24108 The IFC Review of Private Investment in Developing Countries March 2002 1 IRM ~~~~~~~~~~~~~~~Issue - 2 PRIVATE SECTOR PARTNERS Ah ~ ~ ~ ~ ~ ~ A -S ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~ ~~~~~~~~~~~~~~~~~~~~~~~~~, I *1 '1 , x i~~ . X ::;- _ i ' _ ^ < j . fr. ' !t)|-~ ,{ , ~~~~~~~~~~~~~~. ; ' ; --a -A I '''' ', \., Y a& ss«re S r ~~~~~- < ' L - _*s *N * \W ''" flh Ax a sl fr~~~~~~~~~-~s Impact -Pnvate Sector Partners is published by the International Finance Corporat on. the private sector arm of the World Bank, in partnership with 3 Creative Base Publishing in the United Kingdom The magazine reflects the 5 F e L i interests of companies investing in private enterprises in developing countries, development finance insttutions, development finance practition- ers, and those interestec in how a strong private sector supports econornic growth l=C's m ssion is to promote sustainable private sector investment in developing countries, helping to reduce poverty and improve people's lives. Visit us at wwwifc.org Joseph O'Keefe, Editor in chief International Finance Corporation Dana Lane. Managing editor Desmonc Dodd, Contributing editor 2121 Pennsylvania Ave., N.W. Afshin Molai, Contributng editor Washington, D.C. 20433 Telephone: 202-473-3800; With special thanks to Jerifer Wisharl Facsimile: 202-974-4384 Business developmient ccg@creativegrp com To subscribe: ifc-impact@creativegrp.com Cover photo by Dileep Wagle Page 2 Private Investment in Infrastructure Opportunties and Challenges r by Declan Duff r 9 On the Ground, under the Ground, in the Water, in the Air A decade of successful IFC infrastructure projects by Ann Moline 14 Impact Interviews S r Alastair Morton 1SC nW i 16 Is Privatization Good for the Poor? by Danny Leipziger and Vivien Foster 21 Rising Insurance Rates Cast Cloud over Project Finance Market by Afshin Mo/avi 24 Finding Your Niche Matchirg small infrastructure projects with financiers is a challenge by Desmond Dodd ' _ A 26 Russian Infrastructure Investment: -, A View from Moscow: Interv ew with Edward Nassim 28 Recent Trends in Private Sector Finance by International Financial Institutions by Arthur Karlin 32 Regional Feature IFC's Initiative to Assess the Business Environment in East Asiaa by Javed Hamid and Dileep Wagie 'a 38 Bringing Light to Rio's Slums , '; j MIGA-backed powver project tackles outages and safety hazards by Angela Gentile-Blackwell 42 Emerging Markets '1 Infrastructure News Highlights - . Fromr Infrastructure Journal This volurie is a producC- of the Internat ona Finance Ccrpcratior The conclusions and judgments contained herein shou d not be attributed to, and co not necessa i y represent the views of, FC or its Board of D rectors, or the Wor d Banr or ts Execut ve Directors, or the countties they represent FC ard the Wor d Bans do not guarantee the accuracy of the data ncluded in th s pub ication and accept no respons bility whatsoever for any consequence of their use. Project coordinator for the International Finance Corporation: Coroorate Relanons, Joseph O'Keefe, Mlanager By accepting advert sements n this pUblicat cn, the internationa F nance Corporat on does not endorse the advert ser nr ts products Also, the placement of an advertisement or `ai ure co place wil nct advantage or disadvantage the advertiser over other compan es n the procurement of goods and serv ces by IFC or 3ny possible invesimcnt by IFC Ary such procurement or investment will be made strictly In accordance wvth IFC's policios and procedures Dear Readers: We are pleased to present "Focus on Infrastructure," our new issue of Impact-Private Sector Partners, which we have launched with our publishing partners, the Creative Base Publishing from the United Kingdom. _ This issue features articles on various infrastructure-related topics and is timed to coincide with the Projects International conference in Paris, in March 2002. The articles in this issue address a number of specific topics, beginning with Declan Duff's article describing the context in which today's financiers must make their investment decisions. Afshin Molavi's article on insurance and Desmond Dodd's piece on niche investments explore some of the particular problems-and opportu- nities-facing investors. Ann Moline's essay highlights successful infrastructure projects in which IFC has participated, illustrating the wide range of investments in developing countries. We also feature a discussion with Sir Alastair Morton, former head of the Strategic Rail Authority in Britain and former cochairman of the Eurotunnel, on topics ranging from the best time to commit to massive projects to what makes for successful public-private partnerships. The interview with Edward Nassim, director of IFC's Central and Eastern Europe Department, focuses on opportunities for investment in Russian infrastructure projects. Angela Gentile-Blackwell writes about an electric utility in Rio that is using MIGA's risk insurance to meet the demands of the poor for electricity, while Danny Leipziger and Vivien Foster look at the evidence to determine whether infrastructure privatiza- tion is good for the poor. Although most of these articles explore the theme of private sector investment in infrastructure, we draw your attention to two articles that take up other topics. In "Assessing the Business Environment in East Asia," Javed Hamid and Dileep Wagle explain a new tool for analyzing barriers to a well-functioning private sector in developing countries. And in "Trends in Private Sector Finance," Arthur Karlin offers a quantitative analysis of private investment in developing countries, with interesting statistics on regional investment flows and financing provided by devel- opment finance institutions and export credit agencies, with a glance at infrastruc- ture investment as well. Let us hear from you-we appreciate knowing what our readers find worthwhile and interesting. Visit us at wwwifc.org and e-mail us at webmaster@ifc.org. Peter Woicke Executive Vice President Inrerrationa/ Finance Corooration r. ~ ~ ~~~ IE V E~~~--- ____ ~~~~~41~~~~~11 > . ...... Ey~~~~~- Deda DFI _ --: _Z W A Sith concerns about What will it take to make them willing to the success of those ventures by worldwide recession, as move forward despite uncertainty? Can investing in them and providing crucial well as the September 11 they commit to the future? advisory services-even as we face up tragedies in the United to the mettle-testing chal enges to States and their aftermath, ordinary Perceptions of risk and tolerance of project finance in today's environment. workers 3nd world leaders, lenders and ambiguity differ, of course. At IFC, we borrowers, planners and builders, gov- remain focused on our bedrock mission As one of the major financiers of private ernment officials and business owners of promoting sustainable private sector projects in the developing world, IFC must all assess both the immediate and investment. And that means addressing makes gross commitments of some $5 the long-term implications for their challenges to investment, even in espe- billion a year in project financing and economic future. The challenges to con- cially difficult times. plays an active role in promot ng greater ducting the work of the world with a private participation. Through FY 2001 measure of confidence-and with some We recognize that investment in infra- IFC has arranged financing of $12 billion predictatility of result-seem formidable structure is fundamental to our mission, in support of infrastructure prc,ects worth indeed. for to progress modern economies must $42 billion. Since the early 1990s when have functioning, efficient power plants, we first became active in inf-astructure Many people recognize the challenges- roads, ports, telecom systems, railroads, financing, private infrastructure deals they are clear enough-but are there and water and sewerage facilities. We worth nearly $600 billion have been also opportunities? Can investors and are committed to seeking profitable and arranged in developing countries. entrepreneurs regain the sense of environmentally and socially sound Investment in infrastructure projects security necessary to take some risks? opportunities. We intend to help ensure forms a key part of our institutional Issue - 2 IK t 4- - ~ m t 1 #L*,, * l E growth in such conditions identify potentially profitable projects Wi !j ,., ** are severely limited. and how to abate the risks in a ' -: ,*/§'4W ,-4 l* * U ePopulation growth and climate of uncertainty. demands for an expan- ding array of services Investing in Potentially continue to exceed the Profitable Projects ~~~~ ~~capacity of public sector * providers of infrastructure Nothing can ensure a successful to respond effectivety. infrastructure project-there are The need for more private simply too many variables that cannot sector participation in be controlled and too many possibili- infrastructure is clear, ties, however remote, that cannot be and the past ten years predicted. But with certain critical have seen a significant elements in place, a project stands a shift in that direction. much better chance of success. -. ; ; . 7 .s* ',^ Examples range from railroads to ports and A Business-Friendly Legal and from toll roads to airports. Regulatory Environment Infrastructure projects in countries with During the 1990s some sound legal and regulatory structures 60 new rail companies, start off on a sounder footing. ___= _ for instance, began Transparency, efficiency, enforceable operating around 80,000 contracts, equitable bankruptcy laws, kilometers of private rail provision for international arbitration, track in developing and strong environmental and social countries. In fact, private standards provide project sponsors with rail services now carry some assurance that the playing field is virtually all of Latin level and Iliaal he risk of being blindsided America's rail shipments by unanticipated legal obstacles is and about half of Africa's. minimized. About two-thirds of new 1 r:i LT q C|- - expressways -in the The best insurance for long-run stability I_ . > -deieloping world are run in infrastructure investment is an inde- by private concessions pendent, fair regulator. Little remains on a toll basis. Inter- constant for 30 years, and even the most unational financiers have tightly written concession contract will invested in new port need adjustment as circumstances 44X ' terminals, thereby spur- change. The regulator is central to ring containerization in achieving a balance of interests among shipping. Private con- investors, users, and the government. tainer transshipment Investors want fair returns, users want -_ facilities in Latin America low tariffs, and the govemments want and Asia are transforming affordable services and the benefits that world shipping patterns flow from a well-functioning infrastruc- ------.and thus lowering the ture. The trade-offs needed to satisfy all costs of world trading. parties must be made openly and fairly strategy. In FY 2001, for example, infra- Most airlines around the world are according to a transparent set of rules. structure and telecommunications now privately owned, and govern- Newcomers and incumbents should be accounted for almost 40 percent of all ments are increasingly turning over treated equally. Most important, the reg- projects to which we commilted airport handling operations to the ulation process and the regulator should financing, private sector. be apolitical-outside the civil service structure and independent of the party in The Need for Private Participation Over this period, policy changes have power. Independence in regulating In Infrastructure come quickly but unevenly. Rapid, private utilities has three main benefits: positive shifts have taken place in Current financial strains in the global some countries that have effected * It builds public trust and widespread economy have not changed the obvious major policy breakthroughs. In other support by demonstrating that the switch need for infrastructure projects: without countries-those with pofitical and from govemrnment-subsidized to profit- them, industrial inputs cannot reach other constraints-such shifts have oriented utilities will not mean high prices factories; goods languish en route to come much more slowly or not at all. In and excess profits but will lead to market; unpredictable communications fact, some 85 countries, mostly in genuine improvements in service and undermine commercial transactions; Africa and Asia, have yet to embark quality power shortages reduce productivity; seriously on infrastructure privatization. education and health needs go unmet; - Govemments can trust that consumers' and lack of clean water and sewerage The potential for profitable invest- interests as well as investors'claims are con- facilities pose health problems for com- ment in developing countries is sideredintaifreviewandthat theegregious munities. The prospects for economic there-Ihe real question is how to claims for high traiffs will be squeezed out. r,I J.