PERs and Infrastructure

1
PERs and Infrastructure

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

2
Overview of Presentation

• Considerations with infrastructure
• Public vs private in infrastructure financing and
  provision
• Provision of public support
• The Banks Infrastructure Action Plan

3
Considerations with infrastructure
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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

5
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

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Public vs Private
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Public Sector Legacy mis-pricing
Ratio of revenue to costs
Source WDR 1994
8
Public Sector Legacy Inefficiency
bn annually
200
123
55
Source WDR 1994
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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

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Investment in Infrastructure Projects with
Private Participation, 1990-2002

Source World Bank PPI Projects Database.
11
Regional Breakdown of Investment in
Infrastructure Projects with Private
Participation, 1990-2002
Source World Bank PPI Projects Database.
12
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
13
Investment in Private Infrastructure Projects in
Low Income Countries, 1990-2002
(2002 US billion)
Source World Bank PPI Projects Database
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Cancelled projects

• Whos 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)

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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

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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

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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

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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

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Provision of public support
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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

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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.

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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

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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 governments
  exposure to certain types of risk

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Cash subsidies

• For access or consumptionformer 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

25
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

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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

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Inputs (eg, plant, equipment, materials, etc)
Service provider mobilizes private financing
Public funding tied to service delivery
Outputs
Users
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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

29
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

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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

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The Infrastructure Action Plan
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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

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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

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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