PSD Blog - The World Bank Group

Latin America: From disappointment with privatization to innovation in PPP’s

Editor's Note: Bernardo Weaver is a Wharton MBA in Finance Candidate and a consultant at the World Bank working on Public Private Partnerships.

Privatizations in the 80’s and 90’s in Latin America proved to be disastrous by many accounts. The success of the Thatcher administration in the United Kingdom did not transfer well to the other side of the Atlantic, at least south of the US. Many Latin American politicians found an easy target in privatizations: The sale of state-owned assets at sub-par value.

Politicians also conveyed the idea that the state and the citizens are identical. As a result, the population thought that their assets were sold at fire sale prices to big international companies. These international companies—often connected with aggressive animals like sharks and lions (and even monsters)—became vilified. Governments did not respect clauses and tariff readjustments, and the famous instability of the region was again reconfirmed.

Nigeria: Taking the lead on PPPs in Africa?

For quite some time, I’ve suspected that Nigeria would become the leader in Africa for PPPs. Several projects have been announced, and serious government interest has been demonstrated by discussion on policy, legislation and deal flow. The Global Legal Group has provided excellent insight into this in their 2007 Guide to PPP/PFI Projects. In a surprisingly short amount of time, Nigeria has been able to sign a 25-year concession agreement with Bi-Courtney Consortium, concessionaires of the Lagos-Ibadan Motorway (reportedly 27 months). Nigeria has also utilized a PPP-approach to areas such as ports, tourism, healthcare and housing.

Is it a good idea to bail out privately financed infrastructure projects?

When I first heard about public private partnerships (PPPs), most of the emphasis was on PPPs being privately financed with private money at stake. But now, I hear the news about needing to bail out PPP projects with taxpayer money and I wonder: Is this a good idea?

To answer this, we first have to look at whether the reasons for the failure of the PPP are due to (1) mismanagement of the project by the private partner, or (2) macroeconomic impact, which could not have reasonably been foreseen by the public or private partner. If it’s the latter, then I’d argue there’s a very good rationale for a public sector bailout. How then to find the best solution for the project to survive and deliver the hoped-for results?

What can the London Underground tell us about PPPs?

If you’ve ever been to London, then you’ve almost certainly seen the emblematic red circle and blue stripe with the word UNDERGROUND emblazoned on it. The Underground is a huge operation, made up of some 270 stations and 400km of track. So how does London keep this operation running?

Earlier this decade, the government experimented with a public-private partnership (PPP) under the name of Metronet. The hope was to generate efficiencies by bringing in the private sector. So did it work? A recent report by the UK National Audit Office (published 5 June 2009) makes it pretty clear the answer is "no." The report pinned responsibility for this failure on poor corporate governance:

Does lightning strike twice? Peter Schiff at IFC

Peter Schiff, the now well-known author of Crash Proof, visited the IFC earlier this week to talk about the future of the dollar as the reserve currency. Schiff has gotten famous by correctly predicting the financial crisis well before we found ourselves in our present predicament. (See, for example, this Youtube video of Schiff going head-to-head with Art Laffer in August 2006.) Coming off of one prescient call, Schiff is now arguing that the U.S. dollar will very likely lose its reserve status - soon and very suddenly.

So, does lightning strike twice? I can't say there was anything new in Schiff's presentation that convinced me. Essentially, Schiff argues that it won't be long before the rest of the world is unwilling to purchase any more U.S. debt. But where will investors looking for safe assets go? No prediction on that one, even though this seems to be the crux of the issue.

PPI projects in the crisis

A new note on Private Participation in Infrastructure indicates that PPI projects have been hit by the crisis but have rebounded somewhat:

Throughout the financial crisis, new private activity has continued to take place in developing countries with projects being tendered and brought to financial closure. In the first months of the full-scale of the financial crisis (Aug—Nov 2008), the rate of project closure was 26% lower than in the same period in 2007. However, since then private activity recovered and the project closure rate in Aug—Dec 2008 was just 15% lower than in the same period in the previous year.

What might explain this modest recovery? At least in two cases, governments and public sector banks have stepped in with additional financing. Brazil's government provided $US 42.6 billion for the national development bank BNDES to finance infrastructure projects, and India has likwise upped public support for infrastructure through IIFCL, a public infrastructure finance company.

Infrastructure takes a hit

So says the Public-Private Infrastructure Advisory Facility, which just released a note based on new data on private infrastructure projects in developing countries:

From Aug to Nov 2008, 31 PPI [public private infrastructure] projects reached financial closure involving investment commitments...for US$17.2 billion in 21 developing countries...Such [a] level of investment in new projects represents a decline of about 40% compared with the level in the same period in 2007.

So far, though, the data suggest the impact is similar to the experiences in Asia in 1997-98. Even worse is yet to come - that is, if the financial markets don't revive sometime soon:

There is a growing pipeline of PPI projects which are trying to raise funds or will do so in the next six to twelve months and could be affected if financial markets do not recover by then. Around 44 projects involving investment of US$34.7 billion, which were not able to secure financing by Nov 2008, are expected to continue looking for finance...Competition to attract financing will increase among projects as a growing number of them attempt to raise financing.

All things Africa and ICT

I've just run across a spate of items on the development of ICT in Africa; although it could just be coincidence, I suspect there's been a growing interest in this topic in the development community.

First off, Africa Telecom News has just come out with an Africa Mobile Factbook (Hat tip: White African). The report is free - well, if you discount the time needed to take a required survey - but the factbook offers up some interesting statistics. Figure 1 (below) shows that mobile penetration has grown markedly, and they're predicting continuing growth in this sector. White African also points out much of this development is local: "Most of the mobile operators are home-grown. In 2005, the continent’s seven largest investors controlled 53% of the African mobile market."

    

Real estate is booming - in Turkmenistan!

While real estate has been taking a hit in many parts of the world, there is at least one place that is booming - Turkmenistan. Sebastien Peyrouse, writing in the CACI Analyst, describes the scene in Ashgabat, Turkmenistan's capital:

In the city center, expropriations are continuing as former Soviet quarters are razed to make way for grand, green esplanades and new building-lined avenues. Apart from administrative buildings, dozens of residential buildings with marble facades have also materialized.

Can you hear me now?

The importance of cell phones for isolated communities and different applications of mobile technology have been the subjects of much debate.

A new paper suggests that an increase in competition policy in sub-Saharan Africa, to at least the same level as that of the best-performing countries in the region, could almost double overall cell phone coverage. However, the authors highlight that more targeted work would need to be done to eliminate the digital divided between rural and relatively dense areas.