Recent Trends in PPI

September 29, 2006

Michael KleinVice President, Private Sector Development,Bank-IFC and Chief Economist, IFC

• Trends

PPI on the rebound

Investment in infrastructure projects with private participationin developing countries by destination, 1990-2005

0

20

40

60

80

100

120

1990 1995 1997 2000 2001 2002 2003 2004 2005

Investment in sector expansion Investment in acquiring government assets

US$ billion

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

The Sectoral Picture

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

0

20

40

60

80

100

120

1990 1995 2000 2001 2002 2003 2004 2005

US$ billion

Total

Energy andtransport

Telecom

Water

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

The Regional Picture:Changing Leaders…

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

0

20

40

60

80

100

120

1990 1995 2000 2001 2002 2003 2004 2005

Total

LAC

Otherregions

US$ billion

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

EAP

… and more evenness across regions

Investment in infrastructure projects with private participation in developingcountries 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

MENASSA

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

• Top 10 countries 1990-2000– Brazil– Argentina– Mexico– China– India– Malaysia– Philippines– Russian Federation– Indonesia– Poland

• Top 10 countries 2001-2005– Brazil– India– China– Turkey– Malaysia– Mexico– Nigeria– Chile– Algeria– Thailand

Share of lower-income countries is growing…

Share in total investments to infrastructure projects with privateparticipation in developing countries by income group

0%

20%

40%

60%

80%

100%

1990 1995 2000 2001 2002 2003 2004 2005

As % of total investment

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

Lower middle income($826 to $3,255)

Upper middle income($3,256 to $10,065)

Low income($825 or less)

…and there is convergence in investment flows as a % ofGDP

Total investment in infrastructure projects with private participation indeveloping countries as a share of GDP by income group, 1990-2004

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

1990 1995 2000 2001 2002 2003 2004

% of GDP

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

Lower middle income($826 to $3,255)

Upper middle income($3,256 to $10,065)

Low income($825 or less)

Behind the numbers:Telecoms in Afghanistan

• Early 2002 – 2 phone lines per 1000 people;communicating between provinces nearimpossible, even for government

• Today: 1 million+ mobile subscribers withnational and global access

• The key: a clear regulatory framework +competitive tendering for wireless services (4licences to date)– First operator was in place by April 2002– With competition, prices dropped c70% between

September 03 and March 05

Greenfield investments now outstripconcessions/divestitures

Investment in infrastructure projects with private participation indeveloping countries by type 1990-2005

0

20

40

60

80

100

120

1990 1995 2000 2001 2002 2003 2004 2005

US$ billion

Total

Greenfieldprojs

Others

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

Changing sponsors: highlights

• From the 1990-2000 top-ten sponsorlist, only two companies still make the2001-2005 list

• Six of the 2001-05 top-ten aredeveloping country investors

• Concentration is falling – top-tenaccounted for 12% of projects 1990-2000; 5% 2001-05

Older projects:continuing investment

Investment in infrastructure projects with private participation indeveloping countries by periods of financial closure, 1990-2005

0

20

40

60

80

100

120

1990 1995 2000 2001 2002 2003 2004 2005

Projs closed in 1990-95 Projs closed in 1996-2000 Projs closed in 2001-05

U$ billion

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

• Trends• Outcomes

“Sure, the methodmight seem

antiquated, but youhave to admit thatit’s improved since

privatization.”

Cost and benefits

“The recent lifting of prices controls is so…important for trade… that where it used tocost 25 to 35 [pounds] to have goodscarried by [state-owned transport] it onlycosts… 6 [pounds] with [private freightforwarders].”

(Savary des Bruslons in 1701)

-10 0 10 20 30 40 50 60

Brit ish Telecom

National Freight

Brit ish Airways

Kelang Container Terminal

M alaysian Airline System

Sports Toto

M exico Telmex

Aeromexico

M exican Airline

Chile Telecom

Enersis

Chilgener

Percent

155.0

Note: Welfare gains are presented as a percentage pf annual sales in the last year before privat izat ion.Source: Galal, et . al. (1994) sited in Bureaucrats in Business (1995), p. 39.