~~~~~~~~~ - -r .,i- v A: r -' MIa ^~ - -K---rs..:n ..±hw. * New investors can be confident of fair An equitable deal assigns risks fairly. is involved in the deal. successful treatment in the sector, thus lowering the Investors, for example, must be willing to investors will find ways to manage those risk premium in the costs of system accept a large share of the project's risk mismatches. Even with perfect local rehabilitation and expansion. through a sizable equity stake, in capital markets, there would be high addition to taking responsibility for com- rates of foreign investment in infrastruc- Strong Project Economics pleting the project and bringing it to its ture because governments want the While questions of cash flow, market revenue-earning stage. This usually technology transfer that comes with potential. the financial health of the requires the sponsor to provide support foreign management and technical sponsors, ability of local capital markets to the project company until the project is practices. to sustain the project, and exit strategy physically completed. Overtime, lenders must all be satisfactorily answered, fun- have also become sensitive to the front- Currency indexing alone does not damental to the economic success of the loaded risk structure of infrastructure protect against serious problems caused project is a solid, demonstrated need for projects and have developed various by mismatches. Because of thin capital services. risk-mitigating mechanisms, including markets in developing countries, the stretched maturities, back-dated capital most common method of privatization is Once that need is established, the repayments, mortgage-style amortiza- the sale of the facility to a foreign appropriate financial structure is the next tion, tiered pricing, and partial credit strategic investor. Many p'ivatizations critical issue. IFC's considerable experi- guarantees that can lower burdens in the and infrastructure concessions include ence suggests that infrastructure early years. Sometimes those risks are terms that link tariffs to a hard currency investors should begin with the basics: a difficult to calculate, of course. Two new and allow automatic pass-through of solid financial structure as a first defense features of infrastructure projects, com- local currency price variations arising against uture threats to a project. That petition and paying for service, for from currency fluctuations. VVhen very is, a prcject must have built-in financial example, complicate the assessment of large changes in exchange rates occur, slack to cushion foreseeable and market risk. Without a performance the social distress that follows often sometimes unforeseeable problems. In history of similar projects. there is no makes governments reluctant to honor addition to a solid financial architecture, way to gauge demand at the planned pass-through arrangements. Nor could the buffer should also include committed selling price. consumers likely afford the massive sponsors. broad popular support, and increases in utility bills that a pass- access to financial markets. Likewise, start-up firms facing strong through would cause. Indexation is competition on price and quality of clearly an insufficient remedy for the Certain intangibles are also crucial. service may need financial structures problems of currency mismatches. Projects that clearly fit into national that allow longer grace periods and development priorities are more likely to provide longer loan tenors, which will Countries that have combined pension gain the support vital to long-term pros- lower initial repayment rates. When reform (which allows long-term savings perity. Consultation with stakeholders at market-priced utilities, for example, to be invested in private infrastructure) an early stage can also help explain the replace subsidized service, careful with the privatization of utilities have benefits and lower the risk that minor assessments are needed of both the will- seen higher rates of project success. The problems will become insurmountable ingness and the ability of users to pay. financing of Hidro Boliviana, a hydroelec- obstacles. Risks and rewards must be tric plant near La Paz, offers an interest- shared as well, and investors, Managing Currency Mismatches ing example of how the financial consumers, and politicians must While currency mismatches cannot be structure built on those reforms. Although perceive that the deal is fair. avoided any time that foreign investment the financing was denominated in dollars, s T r Issue - 2 it was placed in the Bolivian capital looking to the private sector as a catalyst installed private generating facilities that markets to a largely Bolivian group of of change and are expecting that their produce electricity for about twice the institutions. Itwas the first project bond to fnancial responsibilities in utility sectors notional industrial tariffs; many house- be, oompleted in Bolivia and is equivalent will decline as private investors move in. holds have private water storage tanks in size to 0.8 percent of the countrys or purchase water from tank truck GDP The deal was made possible by the * Without additional resources to expand vendors for many times the piped-water deregulation of the domestic electric and modernize distribution and delivery tariff. Connections to reliable utility industry and by the reform and privatiza- networks, utilities may not have the services have the effect of raising poor tion of Bolivia's pension system, In this means to deliver service to retail families' living standards by 50 percent case, currency mismatch Is not an issue' customers. Thus the final costs of private or more, World Bank studies have -ark*tAceess supply-become pronibiliv.* shown. Direct access to users is also MarkotAccess important in generating public support. Market risk in infrastructure sectors is * Those governments that are privatizing Users who see service improvements generally much lower than th- :default local delivery markets may find that the from private suppliers are likely to risk o-f the publfdy owned utilities in the generous BOT contract terms are become advorates for a wider private sector. Public utilities in the developing unattractive to potental buyers of the sector role in the utilities. countries are among the worst-run utilities and they may lose some of the companies in the worid.. Many cannot value of their assets when sold, Strengthening Local Capital Markets meet their basic operating costs from Moreover, the preferred position of the Encouraging infrastructure investment revenues. Most have inadequate invest- BOT companies may hinder the devel- provides unique opportunities to help ment resoures to maintain their existing opment of true competition in the deepen capital markets and maximize assets in good order or to expand to sectors. the local financing, thus preventing meet growing demand In developed consumers from being held hostage to countries, for example, where demand For these reasons, fewer and fewer gov- currency -fluctuations. Countries that for infrastructure services of all kinds is emments appear to be offerng these have used privatization for developing growing at about 1 percent a year, utilities kinds of terms, and those that do will local savings have seen those savings reinvest about half their cash in system soon be renegotiating in favor of more rates grow impressively. Privatizing improvements and expansion; in the competitive marketlike structures. infrastruclure and seeking local funding developing world, where demand is also serve to expand local opportunities growing at about 8 percent per year, Ending Monopolies to supply equipment and services to investment is barely half that amount. It A far better protection for investors is infrastructure companies, Recognizing follows that a build-operate-transfer direct access to the market, ending the that potential fGr business expansion. a (BOT) project that can se1l only to an utility's monopoly. Coincidentally, this Is numrber of countries are actively devel- uncredviwor1hy public utility is itself also the best method of protection of oping local capitai markets.for infrastruc- implicitly uncreditworthy. consumers' interests. Users of infra- ture services. In addition, local investors structure services in developing can lon infrastructure consortiums and Until now, the most common remedy for countries are willing to pay for them. In are often Invaluable advisors on local this situation has been to ask for a take- fact, because of the unreliable supply conditions. or-pay clause and government backup of from the public ulililies. most residents the performance of the utility under the and. businesses are paying much more In the End, Manageable Risks BOT contract: But that remedy is beng for, private emergency services than turned to less and less, for several what a modern utility would charge. While we must face up to the difficulties reasons: posed by our current investment climate, T- guard against service interruptions in good projects in developing countries * The governments responsible fcr the many countries, for example, new Irndus- still offer opportunities for investors. And poor performarce of the utilities are trial and mmmercial plants have if careful structuring and a conducive business environment are important in better economic times, they are vital now. Out challenge is to find effective ways to tame. the risks and get on with the business of investing In projects that ~~~ ~~~~'1:.1 * ~~~~~~~~~~produce benefits for investors, sponsors, and consumers and that help govern- ments meet the growing needs of their citizens. 1L dx . Ie lDeclan Duff is director of the '-'Li - = _ , ~ - g Infrastructure Department at the - -. nrern.r,tnl1 Finance Corporation. This article is an updated and expanded version of "After the Storm,' which appeared in Global Infrastructure O } - xw_ - -. Development, World Markets in 1999, published by the World Markets Research Centre, in 1998. Cited with permission. .