PERs and Infrastructure Clive Harris Infrastructure Economics and

PERs and Infrastructure Clive Harris Infrastructure Economics and Finance Department January 2004

Overview of Presentation Considerations with infrastructure Public vs private in infrastructure financing and provision Provision 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 years Private 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 investment Continued need to prioritize and accurately account for public expenditure on infrastructure

Public vs Private

Public Sector Legacy : mis-pricing Ratio of revenue to costs Source: WDR 1994

Public Sector Legacy : Inefficiency $ bn annually 200 123 55 Source: WDR 1994

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

Investment in Infrastructure Projects with Private Participation, 1990 -2002 Source: World Bank PPI Projects Database.

Regional Breakdown of Investment in Infrastructure Projects with Private Participation, 1990 -2002 Source: World Bank PPI Projects Database.

Sectoral Breakdown of Investment in Infrastructure Projects with Private Participation, 1990 -2002 Total Private Investment = $US 805 billion (in US$ 2002 billion) Source: World Bank PPI Projects Database

Investment in Private Infrastructure Projects (2002 US$ billion) in Low Income Countries, 1990 -2002 Source: World Bank PPI Projects Database

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 $24 bn, or 3. 2% total investment Cancellation 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 governments Where performance risk can be placed on private sector, PPI generates better results than credible alternatives Most arguments are over the impact on access, particularly by the poor, on prices and quality of service Fewer 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: water But 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 services Promote different routes to serving consumers: lower cost options Competition where possible Regulatory frameworks: need for element of discretion, transparency Financing and exchange rate risks remain

Going forward Most of concerns have reflected difficulties in commercializing infrastructure sectors Working through public sector will require major emphasis on cost recovery, good governance Governments still attempting to privatize and reform in difficult environments: 104 PPI projects in developing countries reached financial closure in 2002 totalling $22 bn 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 externalities Redistributing resources to the poor Failures in financial markets Mitigating political and regulatory risks Circumventing political constraints on prices and profits

Providing support Capital contributions Cash subsidies In-kind grants and tax breaks Guarantees – 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 expenditure Expected cost of exposure Present value of possible losses Reporting: Disclose existence of contingent liabilities Include long-term commitments as debt Provide 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 welltargeted (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 valuefor-money

Targeting subsidies Need to do diagnostics to understand: Levels of service coverage amongst poor households Is access problem due to demand or supply factors? Affordability of connection costs Ability and willingness to pay Extent of expenditure by poor on different infrastructure services

Output-Based Aid Public 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 outcomes Stronger accountability for performance, transfer performance risk to subsidy receiver Leveraging private financing

Input-Based Approach Output-Based Approach Inputs (eg, plant, equipment, materials, etc) Service Provider Private Finance Public Funding Outputs User-Fees (when appropriate) Users Service provider mobilizes private financing Public funding tied to service delivery

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 Argentina Popular 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 subsidies However, need transparency and good governance

Dedicated Funds for Output Based Aid Guatemala: dedicated fund for rural electricity project being implemented by 2 privatized distribution companies Additional credit enhancement through use of trust agent (commercial bank) to hold funds Some situations may need additional

The Infrastructure Action Plan

Background 1993 -2002: 50% decline in infrastructure lending in IBRD countries Reflected 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 infrastructure Response to reduction in private financing, recognition of role of infrastructure in growth and poverty reduction Responses 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, PRSPs Rebuilding knowledge base by strengthening AAA Apply new/existing WBG instruments to maximize leverage: joint use of WBG instruments, adaptation and innovation