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Foreign Investment Advisory Service

Occasional Paper 9

Foreign Direct Investmentin Infrastructure

The Challenge of Southern and Eastern Africa

David J. DonaldsonFrank SaderDileep M. Wagle

Foreign Investment Advisory Servicea joint facility ofthe International Finance Corporationand the World Bank

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Foreign Investment Advisory ServiceOccasional Paper 9

Foreign Investment Advisory Servicea joint facility ofthe International Finance Corporationand the World Bank

Foreign Direct Investmentin Infrastructure

The Challenge of Southern and Eastern Africa

David J. DonaldsonFrank SaderDileep M. Wagle

The World BankWashington, D.C.

© 1997 The International Finance Corporation,and the World Bank,1818 H Street, N.W., Washington, D.C. 20433

All rights reservedManufactured in the United States of AmericaFirst printing February 1997

The International Finance Corporation (IFc), an affiliate of the World Bank, promotes the economicdevelopment of its member countries through investment in the private sector. It is the world'slargest multilateral organization providing financial assistance directly in the form of loans andequity to private enterprises in developing countries.

The World Bank is a multilateral development institution whose purpose is to assist its developingmember countries further their economic and social progress so that their people may live better andfuller lives.

The findings, interpretations, and conclusions expressed in this publication are those of the authorsand do not necessarily represent the views and policies of the International Finance Corporation orthe World Bank or their Boards of Executive Directors or the countries they represent. The IFc and theWorld Bank do not guarantee the accuracy of the data incduded in this publication and accept noresponsibility whatsoever for any consequences of their use. Some sources cited in this paper may beinformal documents that are not readily available.

The material in this publication is copyrighted. Request for permission to reproduce portions of itshould be sent to the General Manager, Foreign Investment Advisory Service (FIAS), at the addressshown in the copyright notice above. FIAS encourages dissemination of its work and will normallygive permission promptly and, when the reproduction is for noncommercial purposes, withoutasking a fee. Permission to copy portions for classroom use is granted through the CopyrightClearance Center, Inc., Suite 910,222 Rosewood Drive, Danvers, Massachusetts 01923, U.S.A.

Library of Congress Cataloging-in-Publication Data

Donaldson, David J., 1938-Foreign direct investment in infrastructu. re: the challenge of

southern and eastern Africa / David Donaldson, Frank Sader, DileepM. Wagle.

p. cm. - (Occasional paper ; 9)ISBN 0-8213-3885-41. Infrastructure (Economics)-Africa, Southern. 2. Economic

development projects-Africa, Southern-Finance. 3. Investments,Foreign-Africa, Southern. 4. Infrastructure (Economics)-Africa,Eastern. 5. Economic development projects-Africa, Eastern-Finance. 6. Investments, Foreign-Africa, Eastern. I. Sader,Frank. II. Wagle, Dileep M. III. Foreign Investment AdvisoryService. IV. Title. V. Series: Occasional paper (ForeignInvestmnent Advisory Service) ; 9.HC940.Z9C33 1997332.67'3'096-dc2l 97-2012

CIP

Contents

Abstract iv

Preface v

Executive Summary vi

1. Introduction 1

2. The State of Infrastructure in the Region 2Telecommunications 2Electricity 2Transportation 3Water 4

3. Improving Infrastructure through Foreign Direct Investment 7

4. Scope for Private Infrastructure Investment in Southern and Eastern Africa 9

5. Bringing in the Private Sector 12Goals and Expectations 12Constraints and Impediments 13

6. Conclusion 18

Notes 19

Annex I: Infrastructure Indicators for Southern and Eastern Africa 20

Annex II: Policy Obstacles to Foreign Direct Investment in Infrastructure in Developing Countries(by Gary Bond, Corporate Planning Dept., IFC) 23

iii

Abstract

The countries in Southern and Eastern Africa of the countries' governments to allow privatehave participated in the worldwide revolution of investment in these areas. There are often inade-private infrastructure investments only to a very quate legal frameworks, insufficient sectorallimited extent so far. While the needs are high to reforms (such as the removal of governmentupgrade and expand the service provision in monopolies or the raising of tariffs to marketareas such as electricity, telecommunications, price levels), and weak, or unclear implementingtransport, water supply, and sanitation, very few rules and regulations. If the countries in theprivate investments have actually been imple- region want to see a more active participation bymented. For one, foreign investors still consider the private sector in infrastructure, the govern-most countries in the region as a high-risk envi- ments will have to introduce crucial reform mea-ronment, making it difficult to attract commercial sures to bolster investor confidence and to buildfinancing. Equally important, investors fre- a policy environment designed to facilitate thequently question the overall political commitment implementation of such projects.

iv

Preface

On March 28 and 29, 1996, the Foreign Invest- impediments to private investment in Southernment Advisory Service (FIAS), in cooperation and Eastern African infrastructure services. Inwith the United Nations Development Pro- addition, the consulting firm BIPE Conseil, withgramme (UNDP), hosted a high-level roundtable financial support m the French goverrnment,on the business environment for foreign direct conducted a survey of current and potentialinvestment in infrastructure in Southern and investors, whose views on the investment cli-Eastern Africa. At this meeting a select number mate in the region are incorporated in this paperof high-level government officials from seven- as well.teen African countries met with senior execu- Numerous individuals in the World Banktives from large infrastructure companies and Group provided valuable comments during theinvestment banks, and representatives from mul- writing of this paper. Special thanks go to Joeltilateral agencies. The purpose of the roundtable Bergsman, Boris Velic, and Jenny Wishart. Thewas to discuss the potential for private foreign paper also benefited from excellent researchdirect investment in the region's infrastructure, assistance by Pernille Holtedahl. The Privateand to assess the policy, legal, and procedural Sector Development Department contributedmeasures that may be needed to facilitate private recent literature on the topic as well as a data-involvement. base on current and potential infrastructure

This paper synthesizes the thoughts and ideas projects in the region. The Corporate Planningexpressed during the discussions. It is also based Department of IFC provided support throughouton the background material prepared for the the entire research and writing process. Themeeting by FIAS in cooperation with the Corpo- French Ministry of Foreign Affairs and therate Planning Department of the International French Ministry of Public Works, Housing,Finance Corporation (IFC). These materials Transport and Tourism provided financial sup-describe the state of infrastructure in the region, port for the investor survey carried out by BIPEtake stock of actual and potential projects in Conseil. The UNDP provided generous financialthe various sectors, and analyze the main support to the roundtable meeting.

v

Executive Summary

In recent years, many developing countries have cost of business and deterring foreign investorsmade dramatic progress in promoting private from setting up operations.participation in their infrastructure sectors, and A key reason for this disappointing perfor-large volumes of funds have been mobilized on a mance has been the historical predominance ofnon-recourse basis for investment in power, state participation in the delivery of infrastruc-telecommunications, transportation, and water ture services in the region. The state has typicallyprojects. This progress has, however, been rela- imposed a multiplicity of "social goals", includ-tively uneven, and some regions have been ing the creation of employment and the subsidi-much more successful than others. Compared to zation of prices to consumers, at the expense ofEast Asia or Latin America, sub-Saharan Africa commercial objectives. Not surprisingly, publichas not been a major beneficiary of this revolu- utilities have tended to run into severe financialtion, and it is clear that investors tend to perceive difficulties, preventing them from undertakingthe region as a relatively unattractive investment the necessary maintenance or expansion of theirlocation. facilities. At the same time, these "social goals"

The current state of infrastructure provision in introduced distortions into the entire economy,Southern and Eastern Africa is demonstrably often resulting in even higher unemployment andpoor. Less than 2 percent of people in the region a disproportionate benefit to the wealthier mem-have a phone connection (compared to 50 per- bers of society from the subsidization policy.cent in North America or Western Europe); elec- Severe though as they may be, these problemstricity production per capita is less than a third are neither unique nor insurmountable. Manyof that in middle-income developing countries, other developing countries faced with similarand transmission and distribution systems in the problems of inadequate infrastructure haveregion tend to be old and inefficient, with result- seized the opportunity to make greater use of theing high losses of generated power. Road net- private sector in financing and operatingworks are in particularly bad shape, for the most projects, with very positive results. The failure ofpart unpaved and poorly maintained. Water sup- most countries in Southern and Eastern Africa toply and treatment facilities are unsatisfactory in do the same has been the consequence of somethe quantity as well as the quality of the service basic constraints. For instance, foreign investorprovided. Air and sea ports are managed perceptions of country risk remain high, with theinefficiently, as the congestion of freight and result that the region faces a severe disadvantagepassenger traffic and the significant delays in obtaining commercial financing. Governmentdemonstrate. All of these factors constitute commitment to private entry is still perceived asimportant impediments to the economic growth weak, and indeed very few privatization pro-potential of the region, raising the transaction grams in the region have effectively taken off.

vi

Project development costs are high, and spon- ratings in most of the region's countries havesors of potential projects encounter a difficult registered a small but clear improvement overand even hostile environment during project the past three or four years, in response to apreparation and implementation. In addition, gradual improvements in the policy environ-domestic financial institutions are weak, and ments. But even more far-reaching steps need touncertainties regarding the convertibility of be implemented in order to improve the region'sproject revenues into foreign exchange persist, as business environment and to reduce privatedo concerns regarding the enforceability of investor perceptions of risk. Although the chal-contracts and the transparency of regulatory lenge is great, there is also great opportunity inframeworks. the encouragement of private investment in

All of these constraints can be removed, but infrastructure; the economy as a whole stands tothey require a clear understanding by govern- benefit, and economic development can be in-ments of private investor needs in the infra- creased through an improved access to capitalstructure sector. Increasing investor confidence and expertise, the promotion of competition, therequires decisive policy reform. There is room reduction of operating costs, and the creation offor cautious optimism here, as country risk greater investor confidence.