~ ~ ~ Capstone Ud t . Coming of A±g By Dr Ake Am gren President and CEO Capstone Turbine Corporation USA - _ Think Globally, Act Locally". Dr. Rene from a few kilowatts to a few megawatts engines. In these new technologies, the Dubos, a French-born Pulitzer Prize - and a reduced financial risk for common denominator is the environ- winning bacteriologist, pioneering envi- investors. mentally friendly focus. The microtur- ronmentalist and author gave mankind bine, in many cases, offers the best this phrase in 1972 firm in the belief that DG does not require a complete value for clean, small-scale en-site gen- global environmental problems could electric transmission and distribution eration. turn into action only by considering eco- (T&D) infrastructure to operate. In that logical, economic, and cultural differ- respect, it is a paradigm shift from large At the forefront of this revolution is ences of local surroundings. Three centralized power plants, which do Capstone Turbine Corporation, lead- decades later, that mantra is central to require a T&D infrastructure for the ing global producer of low-emission the chal enges in melding the environ- delivery of power to the consumer. commercial power products utilizing mental movement with interna- microturbine technology. First-to- tional economic development, ,I - market in 1998, following ten coupled by a more realistic i . years of strategic research and understanding of forces such as = 4 development in real-world envi- energy demand that contribute to = v ronments, Capstone systems the world s problems. i i - / can operate on a variety of fuels including natural gas, methane Fueled ty emerging demand for gas and propane as well as higher levels of reliability during E diesel and kerosene. The 30kW the decade of the Nineties, a A and 60kW units can be aggregat- quiet -ransformation called i ed into so-called "multipacks' Distributed Generation (DG) and thus serve loads up to began tc change the way power several megawatts (MW). The is delive-ed. While serving as a system is completely air-cooled, supplement to the large scale which makes installation and centralized power plants and 1 maintenance much easier than transmission and distribution most other alternatives. infrastructures in the industrialized DG can better utilize locally world, DG offers a number of particular available fuels. Also, DG can serve Collectively, over one million hours of advantages when building infrastructure local demand for power as well as operation have been logged in five in the towns and villages of developing heating and cooling. primary applications: as an on-board countries. generator for hybrid electric vehicles There are a number of DG technologies. (HEV), converting waste gases in DG is quickly deployed. Because DG The reciprocating engine has, so far, resource recovery, capturing the benefits projects can be sited, installed and been the dominating DG technology, but of electricity and exhaust heat for operating in a matter of months rather several new technologies are emerging heating and or cooling in micro-cogener- than years, faster speed of deployment including photovoltaics, microturbines, ation, ensuring power quality and relia- means more flexibility - serving loads fuel cells, and potentially, stirling bility, and protecting end-users from M(W IL-V_ -1 Issue -2 Capstone Turbine Corporation - Capstone price sWikes in a. sophisticated electric Stu/scf. Independent testing of a micto- power. market 1hrOUgh peak shaving, turbinte system deployed on one -Southern California landfill serving the While 70 to 90 percent efficiencies htave Los Angeoles region showed ren-rarkably been demonstrated when utlIizing micro- low NOx emissions of 1.3 plpm, one turbines in comb~ined theat and pomwe hundrad times cleaner than regular (CHP) applications in industrialized corn- natural gas reciprocating engine genera- munities, the Capstone value proposi- tors. tion for small and remote villages of Asia and Africa is best expressed in resource in August 2001, Los Angeles Depart- recovery (free' fuel", applicalions. ment of Water ane. Power. the largest Sustainabie'developme'nt progr*rna by mnunicipal utility in the, United tts definition, -can bene1ttfrornttte simpli'city dedicated a, grotindbreaking ,green' of design.'scatability, fuel flexibility and a energy poetaatull-to-i;apacily stated ultra-low emissions profile of tess landfill: 50 niicroturbines ot L9pez than Sppm NOx. Microturbines can be Canyon ;ill convert enouqh free placed in operation even when only methane gas at the closed refuse dump modest amounts of underutilized oil, to generate 1.5 megawatts o1 power, gas, or biogas are readily available, enough to power 1500 homes in the region. By using gas that WOLuld have .~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Biogas: been flared off into the atmosphiere, the In the face of continued population turbines will eliminate 10,000 pounds of growth, increasingly taxed ecosystems NOx emissions, or the equivalent of and more stringent environmental regu- removing 500 automobiles from the lations, mitigating human, agricultural roadways. and animal wastes using advanced tech- nology solutions is critical The More can be done. INoticeably, thle value Capstone system is proving ideal for proposition utilizing microturt'ines in converting landfill and digester gases to wastewater operations is gaining electricity because it momentum Currently, over 46 systems operates on fuels are operating at ten U.S wastewater with energy treatment plants Serving as both the content as j5jJ source of combustion power and thermal low as energy for the digiester, initial results 350 .~* show the system offers a mriethane destruction efficiency of 99.999%o These microturbineS, in many cases, work by recapturin g exhaust heat to generate hot waFter, ensuring the digester environmeent remains at anr optimum operatinCeg level to producel stable and environmentally safe biosolids The mrodular design and than Sppm NOx. hticroturbiNes can be Canyon will convert enouqh free Capstone small footprint of the microturbine Further offshore well developments, oil system means ultimate configuration and gas exploration in Africa, and flexibility. better energy utilization and coalbed methane retrieval opportunities .1 reduced electricity demands on the on the Asian continent are just some of treatment plant. the projects underway. Significant experience and positive In practice, the microturbine offers an results are also underway utilizing option to flaring gases during oil and gas Capstone systems in a variety of animal exploration, given the solution, or casing digester applications from dairy opera- gas can be diverted at once as fuel for tions to hog and poultry farms. the microturbine. The result: grid-quality power can be used onsite to power small Oil & Gas Recovery: equipment or in other cases, be redirect- Annually, it is estimated that over 4 ed to the power pool. In remote locations - trillion cubic feet of energy-containing without access to grid power, the value .. ' _ t gas is flared worldwide, most because it includes eliminated T&D costs, has no economic use. Utilizing a micro- increased equipment reliability and turbine generator, this "waste gas" is decreased maintenance. With more '. transformed into valuable electricity, effective combustion than incineration, - - s cleanly and efficiently. Microturbines ultra-clean exhaust emissions imnprov,e ^5^] ;i applied to generate remote prime power the community's air quality and reduce can elimi'iate or defer the need for trans- overall environmental impact to foliage ' mission and distribution (T&D) systems, and fauna. economies somehow able to shape a produce a gas commodity by-product standard of living equivalent to that of from oil production, and make the most Summary: industrialized nations, the per capita of previously "uneconomic" natural Distributed generation, utilizing micro- energy consumption and demand for resources. turbine technology, is a viable and energy would result in a "most critical available commercial technology well engineering challenge on earth today". Real-world experience with the suited for sustainable development Capstone system includes operating in projects where speed, scalability and Truly envisions a new affordable, flexible the remote oil patches of Canada, preservation of environmental resources and reliable energy model. It would meet powering unmanned satellite offshore are important. changing needs of a diverse population platforms In the Gulf of Mexico, generat- Microturbines applied to resource in a predictable manner, securely, safely, ing from coalbed methane wells in the recovery applications can be instrumen- and efficiently. Emphasizing sustainable Rocky Mountains and Wyoming's tal in creating a new economy and devel- resources, human activities could be Powder River Basin, and validating oping existing natural resources such as supported without reducing the standard methods to reduce operating costs and shallow gas reserves or unexploited oil of living or incurring debts for future gen- emissions in California. The end result resources. erations. This model, he proposes, could gives Capstone a leadership position in In addition to traditional economic take up to 50 years to complete. transferring this experience to develop- benefits, energy commercialization can ing nations building an economic base also, at a very low cost, electrify a devel- With the help of distributed generation with similar unexplored resources. oping region at a fraction of the usual technologies like the microturbine, the time required to set up a global village could be powered up in traditional electric infras- years, not decades, starting today. tructure. This fast access to electric power may be Senior Management an even bigger economic Contact Names & Titles: benefit. '^ * ~~~~~~~~Dr. Ake Almgren, :Richard Truly, former President & CEO American astronaut and aaImgren@capstoneturbine.com current director of the National Renewable Norman Chambers, COO Energy Laboratory in nchambers@capstonetlrbine.ccm Washington, D.C. once remarked that "people in Mike Tingus, developing countries, VP- Sales, North America many totally without m, ngus@capstoneturbine.com electric power today, see their needs in terms of Mory Houshmand, VP- Sales, '' clean water, clean air, Asia, Africa and South America z adequate food and good mhoijshmand@capstonet.rbine.com ION0 7 .health ... (a) priority even over education and Hans Gners, VP- Sales, - ...build(ing) a decent Europe and Middle East living.' Were these hgners©capstonetLurhine com Issue 2 Capstone Turbine Corporation C'eui~ -*iiii' i - e >-|;-Gd, under jiA'ts in the Air eav-~~ ~~~~~~~ n e. ir.> .J. ill A. 8(. .A : 8 Companies cannot make afrom BNDES (Brazil's development 1 Companies cannot make a bank), an export-credit mechanism :-* t eprofit if they cannot gel their provilded bU. French agency Coface, and gcods to market in an uncovered international bank loans. efficienl, cost-effective way. And yet, in the early 199(0s The five-year project was completed on transportation remained a time at the end of 2000 and met all challenge for local business- targets, according to Amnon Mates, - es in many parts of the world. manager of transport Infrastructure in At that tirrme, Roir: \,ia IFC.s tntrl,sir. Department. "Traffic Presidente Dutra, known as levels were remarkably close to I eV'3ia Dutra, was-and re- forecasts reflecting the reasonable per- mains-the only continuous formance of the Brazilian economy. A q ^ L Ijk hicthwav connecting two of despite the large increase in the pace of - the largest cities n the world, devaluation," he says. Toll adjustments Sao Paulo andi Rio de Janeiro based on the concessionaire's cost * 3J L 1 l in Brazil. Via Dutra also increases, while delayed a bit, eventual- provided the pr;n3rxw access ly helped offset cost increases and route to four major states in maintain financial equilibrium, Mates _ Southeast Brazil, a region adds. * _. _ - _ | Z _ responsit ie for close to 60 percent of the country's Mates, a part of the original investment economy. team, credits the contractor consortium isue 2 IKF -EA as well as the financing for the project's the WVorld Bank's railways advisor Lou 2001, carrying containers from ships effectiveness. "The financial structure Thompson, essentially all railways were between ports on both coasts. that combined local loans and loans in government owned and operated. foreign currency-the latter with sub- And the story is not over. The next stantially lower interest rates-helped Over the course of the past decade, the frontier? "We will soon see similar balance out the project's financial risks," World Bank and lFC have been on the projects in the emerging eccnomies of he says. front lines of a remarkable change, Central and Eastern Europe," predicts helping to replace an aging relic of an Thompson. 