1

PPI in LDCs

Antonio Estache

World Bank and ECARES,

Université Libre de Bruxelles

November 2006

2

Historical Context(Late 80s-mid 90s)

Major Fiscal CrisisLack of Investment in public servicesDeclining service qualityExcess supply of funds on international

capital marketsIdeological changes favoring market driven

economies among leaders of all political sidesWidespread popular support for reforms

including privatization & creation of independent regulator

3

Snapshot of reforms in 2004

PERCENTAGE OF COUNTRIES IN SAMPLE

WITH IRA WITH PPI

INCOME LEVEL ELECTRICITY ICT WATER ELECTRICITY ICT WATER

Developing 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%

4

The promises of PPI

1. Contribution to fiscal stabilization

2. Efficiency gains

3. Increased investments

4. Growth payoffs

5. Contribution to poverty reduction

6. Improved governance

5

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

6

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

7

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

8

How much investment is taking place?

* 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.

Investment commitements through PPI projects

by income group and as a share of GDP

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

1.60%

1990 1995 2000 2001 2002 2003 2004

% of GDP

Total

Lower middle income

Low income

Upper middle income

Source: The World Bank and PPIAF, PPIAF Project database.

9

Low IncomeRoE vs CoE

-35%-30%-25%-20%-15%-10%-5%0%5%

10%15%20%25%

98 99 00 01 02 03

RoE CoE

Low-Middle IncomeRoE vs CoE

0%

5%

10%

15%

20%

25%

98 99 00 01 02 03

RoE CoE

Upper-Middle IncomeRoE vs CoE

-10%

-5%

0%

5%

10%

15%

20%

25%

98 99 00 01 02 03

RoE CoE

Are these investments profitable (1)?

10

EnergyRoE vs CoE

-5%

0%

5%

10%

15%

20%

25%

98 99 00 01 02 03

RoE CoE

WaterRoE vs CoE

0%

5%

10%

15%

20%

25%

98 99 00 01 02 03

RoE CoE

RailwaysRoE vs CoE

-30%-25%-20%-15%-10%-5%0%5%

10%15%20%25%

98 99 00 01 02 03

RoE CoE

PortsRoE vs CoE

0%

5%

10%

15%

20%

25%

98 99 00 01 02 03

RoE CoE

Are these investments profitable (2)?

11

8%

9%

10%

11%

12%

13%

14%

EAP SA ECA LAC AFR

Cost of Capitalby Region

8%

9%

10%

11%

12%

13%

14%

15%

LIC LMC UMC

Cost of Capital per countries grouped according to Income levels

Look at the cost of capital (98-02)

12

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)

13

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

14

So who gained and who lost from these mixed outcomes?

Three ways of looking at it:–Regions

–Sectors

–Actors

15

Winners and losers by region 1990-2005

Investment in infrastructure projects with private participation in developing countries by region, 1990-2005

0

10

20

30

40

50

60

70

1990 1995 2000 2001 2002 2003 2004 2005

US$ billion

ECA

LAC

EAPSA

MENA

SSA

Source: The World Bank and PPIAF, PPIAF Project database.

16

Winners and losers by sectors, 1990-2005

Investment in infrastructure projects with private participation in developing countries by sector, 1990-2005

0

20

40

60

80

100

120

1990 1995 2000 2001 2002 2003 2004 2005

US$ billion

Total

Energy

Telecom

Water

Source: The World Bank and PPIAF, PPI Project database.

Transport

17

Winners and losers by ActorsThe 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 (???)

18

Concluding commentsGlobally: 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

19

THANK YOU

FOR YOUR PATIENCE