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