There seems to be no easy answer to the question of how to woo private investors back into financing developing country infrastructure following a collapse of confidence in the late 1990s. The huge infrastructure funding gap in emerging market economies make it a pressing question demanding a radically new approach.
Data produced by the World Bank at a seminar on financing infrastructure in developing countries showed that from around $20 billion in 1990, private investment in the sector surged to $131 billion by 1997.
But it then went into reverse after a series of regional financial crises in 1997 and fell to $50 billion by last year. Developing countries on average need to spend 7% of GDP on infrastructure which is "double" what they are spending now.
The result is that the public sector, which was supposed to stop investing in infrastructure leaving it to private investors, ended up financing 70% of all projects in the 1990s while the private sector funded only 22% and multilateral development banks 8%. Revenue-producing projects such as ports, airports, railways, telecoms and natural gas pipelines still attract private funds but roads, urban transport, water and sanitation cannot.
One essential lesson that has been learned is that infrastructure projects producing local-currency revenues must not be financed with foreign currency borrowing - the classic "currency mismatch" - observed Herman Mulder, senior vice president at ABN Amro. Another is to avoid the "maturity mismatch" of funding long-term projects with short-term finance.
A further lesson learned from past experience is that an infrastructure project has to "contribute in a major way" to an economy, have "high added value" and improve the revenue-producing potential of the country if it is to be viable, said Mulder. Private investors need to abandon the "naive expectations" they had in the past of developing country infrastructure projects and look for "reliable and professional partners."
Mulder urged private investors to take a long term view of their commitment in emerging economies and to foster good relations with NGOs and local civil society groups as well as with national authorities. To foreign financial institutions financing projects in emerging markets, he offered the advice to let a local bank "take the lead" and to make sure that local currency financing is used to the maximum extent possible.
Investors, it was stressed, should take advantage of the wide variety of public-private partnerships that are emerging to facilitate provision of infrastructure services, and they should collaborate with regional and local investors who are "likely to increase their participation actively" in future.