Private Infrastructure, Public Risk - Finance & Development - March 1999 - Mateen Thobani

recognizing their inability to provide infrastructure services efficiently, governments in many developing countries have opened their infrastructure sectors to private investors. The stock of private foreign financing for infrastructure projects in developing countries grew from $0.1 billion in 1988 to $20.3 billion in 1996. The private sector is now involved in areas once considered the preserve of governments—such as power, gas, telecommunications, water, roads, railroads, ports, and airports—in more than a hundred countries. But infrastructure projects are often risky: they tend to have long gestation periods, and providers of infrastructure services are typically subject to political pressures to keep their prices low. Therefore, investors often request, and sometimes receive, some form of government guarantee—which may be backed by a multilateral institution—against such risks as changes in the political or regulatory climate, breach of contract by stateowned companies, cost overruns, low demand, or fluctuations in exchange and interest rates. For example, to attract private investment in power generation, the governments of Pakistan and the Philippines have agreed to honor the obligations of their public utility companies to purchase power at a predetermined price regardless of demand. When Spain’s highway network was being built in the 1960s and 1970s, the Spanish government guaranteed 75 percent of the foreign loans and assumed the full exchange rate risk—a measure that eventually cost the Spanish taxpayers $2.7 billion. In the recent El Cortijo-El Vino toll road project in Colombia, the Colombian government agreed to reimburse the concessionaire if traffic was less than 90 percent of a specified level. It also guaranteed a minimum revenue when it awarded a build-operatetransfer contract for a new runway at Bogotá’s El Dorado airport. Such guarantees threaten to undermine the benefits of privatization. First, if a government assumes the risk of project failure—for example, by guaranteeing demand for the services to be provided— private investors have little incentive to choose financially sound projects and to manage them efficiently. Second, guarantees may impose excessive costs on the host country’s taxpayers or consumers. Because a government’s guarantees rarely show up in its accounts or budgets, it may be willing to assume risks that should be borne by