Transcript PERs and Infrastructure Clive Harris Infrastructure Economics and Finance Department

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
1.8
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
Telecoms
Source: WDR 1994
Gas
Power
Water
Public Sector Legacy : Inefficiency
$ bn annually
200
123
200
150
55
100
50
0
Subsidies through
mispricing
Source: WDR 1994
Costs of technical
inefficiency
Public investment
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
$130bn in 1997 alone
Near steady decline since to less than half
peak levels
Cancellation of high profile projects,
renegotiations of many
Adverse movements in public opinion and
investor sentiment
Investment in Infrastructure Projects
with Private Participation, 1990-2002
(2002 US$ billion)
140
120
100
80
60
40
20
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
0
Source: World Bank PPI Projects Database.
Regional Breakdown of Investment in Infrastructure Projects
with Private Participation, 1990-2002
Sub-Saharan
Af rica
South Asia
$28 bn.
$46 bn.
Middle East and
North Af rica
$26 bn.
Latin America and
the Caribbean
$397 bn.
Source: World Bank PPI Projects Database.
East Asia and
Pacif ic
$198 bn.
Europe and
Central Asia
$109 bn.
Total Private Investment: US$ 805 billion
(in 2002 US$ billion)
Sectoral Breakdown of Investment in Infrastructure Projects
with Private Participation, 1990-2002
Airports
$13 bn.
Natural Gas
$44 bn.
Electricity
$224 bn.
Seaports
$21 bn.
Railw ays
$30 bn.
Toll-roads
$73 bn.
Water and
Sew erage
$44 bn.
Telecom
$356 bn.
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
20
15
10
5
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
0
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 $24bn, 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 $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 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