'The rail cargo carrier in Today, Via Dutra boasts a vastly earlier industrial age. In its stead, a Poland, for example, could be even improved safety record. Additional vibrant, competitive transportation sector bigger and more important than any of investments include overhead pedestri- now stands, playing a key role in the projects already completed, and an crossings, safety barriers, improved bringing new opportunities to the devel- Romania is also committed to private signaling, and emergency call booths at oping world. lEC participated actively in investment in its rail freight comnpany," he regular intervals, as well as rescue team several railway concession projects as adds. Indeed, in November 2001, IFC's availability at various points along the nations began to embrace the privatizing Board of Directors approved an invest- highway. And BNDES, which previously concept, investing more than $286 ment for a new rail concession in had not included project financing in its million since 1991. Today. according to Estonia, the first significant private portfolio of financing options, now is Thompson, the concessioning of Latin investment in railways in a Central or using this financing structure for similar American freight railways is virtually Eastern European country. projects in Brazil. complete, while eleven railways in Africa are currently in the transfer process. Energy Center Kiadno Generating Railroads The results-increased productivity, lower transportation costs, and In 1999, the first independent power While other utility sectors in the develop- expanded access to markets-have not plant financed in a transition economy ing world grappled with poor perfor- occurred without some bumps in the without government guarantees fired up mance in the early 1990s, railroads, too, road, but IFO continues its commitment in Kladno, Czech Repuiblic. The $400 struggled against similar problems- to the concept. "We will most definitely million U.S.-Czech joint venture in a bloated labor forces resulting in low pro- see a continuation of this trend." clean coal energy plant was designed ductivity, zooorly maintained equipment Thompson says. to exceed stringent new Czech clean causing unreliable service, and bleak air legislation coming into force in 1999. financial situations precluding routine One recent addition to the IFC portfolio, As a arge-scale rehabilitation of an maintenance and repair. At that time in the Panama Canal Railway Company, environmentally hazardous industrial Latin America and Africa, according to opened for freight business in October site, it was also one of the earliest and Issuje 2 = li largest of the "brownfield" ventures in V Pagbilao Thermal Power Plant the region The line from project inception to com- "We simply couldn't have done it i i pletion is not always a straight one. without IFC," said NRG Chairman Dave - ' This situation was certainly true for the Peterson. IFC played a crucial role in Pagbilao Thermal Power Plant project helping to broker the negotiations with a A on Pagbilao Island in the Quezon local coal mine that shares in the elec- province of the Philippines. Conceived tricity price risk; with the region's elec- as a means to alleviate 12-hour-a-day tricity distribution company that was D power outages common in the region moving away from reliance on the during the late 1980s and early 1990s, national utility; with the city of Kladno, the coal-burning plant received IFC which depends on the heat output for its financing, along with other support in district heating; and with the Czech 1992. Plant construction began in 1993 banks that provided $100 million in .. but did not end until November 1995. long-term loans in Czech crowns in Further deiays, due to grid connection their first experience of such nonre- problems, prevented the plant from course financing. IFC contributed $85 £ opening until June 1996. million in financing in A, B, and subordi- t nated loans. - Today, despite the rocky beginning, the * ;2! ,,;i r J plant has become an important success The successful financing of this . story. "The Pagbilao plant is the most project was a significant boost for reliable coal-fired, base-load power other power sector investments in plant in the Philippines, significantly planning for the transition economies - exceeding Mirant's [the plant's owner] - it demonstrated that viable contrac- internal operating standards and tual structures could be put in place - making it one of its best-performing that could obtain financing on attrac- plants worldwide," says IFC investment tive terms. It also introduced competi- _ officer Cheryl Edleson Hanway. tion for the first time into the Czech electricity sector. IFC's Power village telephone network consists of Aside from the establishment of a Department's Denis Clarke says, 6,000 viflage phones, with each phone reliable power source, the company can however, that Kladno 'is not a com- providing coverage for 1,500 people. point with pride to a strong record of pletely happy story." Subsequent to community support. In addition to the financing, the Czech crown GrameenPhone, now Bangladesh's providing full-time employment for more performed poorly and has continued to cellular market leader, received $18.2 than 400 workers and supplemental post declines against the euro. As a million in debt and equity financing from employment opportunities for another result, Clarke says, "There were IFC in 1999 to install and operate a 400 people, the company constructed a bigger foreign exchange losses than nationwide digital cellular network. In bridge to the island, giving local we had projected, and the debt may addition to the village pay phone residents easier access to the mainland need to be restructured.' The long- network, GrameenPhone is working and to increased job possibilities. The term outlook remains good, though, toward increasing telephone penetra- company paved roads, relocated indicated by the intentions of all the tion rates throughout Bangladesh displaced homeowners, and helped current investors and lenders to According to IFC investment officer Kofi build a new high school. "During remain in the transaction. Arkaah, the country remains among the project implementation, local residents least connected in the world, well below were successfully resettled to a newly The project is now producing electricity other countries in similar circum- constructed village," Hanway notes. at low emission levels, on a rehabilitat- stances. With only 500,000 fixed lines, 'The company has continued to provide ed 'brownfield' site, ensuring a future and 450,000 cellular subscribers for a services to the community, including for the local coal mines and contributing population of 129 million, much work skills training, sewing classes, and ren- to a new competitive electricity market. remains to be done. ovation of the local school." GrameenPhone Arkaah says that the company has The ability to count on steady, affordable helped bring new opportunities to the power has also increased demand for Meet an unlikely group of telecom exec- impoverished rural sections of home appliances such as refrigerators utives-the women of rural Bang- Bangladesh, while contributing to and air conditioners, giving local appliance ladesh. A unique program established overall improvements in the nation's companies a strong boost as well. with the launch of GrameenPhone in infrastructure. "GrameenPhone has 1997 gives village women the ability to promoted economic development in Ann Moline is a business writer whose manage newly available village pay rural Bangladesh through its successful work has appeared tn publtcations such as phone operations, through low-cost village phone program," he notes. "Plants Sites & Parks" magazine, financing of cellular phone equipment "Washington Business Journal," and and bulk sales of airtime. Financing is Meanwhile, the company is turning a "womensenews," an electronic news arranged through one of Grameen's profit. Generating revenues of $60.3 magazine. She has written for varous FC shareholders, Grameen Telecom, con- million for the first six months of 2001, publications, for the Inter-American trolled by Grameen Bank, a leader in GrameenPhone reported a net profit of Development Bank, and for other microfinance lending. Currently, the $6.8 million for the same period. corporate clients. tssue- 2 a -. W I C - - --- - ---------- Interviews Sir Alastair Morton Alastair VAorton was chairman of the Impact: What prompted you to leave cumstances. They must simply set the Strategic Rail Authority in the United the oil company? thing up, let the people get on with it, Kingdom from 1999 to 2001 after 10 and act only if the project goes years as the co-chairman of Euro- Sir Alastair: I left after Mrs. Thatcher seriously wrong. They should refrain tunnel, leading, with Andre B6nard and became prime minister, because she from fussing and whining the whole then Patrick Ponsolle as his French didn't believe that governments should time, which they tend to do. colleague. the financing, construction, have state oil companies at their and commissioning-and then the refi- disposal. I disagreed with her. Impact: You had no pattern to follow in nancing-of the Channel Tunnel. Over working on the Channel Tunnel. You nearly 35 years he has held board-level Impact: What similarities were there were inventing that as you went along, I appointments in both public and private between the two projects, the Channel take it? sectors Df British and international Tunnel and the British National Oil industry, Including steel, oil and gas, Company? SirAlastair: I suppose so, in the sense and nuciear and conventional power that it was a joint venture between two generation, as well as transport. Impact Sir Alastair: They were both capital- countries. First of all, the two govern- discussed a number of issues with him, intensive projects in capital-intensive ments signed a treaty with each other. ranging from his insights gained from industries. Between the oil company Then within the terms of that treaty, the his years with the Eurotunnel to his and the Channel Tunnel, I participated Treaty of Canterbury, the countries thoughts on how governments and the in the turnaround of the British Steel granted a concession-in tially 55 private sector could work together more Corporation. Most of my career has years, later changed to 99 years-to a effectively in the planning, financing, been in capital-intensive industry. company that they stipulated had to be and management of major infrastruc- 50-50 British-French. ture projects. I've found that you have to study projects carefully, think hard, and do The partnership was to consist of two Impact: What have been the most your very best to cost them properly companies, one English and one interesting, satisfying projects that and establish the right relationships French, tied indissolubly together. If you've worked on where everything between the parties. You have to be you owned a share in one, you had a seemed to come together for success? prepared to go on spending money for share in the other as well. You couldn't some years before you see a return. separate them. Half my desk was Sir Alastair: One project that comes to There are not