ProFina - Project and Private Finance Feb 2002 Whither Private Sector Participation? Private Investment in the Utility Industries – Energy, Transport,

ProFina - Project and Private Finance Feb 2002

Whither Private Sector Participation?

Private Investment in the Utility Industries – Energy, Transport,

Telecoms, Water and Waste Water


ICEA Meeting 6 February 2002

Andrew Loewenthal

ProFina – Project and Private [email protected]


PSP - Levels of Risk Transfer

1. Limited – service and management contracts

2. Substantial – leases, concessions, BOTs and variants

3. Complete – outright sales and privatisations


Investment in Infrastructure with PSP

0

20

40

60

80

100

120

140

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Source: WB 2000 PPI Database

US

$ b

ill

in 9

9 P

rice

s



0

20

40

60

80

100

120

140

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

W & S

Transport

Energy

Telecom


Investment in Selected Infrastructure with PSP

0

10

20

30

40

50

60

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

US

$ bi

ll 19

99 p

rice

s

Energy

Transport

W & S


Investment in Selected Infrastructure with PSP

0

5

10

15

20

25

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

US$

bill

in 1

999

pric

es

Transport

W & S



0

20

40

60

80

100

120

140

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

US

$ b

ill

1999 p

rice

s

SSA

MENA

SA

ECA

EAP

LAC


What happened during the 90s

• High demand growth for utility services

• Lots of technical change

• PSP as a way getting Govts “off the hook”

• Govts. prepared to fund off balance sheet

• Much “low hanging fruit” was picked

• Privatisation preceded regulation.

• EIB and EBRD entered market


What happened since 1997?

• Shortage of investors? i.e. not enough investors for the available deals?

OR

• Shortage of deals? i.e. not enough deals for the available cash?

AND

• What are the implications?


Traditional Utilities . . .

1. Monopoly to exploit economies of scale and declining L R incremental costs

2. State owned to resolve the conflict between private and public interests

3. Vertically integrated so customers bore upstream sunk investment risk


Problems with Monopolies . . .

Monopoly (without regulation):

• Faces no check on prices

• Doesn’t minimise costs

• Lacks incentives to innovate

And is economically inefficient . . .


Problems with State Ownership

State ownership was prone to political interference in:

• rate setting, required rates of return

• new build vs maintenance,

• accountability, budgets, objectives

And is weakly governed and incentivised and poorly regulated . . . .


Problems with Vertical Integration

Vertical integration is fine but

• Only networks and bottleneck facilities are naturally monopolistic, and

• Provision of services are potentially competitive

And technical advances permit competition


Why Govt’s Do PSP

• Budgetary – doubts about financing subsidies and demand growth of SOEs

• Economic – growing concerns about the economic inefficiency

• Technical – new technologies, management available - old structures could change

• Ideological – shifts in perception of “public good”


What Investors Need for PSP?

1. Political and Stakeholder commitment

2. Commercial viability; cost covering tariffs

3. Good asset and performance data

4. Market entry and sound regulatory framework

5. Adequate credit and capital markets


Option

Stakeholder

Commitment

Commercial Viability

Good asset and perf.

data

Regulatory

framework

Credit

availability

Mgt.

Contract** * * *

Lease *** *** *** ** **Concess-ion/BOT

**** **** **** **** ****

Divest-iture

****** ***** ***** ***** *****

Necessary Conditions for Success for each type of PSP


Too few investors? Evidence . . .

• For – Currency crises; Tequila, Asian, Russian? – DFI’s partial credit and risk guarantees– MIGA political risk guarantees

• Against– Growth of private infrastructure funds– Growth in private, listed infra cos– Expansion of 1st world infra operators


Too few deals? Evidence . . .• For

– “All the good deals are done”– PSP “does not work”– Obstacles to PSP too great

• Against– Govts still seek PPPs– DFIs still selling PSP benefits– Public Private Infrastructure Advisory Facility


Conclusions about PSP

• PSP (Risk Transfer) begins with Public Sector

• PSP needs changes at legislative, regulatory, market, firm and stakeholder levels

• PSP can be poorly or effectively implemented

• Too much PSP is as bad as too little


Implications

• PSP is difficult and takes time

• There are only short times in the political cycle to introduce PSP

• No natural home for PSP in government

• Can be high-jacked or subverted

• Growing market for economic, legal, regulatory and specialist skills.

Documents

ProFina - Project and Private Finance Feb 2002 Whither Private Sector Participation? Private Investment in the Utility Industries – Energy, Transport,