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 Finance

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

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 1 st 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.