vii

I

1Introduction

During the past five years or so, developing passed the African continent by, leaving behindcountries the world over have begun to liberalize the perception that it is a relatively unattractivemarkets for infrastructure services, with often investment location. Though this negative percep-dramatic results. In Chile, Argentina, Hungary; tion may not be justified in all cases, there is noand the Philippines, among others, private sector denying that progress in attracting private partici-participation in the power, telecommunications, pation in infrastructure has been very limited intransport, and water sectors has led to significant sub-Saharan Africa. This paper looks at some ofimprovements in the quality and quantity of the factors influencing these perceptions, some ofservices provided. Such improvements have the real impediments faced by private entrepre-encouraged further policy liberalization and the neurs seeking entry into these sectors, and thelikelihood of wider participation in many other steps that governments might take to establish adeveloping countries. Private financing of infra- more attractive environment for private capital.structure projects has in this way undergone a The first part of the paper looks at the currentvirtual revolution, as large volumes of funds are state of infrastructure in the region, as well as themobilized on a non-recourse basis for invest- extent of private involvement. The latter sectionsment in projects in developing countries, and as provide an overview of the principal impedi-the dominance of the state-owned sector is visi- ments to greater involvement of private capitalbly reduced in a number of cases. and expertise. An annex, drawing on the world-

At the same time, the progress has been relative- wide experience of IFC and FIAS with respect toly uneven. Although countries in Latin America private infrastructure investments, reveals thatand Asia have in many cases seen relatively rapid most of the difficulties encountered in Southernprogress, the impact of these developments has and Eastern Africa are not at all unique, but tendnot extended to all regions equally. In fact, this to be problems with which developing countriesinfrastructure revolution appears to have virtually all around the world are struggling.

I

2The State of Infrastructure in the Region

The level of infrastructure provision in Southern completion rate of only about 60 percent. Fur-and Eastern Africa is one of the lowest in the thermore, the existing telephone companies tendworld. Most of the countries in the region face to be highly inefficient, suffering from substan-difficulties in the provision of basic services at an tial excess manpower. An average employee inacceptable level of quantity and quality, whether the region's companies was responsible for onlyin telecommunications, roads and transporta- 24 mainlines, while a colleague in middle-tion, electricity, or water and sanitation. income countries handled about 88 mainlines.

Telecommunications Electricity

Telecommunications services in the region are The provision of electric power in Southern andgenerally poor, in terms of both availability and Eastern Africa is similarly unsatisfactory. In 1992,quality. Excluding Botswana, South Africa, electricity production was on average less thanNamibia, and Swaziland, the average penetra- 600 kW/h per person, with production intion rate is o'ily 0.5 percent, compared to an Mozambique a mere 24 kW/h (see Annex 1,average 11 percent in middle-income countries. Table B). In comparison, middle-income coun-Even in South Africa, just 9 percent of the popu- tries generated more than 2,000 kW/h per capita.lation has telephone connections. Overall, less In addition, the region's generation, transmis-than two people out of every one hundred in the sion, and distribution systems tend to be old andregion have a phone connection, compared to inefficient, resulting in often substantial losses ofabout fifty out of a hundred in Western Europe generated energy, as much as 40 percent in theor North America (see Figure 1 and Annex 1, case of Uganda. These system losses have furtherTable A). In addition, these small networks are limited the amount of energy available for pro-characterized by outdated technology, which is duction and consumption. Furthermore, in manyhighly unreliable. In 1993, mainline failure countries consumers have experienced frequentoccurred on average 1.4 times a year, reaching in power outages as well as voltage fluctuations,extreme cases a rate of 3.8 in Uganda and 2.5 in which damage electronic equipment and motors.Zimbabwe. In Swaziland, a country with a This unreliability has forced many enterprises inrespectable penetration rate, the failure rate the region to buy and install their own genera-reached 2.4. These technical difficulties are also tors, raising their overhead costs. Most of thereflected in low call completion rates. In Mada- electric power utilities in the region are state-gascar, for example, only 35 percent of all owned and typically too poor to upgrade theirattempted local calls went through in 1992. Even facilities since electricity tariffs tend to be set atSouth Africa's relatively large network had a call highly subsidized rates. With prices insufficient

2

Figure 1: Telephone Networks by Continent(Lines per 100 inhabitants:1994 data)

60

50.

30

20 . . _.

10 - ----. ...

0

Southem Asia- Latin Central and Western Nordhand Pacific America & Eastern Europe America

Eastern Caribbean EuropeAfrica

Sources: International Telecommunications Union and the World Bank.

to cover costs, electric utilities have been running during 1991. Similarly, in 1989 the World Bankcontinuous losses, which have had to be covered estimated that just 10 percent of Uganda's roadsfrom the general state budget. Realizing the des- were in good condition.perate condition of its power sector, the Ethio- Most freight transport in the region is under-pian government recently decided to increase taken by truck because rail typically is not a via-average tariffs by 60 percent over the next five ble alternative. Railroad companies tend to con-years. Even so, tariff rates will still be no more centrate on passenger traffic and are notthan 72 percent of long-run marginal costs. equipped to handle large volumes of freight. At

the same time, most state-owned railroads areTransportation required to subsidize passenger traffic through

relatively cheap fares, resulting in steady finan-The region's most severe infrastructural con- cial losses for the companies and limiting theirstraint is the road network, which carries the ability to maintain the existing network, let alonemajor share of passenger as well as freight traffic. upgrade or expand it. In Kenya and Tanzania, forThe problem is not quantity as much as quality. example, only about half of all diesel locomo-Relative to GNP, sub-Saharan Africa has ten tives were in use during 1993. Tracks, rollingtimes more roads than France, for example, but stock, and traffic control systems are usually inonly a small percentage of these are paved. Even unsatisfactory condition. At the same time, how-in countries with a relatively extensive network, ever, many governments find themselves forcedsuch as Botswana and Zimbabwe, only about 15 to keep these enterprises in operation. For exam-percent of all main roads have a paved surface. ple, the southern branch of Madagascar's railOn average, the density of paved roads in the network, practically bankrupt, remains the mainregion is slightly below 800 km per million per- link between the capital and the country's mainsons, compared to almost 2,900 km per million in port, because the parallel road was not designedmiddle-income countries (see Annex 1, Table C). to handle heavy freight traffic.Even where paved roads exist, they are often in All countries in the region have at least onepoor condition for lack of regular maintenance. international airport as well as several smallerIn Zambia, for example, only about 12 percent of regional airports. However, few of them arethe network received the required maintenance capable of handling large amounts of traffic.

3

Many runways urgently need rehabilitation and to implement. In some cases such as Angola, theexpansion, and air traffic control systems are water supply and sanitation system is so old thatoften outdated. Luggage and freight handling plans for the existing pipeline network are notfacilities, as well as the terminals themselves, available. This situation forces many companiestend to be too small. Businesses frequently com- and the more affluent members of society to pro-plain about delays and an unreliable air freight vide their own water and sanitation facilities.service, which poses a major impediment to the Infrastructure weaknesses pose fundamentaldelivery of intermediate and final goods. social problems and also constitute a major

Sea transport is the major transportation mode impediment to economic growth, since a greatfor exports and imports. However, port produc- deal of economic activity is highly dependent ontivity is, on average, only about a third of inter- the reliable provision of these services. If manu-national norms. Poor management, excessive facturing units do not have access to adequatebureaucracy, and inadequate availability and telecommunications services and modes ofreliability of equipment pose significant obsta- transportation, their ability to stay in touch withcles to international trade. Delays in clearing clients and suppliers will be severely limited. Ifgoods are frequently a problem; for example, they cannot rely on an adequate and reliabletraders expect a shipment from Europe to Kenya supply of power and water, their output will suf-to take about six to eight weeks until they have fer from frequent breakdowns of the productionthe goods in their possession, with three to four process and higher production costs. Thus, manyweeks for the sea transport itself and the same promising ventures will be uncompetitive oramount of time needed for goods clearance. even impossible.

Transportation difficulties are compounded Many foreign investors are hesitant to operatefor land-locked countries by problems in inter- in the countries of the region precisely because ofmodal transport. Countries like Malawi, these difficulties. A recent surveyl of foreign in-Uganda, Zimbabwe, and Zambia depend on vestors in five East African countries-Ethiopia,good connections with African ports in neigh- Eritrea, Kenya, Tanzania, and Uganda-showedboring countries to ensure reliable delivery. In that the current state of the infrastructure wasmany cases, railroad systems differ among coun- one of their main concerns. Of the almost onetries, schedules are not coordinated, and even in hundred companies interviewed, two-thirdstransport by road, goods tend to be delayed by ranked infrastructure as a serious constraint incustoms controls. A Ugandan businessman, for future operations in the region. Although uncer-example, has to wait about three and a half tainty regarding the political and policy environ-months from the time of shipment departure ment aroused the most concern, difficulties withfrom Europe until arrival in Kampala, three infrastructure services ranked a close second (seetimes what would be needed under comparable Figure 2). Unreliable power supply and tele-conditions elsewhere in the world. communications services, as well as the poor

quality of roads, were considered particularlyWater damaging.

