Private Infrastructure, Public Risk? Mateen Thobani

Outline of Presentation n n Background and motivation n n Capital flows at start of study n n Policies to reduce risk n n Guidelines for allocating risks n n Measuring and budgeting for risk n n Conclusion

Net LT Flows to Developing Countries

Net LT Private Flows to DCs

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

Private Infrastructure Investment by Region LAC SSA MENA SA ECA EAP Total in 1999 = $65.85 bn

Private Infrastructure Investment by Sector Telecom Energy W&S Transport Total in 1999 = $65.85 bn

Cumulative Private Infrastructure Investment

Private Infrastructure Investment by Type

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 Wheel

Privatisation Trend is Good (1) n n Incentive to screen out white elephants n n Infrastructure is typically less costly n n Services are usually better-run n n Better safety and environmental record n n Improves living standards n n Better coverage of services

Privatisation Trend is Good (2) n n Makes cost-covering user fees feasible n n Strengthens fiscal position n n Reduces opportunities for corruption n n Enhances competitiveness

Infrastructure Investments are Risky Infrastructure Investments are Risky n n Large and long-gestating projects n n Essential services, tariff levels politicized n n Foreign financing, with large debt, but domestically-consumed services n n Stranded assets provide incentives for opportunistic government actions n n Results in pressures for government subsidies, especially via guarantees

Types of Government Risk-Bearing Types of Government Risk-Bearing n n Political risk (expropriation, convertibility) n n Regulatory risk (pricing, environmental) n n Revenue or cost risks n n Payment risk (purchase agreements) n n Exchange rate and interest rate risks n n Implicit risk-bearing (too big to fail)

Effect of Government Guarantees Effect of Government Guarantees n n 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 n n Other forms of subsidy may be preferable

Policies that Reduce Risk (1) Policies that Reduce Risk (1) n n Macroeconomic framework n n 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) n n Information disclosure n n Contract design LPVR proposal valuing risks

Allocating Risks to Governments: A Framework Allocating Risks to Governments: A Framework n n Principles of risk allocation control over risky outcomes costs of risk-bearing n n Trade-off between risk-allocation criteria correct incentives are key risk concentration often desirable n n Policy transitions and second-best guarantees may be preferable to ownership

Risk-Allocation to Governments: Practical Guidelines n n Political risks n n Regulatory risks n n Quasi-commercial risks n n Demand or cost-overrun risks n n Exchange rate and interest rate risks

Measuring and Budgeting for Risk Measuring and Budgeting for Risk n n Recording the guarantees : statement of contingent liabilities n n Calculating expected losses simple cases econometric methods, options pricing comparing guarantees w/ other subsidies n n Incorporating costs in budgets cash, accrual and present-value accounting

Conclusions Conclusions n n Private infrastructure provision is good but guarantees could vitiate advantages n n Government can limit guarantees macro and regulatory framework are key n n Guarantees can play a useful role for certain political and regulatory risks unavoidable, in times of transition n n Governments should measure and budget for risks