WASHINGTON, D.C., Oct. 1 -- Private financing and management of infrastructure projects can make a valuable contribution to the efficient delivery of infrastructure services in developing countries, according to a study released today by the International Finance Corporation (IFC). The study, Financing Private Infrastructure Projects: Emerging Trends from IFC's Experience, presents initial results from 88 IFC infrastructure projects, with a total cost of nearly US$15 billion, in 26 developing countries. Its principal authors are Messrs. Gary Bond and Laurence Carter of the Private Sector Strategies Division in IFC's Corporate Planning Department. Private investment in infrastructure has grown significantly in the developing world, as governments strapped for cash have turned to private investors for funding and expertise. Between 1988 and 1992, governments in 15 developing countries privatized more than US$20 billion worth of infrastructure-related assets. IFC has played a leading role in mobilizing private i
nfrastructure investment in developing countries. In its fiscal year ended June 30, 1994, IFC approved infrastructure projects in 17 countries. These projects will help bring new or improved basic infrastructure services -- such as water delivery, sanitation, power, and telecommunications -- to about 20 million people. According to the IFC study, private financiers and managers have strong incentives to assess, allocate, and mitigate risk. Lenders, for example, tend to be risk-averse; they undertake stringent risk assessment, mitigation, and monitoring, and seek adequate security arrangements. Private managers are also generally better at developing rapid, innovative solutions to infrastructure needs than their public-sector counterparts. "IFC's experience suggests that good risk management is the key to success in private infrastructure projects," according to Mr. Jemal-ud-din Kassum, Vice President for Operations at IFC. "Governments play an important part in facilitating private financing, by providing an
environment conducive to private contractual activity and a regulatory framework appropriate for private entry."
The projects described in the IFC study illustrate the different approaches that countries are taking to achieve greater private involvement and competition in infrastructure provision. These approaches include deregulation to permit limited private entry into specific markets as well as wholesale privatization. Private participation is occurring even in countries where macroeconomic stabilization has not been completed, or where regulatory frameworks are still evolving. Contract-based or concession arrangements are usually the basis for initial private entry in these environments. The study finds that build-operate-transfer (BOT) and other limited-entry arrangements have advantages, particularly as a transition between state ownership and ultimate privatization. BOT arrangements can provide rapid increases in the supply of services without the immediate need for redesign of the entire regulatory network. Private infrastructure investments, the study notes, have been concentrated in certain countries so far.
However, several small, low-income nations have been able to mobilize private finance for infrastructure projects, if they are structured appropriately. The most difficult hurdle is a country's first project; once the process starts, it can gather momentum quickly, as the confidence of the parties involved (e.g., investors, regulators) increases. Interestingly, the study finds, infrastructure financing, access to international capital markets, and the development of domestic capital markets are all closely linked. Access to capital markets is crucial to infrastructure financing because of the long development periods involved, especially for greenfield investments. New vehicles, like specialized infrastructure funds, are increasing the participation of institutional investors in infrastructure financing, and privatized infrastructure companies are tapping international and domestic equity and bond markets. The countries that have demonstrated the most commitment to private participation, by privatizing existi
ng companies as well as allowing new entrants, have seen the strongest responses. IFC is a member of the World Bank Group and is the largest multilateral source of equity and loan financing for private sector projects in developing countries.