What are the reasons for such a disappointingWater supply and treatment are also deficient in performance? As in most other developing coun-the region. In 1991, only about 44 percent of the tries, the governments in the region have tradi-region's population had access to safe water, tionally assumed responsibility for almost all ofwith this share being as low as 15 percent in these infrastructure services through state-Uganda and 17 percent in Ethiopia (see Annex 1, owned enterprises. These public entities wereTable D). Often, even urban households do not created precisely in order to make socially pro-have access to piped water. In Uganda, for exam- ductive investments so as to eliminate impedi-ple, only about 20 percent of urban households ments to the overall economic development.have in-house water connections. Water treat- However, as part of the public sector, these enter-nmtent is often worse: in 1990, just 13 percent of all prises tend to suffer from multiple, and oftenNamibians and 15 percent of all Malawians had conflicting, objectives. Besides trying to providesanitation services. Most of the water pipe net- a particular service at an acceptable quality, theyworks are old and urgently require repair and are also expected to pursue a variety of "social"replacement to avoid the often substantial water goals, including the creation of employmentlosses, but even rehabilitation plans are difficult and the subsidization of prices to consumers,

4

Figure 2: Infrastructure as an Impediment to Foreign Investment(Based on survey in Ethiopia, Eritrea, Kenya, Tanzania, Uganda)

Political and Policy lUncertaintyj...X

Power Breakdowns/Voltage Fluctuations

Average BasicInfrastructure

Quality of Roads

Telecom Problerms

Quality of PortHandling Facilities

Average TransportInfrastructure

Lack of RoadTransportation

Quality of RailTranspDort

Water Supply Problems

Waste TreatrnentProblems

0 0.5 1 1.5 2 2.5 3 3.5

Nvote: Scale ranges from 0 to 5, with 5 indicating a 'very senous obstacle' to future operationsSource: EconomistiAssociati, "Eastern Africa - Suvey of Foren Inestors', Vol3, Tables 82, & 7 and 9 1.

ostensibly with the view to providing broad and At the same time, these subsidization policiesaffordable access to the poorer parts of society. have invariably translated into smaller revenues.

These objectives have in reality imposed a Prices of electricity in Southern and Easternvariety of costs on the enterprises. In many of the Africa have typically been only around 3 to 4region's countries, the use of public enterprises cents per kW/h, compared to 8 or 9 cents, oras a major employment mechanism has resulted higher, in the industrialized countries. Prices asin significantly bloated workforces. Similarly, the low as this have been insufficient to generate rev-subsidization of services in reality often allows enues adequate to cover long-run marginal costs,the more affluent citizens to benefit dispropor- taking into account asset depreciation. Thesetionately from artificially low prices by provid- problems are often further exacerbated by diffi-ing them with better access to these services. In culties in bill collection. In Uganda, the govern-Lusaka, Zambia, for instance, only 28 percent of ment raised electricity prices closer to long-runthe households in the poorest fifth of the popula- marginal costs, but only 67 percent of the energytion have access to electricity, compared to 70 generated is billed, and barely more than half ofpercent in the richest segment. Similarly, it has all bills are usually collected each year.been estimated that the poorest fifth of the popu- Public utilities have thus often found them-lation in Tanzania receives only about 10 percent selves in the difficult financial position of notof the government subsidy for water, whereas being able to cover their operating expenses. Itthe richest fifth receives about 40 percent. has not been possible in many cases to maintain

5

existing facilities adequately, and new invest- countries have been left with inadequate infra-ments have consistently had to be postponed. At structural facilities, while the responsible enter-the same time, most governments have suffered prises, not motivated by commercial objectives,from chronic budget deficits, which have kept have had little incentive to improve their perfor-them from filling the financial gap. In the end, mance significantly.

6

Improving Infrastructure throughForeign Direct Investment

Although the infrastructure problems of South- debt reductions of $14 billion, while concessionern and Eastern Africa may be severe, they are agreements in the transport sector generatednot urique; most developing countlies are stLug- another $13 billion in foreign investment.gling with the consequences of inadequate infra- While the Philippines and Argentina arestructure services. In recent years, however, among the most aggressive countries in trying tomany have realized that competition and the attract foreign investment into their infrastruc-involvement of the private sector offers the ture sectors, their efforts reflect a global trend.advantages of much better service at lower The World Bank's Private Infrastructure Projectprices, and help to free up scarce governmental Database shows a total of 1,170 privatelybudgetary resources for other social investments. financed infrastructure projects worldwide dur-Several countries have in this way seized the ing the period from 1985 to 1995. Although dataopportunity to make greater use of the private on costs are patchy for many countries andsector to finance and operate projects that can be projects,2 it is clear that private sector involve-run on the basis of commercial principles and ment in infrastructure has been adopted mosthave been successful in improving their provi- extensively in the East Asia/Pacific region, West-sion of infrastructure services. ern Europe, Latin America, and the United States

Faced with a major power crisis in the early (see Table 1). These four regions account for 951990s, the Philippines for instance initiated a percent of the $450 billion of private infrastruc-massive program to attract private investment in ture financed over the past decade.new projects to increase capacity and in the reha- As Table 1 shows, however, private involve-bilitation of existing utilities. The country man- ment in Africa's infrastructure has been quiteaged to resolve the crisis by adding about 4,200 limited. Of the sixty-four projects recorded forMW of new capacity in 25 power projects. sub-Saharan Africa as a whole, only seventeenAnother 20 projects involving 5,800 MW of new are located in Southern and Eastern Africa, andcapacity are currently under preparation. Simi- these projects are concentrated in only six coun-larly, Argentina's government set into motion a tries. Moreover, most of them have been in themassive privatization program in 1990 in an form of management contracts and have notattempt to drastically improve the economy's resulted in large amounts of new investment.efficiency and generate urgently needed financ- The most extensive project is the operation ofing. Infrastructure enterprises played a key role ten toll roads in South Africa, only one of whichin the program, attracting substantial interest is actually privately owned. In Queenstown,from foreign investors. By end-1995, privatiza- South Africa, the French company Lyonnaise destion in Argentina's power and telecom sectors Eaux has an operation and management contractalone resulted in cash payments and external to operate that city's water system. Aeroports de

7

Box 1. Private Providers Solving Public Problems

Africa needs more infrastructure and better stan- local services, and by privatizing the main opera-dards of service at acceptable price levels. Many tor. The sale of the state-owned operation raisedcountries around the world have involved the pri- nearly $2 billion for state coffers and resulted invate sector in infrastructure provision and realized commitments to expand the number of lines by 15remarkable efficiency gains. percent a year. In 1995 the private operator actually

increased the number of lines by 24 percent.Water: In 1993, private firms competed for a thirty-year concession to run the Buenos Aires water and Power: By the end of the 1980s, the Philippines wassewerage network. The bidders competed against experiencing severe power shortages and invited aeach other to offer the lowest tariff, and the win- private firm to build a small power station andner's rate was 27 percent lower than pre-existing operate it for ten years before transferring it to statemunicipal rates. The winning firm also committed ownership (BOT). The success of the project con-to $4 billion of new investments and eliminated the trasted with steadily worsening power availabilityneed for government subsidy. In addition, they countrywide from state-owned electric utilities,achieved the first summer in years without water and spawned twenty-five other BOT arrangements toshortages and the elimination on raw sewage dis- provide around 4,200 MW of new electricity gener-posal in the bay. Furthermore, the workforce was ation. While the first few arrangements providedcut in half through voluntary retirements. power at around 8.5 US cents per kW/h, the bench-

mark price has since dropped to around 5 cents perTelecommunications: Hungary has reformed its kW/h. Power outages have virtually disappeared,entire telecommunications industry by permitting saving the country an estimated $1 billion a year inprivate cellular companies to enter the market, by economic losses.creating private regional concessions to provide

Paris has a lease agreement with the government Three countries in the region-Madagascar,of Madagascar for the operation of the country's South Africa, and Tanzania-have awardedtwelve major airports. Mozambique has priva- licenses for cellular telephone services to foreigntized several port terminals under concession operators. Several countries in the region are cur-agreements of ten to fifteen years. In many cases, rently preparing BOT agreements for privatehowever, operation of these terminals has been power generators. The most advanced of these iscontracted out to the previous main user of the Tanzania's Songo-Songo project, a 142.5 MWfacilities, resulting in vertical integration rather power plant near Dar-es-Salaam that will be sup-than the introduction of private competition. plied from a gas field off Songo-Songo Island.

Table 1. Private Infrastructure Projects Worldwide, 1985-95

Number of projects Cost

Region total with project costs US$ billion

East Asia/Pacific 223 165 185.6OECD Europe 252 145 156.6Latin America 233 168 58.5USA/Canada 290 219 31.1South Asia 27 13 6.3Middle East/N. Africa 13 7 4.7C&E Europe 38 18 3.5Former Soviet Union 30 14 2.5Other sub-Saharan Africa 47 6 1.1Southem and Eastem Africa 17 1 0.1

Total 1,170 756 450.0

Source: World Bank Infrastructure Project Database and FIAS, World Bank Group.

