPI Projects Database

0

5

10

15

20

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

(2002 US$ billion)

Cancelled projects

“Who’s who”: (Dabhol, Manila water Cochabamba, Tucuman) but relatively few private infrastructure projects that reached financial closure have been cancelled: to end 2001, 48 projects cancelled, less than 1.9% of all projects, total investment in these projects around $24bn, or 3.2% total investmentCancellation has lead to large compensatory payouts by governments (Indonesian IPPs, Mexican toll roads)Actions often filed under Bilateral Investment Treaties (e.g. Argentina)

The impacts of private

participation Expectation from PPI: better results from incentives for efficiency, discipline on pricing imposed on governmentsWhere performance risk can be placed on private sector, PPI generates better results than credible alternativesMost arguments are over the impact on access, particularly by the poor, on prices and quality of serviceFewer arguments over technical efficiency

Impacts on the poor

Increases in access following privatization seen in many cases e.g. Chile: power, La Paz: utilities, El Alto: water and sanitation, Cartagena/Tunja/Barranquilla: water, Dhakar: waterBut outcomes influenced by details e.g. structure of prices (e.g. high connection fees), targets, subsidies, flexibility in mode of provision

Policy lessons

Fundamentals critical – users or taxpayers have to pay for these servicesPromote different routes to serving consumers: lower cost optionsCompetition where possibleRegulatory frameworks: need for element of discretion, transparencyFinancing and exchange rate risks remain

Going forward

Most of concerns have reflected difficulties in commercializing infrastructure sectorsWorking through public sector will require major emphasis on cost recovery, good governanceGovernments still attempting to privatize and reform in difficult environments: 104 PPI projects in developing countries reached financial closure in 2002 totalling $22bn in investment

Governments need to offer projects with lower risk, stronger cash flows possibly with increased government support

Provision of public support

Why might governments provide support to infrastructure?

In general users should pay costs of services, but taxpayer support often justified because:Public goods – existence of externalitiesRedistributing resources to the poorFailures in financial marketsMitigating political and regulatory risksCircumventing political constraints on prices and profits

Providing support

Capital contributionsCash subsidiesIn-kind grants and tax breaksGuarantees – risks either under or outside government control

Need to match form of support with the policy rationale.

Commitments and contingent liabilities

Contingent liabilities: require outlays only if certain events occur (e.g. revenue guarantee for toll road)Commitments: obligations extending beyond current budget horizon (e.g. purchases of services by government)Prevalence of both has increased with governments turning to private finance of infrastructure

Measuring and reporting commitments and contingent liabilities

Measuring:Maximum possible expenditureExpected cost of exposurePresent value of possible losses

Reporting:Disclose existence of contingent liabilitiesInclude long-term commitments as debtProvide quantitative information on government’s exposure to certain types of risk

Cash subsidies

For access or consumption:former is more likely to be pro-poor

Traditional subsidy schemes not well-targeted (80% of Honduran “lifeline” power subsidies go to non-poor)

Increasingly used as support for private infrastructure schemes – competition for subsidy schemes provides better assurance of value-for-money

Targeting subsidies

Need to do diagnostics to understand:

Levels of service coverage amongst poor householdsIs access problem due to demand or supply factors?Affordability of connection costsAbility and willingness to payExtent of expenditure by poor on different infrastructure services

Output-Based AidPublic funding is tied to the delivery of specified outputs by private firms

Funding may complement or replace user-fees

Potential benefits:Better targeting of public funding to intended beneficiaries or outcomesStronger accountability for performance, transfer performance risk to subsidy receiverLeveraging private financing

Inputs(eg, plant, equipment, materials, etc)

Users

Public funding tied to service delivery

Service provider

mobilizes private

financing

Outputs

Private Finance

Output-Based Approach

Service Provider

Input-Based Approach

Public Funding

User-Fees(when appropriate)

Cross-subsidies

Highly prevalent in utilities in many countries: usually industrial and commercial consumers subsidizing residential consumers

Often over-exploited: cheaper for subsidizing consumers to exit the system

Can be used successfully to help expand networks and increase access: (B.A. water after renegotiation) but usefulness depends on size of connected vs unconnected populations

Extra-budgetary financing mechanisms

Increasingly common e.g. roads funds in Africa; account for c. 50% exp in ArgentinaPopular with sectors because can promote cost-recovery, stabilize resource flows at critical times, reduce political interference and provide greater government commitment where private sector is receiving subsidiesHowever, need transparency and good governance

Dedicated Funds for Output Based Aid

Guatemala: dedicated fund for rural electricity project being implemented by 2 privatized distribution companiesAdditional credit enhancement through use of trust agent (commercial bank) to hold fundsSome situations may need additional

The Infrastructure Action Plan

Background

1993-2002: 50% decline in infrastructure lending in IBRD countriesReflected focus on sustainable service delivery, increased role of other Bank Group agencies (IFC, MIGA)But also reflected higher preparation costs, corporate signals, move to programmatic lending

Re-engaging in infrastructure

Board and management: Bank to lend more for infrastructureResponse to reduction in private financing, recognition of role of infrastructure in growth and poverty reductionResponses to differ across sectors (e.g. ICT – financing still largely private)Financing inefficient public utilities to remain a thing of the past

Main Actions in the IAP

Respond to client country demand for infrastructure: broad menu of public/private options; better integrate into CASs, PRSPsRebuilding knowledge base by strengthening AAAApply new/existing WBG instruments to maximize leverage: joint use of WBG instruments, adaptation and innovation