ASi" kUCTURE FlOR DEVELOPMENT

sponsoring a project, a practice that is thought to vate sponsors to seek commercial financing or to
-.-- have contributed much to the development of the commit a laiger amount of equity funds and to enconstruction
industry in Mexico. As part of its trust sure that the fund manager or the operating interactivities,
BANOBRAS also operates a special fund mediary has a stake in the success. of projects fithat
can provide up to 25 percent of the full cost of a nanced. Although appropriately designed funds
project to finance the start-up costs of construction. could be useful instrments while capital markets
Such finance is no substitute for regular payment by are still developing, reform of the financial sector
government agences to contractors, however. and improved creditworffiiness of borrowers
should be the long-term goals.
A number of private funds have recently been es
Two types of infrastructure funds have emerged in tablished to channel international capital for develrecent
years. Government-sponsored infrastructure oping country infrastructure. They pool risks across
development funds are designed as transitional projects and hence increase the availability as well
mechanisms to provide long-ten finance until cap- as lower the costs of finance. These funds mobilize
ital markets are better developed Private funds, of resources through private placements from instituwhich
there are a grwing number, serve the corM- tional investors, indluding pension funds. For exammercially
useful function of diversifying investor pIe, a pension fund with little interest in investing
-isk. As transitional mechanisms, these fhnds serve directly in a toIl road in Mexico might be interested
two purposes. They allow the leveraging of govem- in participating in a fund that invests in a portfolio
ment resources or official development assistance of such toll roads. As has been the practice of govby
attracting cofinancing from private sources. They eriment-backed funds, private funds have concertcan
also create credit histores for borrowers per- trated heavily so far on power projects. Continued
ceived as risky In time, these borrowers can secure flow of resources into such funds will depend on in-
Tdhect aoces to capital markets.d
vestments being made in sound projects with credi-
The Private Sector Energy Development Fund m ble sponsors as well as on the pace at which regula-
Pakistan and the Private Sector Energy Fund in Ja- tory restrictions on institutional investors are
maica are designed to catalyze private financing for relaxed.
power projects. In response to perceived country
risk and a lack of long-term financing compatible.
Of domesbc capial mars
: wit - the requirements of the power sector, the Ja- The long-term goal must be to broaden and deepen
maican govenmnent -makes long-term financing domestic capital markets so that they can serve as
available through the Energy Fund (up to a maxi- efficient and reliable conduits for infiastructure fimium
of 70 percent of project costs) as a means of at- nance. Getting there will require broad investor partracting
private investments. Investors in the fund ticipation, a variety of market-making players (broindude
the World Bank and the Inter-American De- kers, dealers, underwxiters), and a wide range of
velopment Bank. Another example of fund leverag- financial instruments. hI addition, markets require
ing in a developing country is the proposed Thai adequate disclosure of information to ensure effi-
Guaan yFacilityforfinancing environmental infra- ciencr, and effective laws to safeguard investors.
structure (see Box 5X)_ This facility will not lend di- In most developing economnies, the informational
rectly to infrastructure projects but will guarantee and contractual preconditions are not in place forefprivate
loans to municipalities and private opera- ficient private and commnercial financing of infrators.
The Regional Development Account (RDA) in structure projects. Prvate institutions such as credit-
Indonesia is a transitional credit system designed to rating agencies and public ones such. as regulatory
shift.flnancing of fastructure projects from gov- agencies are needed to ensure an adequate flow of
enm. ent grants to debt instruments, thereby creat- information to investors, to facilitate monitoring,
ing a credit history for borrowers, principally local and to discipline managemeaL Fnancial liberalizaauthorities.
The RDA lends at .near-market rates. tion and polices to encourage the growth of the for-
The goal, is to give local authorties three to five mal financial sector wil in time help overcome such
years to establish measures for cost recovery and to . shortcomings.
demonstrateadequatefinancialmanagement-thus
Experience shows, however, that equity listings
enabling them to borrow diectly from financial in- and bond issues by inf-astructure comparies or
stitutiorns and capital markets. . projects can spur capital-market development by
Good design for such domestic funds requires increasing the range of investment options. The
that they pnrce their loans on market benchmarks. It discussion here higlights how inftastructure develis
also important to incorporate incentives for pri- opment, private provision strategies, and capital-
104