Putting it to Work in Developing Countries - Nathan Associates

PRIVATE INFRASTRUCTURE DEMAND
Robust long-term economic growth and development
requires cost-effective, reliable infrastructure—power,
transport, telecommunications
and water-sanitation. Everywhere in the
developing world, expanding economies and
populations are putting enormous pressure on
inadequate infrastructure systems and service
delivery. Serious infrastructure deficiencies
threaten to disrupt economic progress. Faced
with fiscal deficits, governments are unable or
unwilling to invest in new facilities. In India, for
example, “the single most important macro constraint
on the Indian economy, holding back its
average growth, is the low spending on infrastructure.”
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One obvious solution is private provision of
infrastructure through public–private partnerships.
Private infrastructure projects can take a
variety of forms, among them nonequity
arrangements, but much of the large-scale
upgrade and expansion needed in the developing
economies requires significant private investment,
including FDI by multinationals with
expertise in designing, building, and operating
power, transportation, telecommunications, and
water-sanitation systems. Indian policymakers,
for example, have called for roughly $155 billion
in FDI for infrastructure over the next ten
years, including $55 billion in airports and railways
in the next decade, and $75 billion in
power and $25 billion in telecommunications in
the next five years alone. 17
Market-seeking FDI has already played a significant
role in infrastructure projects in developing
countries. 18 In the 1990s investment boomed,
going from $13 billion in 1990 to $114 billion
in 1997. Privatization of telecoms and electric
power utilities through cross-border M&As and
concessions in Latin America drove much of this
flow, as well as greenfield FDI projects for independent
power plants in East Asia. But all
regions and all infrastructure sectors received
flows. After peaking in 1997, investment
declined steadily to $53 billion in 2003. 19 East
Asia and Latin America, where the boom
occurred, suffered the worst declines. This drop
reflected deteriorating conditions for private
infrastructure finance, beginning with the Asian
Financial Crisis, followed by a severe economic
slump in Brazil, further crises in Russia and
Argentina, the collapse of world stock markets,
and corporate scandals, including that of Enron,
a high-profile provider of infrastructure FDI. 20
Under economic stress, the weak design of
boom-time projects emerged—impractical pricing
provisions, inadequate regulatory structures,
inattention to needs for competition, and unsustainable
government guarantees. This led to disputes
between investors and states, renegotiation
or closure of projects, and a depressed market
for infrastructure FDI.
In the last two years, however, the trend in private
infrastructure investment has again turned
positive. In 2005, a total of $96 billion in commitments
for infrastructure investments with
private participation was reported, with new alltime
highs in telecoms ($60 billion), airports
($7.5 billion), and seaports ($5.4 billion). All
regions now show recovery from the lows of
2002–2003, with Europe and Central Asia and
South Asia setting records. In view of the massive
need for infrastructure improvement in
developing economies, this cycle of private infrastructure
investment will surely gain momentum
over the next 10 to 15 years, particularly if lessons
about realistic pricing, competition
arrangements, regulation, and risk mitigation
have been learned. The result will be new and
important opportunities for FDI among marketseeking
infrastructure multinationals, both in
greenfield and cross-border M&As. And because
dependable infrastructure is a prerequisite for all
foreign investments (Chapter 5 below), infrastructure
FDI may be expected to reinforce new
FDI flows to all sectors.
SOUTH–SOUTH FDI FLOWS
According to a World Bank survey of FDI
inflows and outflows in a sample of developing
countries, South-based multinational enterprises
became much more active in FDI transactions
during the 1990s. South–South flows may now
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