Private Infrastructure, Private Infrastructure, Public Risk?Public Risk?

Mateen ThobaniMateen Thobani

Outline of Presentation

Background and motivation

Capital flows at start of study

Policies to reduce risk

Guidelines for allocating risks

Measuring and budgeting for risk

Conclusion

Net LT Flows to Developing Countries

0

50

100

150

200

250

300

350

400

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Billions of US dollars

Private Flows

Public Flows

Net LT Private Flows to DCs

0

50

100

150

200

250

300

350

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Billions of US dollars

Debt flows

Portfolio equity flows

Foreign direct investment

Private Infrastructure Investment in Developing Countries (1999 US$ bn)

0

20

40

60

80

100

120

140

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Private Infrastructure Investment by Region

0

10

20

30

40

50

60

70

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

LAC

SSAMENA

SA ECA

EAP

Total in 1999 = $65.85 bn

Private Infrastructure Investment by Sector

0

10

20

30

40

50

60

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Telecom

Energy

W&S

Transport

Total in 1999 = $65.85 bn

Cumulative Private Infrastructure Investment1990-1999

0

50

100

150

EAP LAC ECA SSA MENA SA

Energy

Telecom

Transport

Water

(1999 US$ billion)

Private Infrastructure Investmentby Type 1990-1999

0

50

100

150

200

250

300

Latin Americaand the

Caribbean

East Asia andthe Pacific

Europe andCentral Asia

South Asia Middle Eastand North

Africa

Sub-SaharanAfrica

Divestitures Greenfield Projects M&O with capexp

(1999 US$ billion)

10

8

7

65

4

3

2

1

9

Entrepreneurial

Consolidation

Regulation of fees and franchises

Decline in profitability

Withdrawal of capital

and services

Public takeover

Public subsidies

Declining efficiency

Dilemma of subsidy cuts, fee increases and service

cuts

Privatisation

Privatisation-Nationalisation WheelPrivatisation-Nationalisation Wheel

Privatisation Trend is Good (1)Privatisation Trend is Good (1)

Incentive to screen out white elephants

Infrastructure is typically less costly

Services are usually better-run

Better safety and environmental record

Improves living standards

Better coverage of services

Privatisation Trend is Good (2)Privatisation Trend is Good (2)

Makes cost-covering user fees feasible

Strengthens fiscal position

Reduces opportunities for corruption

Enhances competitiveness

Infrastructure Investments are RiskyInfrastructure Investments are Risky

Large and long-gestating projects Essential services, tariff levels politicized Foreign financing, with large debt, but

domestically-consumed services Stranded assets provide incentives for

opportunistic government actions Results in pressures for government

subsidies, especially via guarantees

Types of Government Risk-BearingTypes of Government Risk-Bearing

Political risk (expropriation, convertibility)

Regulatory risk (pricing, environmental)

Revenue or cost risks

Payment risk (purchase agreements)

Exchange rate and interest rate risks

Implicit risk-bearing (too big to fail)

Effect of Government GuaranteesEffect of Government Guarantees

Guarantees, unless well-designed, could:• blunt incentives for efficiency and for

screening out white elephants

• soften budget constraints

• expose users or taxpayers to excessive risk

Other forms of subsidy may be preferable

Policies that Reduce Risk (1)Policies that Reduce Risk (1)

Macroeconomic framework Regulatory policy

• good laws and regulations (competition)

• independent and expert regulatory agency

• constitution limits executive to act arbitrarily

• independent and fair judicial system

• signatory to international treaties

• bound by international arbitration

Policies that Reduce Risk (2)Policies that Reduce Risk (2)

Information disclosure

Contract design• LPVR proposal• valuing risks

Allocating Risks to Governments: Allocating Risks to Governments: A FrameworkA Framework

Principles of risk allocation• control over risky outcomes• costs of risk-bearing

Trade-off between risk-allocation criteria• correct incentives are key• risk concentration often desirable

Policy transitions and second-best• guarantees may be preferable to ownership

Risk-Allocation to Governments: Risk-Allocation to Governments: Practical GuidelinesPractical Guidelines

Political risks

Regulatory risks

Quasi-commercial risks

Demand or cost-overrun risks

Exchange rate and interest rate risks

Measuring and Budgeting for RiskMeasuring and Budgeting for Risk

Recording the guarantees:• statement of contingent liabilities

Calculating expected losses• simple cases• econometric methods, options pricing

• comparing guarantees w/ other subsidies

Incorporating costs in budgets• cash, accrual and present-value accounting

ConclusionsConclusions

Private infrastructure provision is good• but guarantees could vitiate advantages

Government can limit guarantees• macro and regulatory framework are key

Guarantees can play a useful role• for certain political and regulatory risks• unavoidable, in times of transition

Governments should measure and budget for risks