profina - project and private finance feb 2002 whither private sector participation? private...
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ProFina - Project and Private Finance Feb 2002
Whither Private Sector Participation?
Private Investment in the Utility Industries – Energy, Transport,
Telecoms, Water and Waste Water
ProFina - Project and Private Finance Feb 2002
ICEA Meeting 6 February 2002
Andrew Loewenthal
ProFina – Project and Private Financeprofina@compuserve.com
ProFina - Project and Private Finance Feb 2002
PSP - Levels of Risk Transfer
1. Limited – service and management contracts
2. Substantial – leases, concessions, BOTs and variants
3. Complete – outright sales and privatisations
ProFina - Project and Private Finance Feb 2002
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
ProFina - Project and Private Finance Feb 2002
Investment in Infrastructure with PSP
0
20
40
60
80
100
120
140
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
W & S
Transport
Energy
Telecom
ProFina - Project and Private Finance Feb 2002
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
ProFina - Project and Private Finance Feb 2002
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
ProFina - Project and Private Finance Feb 2002
Investment in Infrastructure with PSP
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
ProFina - Project and Private Finance Feb 2002
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
ProFina - Project and Private Finance Feb 2002
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?
ProFina - Project and Private Finance Feb 2002
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
ProFina - Project and Private Finance Feb 2002
Problems with Monopolies . . .
Monopoly (without regulation):
• Faces no check on prices
• Doesn’t minimise costs
• Lacks incentives to innovate
And is economically inefficient . . .
ProFina - Project and Private Finance Feb 2002
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 . . . .
ProFina - Project and Private Finance Feb 2002
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
ProFina - Project and Private Finance Feb 2002
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”
ProFina - Project and Private Finance Feb 2002
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
ProFina - Project and Private Finance Feb 2002
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
ProFina - Project and Private Finance Feb 2002
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
ProFina - Project and Private Finance Feb 2002
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
ProFina - Project and Private Finance Feb 2002
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
ProFina - Project and Private Finance Feb 2002
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.
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