Welfare effects of selling state-ownedenterprises Welfare Gains from Reform of Water

System

1,388

-200

-100

0

100

200

300

400

Buenos Aires,Argentina

Lima, Peru Santiago, Chile Conakry,Guinea

US$

(milli

ons)

Government Consumers Workers Domestic Investors

0

5

10

15

20

25

Luz Del Sur, Peru Edelnor, Peru Union Fenosa,Guatemala

SEEG, Gabon

Increase inpercentage points

Electricity: increases in accessfollowing private participation

Water: increases in access followingprivate participation

Source: Shirley (2002).

0

5

10

15

20

25

Con

akry

,G

uine

a

Bue

nos

Aire

s

La-P

az-E

lA

lto

Cor

rient

es,

Arg

entin

a

Côt

e d’

Ivoi

re

Gab

on

Man

ila E

ast

Car

tage

na

Bar

ranq

uilla

Tunj

a

Increase inpercentage points

Sanitation: increases in access followingprivate participation

Souce: Shirley (2002), World Bank/PPIAF (2002), World Bank (2001).

Increase inpercentage

points

0

2

4

6

8

10

12

14

16

18

20

Buen

os A

ires

La-P

az-E

l Alto

Cor

rient

es,

Arg

entin

a

Car

tage

na

Barr

anqu

illa

Tunj

a

Ownership and Competition

Output per Employee90 91 92 93 94

PrivatizedMidlands Elec. 100 103 104 109National Grid 100 101 107 117

Privatized and CompetitionNational Power 100 105 119 148 174Power Gen. 100 106 119 174

Gov't-Owned and CompetitionNuclear Electric 100 110 123 154 195

Source: Prof. George Yarrow, Vienna, 8/94

Competition spurs the spread of mobilephones in Sub-Saharan Africa

0123456789

-6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6

Year relative to start of mobile competition

Inde

x of

tele

dens

ity

Cote d'IvoireGhanaGuineaMadagascarUgandaZambiaTanzania

• Trends• Outcomes• Failure and pricing

Dealing with failure

• In competitive markets about 50 percent of new entrants exit the marketwithin five years

• By 2003 private firms exited in 140 outof 2700 infrastructure projects

• Out of 918 concessions in Latin Americaabout 30 per cent were re-negotiated(energy 5%, transport 55%, water 75%)

Share of projects cancelled / under stressremains small

• For period 1990-2005, cancelled / understress projects account for 9% of totalinvestment, 6% of total projects

• Most affected regions are LAC (12% oftotal investment) and EAP (11%)

• Most affected sector is water andsewerage (34% of total investment,11% of projects)

The tricky politics of cost recovery…

• Governments can find it hard to raiseprices – but less hard to burdentaxpayers?– Eg. In Pakistan the government spends the

equivalent of 1.5% of GDP covering powersector losses (twice what they spend onhealth)

Cost Recovery by Public Utilities inDeveloping Countries: the Early 1990s

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

Telecom Gas Pow er Water

Ratio of Revenueto Costs

Source: World Bank (1994).

10

8

7

6 5

4

3

2

1

9

Entrepreneurial

Consolidation

Regulation of feeand franchises

Decline inprofitability

Withdrawalof capital

andservicesPublic

takeover

Publicsubsidies

Decliningefficiency

Dilemma ofsubsidy cuts,fee increases

and service cuts

Privatization

The privatization wheel

Source: Gomez-Ibanez and Meyer.

• Trends• Outcomes• Failure and pricing• Small scale provision

Man carrying water back to his house.Kompongspeu Province, Cambodia

Piped water in a private residence coming from aprivate water treatment facility.Kompangspeu Province, Cambodia

Output-based Aid inCambodia Water Sector

Winning bids for OBA contracts, by service area

500

385 385356 356

0

100

200

300

400

500

600

Public SectorComparator

Suong Skun Chrey Vien Peam Chi Kang

Cost

pe

r co

nne

ctio

n (

US

$)

Public vs. private schools

• Trends• Outcomes• Failure and pricing• Small scale provision• Popular perception

“Privatization” or “concession”Opinion Poll – PeruPrivatization of electricity generation

Source: Apoyo 2002.

In favor of privatizationin general

In favor of privatizationwith investment toexpand service

In favor of privatizationif tariffs authorized byregulator

In favor of privatizationif transparent process

21%

69%

65%

59%

rru.worldbank.org