8

4Scope for Private Infrastructure Investmentin Southern and Eastern Africa

Why have private investors not yet seized the the evidence suggests that there may well beopportunity to develop Africa's infrastructure substantial excess demand in some sub-sectorsmarkets, as they have done in Latin America and and also some services that could be suppliedelsewhere? According to World Bank estimates, commercially.African economies are expected to grow at about Indications in the telecommunications sector,4 percent annually over the next two years, and for example, are fairly positive. Telephone usageSouthern and Eastern Africa are expected to per- in most countries tends to rise as per capitaform slightly better than that. The rates compare income increases. However, in Africa, differencesfavorably with a realized growth rate of only 1 among countries at the same income level arepercent in 1994 and an average of 2.2 percent per revealing. Malawi, with about the same per cap-year during the period from 1974 to 1990. While ita income as Uganda, boasts a penetration ratethe countries of Southern and Eastern Africa cer- almost triple that of Uganda. Kenya, onlytainly are at a lower stage of economic develop- slightly better off than Malawi, has a penetrationment compared to most other regions in the rate two and a half times higher. Botswana hasworld, their potential for future investments one of the highest line penetrations in the region,appears to be steadily improving. but, by contrast, Chileans have access to twice as

Despite this promising outlook, most private many lines, even though per capita incomes areinvestors do not consider Southern and Eastern the same. Following the privatization of Chile'sAfrica an attractive location for infrastructural telecommunications company in 1987, the num-investment at this time. One argument fre- ber of telephone lines doubled in four years.quently advanced is that the region's low aver- The existence of a robust potential market forage income means that effective demand for telephones is supported by the fact that Africaninfrastructure services from African consumers consumers are currently paying a substantialis lower than demand estimated on the basis of amount to use a telephone. Average rates arenotional consumer "needs". The fragmentation comparatively high, especially for internationaland small size of markets would almost certainly calls. There are nevertheless long waiting lists,impose economies-of-scale constraints sufficient reportedly up to five years in some countries.to affect the viability of some types of ventures. And cellular systems, which are much moreAnother argument is that the average level of expensive than line-borne calls, have witnessed ainfrastructure provision in the region is similar burgeoning demand in several African countries,to that of other countries at similar income lev- often far in excess of expectations. A privateels, and that infrastructure should only expand cellular operator in one East African countryas income expands. While this may be true in found that $900 handsets were in high demand,general, such arguments are not equally applica- with locals rather than expatriates composingble to all ventures in Africa. A casual analysis of the largest customer group. Similarly, cellular

9

operators have found Ghana a highly attractive including social expenditures and the mainte-market, and an increasing number of operators nance of the existing infrastructure, such anare competing for market share, resulting in expansion would clearly be beyond the capacitylower costs and higher penetration. At lower, of the public purse.more competitive prices, a rapid doubling of As a result, an increasing number of countriestelephone penetration in the region does not are now seriously considering the involvementseem to be outside the realm of possibility. of the private sector as a way to ameliorate the

Some anecdotal evidence suggests that there is pressures of an inadequate infrastructure. Pri-also a strong market potential in the water sector. vate involvement can come either through theEven the poorest consumers appear to be quite entry of new competitors into a market monopo-willing to pay comparatively high prices to have lized by state-owned enterprises or via the priva-access to clean water. In Angola, for example, tization of these enterprises. At the present time,inner-city residents of Luanda pay the ridicu- some 40 privately funded projects-involvinglously low price of $0.0015 per cubic meter, while both privatization and new entry-are underpeople on the outskirts of the city have to rely on discussion in different countries in the region.4

water supplied by private trucks at prices up to A key question for governments is how toalmost $17 per cubic meter. Similarly, in Maputo, maintain a socially acceptable provision of ser-Mozambique, poorer consumers, with no access vices while switching from public to privateto piped water connections, pay up to $10 per operators. It is now recognized that appropriatecubic meter for privately marketed water, a fig- regulation can generate and maintain competi-ure 600 times that charged for piped water. tion, given that continued competition among

Private customers also appear quite willing to suppliers is the surest way of guaranteeing thepay for a reliable supply of electric power. Pri- best deal for the customer. Cellular suppliersvate companies and individual households in compete against line-based carriers. Indepen-most countries in the region install individual dent power producers can compete to sell powerpower generation units simply to bridge periods to the national grid. Railroads compete againstof blackout or to avoid damage from power fluc- truckers. In the telecom sector, licenses for cellu-tuations. Compared to the power supplied by lar services are under preparation in a number oflarge state-owned utilities, independent power countries, including Kenya, Madagascar, Uganda,generation is far less efficient and substantially and Zimbabwe. Angola, Mozambique, Tanzania,more expensive in terms of capital as well oper- Zambia, and Zimbabwe are preparing BOTating costs; it is about 100 times more costly in agreements for power plants.the case of Kenya, for example. The average gen- Competition, however, may not always be aerator installed by small- and medium-sized viable option. In some cases, markets are simplyenterprises in Uganda costs about $25,000 new too small to allow for more than one operator,and needs another $10,000 annually for fuel and despite recent technological innovations thatmaintenance. limit the need for economies of scale. With the

There is no doubt that demand for expanded exception of South Africa, the economies of theand improved infrastructure projects does exist region are small by world standards, and Africanin the region. What would it cost to meet this governments will therefore have to depend ondemand? Assuming that the stock of infrastruc- good regulation to deal with monopoly suppliersture will have to double over the next decade in of infrastructural services. This also emphasizesorder to sustain economic growth of about 5 per- the need for privatization of existing assetscent while satisfying the needs of a population rather than the construction of new facilities.growing by about 3 percent annually, investment Privatization is, however, politically more diffi-expenditures for infrastructure in telecommuni- cult than competition because it carries with itcations, power, and water alone will be in the associations of "selling off the family silver". Inrange of $25 billion.3 If these investments were to addition, a number of interest groups exist, suchbe handled in the state-owned sector, the as the managers and employees of the state-region's governments would thus have to mobi- owned enterprises, who would not immediatelylize $2.5 billion annually, equivalent to about benefit from-and would hence oppose-a sale.5 percent of GDP or 40 percent of concessional A further constraint is that the purchase of exist-official development loans each year. Given that ing assets, involving the inheritance of existinggovernments have many other priorities, staff, technology, and management, is often

10

much less attractive to private sponsors than the transport is a possibility, despite protracted polit-complete flexibility allowed by a greenfield project. ical debates in the country, and Mozambique is

About a third of all the future infrastructure planning to give the private sector the responsi-projects currently under discussion in Southern bility for managing transport links betweenand Eastern Africa are potential privatizations. Maputo and South Africa.During the first half of 1996, Kenya successfully Many of these projects, whether privatizationscompleted the sale of Kenya Airways, and the or greenfield investments, have been in thecountry may also privatize its state-owned tele- "potential" category for quite some time, how-com operator. Madagascar, Swaziland, Uganda, ever. Why have they not yet become realities?Zambia, and Zimbabwe are also in the process of The following sections focus on this issue, argu-evaluating the possible privatization of their ing that the central problem lies in the diver-telecom monopolies and Zambia's major power gence of the goals and objectives among the par-utilities are potential privatization candidates as ties involved in such projects, as well as inwell. The sale of South Africa's large public misperceptions about the capacities and respon-monopolies in power, telecommunications, and sibilities of each.

11

5Bringing in the Private Sector

Goals and Expectations structure services or suffer from the low qualityof the services provided. However, not every-

Private participation in the ownership and oper- body benefits immediately from privatization.ation of infrastructure services is still relatively Connected consumers who have typicallynew in developing countries, and the last five enjoyed artificially low, subsidized tariffs areyears have seen a great deal of learning-by- often vocal in their resentment over pricedoing. For example, the first private concession increases. Managers and employees of state-to manage, operate, and expand an urban water owned enterprises who have typically enjoyedand sewerage system (as distinct from contracts job security, good remuneration, and a range oflimited purely to the management of such sys- social and economic benefits, would tend totems) was not structured until 1993, for the Bue- resist any change of the status quo, be it throughnos Aires water supply in Argentina. A body of privatization of the enterprise or throughknowledge on how to promote and manage pri- increased competition from new market entrants.vate investments in infrastructure has developed Governments are the brokers of these interests,only recently. and civil servants the implementors of govern-

At the same time, the circumstances of indi- ment policy. But even this group is not mono-vidual countries entering this arena are quite dif- lithic, and while some may seek to serve theferent. Strategies are not designed in a vacuum, national interest by resisting private-and espe-and the best practices for one country may not be cially foreign-operators, others are simply try-appropriate, or even feasible, in another. In ing to protect their own institutional turf or evenAfrica, as anywhere else, strategies designed to to extract profits from the control they enjoy.introduce private involvement into the infra- On the other side are the private investors;structure have to be tailored to specific circum- they are united by their commercial principlesstances. At the same time, however, all these and by a desire to balance risks and returns.projects are characterized by certain commonali- Beyond this, they are fairly diverse players. Theties, built around the two primary groups of two main groups involved are sponsors andplayers involved. lenders, with their individual interests defined

On one side is the government, representing by their risk-reward perceptions. Because theythe consumers of existing infrastructure services, have different roles in such projects, their objec-the managers and employees of the state-owned tives and concerns are not always identical, andenterprises that provide the services and the call for differentiated policy responses from thegovernment agencies that own these enterprises governments concerned.and that set the rules for service provision. Large Sponsors, who provide the major share of theparts of the population have no access to infra- equity financing, are typically large international

12

project development companies. They are usu- supported by sponsor equity, supplemented byally willing to take some amount of risk as long loans from bilateral and multilateral agencies.as it is compensated by higher returns on invest- However, for any larger project, debt financingment. The structuring of the project and its man- will be essential. At present, it appears that mostagement is therefore critical to them in order to investment bankers simply consider Africa as aassure profitable long-term operations. Because whole to be too risky to support any medium-of the relatively long time span of such invest- term project financing. If private participation inments, sponsors are especially concerned with infrastructure is to succeed to any real degree inestablishing a viable framework over the lifetime the region, this perception will need to beof the project. This involves the creation of reli- addressed and changed.able partnerships with other companies respon-sible for the financing and the construction and Constraints and Impedimentsmaintenance of the assets. Sponsors also look fora reasonably predictable business environment. Most investors would probably consider sub-Doubts about market rights, pricing, and the Saharan Africa as the riskiest region in the world.future adjustment of tariffs, as well as the ade- In September 1995 the Institutional Investorquacy of the legal arrangements, including the Index gave the nations of Southern and Easternneutrality of a country's judicial system, can all Africa an average score of 23.6, significantlyaffect perceptions of risk and expected profitability. below the global average of 38.5 for 135 countries

