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PPI in LDCs
Antonio Estache
World Bank and ECARES,
Université Libre de Bruxelles
November 2006
1
Historical Context
(Late 80s-mid 90s)
 Major Fiscal Crisis
 Lack of Investment in public services
 Declining service quality
 Excess supply of funds on international
capital markets
 Ideological changes favoring market driven
economies among leaders of all political sides
 Widespread popular support for reforms
including privatization & creation of
independent regulator
2
Snapshot of reforms in 2004
PERCENTAGE OF COUNTRIES IN SAMPLE
WITH IRA
INCOME LEVEL
WITH PPI
ELECTRICITY
ICT
WATER
ELECTRICITY
ICT
WATER
51%
66%
22%
36%
59%
35%
Low
38%
69%
13%
29%
50%
18%
Lower-middle
63%
60%
32%
37%
62%
50%
Upper-middle
63%
71%
28%
48%
72%
47%
Developed
79%
56%
20%
43%
84%
81%
TOTAL
56%
64%
22%
37%
64%
42%
Developing
3
The promises of PPI
1.
2.
3.
4.
5.
6.
Contribution to fiscal stabilization
Efficiency gains
Increased investments
Growth payoffs
Contribution to poverty reduction
Improved governance
4
To what extent were goals achieved? (1)
Fiscal benefits: yes in short run,
more complex in long run
– Short run: sales of assets and reductions
from transfer of Opex and capex obligations
to private operators
– Long run: renegotiations associated with
increased changes on fiscal effects of
reforms
• Return of capex subsidies in utilities
• Return of opex subsidies in passenger transport
5
To what extent were goals achieved? (2)
Efficiency gains: ok in general
– Lots of evidence from partial performance
indicators
– Confirmed by papers looking at economic
concepts of efficiency (TFP, TE, TEC)
– Noteworthy:
• evidence of changes in allocative efficiency
changes for a few papers on electricity
• Evidence that regulatory regime drives
efficiency often more than ownership
– No difference in water
– Major difference in rail and ports
– Jury still out on energy
6
To what extent were goals achieved? (3)
Investment: not clear
– Fast increase till 1997, decline since, some
recovery in last 2 years
– Not as much as expected
• Drop in CAPEX from 8-10% in 1970s to 1-3% since
mid 1990s
• And it is not only a result of efficiency gains
– Not as private as expected (mostly in middle
income countries)
• 20% of the actual investments in the sector
• 10% of the needs
– Significant cream-skimming problems:
• Typically urban better off than rural
7
How much investment is taking place?
Investment commitements through PPI projects
by income group and as a share of GDP
% of
GDP
1.60%
1.40%
Upper middle
income
1.20%
1.00%
Low
income
0.80%
Total
0.60%
Low er
middle
income
0.40%
0.20%
0.00%
1990
1995
2000 2001 2002 2003 2004
Source: The World Bank and PPIAF, PPIAF Project database.
* Assuming developing countries invested around 4% of their GDP in infrastructure (WDR 94). Investment flows to PPI
include only investment in facilities (sector expansion). Investment in acquiring government assets have been excluded.
8
Are these investments profitable (1)?
Low-Middle Income
RoE vs CoE
Low Income
RoE vs CoE
25%
20%
15%
10%
5%
0%
-5%
-10%
-15%
-20%
-25%
-30%
-35%
25%
20%
15%
98
99
00
01
02
03
10%
5%
0%
98
RoE
99
00
CoE
01
RoE
02
03
CoE
Upper-Middle Income
RoE vs CoE
25%
20%
15%
10%
5%
0%
-5%
98
99
00
01
02
03
-10%
9
RoE
CoE
Are these investments profitable (2)?
Water
RoE vs CoE
Energy
RoE vs CoE
25%
25%
20%
20%
15%
15%
10%
10%
5%
5%
0%
-5%
98
99
00
01
RoE
02
03
0%
98
99
01
RoE
CoE
02
03
02
03
CoE
Ports
RoE vs CoE
Railways
RoE vs CoE
25%
20%
15%
10%
5%
0%
-5%
-10%
-15%
-20%
-25%
-30%
00
25%
20%
15%
98
99
00
01
02
03
10%
5%
0%
98
RoE
CoE
99
00
01
RoE
CoE
10
Look at the cost of capital (98-02)
Cos t of Capital
by Re gion
14%
13%
12%
11%
10%
9%
8%
EA P
SA
EC A
LA C
A FR
Cos t of Capital pe r countr ie s gr oupe d accor ding to Incom e
le ve ls
15%
14%
13%
12%
11%
10%
9%
8%
LIC
LM C
UM C
11
To what extent were goals achieved? (4)
Growth payoffs: not
clear
– Direct effect of PPI generally non-significant
– But…strong evidence that infrast. matters in
LDCs
• But lower investment/cream skimming linked to
lower growth for utilities;
• Positive payoff from freight transport reforms
– Useful counterfactual studies on growth
consequences of infrastructure gaps
associated with reforms
• See various papers in Easterly and Serven (2003)
12
To what extent were goals achieved? (5)
Improved governance: not clear
– Institutional changes tend to be
associated with better outcomes in
terms of access
– High renegotiation rates (Guasch
(2004)
– Yet corruption continues to be an issue
13
So who gained and who lost from
these mixed outcomes?
Three ways of looking at it:
–Regions
–Sectors
–Actors
14
Winners and losers by region 1990-2005
Investment in infrastructure projects with private participation in developing
countries by region, 1990-2005
US$ billion
70
60
50
40
ECA
30
LAC
20
EAP
SA
MENA
10
SSA
0
1990
1995
2000 2001 2002 2003 2004 2005
Source: The World Bank and PPIAF, PPIAF Project database.
15
Winners and losers by sectors, 1990-2005
Investment in infrastructure projects with private
participation in developing countries by sector, 1990-2005
US$ billion
120
Total
100
80
Telecom
60
40
Energy
20
Transport
0
Water
1990
1995
2000 2001 2002 2003 2004 2005
Source: The World Bank and PPIAF, PPI Project database.
16
Winners and losers by Actors
The actors in the payoff matrix
– The users (access: (+ but not as much as
expected and distributional issues), affordability(-),
quality (+))
– The taxpayers (cash!: + in SR, -/+ in LR)
– The workers (jobs + cash: - in SR, + in LR)
– The operators (cash in the SR and IRR> COC in
the LR for a few! (+ in SR, ? for LR)
– The local owners (cash! + in SR and LR)
– The foreign owners (cash! + in SR, +/- in LR)
– The bankers (cash! + in SR and LR)
– The politicians (cash! + in SR and LR)
– The donors (???)
17
Concluding comments
 Globally: net welfare impact seems to be globally
positive but distributional issues have been really
poorly addressed
– THERE ARE EQUITY-EFFICIENCY TRADE-OFFS!
 Main tough challenges:
–
–
–
–
–
–
–
–
–
–
Actually addressing the distributional implications
Strategic behavior of actors (demand and costing games)
Dealing with renegotiation and FOREX risks
Water and some of the transport sectors where cost of capital
too high for viable average tariffs
New macro teams seeing long term fiscal costs
People fed up with corruption issues
…people interested in new sources of rent…
NGOs
Change in ideology
… main issue really is…the need for a political commitment
on the parts of ALL actors
18
THANK YOU
FOR YOUR PATIENCE
19