By Anthony Rowley
The search for a successful marriage of public- and private-sector efforts to provide infrastructure for developing countries continues, but no magic formula is likely to emerge, even after a mammoth study of the subject currently being conducted by the World Bank, the Asian Development Bank and the Japan Bank for International Cooperation. What can be expected is a roadmap showing different routes for approaching the issue, says Khalid Rachman, ADB deputy director-general for regional and sustainable development.
This may disappoint those who hoped that the two-year tripartite study ? the first of its kind among the world's three largest development institutions ? would produce new kinds of public/private-sector partnership to help resolve the conflicting interests of investors and consumers and of public versus private enterprise. But finding a way through the jungle of financial, legal, regulatory, social and environmental problems that confront infrastructure providers in the developing world is proving to be something of a nightmare.
As Mark Baird, a retired senior World Bank official who is coordinating the study, says, there is a ?basic tension? between the urgent need for infrastructure that will enable economic and poverty reduction targets to be met and the absence of institutional underpinnings to support an environment in which the private sector feels confident about investing. Some see a new role for the World Bank and other development banks in acting as honest broker to help close such divides, notes Baird.
ADB lessons
Meanwhile, Rachman, the ADB's point man on the Japan-funded tripartite study, says that when the findings are made known early next year, sufficient collective wisdom should have been distilled to show the way forward. This will be due in no small measure, he says, to the fact that, unlike the World Bank, the ADB never ?withdrew? from infrastructure provision and has thus been able to gain knowledge on bridging the infrastructure gap between planned and market economies.
What this means is that in the past, when developing country governments were chiefly responsible for infrastructure provision (often using loans from the World Bank or ADB), they had only to play by their own rules. They decided the cost of services, and the national budget bore the cost of providing these, with few questions asked about whether projects showed a financial or economic rate of return. Inserting the private sector into this area has revealed a mass of hidden subsidies, kick-backs, inefficiencies, lack of clear rules and regulations and other deficiencies.
The World Bank (as a recent internal audit on power sector lending revealed) largely withdrew from this morass, leaving developing country governments and private sector providers to try to work out some kind of modus vivendi by themselves ? instead of getting seriously into the business of reforming the environment for private provision of infrastructure. The ADB, on the other hand, stayed the course, according to Rachman. This is why, they argue, ADB input into the tripartite study is likely to teach the World Bank a few lessons. The study was originally aimed at East Asia only but its findings will apply also to South Asia and will also have relevance to other developing regions of the world, says Rachman.
Financing needs
The complexity of the subject is being revealed by the tripartite study, and has been hinted at in workshops organized in Manila and Bali since the study was launched last year. One problem is finance, and there is, according to a World Bank report on the Bali workshop, ? broad agreement that the financing requirements are large?. There is ?strong private-sector interest? in infrastructure investment in East Asia and elsewhere, the report noted. But this is ?very much contingent on improvements in predictability,? it added.
Estimates vary on the size of the financing requirements, but everyone agrees that these are too large for governments or development banks to meet on their own. Private capital markets and banking flows must be involved. Countries in East Asia and the Pacific will require at least $200 billion a year ?and perhaps a lot more? to meet their infrastructure needs over the remainder of the decade, says Jemal-ud-din-Kassum, World Bank vice-president for East Asia and the Pacific. Yet global private investment, which peaked at $120 billion a year in 1997, has since fallen back to under half that level.
ADB vice-president Geert van der Linden says that, after peaking at over $40 billion in 1997, private-sector investment in infrastructure in East Asia has fallen now to around $12 billion annually. This compares with what he called ?conservative estimates? for required infrastructure investments of $180 billion or 6% to 7% of GDP annually during the period from 2005 to 2010 (to cover new infrastructure assets and the maintenance of existing assets). Tadao Chino, the outgoing ADB president, has spoken of a financing requirement of $250 billion a year for Asia alone.
The World Bank, ADB and JBIC ? the main providers of multilateral infrastructure funding in East Asia ? are together supplying only around $8 billion a year in total for infrastructure investment. Funding, meanwhile, from private sources (defined as public projects that have a private-sector component) amounts to around $12 billion a year in East Asia at present, which means that only around 10% of estimated future annual expenditures is assured at present, according to Baird.
When public-sector provision of infrastructure in developing countries became discredited in the early 1990s, it was assumed that global capital markets would be able and willing to fill the financing gap. Techniques such as Build, Operate and Transfer (BOT) and Build, Operate and Own (BOO), whereby private providers would construct transport, communications and power facilities and run them for a while before handing them over to the state (or retain them), became popular for a while. So did the ?unbundling? of services (such as power generation and distribution), to lure private investors.
Altercation
But these models were by no means a complete solution. Disputes arose between private investors and developing country governments over contracts, changes in political and other conditions ? leading to some dramatic withdrawals from projects and helping to scare away potential investors.
?Most important is the basis of the contract and a dispute resolution mechanism,? says Rachman. ?Some private investors have pulled out through lack of such mechanisms?, and development banks are now being asked to act as ?mediators? by clearly setting ground rules before high-profile disputes arise.
The World Bank appears to accept this point. ?The IFIs have a role to play in acting as honest brokers between the public and private sectors, and in improving policy
predictability for investors,? said a World Bank summary of the Bali workshop. It is also accepted now that no amount of smart financing techniques can in themselves bridge the gap between private investors and the need for infrastructure in the developing world. ? While financial engineering can help, it cannot overcome poor project economics or bad policies,? added the report.
Former senior World Bank group official Ernest Kepper (who worked in both public- and private-sector arenas and who is now a private consultant) says that ? the problem is not, as often stated, simply a shortage of long-term private funds for infrastructure development but rather a lack of bankable projects where risks and rewards are clearly defined, and where risks are shared equitably among the various participants in infrastructure projects.? This requires the adoption of a whole new ?risk culture? in developing regions, and the World Bank could help to achieve this through devising suitable ?framework agreements', he adds.
Multi-party roles
Infrastructure provision in developing countries is complicated too by the need for multi-party involvement ? not only bankers, risk managers, project engineers and government officials but also non-governmental organizations and other civil society groups. The Bali workshop acknowledged the need for all of these to be involved in future. It pointed to the need for private investors to deal increasingly with provincial and local governments in negotiating infrastructure contracts. There is also a need for tariff reforms in infrastructure services, and if subsidies are to be provided to certain users these must be made very transparent from the outset for the benefit of investors.
There is no magic solution, but at least the contours of the problem are coming into clearer focus as a result of the tripartite study. ? I am quite optimistic? about the outcome, says the ADB's Rachman.