enough people in the British and half my desk was French, in mind was some 25 years ago when I world with that long-term view of life, effect. was appo nted the first and founding but, frankly. I've been comfortable with managing director of the British it for the better part of my career. We operated under a single manage- National Oil Corporation. The British ment, which reported to a joint board led government of that day wanted to get Impact: It sounds as if part of the by British and French cochairmen. I was involved ii the development of the very challenge is to educate and persuade. the Brtish cochairman and Andrb large Nor-h Sea oil reserves. That kind Benard the French. Both of us dealt with of project was relatively new to us then. Sir Alastair: I think it is, and I think it the two governments, a single board, a We had to set up an offshore upstream points up one of the principal problems unified management, and a unified oil company from scratch. The company of infrastructure development. Too project direction. There were five British then raised a lot of money in the United often, politicians-and others as well- and five French contractors who States and invested heavily in explo- have time horizons between six hours sponsored the projects, and they were ration anc production in the North Sea. and six months. They have to recognize bound in a risk-sharing joint venture. I enjoyed that, and then, of course, I that they can't declare victory after a became involved in the Channel Tunnel week or two and can't micromanage the Yes, it was a unique project, and the 10 years later. details of expenditure or changing cir- most remarkable thing about it was the J R Issue - 2 tI construction contract. It stipulated that changing the specifications all the time banks in major projects. They helped the common principles of English and without regard to costs-if one thinks finance the tunnel. Some of them have French law were to govern the contract. it's a light-rail system and the other been privatized, and perhaps things will To this day I've never met anyone who thinks it's the backbone of the national change. Over the decades, France has knows of any common principles transport system-you're going to end established a consensus among voters between the two, but we got the tunnel in tears. and taxpayers that the state should built. provide funds for infrastructure projects The failure to start from a common and that infrastructure projects can be Impact: We know that sometimes these understanding of the objectives, the done well and will improve everyday public-private partnerships can be outputs, the specifications, and the prin- life, whether it's electricity or water or bumpy rides, but we know that they can ciples of funding can result in endless something else. be quite useful as well. What particular trouble. Thats a big challenge because challenges do you think these partner- the project won't get off the ground. When the Japanese set out to build a ships pose? On the other hand, what Sometimes the parties to the projects bridge and tunnel across the mouth of are some of the opportunities they decide to sort things out as they go Tokyo Bay, they assigned to the state all present? along whenever they strike a difficulty. the costs and the difficulties of getting But that approach doesn't work; it's to the point where the first bulldozer Sir Alastair: A quick word on the oppor- better to look ahead and resolve arrived and cut ground. The state had to tunities first. When I was just starting potential troubles in advance. settle the worries of villagers who had out in the 1950s and 1960s, big projects to move, compensate the fishermen usually had to be funded by the govern- Impact: Is there a particular example who could no longer fish in the area, ment. Capital markets were relatively you could point to, where everyone got and control the entire planning process. slight by comparison with the public it right? The government brought it to the point purse, even in the United States and of construction and then turned over the Britain, The U.S. interstate highway Sir Alastair: My example is not a very project to a corporation. The govern- program, for instance, was not a private big one, nor is it an international one, ment held the shares initially until sector program. but it is illustrative. There was a bndge enough progress had been made to built here in Britain-sometime in the confirm the completion cost estimate. But that changed over the years. Now, a 1980s, I think-across the lower Then the government planned to sell off big project by today's standards is too Thames River between London and the shares but still remain involved. big for the government to fit within an sea. It is called the Dartford Bridge. It annual budget approach. We must look was a private sector proposal to gov- The government gradually withdrew to the world capital markets to fund it. ernment if the govemment would grant from the project, though I don't know if Although various countries like France a concession enabling the private they completed the withdrawal or have tried to find pragmatic middle investors to put a toll on the heavy remained involved afterward. But at the ways, with some success, in general, motorway traffic that was going to use end of the day there was a toll link that big money for long-term investment the bridge, the investors would raise the was remunerating what had become needs to come through the private money and run it. It was a very carefully private sector capital put into a suC- sector. Therefore, it's important to build worked out proposal, put very fully to cessful project a relationship between the public the government, argued about for quite interest, the public purse, which is a long time, tied down in detail, and built Confidence to have government paying for part of the project and stipu- to time and budget. I know of bigger involved in long-term agreements with lating the public services to be cases that have also gone well but the private sector is evident in France, provided, and the private interests, the that's a good example where all the and the confidence to be in business business-for-profit approach of the issues were tied down first and kept as with the private sector but withdraw pro- private sector. simple as possible and where each gressively as the risks diminish is party's interests were addressed in evident in Japan. The benefit is that you can get a lot advance. more money together in a public-private That confidence is missing in this in Britain arrangement, but that's also where the Impact: Is there any country that's par- because we don't have a culture of long- challenges come: you've got to put the ticularly adept at public-private partner- term investment here. The attitude over interests of the two sectors, public and ships? there is to be admired, for it takes confi- private, side by side and find compro- dence on the part of government to see mise between them. We've now had Sir Alastair: One always believes that long-term investment as essential and to enough experience to know what the the Japanese do these things better or view major risk taking as a function of gov- challenges are. Whatever the particu- used to when they were doing them. emient to produce public services for the lars, at the end of the day you have to The French also seem more sensible people. To the extent that we can get satisfy the same questions, allocate the about them than we are. There are private sector capital to take on more risks same risks, and resolve the same reasons for that, but they're partly that it can assess for prices that we can problems. cultural. In France along the highways accept, we pull private sector capital are signs saying, "Here the State Is further into such projects. But if every One of the biggest challenges can be Investing for Your Future," and the negotiation is a sort of poker game played the underlying cultural approach of the people think that's good. France has out with mutual mistrust, we can't accom- parties. If the public and private parties also over the years had a very well- plish as much. don't understand each other and developed system of state-owned believe they are being taken advantage banks that operate like private sector Impact: You mentioned long-term risk, of by the other or that the other is banks and are willing to act as core which brings up a question relating to . ' ... .- -------............, 1- insurance markets. There is the view to a level that can't be priced. I have carefully to avoid building n inflation. that post-September 11 insurance is great faith in the ability of the market- The parties have to figure out in very difficult to get and that investment place to price risk, but past a certain advance what to do if the currency guarantees are very difficult to come by. point either the government underwrites degrades and prices escalate in special There seems to be less appetite for the project if it can, or the project circumstances. If you try to hold the long-term risk than we might have seen doesn't happen. ceiling on the electricity price to the earlier. Is that your sense? consumer despite changes in the fuel Impact: If we could talk about emerging price, you can get into difficulties. Tying SirAlastair: Maybe so, but I don't see markets for a moment, do you see any down that contingency is very any good reason why it should remain promising opportunities in infrastructure important. that way Insurance markets have dealt investment in the developing world? with risks-that's what they're there Impact: Should infrastructure projects, for-over the centuries. The market Sir Alastair: For 10 years after its pri- because of their price tags, be set aside needs the opportunity to assess risk vatization, I was on the board of the during recessions? and price risk, and it can put a price on major electricity generator here in just about anything. If the price is too Britain, National Power, and we set up a Sir Alastair: I've got into some quite high, the industry will figure out a way to business in the independent power energetic arguments with cur Treasury modify or moderate the risks by laying plant (IPP) market around the world. here in Britain when they behave like all off part cf it or subdividing it, We took on a lot of projects, most of treasuries. When there's a recession, which went reasonably well. they want to reduce expenditures. It's Some fcrms of insurance and credit easy to cut back on projects-all you backing will be more expensive in the That sort of project has become a do is draw a line through the project future than in the past. In the capitalist commodity now. You package these plan and it's dead. It's an attractive world, we have got used to the notion combined cycle gas turbine facilities, option compared with laying off that massive banks lend huge sums of which are very efficient electricity-gen- workers. money wnether for commercial property erating plants, and supply them on or whatever reason at very narrow standard conditions to all sorts of In my view, though. it's counterproduc- margins-50, 100, 150 basis points. A countries. The market is probably being tive in the long run to cut projects. If you few bad loans can wipe out all the well served now, and whether there are commit today to a long-term project like profits earned by lending with narrow further opportunities depends on what a new railway line, a major power margins. Margin spreads would widen you consider an opportunity. Because station, or a big sewage development, for a wnile, and insurance prices of increased competition, the opportuni- not much money gets spent for a year increase until perceptions of risk ties to make a great deal of money are or three, depending on the planning stabilize and a