Commercial lenders, on the other hand, are (with the score of 100 representing a perfectlyrelatively risk-averse, particularly for longer- risk-free environmerit). There was, however, aterm loans. Their caution is natural, since, unlike wide divergence among the African countries,sponsors, they do not exercise direct control over and four countries in the region received no rat-operations nor share in the profits. They do ing at all. Angola was given 11.3, making itshare, though, in all of the downside risks, given 122nd in the world, while Botswana on the otherthat their financial return is entirely dependent hand had a score of 49.0, placing it 43rd (seeon loan repayments, which have to be generated Figure 3).through the project's cash flow. Lenders have typ- At the same time, country risk in almost all ofically provided between half and three-quarters the region's countries has fallen more quicklyof the financing of most infrastructure projects, recently than in the rest of the world. While theespecially since domestic capital markets in index has improved globally by 2.6 percentagedeveloping countries have tended to be small. points over the last three years, the area of South-

While the cautious and selective approach of ern and Eastern Africa has improved by 5.6 per-commercial lenders often makes it more difficult centage points. Only for Angola has the scoreto develop a project, they have a valuable role to dropped, thanks to the protracted civil war.play. A key priority for them is to ensure that the Botswana's rating improved by an impressiveproject, as set out at its inception, will generate 13.7 points, and perceived risk also has fallen sub-an adequate and reliable cash flow. This means stantially in Swaziland, Uganda, and Ethiopia.not only that the project must be technically via- The decline in the area's country risk indexble, but also that the environment in which it will indicates that in the eyes of private investors, theoperate is sufficiently stable. In particular, lend- region has more than recaptured the grounders will want to make sure that the project is per- yielded during the "lost decade" of the 1980s. Inceived as fair by the government and consumers. fact, some countries in the region are slowlyPopular resentment against such foreign-owned gaining consideration as an attractive investmentand financed infrastructure projects can easily location. If governments can take the actions nec-lead to regulatory changes that could adversely essary to address the key factors influencingaffect future cash flows and the company's abil- investor perceptions of risk, particularly of polit-ity to service the loans. ical and non-conmmercial risk, there is no reason

From the perspective of Southern and Eastern why private capital cannot be attracted to theseAfrica it is important to note that, with the countries on a more sustained basis.exception of certain projects in South Africa, no Of course, government actions are themselvesproject in the region has yet managed to include determined by an assessment of risks, primarilycommercial lenders. Most projects have tended political and social. The withdrawal of politicalto be small by world standards and fully support by disaffected groups, pressures from

13

Figure 3: Institutional Investor Index for Southem and Eastern Africa

Institutional Investor Rating, September 1995

Angola 122Mozambique 120

Uganda 119

Ethiopia 118

Zambia 115

Tanzania _ _ E_ 108

Malawi 100

Kenya ~~l 77

Regional avenage

Swaziland 73

Zimbabwe _ 66

Global avenage:

South Africa 47

Botswana 43

0.0 10.0 20.0 30.0 40.0 50.0 60.0

Three-Year Change in the Institutional Investor Rating

Angola Global avenge

Ke'nya.

Malad v

Tanzania

Zimbabwe i

Mozambique_

South fic

countries rated~ ~ ric

Zarnia.Regional aves er

Ethiopia

Uganda

Swaziland

Botswana_ _ ___ _

-4.0 -2.0 0.0 2.0 4.0 6.o 8.0 10.0 12.0 14.0

Change in Percentage Points

NVote: A score of '100' mclicates a perfectly nsk-free envirorlnent Num'oers tO the right of the bars indicate the country's ranking among all 135countries ratedSource Institutional InvJestor

protectionist business concerns, and dernonstra- However, the ability to attract private risk cap-tions against price increases are a few examples ital from international sources does not onlyof the kinds of risks governments run when they depend upon factors contributing to generalizedcontemplate making an investment of political country risk, but also on project specifics. Infra-capital in policy reform. If there has been an structure projects in particular, involving rela-improvement in investor perceptions of Africa, it tively large capital outlays and longer-termhas been because an increasing number of Afri- finance, are very sensitive to non-commercialcan governments have in fact shown themselves risks of all kinds, and pose a number of addi-ready to take on the political risk of economic tional obstacles to investors. The manner inreform measures. which a government helps manage and mitigate

14

these risks has an important bearing on whether trating changes in key personnel and policies.or not investors will find non-commercial risks Cellular operators who try to develop projects infor a given country acceptable. several countries in the region are often daunted

In practice, there are numerous stumbling by the lengthy licensing and approval process.blocks on the road to the private provision of Similarly, power developers frequently complaininfrastructure that go beyond general macroeco- about the lack of technical and financial expertisenomic policies and political stability. Investor of their counterparts, resulting in protractedinterest in a country is a function of various fac- delays in the project development phase. Gov-tors including perceptions regarding the nature ernments often overlook the fact that higherand the transparency of the business environ- development costs eventually translate intoment. The experiences of even the relatively few higher project costs and tariffs, that is, if theprojects that are under negotiation, and the diffi- efforts of the private developers result in con-culties encountered-which may have resulted crete projects at all.in costly delays-can play a major role in influ-encing these perceptions. The most commonly A Reliable Privatization Program: When decidingencountered difficulties in Southern and Eastern to invest in the privatization of existing publicAfrica include the following: enterprises, investors are particularly concerned

about the reliability and effectiveness of the salesLack of Government Commitment: Foreign inves- process. In practice this means the clear defini-tors often encounter a difficult, and occasionally tion of key issues, namely (i) the degree of accesshostile, environment during project preparation to certain sectors through the elimination ofand operation. Even when the government pub- monopoly arrangements, (ii) the decision-mak-licly expresses its commitment to such projects, ing authority on privatizations or project financedifficulties can arise within sectoral line minis- transactions, and (iii) the precise procedures bytries or at the regional or municipal level. Many which individual projects are awarded. Espe-investors are thus left with doubts about the gov- cially in African privatizations, the process tendserinent's willingness to introduce private infra- to suffer from political indecisiveness, interfer-structure operations, and even about the govern- ence, and apparently arbitrary decision-makingment's true commitment to its obligations in a by government authorities; investors are there-project. In Uganda and Kenya, for example, fore reluctant to participate. The lengthy politicalproject developers experienced substantial resis- debate on whether or not to privatize the infra-tance from line ministries or state-owned enter- structure enterprises in South Africa has notprises despite expressions of full support for improved investor perceptions of governmenttheir projects by the president himself. True com- commitment. Similarly, complaints about irregu-mitment requires more than rhetoric: it is larities in the sale of commercial enterprises inreflected in matters of detail, and calls for consis- countries such as Kenya, and the lack of a full-tent policies over time, as well as at all levels of fledged privatization program in Angola, havegovernment. intensified investor concerns regarding the fair-

ness and reliability of future infrastructure priva-High transaction costs and uncertainty in dealing tizations.with governments: Sponsors of projects in Africaoften find themselves confronted with a bewil- Non-Transparent Negotiations: In the face of a pol-dering array of red tape. Few governments in the icy and procedural vacuum from the govern-region have developed clear guidelines for ment side, individual sponsors and projectattracting infrastructure investors or have estab- developers frequently contact government agen-lished a coordination office. In some sectors it cies directly, proposing and negotiating individ-may not even be clear whether private entry is ual projects. Sometimes this has proved to be anpermitted. Sponsors therefore often face the effective way to focus attention on the issues toprospect of spending large amounts of time and be resolved, and to make progress towardsmoney in negotiating permission to proceed achieving financial closure. In other cases, thisfrom government ministries, local government process has aroused opposition from critics com-offices, and state-owned enterprises. As most of plaining that deals have been negotiated inthese entities are themselves undergoing major secret and may have been based on illegitimatetransformation, sponsors often encounter frus- procedures. For example, the sudden appearance

15

of a private power project in Uganda, outside of sort of long-term finance they require is typicallythe standard procedures applied to other difficult to arrange domestically, however. Inprojects, raised suspicions of irregularities. For- many countries the banking system is facingeign investors in Zimbabwe are complaining fre- grave difficulties because government borrow-quently that the tendering system is not open ing has pushed up interest rates and banks withand fair. In October 1996, for example, President cash to spare have a limited appetite for long-Mugabe decided to sell 51 percent of the term project finance. The domestic interest inHwange power station to a Malaysian company bond issues is also limited, although there areoutside of the established tendering procedure, indications that it is growing. Pension funds andresulting in vigorous protests from the investor insurance companies, which would seem to becommunity. Automaticity, transparency, and pre- logical sources for term finance, are often eitherdictability are keys to the development of an under-funded or prohibited by government reg-attractive framework. Investors have tended to ulation from project lending.stay away from countries where selection is per-ceived to be based more on the strength of politi- Ensuring Convertibility and Transferability: Foreigncal ties and other non-transparent criteria rather investors need assurance that they will be able tothan on technical and financial merits. convert project revenues into foreign exchange

that they can repatriate. Mainly due to balance-Limited Domestic Entrepreneurship: Although the of-payments concerns, several countries in thenumber of domestic entrepreneurs in many Afri- region still impose limitations on profit repatria-can countries has begun to take off, nurturing a tion, and even in countries where legal restric-home-grown business community takes time. To tions do not exist, actual conversion of funds isvarying degrees in different countries, there are often difficult. Investors also face the danger offew entrepreneurs with the financial strength large exchange rate fluctuations, jeopardizingand technical expertise to be able to operate the adequacy of the project's cash flow in hardinfrastructure facilities. Under such conditions, currency. Thus, many investors are hesitant toinvestors tend to hesitate when confronted with engage in projects where transferability and con-regulations forcing them to join forces with a vertibility remain uncertain. The government ofspecific domestic partner. Tanzania, for example, has wanted to involve the

