Choices for Efficient Private Infrastructure Provision in East Asia Edited by Harinder Kohli, Ashoka Mody, and Michael Walton The World Bank Washington, D.C. Contents 1 Making the Next Big Leap: Systemic Reform for Private Infrastructure in East Asia 1 Harinder Kohli, Ashoka Mody, and Michael Walton 2 Organizing the Government for EfÞcient Private Participation in Infrastructure: Lessons from Australia 21 Donald Russell 3 Contracting for Private Provision of Infrastructure: The Malaysian Experience 43 Yahya Yaacob and G. Naidu 4 Regulating Private Involvement in Infrastructure: The Chilean Experience 55 Alejandro Jadresic 5 Managing Environmental and Resettlement Risks and Opportunities in East Asian Infrastructure 71 Bradford S. Gentry 6 Financing Private Infrastructure: Lessons from India 81 Montek S. Ahluwalia iii 1 Making the Next Big Leap: Systemic Reform for Private Infrastructure in East Asia Harinder Kohli, Ashoka Mody, and Michael Walton uch is expected of private Þnancing to support. Recognizing the limits to private help meet the infrastructure require- involvement under the incremental approach, Mments of the rapidly growing East some countries are undertaking broader policy Asian economies. In the Þrst half of the 1990s and institutional reforms aimed at creating an private Þnancing did grow briskly. East Asia led environment more conducive to private partici- the developing world in total international pation, but these efforts are still at an early stage. Þnance for infrastructure, and a sharply grow- Designing such reforms, improving methods of ing share of that Þnance went to private projects contracting with private parties, building regu- (Þgures 1.1 and 1.2). In 1996, $13 billion in inter- latory capacity, and developing domestic capital national capital ßowed to East Asian infrastruc- markets remain on the policy agenda in all the ture projects, more than $9 billion of it for regionÕs economies. private activities. Domestic sources provided an The chapters in this monograph illustrate the estimated $3 billion for private infrastructure. policy concerns and choices in moving toward Despite the growth in private investment, it efÞcient private involvement in infrastructure. remains a small share of all infrastructure invest- Choices arise in the strategy and organization of ment in East Asia, between 12 and 18 percent reformÑwith regard to sector, the extent of pri- (although there is much variation in this share vate participation, the speed of reform, and the across the region). And because much of this planning and coordinating roles of the govern- investment is backed by implicit or explicit gov- ment. Choices must also be made in the meth- ernment assurances, the share of private capital ods for contracting and regulation, the at risk is far smaller. Moreover, the growth of pri- management of environmental and resettlement vate Þnancing slowed in 1996, partly because of issues, and the development of Þnancing mech- the lumpiness typical of infrastructure invest- anisms to increase access to long-term funds. ments. This monograph draws on experience in The chapters draw on experience in a range of a number of countriesÑin East Asia and else- countriesÑAustralia, Chile, and India as well as whereÑto analyze the impediments to and economies in East AsiaÑto show what choices prospects for private Þnancing of infrastructure. are available and what strategies governments The challenges in achieving substantial pri- have followed. Experiences from outside East vate risk-taking are many. Most East Asian Asia illustrate the payoffs of a more integrated economies have adopted an incremental and concerted move toward private provision of approach to private participation in infrastruc- infrastructure. ture. They have sought private investment The chapters were originally prepared as mainly for speciÞc projects, ring-fenced to insu- background papers for a high-level conference late them from the existing structure of delivery. on private involvement in infrastructure, spon- The result has been variable ßows of investment, sored by the World Bank and the government of typically backed by substantial government Indonesia and held in Jakarta, Indonesia, in 1 2 Choices for EfÞcient Private Infrastructure Provision in East Asia Figure 1 East Asia leads the developing world Figure 2 . and devotes a growing share of it in international finance for infrastructure . to private projects Infrastructure financing raised by developing countries, International infrastructure financing raised in East Asia, by type 1986–96 (US$ millions) of borrower, 1986–96 (US$ millions) 15,000 10,000 East Asia and the Pacific Private Latin America and the Caribbean Europe and Central Asia 12,000 South Asia 8,000 Middle East and North Africa Sub-Saharan Africa 9,000 6,000 Public 6,000 4,000 3,000 2,000 0 0 1986 1988 1990 1992 1994 1996 1986 1988 1990 1992 1994 1996 