comfort with risk returns. now limited. situation Spending in the early days of After every major hurricane in the the project on-site is also quite restrict- Caribbean, insurance companies Highway building is probably similar. ed. Spending starts in earnest only question why they are doing that kind of Railways and more complex projects in later. The time of heavy expenditure business, but they come back, most of the emerging markets are comes around when the recession is trickier-everyone has to think hard, over. Impact: Do you see any kind of long- and words like government guarantee term effect of the events of September and World Bank backing take on more Therefore, as you go into a recession, 11? meaning. say 1, you should commit energetically to project development. If you don't Sir Alastair: In political and diplomatic Impact: Could you comment on the dif- commit to project development until the terms, there has to be more dialogue ferences you have observed between boom returns, you will be disbursing between opposing sides. There has to working in emerging markets and through the next recession. It may not be more tolerance. We in England, for working in the developed world? always be as dramatic as that, but that's instance, look with some amazement the general pattern. I find that Treasury on the c0 years of bloodshed in Sir Alastair: One difference has to do people here are remarkably unreceptive Northern Ireland. But even more than with the chain of fuel supply-generating to that debate. the bloodshed, we look with costs, capital costs, and electricity amazement on the depth of feelings on price. Different countries have different Impact: What are the sectors you see the two s des The conflicting parties ways of approaching the problems. If a as the most vulnerable now? find it so difficult to sit down with each country has poor quality, cheap local other. Gradually-and this is a great coal, for instance, they face problems Sir Alastair: The key story of Britain is achievement by Tony Blair-they're that are not an issue if there is a ready transport. Both road and rail get cut beginning to do so. And the blacks and pipeline supply of gas. Or if the gas back in every recession. The authori- the whites in South Africa under Nelson field has to be developed to supply the ties think that because there is less Mandela eventually sat down together power units, problems other than power traffic today, for example, they can't and are Norking hard to maintain generation have to be addressed. justify the project despite the fact that political un ty and make it work. the long-term trend is upward. Another difference between working in Recessions do place transport projects Conflict produces destruction-there's developing and developed countries is at risk. no other way of putting it. And if there's the possibility of deteriorating currency threat of destruction, insurers will hold in developing countries. Because dollar Many other infrastructure sectors are back. People's perception of risk will denomination of a number of prices is privatized fully here in Britain. There's a increase, and that perception could rise common, people have to proceed very pipeline of projects in the works, parti- IFC ularly in water and electricity. Telecoms comes through from France and on into system, because railways are not prof- are In recession, but that was virtually a Holland or Germany. But the Belgians itable almost anywhere else. bubble. People were overclaiming what have a 10-year plan out of which they these new forms of telecommunications create a 5-year capital expenditure Impact: Would you point to the lack of could do for us and touting the booming budget. They have, of course, a 1-year funding as one of the key problems? business to be had. That bubble has operating budget, and every year the 5- burst good and proper. Pending or year capital budget advances one year. Sir Alastair. Underfunding is a key actual overcapacity in some areas may But the government's permission to problem, but the structure of privatiza- well result in recession in some project spend for the next five years is tion was not successful, either. Those sectors. committed. who arranged the privatization sep- arated operations from infrastructure, Impact: Sir Alastair, you've been That notion is quite foreign to Britain; we which is what Brussels wants. That can involved in infrastructure for a long time, don't have that culture. The British be done, but you have to pay a lot of and you've seen many trends. One of Treasury has managed the economy for attention to how it's done and how it's the most important these days is the rise cash for decades and thinks it should be regulated. Privatization of the rail of the Internet. Can you explain how the very shy indeed about things that cannot system here in Britain has got to be Internet has affected the world of infra- be tumed on and off from one year to revised, not reversed, revised. That is structure? another. Short-term thinking is not con- Mr. Bowker's main challenge. structive when it comes to putting the Sir Alastair: I'm sure that the ease of infrastructure of the country in place. As Impact: Do you think the lessons have communication and particularly the a result, those elements of the infras- been learned? improvements in procurement made tructure that are still in the public sector, possible by the Internet are bringing rails and roads, have been underinvest- Sir Alastair: I'm not convinced. There many benefits. In the motor industry, for ed for decades. In contrast, telecoms is confusion at the moment over the example, getting the component and water, to take two examples that status of the infrastructure company supplies or the subassembly supplies to were privatized by Mrs. Thatcher in the Railtrack, and I don't think the govern- the major automobile companies has 1980s, have had enormous investment ment knows its own mind. I have no become more efficient though the that we hope will produce good results. doubt that Richard Bowker will help Intemet. The creation of an a-commerce them to get clear on it. But then they market in tenders for large volumes of Impact: Your days at the Strategic Rail have to allow him to be active in moving product is quite useful-it makes the Authority are coming to a close. Do you in the directions agreed on, sooner prize of being the low-cost producer have any good advice to pass long to rather than later. even greater and it encourages global- Richard Bowker, your successor? ization. Impact: We are interested in knowing Sir Alastair: I wish him well. He's a what your next challenge will be. Countries that are just getting into e- very able man, and he's younger than I business and are competing with indus- am so he can stay with it longer and see Sir Alastair: Well, I shall be 64 in tnalized countries may find entry into the it further through if it gets going properly. January. I'm prepared to take a side new world a bit painful, though. I'm not seat and try to advise people on some of sure what greater exposure of informa- The situation in rail here is not happy. It the difficult situations they face. I hope tion does for the economies of the hasn't been a successful privatization. that we can get a bigger bang for every developing countries. It's probably the first unsuccessful priva- buck of investment and get a good deal tization in Britain, and it's unsuccessful of infrastructure in place, not just in the Impact: One thing we believe here at for a variety of reasons-some struc- emerging markets but also in places like the International Finance Corporation is tural and managerial and some Britain, so that the quality of life can be that infrastructure is critical to economic stemming from government attitudes, better assured. development in emerging markets. Is what you might call cultural again. You that message getting across? cannot prevent ministers from thinking The conviction with which I started my they are responsible for travel and career is still valid, I think: we need Sir Alastair: I think people in general transport, and if they feel responsible, investment, investment, and more are clear on that, and they're even you can't stop them meddling. investment to produce better public clearer on it in Brussels. Integrating services, better facilities, better edu- Europe, bringing more and more My message to Mr. Bowker would be to cation, better health care-all of this is countries into the European Union, is use the leverage of his appointment to absolutely essential to an improved highly reliant on transport and other get the prime minister's support, to get quality of life for all of us. Governments forms of infrastructure-telecoms, policy directives given to the Strategic need to bring in experienced and skilled water, electricity, the lot. Brussels places Rail Authority, and to create space for people to think projects through; then a strong emphasis on the need for every the SRA to do its job. The SRA needs those governments need to say what investment to facilitate commerce the long-term commitment of funding they are going to do and fund-then do across the European Union. from the public purse to create what has and fund what they have said. Long- to be a giant set of public-private part- term trust in a government's skills and What differs between the countries is nerships. intentions is a prerequisite for public- their culture of long-term investment. private partnerships in infrastructure. Belgium, for example, has a 10-year The railways in Britain won't be run with view of the future development of its purely private capital. Strictly private railway. Belgium is not a big country, ownership doesn't work for rail and quite a lot of its railway activity anywhere except in the American freight - Fc By Danny Leipziger and Vivien Foster B ack in 1990, it was almost a problem lies not so much with privatiza- which barely covers the cost of reading tenet of faith that infrastructure tion itself as with the political objectives the meter and issuing the monthly bill. services were best provided by for which it is typically used. the state. Who could have Status Quo predicted -hat within a decade more than Often prices do have to increase sub- 120 developing countries would have stantially in the context of privatization. Whatever the concerns raised by privati- been willing to invite the private sector to Where this happens it is usually because zation, it is equally important to participate in their water, electricity, tariffs have been kept well below costs recognize that the poor have not fared telecomminications, or transport for many years, generating a substantial particularly well under the traditional services? Or that the private sector drain on the public purse and diverting model of state ownership. would ha\e accepted this invitation so scarce resources from other vital areas enthusiast cally, increasing its infrastruc- of public expenditure. In the majority of It is true that state-owned providers keep ture investments in developing countries states in India, for instance, power sector tariffs low and take a relaxed attitude to by a factor of ten? subsidies actually exceed expenditure illegality and nonpayment. This very on public health services. Put sim-ply, in policy, however, has left many operators Social Concerns many countries it may be a choice starved of financial resources. As a between cheap electricity or childhood result, service quality is often very bad, Although private sector participation in vaccines. In many South Asian cities, for eXaMple. infrastructure services has become the families receive water for only a couple new orthodoxy, many remain concerned Moreover, poor families often don't of hours at a time-and this not even abouit the social implications. It is often