Potential investors in Zimbabwe, for example, private sector in the Songo-Songo project sinceare concerned about the effects of the govern- the discovery of the natural gas field in 1974.ment's "indigenization policy", and the lack of a However, major difficulties arose in trying to cre-concise description and definition of this policy ate an acceptable framework for currency trans-does not help to improve investor confidence. ferability and convertibility. At present, the

project is being developed with the help of thePopular Resistance to High Returns and Market World Bank and may be concluded soon throughPricing: Many governments in the region are con- the innovative use of World Bank guaranteescerned about the tariffs for services that would and the creation of an escrow account abroad.be provided by private entities. Pricing at com- However, not many investors would be asmercial rates often conflicts with existing policies patient as in this particular case if a reasonableof subsidized tariffs, and governments tend to solution cannot be found promptly.suspect that these prices are the result of exces-sively high rates of return demanded by private Unclear Regulatory Frameworks for Service Provi-operators. Investors, on the other hand, believe sion: A primary concern for any investor in infra-that this perception results from an insufficient structure projects is the extent to which theunderstanding by government officials of under- future business environment will be reasonablylying market forces, which require these profit predictable. Investors want a well-developedmargins as well as take pricing market in order and reliable framework of regulations. However,to attract partners and lenders to these projects. countries in Southern and Eastern Africa do not

have a strong history of regulation and enforce-Weakness of Domestic Financial Institutions: Most ment. Regulatory agencies often do not exist,infrastructure investors send their bills in and when they do exist they tend to suffer from adomestic currency, and such projects are hence severe lack of qualified manpower and expertise.most sensibly financed in domestic currency. The The future environment for projects is thus

16

uncertain, especially with respect to tariff adjust- description of the circumstances under whichments over time. While some of these problems concessions can be modified or canceled, oftencan be solved by incorporating solutions in do not exist. In Uganda, for example, potentialproject-specific contracts and concession agree- investors in the power sector are concerned thatments, the lack of an overall framework is dis- it is unclear whether private operations are actu-concerting to many potential investors. ally possible under the existing legal regime. The

definition of rights and guarantees, including theConcerns over the Adequacy of the Legal Framework: ownership of land and assets, is also of keyMany investors have doubts about the efficacy of importance. Disputes can arise even under thethe current legal framework in most of the coun- best contractual and regulatory setup, and legaltries in the region. Concession laws that spell out recourse is therefore important to all partiesthe rules for private participation, including the involved. Investors often doubt the neutralitydefinition of the responsible government agency, and independence of the local judicial systemrules for project bidding and tendering, and a and press for international rules of arbitration.

17

Conclusion

While private investment in infrastructure the country: governments can use private infra-projects is booming across the globe, it is lagging structure projects as an integral, highly visiblein Southern and Eastern Africa. The riskiness of element of their overall development process.the business environment, combined with legal, The demonstration effect of a successful projectregulatory, and procedural impediments, have can improve not only infrastructure but alsofrequently made it difficult for investors to investor perceptions of the country as a whole.develop specific infrastructure projects. Condi- Those countries that manage to jump on the "vir-tions are improving, however, and an increasing tuous circle" offered by a commitment to infra-number of countries are looking for private sec- structure privatization (see Figure 4) maytor solutions. achieve rapid improvements in other areas

To facilitate private investments in infrastruc- important to the development of the private sec-ture, the countries in the region clearly need to tor, including a strengthening of capital markets,improve their policy environment. The challenge improved access to international finance andof the imperative also presents opportunities for expertise, and the strengthening of the legal and

institutional framework for their businesses.

Figure 4: The Virtuous Circle

* InfrastructurePrivatization

* DeeperDomesitic _ * _ *Access toCapital ForeignMarkets Capital &

i ^ ~~~~Expertise

* StrongerConsumer *Report Investor

*Improved Quality, PerceptionsEfficiency &Competitiveness

18

Notes

1. Economisti Associati, "Eastern Africa-Survey 4. Based on the "World Bank Infrastructureof Foreign Investors", The World Bank, Washing- Project Database".ton, D.C., September 1994.

5. Every six montns, institutionai investor asks 1002. For some projects, cost information is simply international banks to score almost every coun-not available. In other cases, project costs might try in the world from 1 to 100, according to theactually be negligibly small or even zero because perceived likelihood of the country's default onthe arrangement does not involve initial invest- its debts. While this index only reflects one par-ments from the private investor or operator. ticular angle on the business environment in a

country, it is a useful index of country risk.3. These estimates exclude South Africa.

19

Annex I

Infrastructure Indicators for Southernand Eastern Africa

Table A. Telecommunications

Telephone mainlines Call completion Faults per 100 Mainlinesper 100 persons rate (% of local calls) mainlines per year per employee

Country (1994 data) (1992 data) (1993/4 data) (1993 data)

Angola 0.53 52.0 150.0 25.0Botswana 3.1 n/a 55.0 27.0Eritrea 0.59 n/a n/a n/aEthiopia 0.26 50.0 74.0 25.0Kenya 0.85 57.0 n/a 16.0Lesotho 0.64 89.0 n/a 13.0Madagascar 0.27 35.0 78.0 14.0Malawi 0.35 62.0 n/a 8.0Mozambique 0.37 n/a 90.0 25.0Namibia 4.5 n/a 78.0 36.0South Africa 9.0 61.0 n/a 61.0Swaziland 2.0 63.0 238.0 31.0Tanzania 0.31 82.0 n/a 18.0Uganda 0.12 45.0 380.0 17.0Zambia 0.91 n/a 33.0 25.0Zimbabwe 1.2 n/a 254.0 25.0

SEA Average 0 .5 3a 59.6 143.0 24.4

Middle Income Country Average 11.0 9 8.0b 55.4 88.3

Notes: a: excludes Botswana, South Africa, Namibia and Swaziland; b: high income country average; n/a-data not available.Sources: World Development Report 1995, International Telecommunications Union, and World Bank staff members.

20

Table B. Electricty

Electricity System losses % of Electricityproduction kWh/cap total output consumption

Country (1992 data) (1992 data) kWh/cap (1991 data)

Angola 194 18C 98Botswana 390c 6 955Ethiopia 2 5a 3a 18Kenya 130 16 148Lesotho n/a 1 2d 168Madagascar 47c 17 47Malawi 8 5c 19 54Mozambique 24 24 60Namibia n/a n/a 1,256South Africa 4,329 7 3,901Swaziland n/a 10b 842Tanzania 66 12 66Uganda 46c 40 n/aZambia 900 11 937Zimbabwe 790 7 863

SEA Average 585 14.4 672

Middle-Income Country Average 2,144 11.8 n/a

Notes: a: includes Eritrea; b: 1991; c: 1990; d: 1988

Table C. Transportation

Road density Roads in good %of road Maintenance % of roads % of main Railways:km paved roads condition budget Shortfall % that are roads that diesels in use -

per million % of going to actual paved are paved % of dieselpersons paved roads maintenance Irequired (1992-93 (1992-93 inventory

Country (1993 data) (1989 data) (1991-92 data) (1991-92 data) data) data) (1993 data)

Angola 816 n/a n/a n/a n/a 50.2 n/aBotswana 2,022 94 n/a n/a 13 .3c 15.8 n/aEthiopiaa 75 47 n/a n/a 15 29.3 60Kenya 334 32 25 22 13.3a 13.6 52Lesotho 315 53 n/a n/a 15 25.6 n/aMadagascar 366 56 15 29 15.4 31.0 n/aMalawi 277 56 n/a n/a 18.6c 25.3 70Mozambique 277 19 n/a n/a n/a 34.6 n/aNamibia 2,722 n/a n/a n/a 10.7b n/a 88South Africa 1,433 n/ae n/a n/a 3 0 .4a 91.9 83Swaziland 765 35 n/a n/a 58.6 25.0 n/aTanzania 129 39 42.5 41 4.2 12.0 52Uganda 120 10 13.4 33 8.5 26.0 64Zambia 744 40 32.6 12 17.6 30.8 71Zimbabwe 1,360 70 36.3 73 16 44.8 80

SEA Average 784 46 27.5 35 18.1 32.5 60

Middle IncomeCountry Average 2,881 45.7 n/a n/a 9 1 .7d 9 8d 69

Notes: a: 1991; b:1990; c: 1988; d: Western European Average; e: 5% are considered "poor"; n/a -data not available.Sources: World Development Report 1995, World Road Statistics 1989-93, and World Bank staff members.

21

Table D. Water

% of population % of households % water losswith access with house connection of total % of populationto safe water to water supply provision with sanitation

Country (1991 data) (urban 1992 data) (1986 data) (1990 data)

Angola 40 30 n/a 22Botswana 89 90 25 87Ethiopia 17 n/a 46 n/aKenya 49 18 n/a n/aLesotho 46 n/a n/a n/aMadagascar 21 n/a 33 n/aMalawi 53 n/a n/a 15Mozambique 22 n/a n/a n/aNamibia 37 n/a 25 13South Africa 50-74 n/a n/a n/aSwaziland n/a n/a n/a n/aTanzania 52 n/a n/a n/aUganda 15 20 n/a 57Zambia 59 n/a n/a 40Zimbabwe 36 n/a 16 n/a

SEA Average 44.9 n/a n/a 43.8

SSAAverage 56 50 n/a 42

Middle-Income Country Average 79.3 n/a 18-20a n/a

Notes: a: estimate of average for high-income countries; n/a-data not available; SSA-Sub-Saharan Africa.

