5 A Global Market of US$30 Billion a Year Jae So and Ben Shin 9 Company Strategies 47579 Jae So and Ben Shin 15 Reality Checks for Power Forecasts Robert Bacon 19 The Real World of Power Sector Regulation Bernard Tenenbaum 23 Competitive Contracting for Privately Generated Power Robert Bacon 27 Fiscal Systems for Oil-How Governments Compete for Exploration Investment Chakib Khelil 31 Bankruptcy Reform-Breaking the Court Logjam in Colombia - . . . 1Zak Atzyas 35 To Buy or Lease?Farm Revival in Eastern and Central Europe Omar Razzaz 39 Money Laundering and International Efforts to Fight It David Scott 43 Protecting Bank Depositors Samuel Talley The World Bank Group rnVice Presidencv for Finance and Private Sector Develo~ment Private Sector is an open forum intended t o encourage dissemination of and debate on ideas, innovations, and best practices for expanding t h e private sector. The views published are those of the authors and should not be attributed t o the World Bank or any of its affiliated organizations. Nor do any of the conclusions represent official policy of the World Bank or of its Executive Directors or the countries they represent. Quarterly No. 3,June 1995 The Private Infrastructure Industry A Global Market of USS30 Billion a Year 5 Since 1984, 54 countries have privatized 286 infrastructure companies in such sectors as waste, power, water, transport, telecommunications, and natural gas. In addition, at least 272 private greenfield projects are under way. These investments are substantial-US$200 billion for the privatizationsand more than US$100 billion for the new projects. Drawing on a new World Bank database,Jae So and Ben Shin sketch the recent growth of the industry and profile future projects. Company Strategies 9 In the past, infrastructure was generally managed by national, single-sector utilities. But technological develop- ment and regulatory change have allowed companies to cross traditionalboundaries, and the recent growth of the infrastructureindustry has attracted more than 700 companies.Jae So and Ben Shin look at the some of the major players, their growth strategies, and the risks they face-developmental, financing, and regulatory. Forecasting RealityChecks for Power Forecasts 15 In some of the poorer countries now starting to look at large power projects, the information on past power demand patterns is not good enough to make reliable demand forecasts. Forecasters often end up simply project- ing current growth rates. But this can produce forecasts that are inconsistent with macroeconomic develop- ments--such as the real price rises that occur when governments remove subsidies. Robert Bacon outlines two simple reality checks to help prevent forecast error. Law and Regulation The Real World of Power Sector Regulation 19 More than twenty countries are now reforming their power sectors. For many politicians,this reform means simply restructuring and privatizing state-owned enterprises. But, what they forget or may not know is that a government cannot regulate private power companies the way it once regulated state enterprises. Bernard Tenenbaum argues that if a government is serious about attracting private investors, it has no choice but to adopt a new regulatory system that keeps promises and exercises restraint--one that is independent and open to public scrutiny. Competitive Contracting for Privately Generated Power 23 Introducing independent power producers (IPPs) into a power system where existing generators are inefficient can deliver more efficient investment. But it is not sufficient to achieve the operating benefits of competition. Key to determining whether or not the IPPs and the system as a whole will operate efficiently are the power and energ) sales contracts with the IPPs.Robert Bacon surveys a range of power purchase agreements and highlights their risks and benefits for operational efficiency. Exploration for petroleun~occurs on the basis of government-granted concessions, leases, or contracts whose terms and conditions are established by law or negotiated case by case. An important part of these arrangements is the fiscal terms and conditionsbonuses, rentals, royalties, taxes. ChakibKhelil looks at fiscal systems around the world and draws some conclusions about how governments compete for exploration investment. Bankruptcy Reform-Breaking the Court Logjam in Colombia 31 Many developing countries suffer from logjam in the courts, a condition that tends to reduce the effectivenessof bankruptcy law in relieving financial distress.Colombia'sbankruptcy reform provides some useful lessons for these countries. In particular, it shows that when traditional court procedures are hard to change, an alternative is to legally empower another entity to handle the entire process. Izak Atiyas explains how it was done in Colombia. To Buy or Lease?Farm Revival in Eastern and Central Europe 35 Buying, selling, and mortgaging farmland are still rare in Eastern and Central Europe. Not surprisingly, given the economic risk in rnany of these countries, short-term leasing is much more common. These short-term transac- tions do almost as well as land sales in allocatingresources. OmarRazzaz argues that facilitating leasing arrange- ments by improving simple registration and enforcement systems and increasing access to information on what's for rent and at what price would do much to help revive the farm sector. Finance Money Laundering and International Efforts to Fight It 39 Accordingto one estimate, US$300 billion to US$500 billion in proceeds from serious crime is laundered each year. Left unchecked, money laundering could criminalize the financial system and undermine development efforts in emerging markets. David Scott reviews efforts by international bodies to fight it. Protecting Bank Depositors 43 Depositor protection is now part of most banking systems. In industrial countries a common approach is deposit insurance. Among developing countries, most still rely on implicit protection-in which the government rescues banks that would otherwise fail-but there has been a gradual shift to deposit insurance,and this trend is likely to continue. SamuelTalley looks at the pros and cons of the two approaches and suggests good