Capital Flows to Infrastructure Reunión Latinoamericana sobre el Financiamiento de la Infraestructura Mansoor Dailami World Bank Buenos Aires April 2004

Overview  Recovery in private capital to developing countries  Steady decline in private capital flows to infrastructure Emerging frontiers in infrastructure finance - local-foreign blend, bond financing and scaling- up of multilateral role

$286 in 1997 $ billion $200 in 2003 Net private flows Private capital flows recovered in 2003 …but remain well below 1997 peak

$ billion Over longer-term, rotation from debt to equity Net equity flows Net debt flows

Economic fundamentals, creditworthiness, external liability position Investor preference, Narrowing of bond market spreads Easing of monetary policy, low interest rates, global economic recovery Increased investors’ risk appetite Favorable external market conditions Improved credit quality Drivers of private capital flow recovery subject to sudden shift sound progress cyclical in nature

External financing environment and domestic conditions led to spreads rally Developing country spreads Basis points Developing countries Brazil Basis points

Overview  Recovery in private capital to developing countries  Steady decline in private capital flows to infrastructure Emerging frontiers in infrastructure finance - local-foreign blend, bond financing and scaling- up of multilateral role

International investment in developing- country infrastructure has declined since 1997 $ billion Total international investment in developing country infrastructure East Asia Latin America

Due to domestic macroeconomic shocks, beginning with East Asian crisis Average regional credit quality, Credit rating (Moody’s) B1 Ba3 Ba2 Ba1 Baa3 Baa2 Baa1 Dec-1996Dec-1998Dec-2000Dec-2002 East Asia and Pacific Latin America and Caribbean

Since 2000, global industry shocks in telecoms and electricity Volatility (standard deviation) in stock market price indices, Stock market index Telecommunications US electricity Electricity

Increase in systemic risk of investing in telecoms and electricity (March 1, 2000 to March 1, 2003 Return on a particular sector index = a + b*return on world index + c*dummy + d*(dummy)*(return on world index) + error term, using daily observations (January 1, 1995 to November 11, 2003) Telecom US elect. Elect. Constant (a) (1.40)(0.19)(0.09) Return world index (b)0.94*0.37*0.50* (34.68)(8.78)(20.76) Dummy (c)0.00* (-3.11)(-0.96)(-1.25) Dummy*return world index (d) 0.23* 0.35*0.08 (6.21) (5.96) (2.29)

Overview  Recovery in private capital to developing countries  Steady decline in private capital flows to infrastructure Emerging frontiers in infrastructure finance - local-foreign blend, bond financing and scaling- up of multilateral role

Phases in infrastructure finance – historical perspective  Until mid-1980s – public-sector financing and vertically integrated utility model in the US provided stability to infrastructure finance  Late-1980s and 90s – deregulation and competition in mature markets and liberalization in the developing world. Prior stability lost.

Looking into the future - frontiers in infrastructure finance  Increasing trend towards blending of local and foreign financing. Local banks participating in loan syndicates, increased local bond market financing  Driven by structural change in international banking industry Development of local capital markets and local banks’ expertise and capability Example BLCP power project in Thailand Example Autopista Central toll road in Chile

Structural change in international bank lending - cross-border lending has stagnated, local operations have increased Lending of BIS-reporting banks to developing countries $ billion Total claims International claims Local claims 2003

Project bond financing has emerged, concentrated in telecommunications Bond financing for developing-country infrastructure, $ billion Telecoms Other sectors Since 1996, average issuance = $4.9 bn

Spreads on project bonds are lower than on sovereign bonds Comparison between EMBI and sample of 150 project-bonds Basis points Emerging-market sovereign bonds Project-bonds

As proportion of total external financing, bond issuance has risen Gross private debt flows to developing countries $ billion Banks Bonds

Investment grade issuers accounted for a bulk of bond issuance in 2003 $ billion Investment grade ($49bn) Non-investment grade ($37bn) Including Mys, Ind, Tha Including Rom, Dom, Mor

Multilateral commitments to infrastructure – decline in 90s…but evidence of pick-up Multilateral development bank commitments to infrastructure sectors, Billions of US dollars Decline concentrated in energy sector

Scaling-up by multilaterals is needed  World Bank launched Infrastructure Action Plan  Development of instruments to address political, currency, contractual and regulatory risks  Increasing focus on sub-sovereign public utilities (such as municipal utilities)

Concluding messages  International capital markets are not being sufficiently tapped (even at 1997 peak total private flows to developing-country infrastructure were 3.6% of int. issuance)  Need a strong institutional framework, to protect investors  Strengthen local capacity of local capital markets  Multilaterals have important role to play