22

Annex II

Policy Obstacles to ForeignDirect Investment in Infrastructurein Developing Countries(by Gary Bond, Corporate Planning Department, IFC)

Introduction Most difficulties in implementing privateinfrastructure investments arise out of policy

The purpose of this annex is to review the experi- and regulatory weaknesses in the host country,ence of the International Finance Corporation and experiences show that the potential sources(IFC) and the Foreign Investment Advisory Ser- of trouble can be many. Foreign investment invice (FIAS) with respect to the main policy issues infrastructure usually involves more complexwhich have affected the pace of foreign direct undertakings than in traditional activities suchinvestment in infrastructure in developing coun- as manufacturing. The policy and regulatorytries. The focus is on those issues that have barriers faced by infrastructure investors areemerged as barriers to foreign investment, par- therefore typically over and above those of moreticularly during the early phases when a country traditional investors. This is one reason why someis opening up to private infrastructure for the countries have been able to achieve success infirst time. The annex draws in part upon the attracting foreign investment into their industrialoperational experience of the IFC in financing or commercial sectors, but not into infrastructure.private infrastructure projects, a summary of The complexity of private infrastructure invest-which is presented in the IFC publication Financ- ment is reflected in the large number of contrac-ing Private Infrastructure (1996). This annex also tual undertakings that are required, involvingdraws upon the advisory experience of FIAS in government agencies as well as other privatepromoting policy and regulatory reform for for- businesses. Policy weaknesses that affect imple-eign direct investment in infrastructure in Africa, mentation or enforcement of just one of these con-Asia, and Central Europe. Part of the discussion tracts may impede the progress of a whole project.is based upon contributions made by partici- While no two countries are approaching pri-pants at previous FIAS Infrastructure Roundta- vate infrastructure provision in exactly the samebles in Bangkok (1993), Beijing (1994), Hanoi way, there are common elements in the overall(1995), Vienna (1996), and Entebbe (1996). These policy and regulatory requirements for enablingparticipants included representatives of project FDI in infrastructure to work. The following sec-development companies, commercial lenders, tions provide an overview of the main issueslegal advisors, and government officials. which have been encountered to date.

23

Meeting the Requirements of Project Financing Some other countries have encountered diffi-culties in achieving foreign participation in infra-

FDI is often thought of as consisting purely of structure without first having a clear concessionequity financing, and for many smaller projects framework. In China, for instance, a large num-this is correct. For private infrastructure projects, ber of agreements were signed in the early 1990showever, investor equity is usually either insuffi- between various government agencies and for-cient or too expensive to meet total project costs, eign investors to undertake infrastructureand typically a mixture of debt and equity fund- projects (notably power generation) on a jointing is required. In power projects, for example, venture basis. Very few projects have been abledebt might contribute as much as 75 percent of to proceed, however, mainly because of uncer-project costs. Where equity and debt are being tainties over which agencies have responsibilitysupplied on an "at risk" basis, project implemen- for certain key approvals, and which approvaltation depends on adequate arrangements in criteria should be applied. China is now in theplace to satisfy the risk-return requirements of process of developing a concession frameworkboth investors and lenders. In most situations, it aimed at overcoming these difficulties.is a country's policy framework, at both macro- Detailed implementing rules and regulationseconomic and sector levels, that determines are an essential companion to the laws that gov-whether the risk-return levels are acceptable. ern private participation in infrastructure. Inves-

Under limited recourse project financing, there tors need to know which government agenciesare several ways in which policies and regula- are authorized to negotiate and award conces-tions can affect the bankability of a project. As sions, and they need to know the procedures fordiscussed below, policy considerations operate obtaining approvals and clearances, as well asat both the country level (the issues include the criteria for approval. The absence of pub-country risk, the ability to take security over lished implementing rules and regulations canassets, and the enforceability of contracts) as well create confusion among both investors and gov-as at the project-specific level (here the issues ermnent officials, and may result in arrange-concern concession arrangements, government ments that are not necessarily within the provi-agency obligations, and approval and clearance sions of the law. Vietnam, for instance, hasprocedures). Policy weaknesses at any stage in experienced a number of implementation diffi-the implementation process can delay a project, culties since publishing a BOT Law in 1993,particularly where the security requirements of partly due to the inadequate specification oflenders are in doubt. The inability of policy and implementing rules and regulations. These diffi-regulatory frameworks to meet lenders' require- culties have contributed to the very slow pace ofments is the most frequent cause of project delay private infrastructure investment in Vietnam.and, in some cases, abandonment.

Foreign Exchange ConvertibilityConcession Arrangements

Most infrastructure projects generate earningsMost countries that have been successful with denominated in local currency, which must thenprivate infrastructure programs have intro- be converted into hard currency to meet theduced specific legal frameworks that provide for obligations of foreign investors and lenders.private (and foreign) participation either in the Although there are exceptions, such as ports thatform of ownership (such as BOO or privatization charge for services to foreign vessels, power thatarrangements) or fixed-term contracting arrange- is exported to a neighboring country, or tollments (such as BOT). Pakistan (with BOO or roads which rely on foreign traffic, most cashprivatization) and the Philippines (with BOT) are flows from infrastructure projects are not in hardexamples of countries that have prepared compre- currency, and the ability of project investors tohensive legal frameworks for private infrastruc- make the necessary conversion on a timely basisture as a first step in the development program. can be a major concern.While the approaches taken by these countries are Few developing countries have currencies thatdifferent, they have in common a clear legal basis are freely convertible on both current and capitalfor approval and award of concessions, plus account transactions. Most have administrativedetailed implementing rules and regulations arrangements that operate through the cen-which specify the procedures to be followed. tral bank for allocating hard currency among

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comDeting demands, both public and private. under each of these arrangements, ownershipThe main concern of foreign companies is restrictions typically add to implementationwhether the country's foreign reserves will be difficulties.sufficient to meet their conversion requirements Laws or rules requiring minority foreign own-in the years to come and whether the arrange- ership in a joint venture are usually aimed atments for foreign exchange allocation will work promoting local capabilities and ownership, butin their favor or against them. such an arrangement is not always the most effi-

Some countries have been able to make special cient from the viewpoint of project managementarrangements through offshore escrow accounts and financing. The local partner's capabilitiesfor payment of infrastructure fees in foreign cur- and record of business management may influ-rency; this arrangement has been used by the ence the desirability of the venture. The foreignPhilippines to implement private power projects. partner may be reluctant to cede managementOther countries have provided guarantees of for- control to the local partner, and may not be will-eign exchange convertibility, issued through the ing to transfer technologically advanced equip-central bank or ministry of finance. However, in ment. Financiers, who look to the project's effi-some emerging markets, investors are uncertain cient management and operation as the basis forof the meaning of such guarantees and doubt loan repayment, may also have reservationswhether they will ensure that conversion takes regarding the managerial capabilities of the localplace in a timely manner. The latter issue is par- partner.ticularly important to foreign lenders, who Restrictions on foreign ownership can give riserequire strict adherence to loan repayment to other types of financing problems. In jointschedules (in hard currency). ventures where equity is contributed in propor-

Countries can do much to improve investors' tion to ownership, the local partner may notforeign exchange perceptions by putting in place alw^ays have access to sufficient investmenta credible strategy for balance-of-payments man- funds for the project's equity requirements. Theagement. The most credible strategies involve local partner may then seek to borrow to makecontrols over excessive public sector borrowing up the equity contribution, or advocate an(mainly through fiscal reform measures) and the increase in the debt portion of project funding, orpromotion of external competitiveness (particu- scale down the project size to a level that suitslarly through removal of anti-export biases in the the limited equity availability. In many casestrade regime). For many investors, foreign these attempts to alter the financing structure orexchange concerns are ultimately a measure of project size to fit a predetermined ownershipfaith in a government's ability to manage the bal- arrangement can be detrimental to the sound-ance-of-payments situation, and credible fiscal ness of the undertaking.and trade policies can have an important, if indi- In some countries the law may provide for 100rect, effect on promoting investments in infra- percent foreign ownership, but in practice thestructure. Investors are also aware that while government agency authorized to negotiate theinfrastructure projects may not add directly to a project concession may insist on a joint venturecountry's net export earnings, they can help arrangement with the state utility. Such a caseovercome export bottlenecks. For this to happen, can happen where there is no functional separa-however, a credible export-oriented strategy tion between the implementing agency and themust also be in place. state utility, or where the implementing rules

and regulations are not clear regarding the pre-Ownership Requirements ferred ownership structure. In some countries

(e.g., Pakistan), a separate agency has been estab-Investment opportunities for foreign investors in lished to award concessions to private investors;infrastructure vary from 100 percent foreign- contractual negotiations of elements such asowned and operated enterprises to legally-man- power purchase and fuel supply are carried outdated minority stakes in joint ventures with local separately with the relevant state agencies.firms. In some countries, the foreign investor's In situations where the foreign investor estab-local partner is a state-owned utility, which may lishes a joint venture with a local entity, it isact as business partner, regulator, and offtaker (in important that the relevant company laws pro-the case of electric power). While foreign inves- vide adequate protections. The law should pro-tors have found ways to implement projects vide for freely transferable ownership rights, not