design character- istics for insurance-based systems. In the September issue. .. Privatization by concession Regulating railways, electricity,gas and telecommunications Post- - . privatization performanceof BT in the United Kingdom .Enterprise reform Business advisory and . charge management services .Financing power projects Editor: Suzanne Smith Room G8105 The World Bank 1818 H Street, NW Washington, D.C. 20433 The entire contents of Private Sector 01995 World Bank. You are authorized to repro- duce, duplicate, and disseminate all or part of this publication so long as you include the name of the publication and the name of the respective author. You may not, however, modify, alter, or otherwise change any part of this publication or sell, transfer, or other- wise disseminate any part of the publication for profit. @ Printed on recycled paper. The Private Infrastructure Industw- A Global Market of US$30 illi ion a Year Jae So and Ben Shin Private infrastructure prc~jectshave boomed fifty-four countries have privatized 286 infra- around the world since the early 1980s, in such structure companies in these sectors, and at least sectors as waste, power, water, transport, tele- 272 private greenfield projects are under way communications. and natural gas. Much of this in some fifty-two countries (see figure 1 for activity has its origins in the deregulation poli- sectoral distribution). This Note sketches the cies in the United States during the 1970s and growth of the industry.' in the privatization experiences of Chile, New Zealand, and the United Kingdom during the A US30 billion annual market 1980s. These deregulation and privatization policies were driven by disenchantment with Over the past ten years, the value of privatiza- public sector performance, fiscal crises (often tions has totaled US$200 billion and that of new - related), and technology changes that have in- investment projects more than US$100 billion. creased the scope for competition. Since 1984, Thus, private investment activity in infrastructure = PRIVATE PARTICIPATION I N INFRASTRUCTURE Mew investmenlprojects (number of projects byregion, 1964-84) Privatiurtions The boundaries. colors. denominations. andanyother informationdown on this map do notimply, onthe palt of the World Bank Group, any judgment onthe legal status04 anyterriteryor my endorsementor acceptanceoieuch boundaries. h ~ r c e :World Bank, PrivateIflfmPhecturePmjeclDatabase. llecmkr I## 6 The Private Infrastructure Industry-A Global Market of US$30 Billion a Year -- 'The World Bank Group 7 amounted to some US$30 billion a year during the past decade. The average project was val- ued at about US$0.5billion, although about two- thirds of projects were valued at less. FIGURE 1 PRIVATE INFRASTRUCTUREPROJECTS, BY SECTOR, 1984-94 Privatizationrevenues generally have been domi- nated by sales of telecommunications companies. Also contributing a large share of revenues have been energy and water companies,often through service concessions. Greenfield investment was most prevalent in power and transport projects, mostly toll roads, tunnels, and bridges. (See tables 1and 2 for the ten largest projects in both catego- ries.) Of course, the line between privatization and greenfield investment is fluid. Many freshly private telecommunications companies invest heavily in new facilities.Telecommunications in- (h;arci W&w nt Was@ Transport Power vestments tend to be funded mostly with retained earnings,reflectingstrong market growth and con- Privatization/ ogsratiarandm i r d ~ k u o e sumers' willingness-to-pay.Many other infrastruc- hEtluwirlvaa&nsnt ture ventures face more uncertain financial prospects because of political difficulties in rais- ing and regulating utility tariffs. Investors often try to manage risks by seeking limited recourse or nonrecourse project finance. Some geographic patterns have emerged. Not FIGURE2 POTENTiALPRIYATE INFRASTRIUGTURE surprisingly,the fast-growing countriesof East Asia PROJECTS, BY SEGTaR, AS OF 1994 emphasize new investment, which accounts for more than 80 percent of the private infrastructure investment activity in these countries (see map on first page). Two countries in the region are the clearfrontrunnersthe Philippines,with thirty- three new private projects, mostly in power, and Malaysia,with twenty-four,mostly in transport and wastewater treatment. Privatizationactivityis con- centrated in LatinAmerica and Europe and in New Zealand. Argentina privatized almost all its infra- structure companies. a total of twenty-nine. The United Kingdomwas the most activecountry, with some forty-nine privatizations. Privatization is Gas Weter Tdaenm W m Tfa~spert Power spreading in Latin America: major programs are under way in Bolivia and Pem, as well as a host Privatizatirr~I' operationend msi ce of privatizations, mostly in telecommunications, Mew investment in countries ranging from Belize to Chile. And the future? The World Bank's new Private Infrastructure Project Database is tracking 788po- tential projects-168 privatizations worth some 8 The Private Infrastructure Industry-A Global Market of US$30 Billion a Year - --- TABLE 3 TEN LARGEST PO'TEN'TIAL PRIVATE INFRASTRUCTLIRE PRO.IECTS, AS OF 1994 Cost/price Country Project Contract (USSmillions) Hong Kong Chek Lap Kok Airport BLO 20,000 Taiwan (China) Taipei-Kaohsiung High-speed Rail BOT, 30 years 20,000 India Hopewell Power BOT 12,700 Germany DBP Telekom Privatization,25 percent 8.059 Pakistan Sindh Coast Coal-Fired Power Plant BOO 8.000 China Dapeng Power Complex BOT. 15-20 years, or BOO 6,000 Germany Berlin InternationalAirport BOT 6,000 United States Texas High-speed Rail BOT, 50 years 5.800 Germany Hamburg-Berlin Maglev Train BOO 5,600 France Maille Urbaine Souterraine Express BOT,25 years 5.400 BLO= build-lease-operate;BOO = build-operate-own;BOT= build-operate-transfer. Note: Excludesthe $52 billionThree GorgesDam in China, which is under consideration as an independent power projectbutfor which no detailed proposalhas appeared. Source:World Bank, PrivateInfrastructure ProjectDatabase. IJS$70 billion and 620 new investment ~roiects ~ n t ~ u / i z u t ~ ri-.]I. / ~n)~ l u d e ss~le:. 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