Source: World Bank 1997a. Source: World Bank 1997a. September 1996. Ministers from East Asian gov- lion). Indeed, in 1996 the ßows to public projects ernments and senior private sector representa- fell sharply, from about $5 billion to just over $3 tives gathered for two days to identify and billion. discuss the major stumbling blocks to broader A distinguishing feature of private capital and more effective private participation in infra- ßows to East Asia is the large share going to new structure. projects rather than to Þnance the transfer of This overview chapter describes the recent assets in privatizations. Between 1984 and 1996 trends in international Þnancing of infrastruc- the number of privatization transactions in Latin ture projects in East Asia, discusses the key pol- America was about the same as the number of icy and institutional impediments to greater new investment transactions; in East Asia, by private participation, and assesses the role of contrast, there were only a third as many priva- domestic capital markets and Þnance. It then out- tization transactions as new investment transac- lines a national and regional strategy for stimu- tions (World Bank, Private Sector Development lating private investment in infrastructure. Department, Private Infrastructure Project Database). Privatization drew 20 percent of the Trends in international Þnancing for Þnancial ßows for infrastructure into East Asia infrastructure in 1993, 35 percent in 1994, and less than 10 per- cent ($800 million of $8.7 billion) in 1995 (World East AsiaÕs appetite for infrastructure Þnance is Bank, International Economics Department, evident in the numbers.1 In 1996 East Asian Privatization Database). economies received $12.7 billion for infrastruc- ture through equity, loan syndications, and Who is receiving the investment? bond issues, absorbing just under half of the $27.4 billion in infrastructure Þnance received No single country in East Asia has dominated in by all developing countries.2 Three-quarters of international Þnance for private infrastructure the international ßows to East AsiaÑ$9.3 bil- projects. In 1995 and 1996 Indonesia was the lionÑwent to private projects. In the rest of the largest recipient, however, receiving almost $4 developing world too the private sectorÕs share billion in each of these yearsÑ40 percent of all in international capital ßows for infrastructure ßows to private infrastructure projects in the increased steadily over the 1990s, from about a region (table 1.1). Private capital for infrastruc- third in 1991 to three-quarters in 1996 ($11 bil- ture accounted for about a third of all private Making the Next Big Leap: Systematic Reform for Private Infrastructure in East Asia 3 Table 1.1 International finance for private infrastructure in selected East Asian economies, 1986–96 Country 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 China 0 0 0 0 0 0 761 145 212 185 904 Indonesia 0 0 34 0 0 0 339 0 161 3,690 3,809 Korea, Rep. of 75 160 12 0 957 285 330 105 374 772 1,164 Lao PDR 0 0 0 0 0 0 0 0 0 0 20 Macao 0 0 0 0 0 0 0 0 246 0 0 Malaysia 10 0 42 767 266 31 240 1,135 3,714 1,074 703 Philippines 0 0 0 0 23 39 336 707 1,044 2,135 1,072 Thailand 0 0 0 0 291 0 20 3,619 1,015 936 1,622 Vietnam 0 0 0 0 0 0 0 0 0 5 12 Total 85 160 88 767 1,537 355 2,026 5,711 6,766 8,797 9,306 Source: Euromoney; Loanware; Bondware; World Bank staff estimates. ßows into Indonesia in 1995 and a fourth in 1996. China may be the dominant user of interna- Before 1995, however, the largest annual capital tional capital ßows for infrastructure in the com- inßow for private infrastructure into Indonesia ing years. Inßows into China jumped to $900 was $339 million, in 1992. The huge jump in 1995 million in 1996 with increasing activity in power and 1996 reßects primarily the Þnancing of a few and transport. Although private investment in large independent power projects whose nego- infrastructure remains well below projections, tiations, under way for many years, had Þnally both the government and the private sector have been completed. In addition, the partial privati- taken actions likely to boost it. The government zation of the telecommunications authority has prepared a model for build-operate-transfer drew in equity ßows, and the award of telecom- projects and applied it to the Laiban power pro- munications concessions at about the same time ject. The private sector has recently raised funds created demand for Þnancing to meet the invest- by securitizing existing projects and then issuing ment obligations under the contracts. shares on the Hong Kong (China) and Shenzhen Nor does any other economy in East Asia stock exchanges. This Þnancing strategy marks show a clear, strong trend (Þgure 1.3). Perhaps a shift from pure project ÞnanceÑwhere Þnanc- the most consistent growth has been in the ing is based only on project cash ßows and rev- Philippines, however.