25

subject to government approval. The law should and power as a prelude to attracting significantlyalso ensure that equity can be effectively voted. increased volumes of foreign investment in theseIn Vietnam, for instance, the implementation of sectors.joint ventures has been delayed because majorityequity in a joint venture company does not mean Enforcement of Contracts and Disputethat the foreign investor will have effective Settlementmanagement control; certain decisions of themanagement board of the company require Infrastructure projects are contract-intensiveunanimous approval, including decision on pro- arrangements, often involving explicit undertak-duction, business, budget, and financing plans. ings between the foreign investor and local com-Hence, the local board members may have effec- panies, including state enterprises. Because con-tive veto power over all business decisions in tractual undertakings form the basis of aspite of a foreign investor's majority equity. project's ability to generate cash flow and serviceVietnam is, however, in the process of revising debt, it is essential that all contracts be enforce-this provision. able under law. It is also important that mecha-

nisms for settling disputes among contractingThe Pricing of Infrastructure Services parties be in place. Dispute settlement mecha-

nisms should aim to resolve differences in aLow or subsidized prices for key infrastructure timely manner and without prejudice to theservices such as power and water present major ongoing operation of the project.obstacles to foreign investors in many countries. Contract enforceability is usually most evidentConsumer prices that are below economic costs in countries with established business legaldeter private investors in several ways. First, in frameworks and with a history of private sectorthe absence of comprehensive sector price re- growth and development. It is in these countriesform, project developers are reluctant to supply that the necessary integration of specific lawsservices at economic prices for fear of a backlash governing BOT, BOO, or privatization conces-aimed at them. Second, low prices impair the sions with laws relating to contracts and othercreditworthiness of existing state-owned utilities commercial activities has been achieved mostand this limit their ability to enter into contractual readily. By contrast, in countries that have onlycommitments without some type of government recently given prominence to private sectorbackup. Third, government transfers to utilities development issues, there are more likely to beto cover revenue shortfalls may bring political questions over the legal basis of contract enforce-objections against foreign power generators or ability and the provisions for dispute settlement.water providers. Hence, in a number of countries, Project negotiations in countries currently under-especially in Eastern Europe and sub-Saharan going transition to the market (including ChinaAfrica, pricing is one of the main issues holding and Vietnam) have been delayed over theseup private investment in power and water. issues, especially in relation to contracts involv-

Governments have been slow to implement ing state-owned entities.reforms of water and power tariffs due to con- Countries need to ensure that disputes involv-cern over people's abilities to pay market prices. ing local and foreign joint venture partners doIn addition, in countries with extensive state not jeopardize the integrity of the project. Someenterprise sectors, there is the related concern countries have passed regulations enabling dis-that higher tariffs may mean higher subsidy pay- putes to be referred to a domestic arbitrationments to industrial firms. Some governments body or to an arbitration body of another coun-have nevertheless realized the wastefulness of try. However, such provisions need to be backedsubsidized tariffs and have sought to phase in by domestic laws on the recognition and enact-tariff increases over a period of years. Others ment of foreign arbitral awards. It is also impor-have also recognized that the significant portions tant for foreign investors to know the positionof the population who have no access to water or that local courts will take regarding enforcementpower receive no benefit from these subsidies, of awards against local parties. In some coun-and that by inhibiting investment, subsidies may tries, there have been occasions when state enter-actually be working against these people's prise partners in a joint venture have called uponinterests. Several countries are currently in the other arms of government to help resolve a dis-process of implementing tariff reform in water pute in their favor. Clearly, countries sometimes

26

need to make a special effort to overcome the Inadequate accounting practices and a lack ofconflict of interest that is inherent whenever state audit requirements add to the difficulties of lend-agencies act as both an arm of government and ers. In projects involving joint ventures withas a joint venture business partner. local partners or important local contractual

arrangements, lenders will want to carry outLenders' Requirements proper credit analysis to ensure their ability to

meet commitments. In several countries, thisFew private infrastructure projects are financed task has proved difficult due to poor accountingon the basis of equity finance alone, and in most and auditing standards.cases a project's viability depends on whether or Creditworthiness concerns also arise wherenot it can attract term debt. Under situations of government entities enter into contractuallimited recourse project financing, where debt arrangements such as power purchase agree-repayment is not guaranteed, lenders will ments. Timely payment for power generated byimpose stringent conditions in order to protect a private power company is essential if the com-themselves against the risk of default. These con- pany is to meet debt service obligations, andditions, which are also referred to as lenders' lenders are reluctant to provide at-risk financerequirements, apply to virtually every element of when the creditworthiness of the power pur-the project that may impact upon the project's chaser is in doubt. In a number of countries,cash flow and asset value. project implementation has been able to proceed

A number of developing countries have diffi- only through the provision of counterguaranteesculty attracting term debt for project financing on the state utility's obligations, either by thebecause of country risk factors. Commercial government or through agencies such as thebanks and other lenders will typically set limits World Bank. Avoidance of the government coun-to their involvement with risky countries, either terguarantee prob'LEl 's occurred oruy wherein the amount of loans outstanding or in the the utility that is purchasing the service ismaximum term of loans. For the least creditwor- demonstrably creditworthy or already in privatethy countries, these limits are often too low for hands.infrastructure projects, which typically involve In addition to seeking minimization of cashrepayment terms of six to eight years (at least) flow risk, lenders will also protect their interestsand loan volumes in the tens (or hundreds) of by taking collateral security over project assets,millions of dollars. While agencies such as the usually in the form of a mortgage. In manyIFC can help to overcome risk barriers for indi- developing countries, there are well-establishedvidual projects, the priority strategy is to seek an procedures for drawing up and registering mort-improvement in country risk status through gages over land and fixed assets, but this is notappropriate policy reform. always the case. China, for instance, has only

Beyond the limitations imposed by country recently established a national security lawrisk factors, there are also project-level impedi- authorizing mortgages. In other countries, suchments to the mobilization of term debt. Under as Vietnam, the problem involves legal uncer-limited recourse financing, a lender's primary tainty over the assignability of land use rightsconcern is the project's cash flow and the ability and the ability of foreigners to establish claimsof the project sponsors to service debt out of that on land.cash flow. Such an assessment requires detailedappraisal, but in some countries, lenders have Project Selection, Negotiation, and Approvalfound it difficult to properly appraise a project Processesbecause the terms and conditions of the contractor concession have not been finalized at the time There is much variation in the ways that coun-finance is requested. This problem arises because tries select projects for FDI, the transparency oflicensing procedures in these countries require the negotiation process, and in speed of approv-the foreign partner to be quite specific about the als. These differences have had a major impactsources and terms of finance, something that few on the rate of project implementation. In someproject developers can know with certainty in countries, the selection of eligible BOT projectsadvance. Such requirements only add to the appears to be unrelated in many cases to theircomplexities of project negotiation and may commercial potential, and difficulties thus arisedelay or jeopardize the implementation process. in the government-to-business relationships

27

from the very start. This relationship is particu- investors to infrastructure poses a great chal-larly important in sectors such as transport, lenge to government officials in the fulfillment ofwhere doubts over traffic volumes and willing- their responsibilities.ness to pay economic tolls will make foreign When countries are in the initial phases of ainvestors very cautious in their commitments. In private infrastructure program, few officials willthe power sector also, projects need to have have any depth of experience with the practicesstrong business underpinnings, which are that underlie project concessions and financing.reflected in arrangements for fuel type and sup- The lack of experience sometimes results in mis-ply, cost pass-through provisions, take-or-pay interpretations and may also account for theprovisions, grid connections, etc. resistance to foreign investment that is still

In some countries investors have not being encountered in some countries. Incentive struc-able to determine easily which projects are up for tures within the ministries responsible for infra-BOT investment and which are not; often when structure may also be a problem. Ministries willgovernments are developing public sector probably continue to have close relationshipsprojects in parallel with BOT projects, but have with their counterpart utilities and may not wel-not drawn a clear line between them. Problems come the concept of dealing with them througharise when a project is offered as a BOT opportu- arms-length regulations. Furthermore, they maynity, but is subsequently withdrawn and imple- fail to see the importance of providing even-mented on a public sector basis, as has happened handed treatment to all parties concerned.for example in the Czech Republic. Although As a result of these imbalances, many of thesuch changes may happen for valid reasons difficulties faced by foreign investors occur at theof urgency, they do not promote investor initiation or negotiation phases of project imple-confidence in the government's commitment to mentation. An overall lack of familiarity withprivate infrastructure. In several developing large-scale foreign investment is said to be onecountries, there is still a perception that the gov- reason that government officials will proceedernment regards private infrastructure not as a very cautiously-and slowly-at the initialpriority, but as a last resort. stages Indeed, negotiations leading up to the

Private infrastructure projects involve a large granting of a license can sometimes take up toamount of business-to-government negotiation, two years and involve considerable legal feesboth in the form of the concession arrangements and other costs for the foreign investor. At thethat define the investor's rights to own and/or project negofiation phase, officials are still tryingoperate an infrastructure facility as a business, to find out how in practice project risks are man-and in various contractual undertakings with aged and how this management in turn affectsgovernment firms, including power purchase negotiating strategies. Officials are often con-agreements, fuel supply agreements, and con- cerned that there be an equitable sharing of risksstruction works agreements. Both the concession in BOT projects, but it is not clear whether theyarrangements and the contractual undertakings are talking about the sharing of risks within theinvolve government in new types of com- joint venture or between the joint venture and con-mitments that, in many cases, would not be sumers. Clarification of this key regulatory issuenecessary if everything were to be done by state will be central to any future improvements inenterprises. Hence, the introduction of private project negotiation and approval.

28

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The Foreign Investment Advisory Service (FLAs), ajoint facility of the International Finance Corporation(IFC) and the World'Baik, w,as established to helpgovernnents of developing member countries toreview. and adjust policies, institutions, andprograms that affect foreign, direct investmerit. Theultimate,purpose 'of PIAS is to assist membergovernments in attracting beneficial foreign privatecapital, technology', and m,angerial expertise.

FIAS Occasional Papers report the results of researchon practical issues which,the staff'of FIAS identify in'-the course of their workl The ese,arch has either beencarried out or sponsbored by FIAS. The Papers will beissued'as research, findings become available,'

9' j j8 IW,F ii 82i33iii111 ISBN 0-&213-3885-4