represent a very attractive commercial every day- Moreover, the mneager argued that privatization leads to tariff prospect. Many of them live in outlying revenue collections of state-owned hikes that make services unaffordable settlements that are costly to serve and utilities mean that there is little capital left for the poor and that profit-oriented multi- consume only modest amnounts of infra- over to finance network expansions into nationals are unwilling to provide structure services, which they may not the slums and villages where the poorest services t.o urban slums and remote even be accustomed to paying for. In the families live. villages. There is undoubtedly some Bolivian city of El Alto, for example, poor legitimacy to these concerns. As this families spend only about a dollar a Ironically, the poor who live beyond the article aims to show, however, the month on water and sewerage services, reach of network utilities often end up Issue - @ f ( -- 1|IK paying much higher prices to meet their sumers. In Colombia, for example, 80 Privatization also opens up access to an basic needs. For example, in percent of those benefiting from water important new source of capital. The Guatemala, households with electricity service subsidies are not poor. Similarly, total flow of private capital to developing pay less than $0.10 per kilowatt hour to in Honduras, 80 percent of the overall country infrastructure in the 1990s was light up their homes, while those without value of electricity subsidies is captured nearly $550 billion, or more than three rely on candles that cost the equivalent by families that live well above the times the $150 billion foreign develop- of $5 per kilowatt hour. In Port-au-Prince, poverty line. ment assistance to the infrastructure Haiti, households with piped water con- sectors over the same decade. nections pay $1.00 per cubic meter, but Nor is illegality necessarily in the those without pay $10 per cubic meter to interests of poor households. Another It would clearly be a mistake for any obtain water from private vendors. Such article in this issue-"Bringing Light to country to overlook dividends of this price differences between the Rio's Slums"-vividly illustrates the risks magnitude. The key question is how the "connected" and the "unconnected' of electrocution and electrical fires faced benefits of privatization are distributed make the tariff increases that are often by poor households that steal from the among different stakeholder groups in introduced following privatization look electricity network. It also shows how society and whether they can ultimately comparatively modest. establishing a formal relationship with a be channeled toward the poor. utility can be a first step to establishing Even more ironically, the subsidized the proof of residence necessary to Conflicting Interests tariffs offered by many state-owned obtain credit and access to other providers often fail to reach the poor. services. Policymakers face great challenges, This is partly because a high proportion given the number of conflicting interests of the poor are unconnected and so are Privatization Dividends that arise in any privatization transaction. unable to access the subsidy. It also reflects the fact that utility tariff structures If state-owned enterprises have histori- The Ministry of Finance will tend to are not very effective in targeting cally failed the poor and privatization regard privatization primarily as a subsidies toward low-income con- raises potential social concerns, what revenue-raising exercise. The prefer- then is the way ence will therefore be for a transaction forward for bringing design that maximizes the sale value of essential infrastruc- infrastructure assets and reduces ture services to the reliance on state subsidies. This can be millions of poor achieved by keeping tariffs relatively people around the high, minimizing investment obliga- world who still do tions. and postponing the introduction not have access? of competition. The answer is probably not to From the perspective of existing discard privatiza- customers (generally the better-off), the tion, but rather to priority should be to keep service tariffs make privatization as low as is compatible with providing an work for the poor. adequate quality of service. This objective is best served by selling assets There is consider- off cheaply, minimizing major rollout obli- able evidence that gations, and speeding up the introduc- pr- i v a t priv atization tionofcompetition. - creates substantial dividends. Private For those who currently lack access to management of infrastructure (generally the poorest), the services often most important objective is to accelerate leads to significant the expansion of the network into under- reductions in costs, served areas-regardless of the fact that , particularly when this is likely to lead to higher tariffs and a competition is also lower sale value for the enterprise. introduced or when there is at least How these conflicting interests are effective regulatory resolved is ultimately a question of control of prices. It political priorities. is estimated, for example, that the It appears that in many countries fiscal improvements in concerns, rather than poverty issues, ,43 _ _: X efficiency following have been uppermost in the design of &_ iAL the infrastructure privatization transactions. Worldwide, 42 p r i v a t i z a t i o n percent of the private investment program in attracted to the infrastructure sectors Argentina were as during the 1990s was captured by the -z ...Zs: much as 1 percent state in the form of asset sale revenues, of gross domestic rather than being reinvested in infra- product. structure networks to upgrade and tIFC Issue 2 expand services. In the Latin America t region, the proportion captured by the state is even higher at 58 percent of total private investment. This is not necessarily a bad thing, if the additional fiscal resources are judi- ' _-- -j'- ciously allocated to pro-poor invest- -".' '-._ ments (such as primary education, rural - - .. roads, or urban slum upgrading). But there is no guarantee that this will actually take place. Moreover, such indirect tenefits of privatization are not very visible politically. Political Will = There are some important examples of privatization transactions, however, that have been consciously designed with - the interests of the poor in mind. They offer important lessons for countries gn. aiming to privatize in a socially sensitive - manner. Furthermore. they illustrate that-when the political will is there-pri- communities. Moreover, every dollar of A Two-Edged Sword vatization can be made to work for the public subsidy has leveraged at least two poor dollars of private investment. To conclude, privatization is a two- edged sword. In the right hands, it can The first lesson is to make the expansion The fourth lesson is that social policies be deployed to harness the efficiency of access for the poor a central objective can be introduced to protect the poorest and resources of the private sector for of the privatization program. The from tariff increases necessitated by pri- the achievement of social objectives. Bolivian covernment, for example, con- vatization. In Chile, water tariffs had to But mishandled, it may leave the poor sciously chose to award the concession be doubled to pave the way for private where they have always been: contract for water and sewerage participation. To mitigate the impact, the namely, "unconnected" to the most services in La Paz and El Alto to the government introduced a targeted basic necessities of life. The choice is private operator willing to make the subsidy scheme to ensure that no family ultimately a political one. largest number of new connections in spent more than 5 percent of its budget low-income neighborhoods. The winning on water bills. Eligibility for the subsidy is Danny Letpziger is director o i finance in bidder was contractually obliged to determined on the basis of a household the Private Sector and Infrastructure connect 72,000 families to piped water interview that reviews a broad range of Department at the World Bank. Vlvien and 38,0CC families to sewerage over a socioeconomic factors. Although the Foster is an economist in 1}e Private five-year period. subsidy scheme costs the Chilean gov- Sector and Infrastructure Department ernment about $40 million per year, this of Latin America and Caribbean Region The second lesson is to use the privati- is less than half of the $100 million of at the World Bank. This art,cle will be zation process itself as a means of state subsidy to the sector before the published in the February/larch issue financing the expansion of access for the reforms, of Infrastructure Journal. poor. In Guatemala, the total net proceeds Df the sale of the two national electricity distribution utilities-some $110 million in all-being used to finance an ambitious rural electrification program. C The program aims to electrify 280,000 homes and has already reached more than 60,0G0 families. The third lesson is that the private sector is often willing to provide services to unprofitable communities, as long as some financial incentive is provided by the state. Io Chile, Guatemala, Peru, and Colombia, capital grants have been competitively allocated to the private operator willing to provide (unprofitable) rural services at the lowest subsidy cost to the government. These programs have succeeded in bringing public telephone services to some 19,000 rural WFC Rising, Insurance Cast C Flila nce ' §' ~~~~~-- ,p- I': __ __ .-~ ~ w ~~~-p-------. t.*uS~~~~~~~~~~~~~~~~~~~~~~~~- a' , '- .. By Afshin Molavi .- _i_ V-1 Phlto ,y Norbert Sch ller > A s the dust settles in the deductibles, new restrictions on Higher Costs, Tougher Terms aftermath of the terrorist coverage, lower appetites for risk, and attacks of September 11, the the rise in importance of political risk Insurance companies generally raise worldwide insurance industry insurance premiums in the wake of heavy capacity- faces the difficult prospect of recovering reducing disasters in order to build up from its largest insured loss in history Impact-Private Sector Partners sur- new reserves All told, 10 percent of the Estimated losses range anywhere from veyed the infrastructure finance world's insurance capacity-the amount $30 billion to $70 billion, far exceeding insurance market in wide-ranging inter- of money available for insurance-was the losses incurred by the devastating views with leading insurers, reinsurers, wiped out by the terrorist attacks Bill Hurricane Andrew of 1993, previously brokers, specialists, and project Chew, a managing director and infras- the highest property and casualty loss financiers Although insurers noted that tructure specialist at Standard & Poor's, well-structured deals will still be insured says that "project financiers will have to In the face of such steep losses and the at reasonable rates, project financiers face these higher costs with a more inevitable higher risk perception engen- and managers expressed alarm at the selective approach to investments in dered by the terrorist attacks and the current market "I have never seen such 2002 We will see a crowding out of the subsequent war in Afghanistan, private high premiums," one veteran prolect marginal deals, the deals with tight sector infrastructure financiers will have finance observer said "Even good, financial schedules that benefited from a to face new insurance market realities well-structured deals are facing difficul- soft insurance market The terms and higher premiums. renegotiation of ties in getting reasonable insurance the premiums on those types of deals existing cover, substantially higher rates Premiums are way too high" won't make economic sense" ,K 1~~~~~~~1r ~~~~~~~~~I Daniel Riordan. executive vice-president "Despite the fact that these were good premniums will not be felt until late 2002, and marnaging director of Zurich risks, market capacity has shrunk, and most analysts say. In the meantime, new Emerging Markets Solutions, a sub- the projects could be renewed only at projects will be up against a tougher sidiary of Zurich Reinsurance, said: "The substantially reduced terms and at a entry market and existing projects will contractioni in the market is significant. higher cost," she added. face tough renegotiations of cover. Our colleagues in London are pulling Parvez Ghias. of Pakistan-based Engro, back substantially. Still, I believe that Mr. Jobko, Ms. Ahmid, and many others a leading fertilizer producer, faced a par- good dea s will be insured. Insurers are waiting anxiously for the reinsurance ticularly difficult renegotiation. "Our might be more selective than in the past, renewal season in January to see what premiums shot up from $327,000 to but that dces not mean that good deals sodt of capacity might be on the market $1.12 million, our deductibles for PDIMD will lack for coverage." in the year 2002. Market insiders, went up from $33,000 to $1 m Ilion and however, are not optimistic that the from 14 days to 30 days," he sa d. "Local Still, project financiers and managers are January renewals will bring much relief insurers have also reduced cover. There having a tcugh time. Dean Jobko, a risk to the current situation. is no appetite for Pakistan risk and insurance specialist with Mirant, anywhere," he said, noting that there is says that "the post-September 11 market Building New Capacity little relief on the horizon. "I see the is a very difficult one-" He noted that "the insurance situation in Pakistan deterio- insurance market had been tightening Project finance insurance managers are rating further.' even before September 11, but also watching closely the rise of a new September 11 exacerbated the situation group of Bermuda-based insurance Pakistan, a front-line state in the ongoing greatly." s irant, which operates two companies that are sprouting up in the war in Afghanistan, has been especially coal-ired plants in the Philippines that wake of September i1 to fill the need for hard hit, but Engro is not alone. Paul are supported by IFC investments, has new capacity. This new group of heavily Aird, a risk specialist with global power- managed to "work through the current capitalized firms is expected to enter the house Bechtel, notes that several market," Mr. Jobko said, after renegotiat- market in early 2002. Some of these Bechtel projects came out of their annual ing its cove- on November 1. Asked if the firms are backed by leading American renewals with renegotiated higher two projects might have been able to get and European investment banks and are premiums. He also noted with concern off the gracund in today's insurance expected to focus primarily on the the number of exclusions being added to market, he said, 'Probably not." American and European markets. Still, policy wordings. "If you go into a renewal the rise in capacity should be beneficial and come out with 20 new exclusions Merunisha Ahmid, insurance manager at to project financiers in emerging added to your policy wording, your risk IFC, sees an alarming number of markets. rises immediately," he said. 'On existing projects sloweed by insurance worries. "A projects, the higher rates and new exclu- large number of our projects in the Costly Renewals sions disrupt the initial calculations made infrastructure and oil and gas sectors by the project developer, who factored in experienced difficulties renewing their The effects of the Bermuda firms and the a certain amount for insurance but is programs post-September 11," she said. rise in capacity as a result of the higher faced with a new, much higher rate and IFC new exclusions for the next year and Political Risk Insurance but I think that is likely to rise." Zurich potentially beyond." Emerging Markets has received new Multilateral and national investment interest from infrastructure companies Mr. Aird also noted that war risk guarantee agencies are expected to looking to cover existing risk, Mr. insurance for airport projects is step up their role in project finance Riordan said. "naturally much more expensive than insurance to help cover the rocky before September 11." Airport projects market. The Multilateral Investment "With the drop in capacity, we are all can expect to face the highest Guarantee Agency (MIGA), a member looking for new ways to serve our premiums, analysts say, along with of the World Bank Group, may see customers,' he said. transport and shipping. "There is a more requests than usual in fiscal year bullseye on those sectors right now," 2002. Sir Alastair Morton, the outgoing Mr. Chew of Standard & Poor's said. chairman of the Strategic Rail Authority 'Premiums will be quite high there." MIGA has developed considerable in the United Kingdom and veteran of experience with complex infrastructure infrastructure project management with Declining Terms projects. In fiscal year 2001, these more than forty years of experience, projects accounted for about 30 percent offers some long-term perspective on Also worrying, insurance terms are of MIGA's total outstanding portfolio. the issue: declining dramatically. 'The days of ten- The projects guaranteed included the year terms are over," a London-based North Tollway transportation project in "Insurance markets have dealt with broker said. "These days, one-year Manila, a water services project in risks-that's what they're there for- deals are more likely.' Project Finance Ecuador for which a performance bond over the centuries," he told Impact in an magazine, a leading industry observer, was also covered, and a project to interview (see article in this issue). "The noted that insurance behemoth Lloyds support the upgrading of newly priva- market needs the opportunity to assess "may start to limit their terms to 12 tized electricity distribution companies risk and price risk, and it can put a price months-anywhere." Lloyds has been in Moldova. on just about anything. If the price is too particularly hard hit by the September high, the industry will figure out a way to 11 terrorist attacks. Standard & Poor's "MIGA's risk mitigation products can modify or moderate the risks by laying recently downgraded Lloyds to A- really provide confidence to investors in off part of it or subdividing it. Some minus. these uncertain times,' says Philippe forms of insurance and credit backing Valahu, manager for infrastructure at will be more expensive in the future Mandy Woods McNeil, vice-president MIGA. "We are well positioned to than in the past. In the capitalist world, and head of infrastructure and project guarantee complex infrastructure deals we have got used to the notion that finance at Marsh Insurance, explains in keeping with our broader mandate to massive banks lend huge sums of the reality of today's market this way: promote FDI flows." money whether for commercial property "Today, insurance companies will want or whatever reason at very narrow to make sure that project participants Strong Demand for Insurance margins-50, 100, 150 basis points. A have their interests aligned fairly. All few bad loans can wipe out all the sides should have a fair share of skin Of course, rising insurance costs and profits earned by lending with narrow exposed. In the past, the insurance war risk concerns are not the only margins. If margin spreads widen for a firms exposed more skin to risk. Now, factors in creating a more challenging while, insurance prices will increase there will be demands for more environment for infrastructure invest- until perceptions of risk stabilize and a equitable arrangements." Still, she ment. A simultaneous economic comfort with risk returns. After every says, 'if a project is well-structured and downturn in Japan, the United States, major hurricane in the Caribbean, the market fundamentals are solid, then and the European Union has slowed insurance companies question why insurance companies will display world growth and forced project they are doing that kind of business, but interest." financiers-like everyone else-to they come back." retrench and reorder priorities. Still, the She said that Marsh is meeting the demand for private participation in In the end, despite the tight insurance challenging new environment by infrastructure projects remains strong. market expected for the year 2002, a "thinking more creatively about what we Worldwide, there are enough telecoms, confluence of factors-the rise of the can do to create capacity in order to water, power, and energy deals to keep Bermuda firms, the build-up in capacity stay on top of the well-structured deals, project financiers busy. through the raising of premiums, which will always attract interest." She stepped-up activity by multilateral and said that "the portfolio of tools available Daniel Riordan of Zurich Emerging national investment guarantee for project finance is expanding" Markets Solutions puts it this way: 'I agencies, the regenerative nature of the think everyone will be cautious in this insurance industry, and the increasing The rising insurance costs have also market, but everyone also knows that demand for private participation in put a heavy burden on infrastructure the demand for infrastructure projects infrastructure-provide a silver lining to isers, such as shipping companies and remains strong. As long as the demand the insurance cloud hanging over the airlines that face prohibitively high war is there, industry people will come up project finance market. risk insurance costs. Shipping lines that with creative ways to accommodate that serve the Middle East and South Asia demand." have been particularly hard hit, with several companies reporting a reduced Mr. Riordan expects a rise in the impor- flow in shipping. Several national gov- tance of political risk insurance cover. Afshin Molavi is a communications analyst ernments have stepped in to help "Currently, about 10 percent of foreign at the lnternational Finance Corporation airlines pay their rising insurance costs. investment is insured for political risk, and an Impact staff writer nsse - 2 sFinding AT y-- urDizche rni By Desmond Dodd U ntl recently a telephone line vacuum. "There was no alternative," small telecom projects in Africa. But offered little to callers in the says Thomas Chopin, MSICIH's director Chopin believes that his company's l2emocratic Republic of the of corporate finance. By October 2001, string of operators is proving t1nat small Congo (DRC). Even the lucky Celtel had 129,000 subscribers for its can be beautiful in infrastructure. ones with access grew accustomed to mobile telephone service. The company busy signals, since the network was is preparing to expand further, bringing As a rule, banks today prefer large, usually clcgged. And there were few the capital expenditure for the project to internationally recognized. anc proven places to call anyway. Under the state- around $50 million. And that's one of sponsors engaging in big infrastructure run monopoly somewhere between MSICIH's bigger projects. projects. 'We don't like small projects," 5,000 and 20,000 telephone lines- says Martin Weurth, the New York-based depending on whose figures are MSICIH is on the leading edge of private director of global project finance at accurate-were responsible for linking a telecom investmnent in sub-Saharan Germany's HypoVereinsbank. He population Df over 50 million. Africa. In addition to operations in the doesn't rule out financing niche projects, DRC, the Dutch holding company's but he doesn't seek them out either. "There was only one company and the projects include cellular operating sub- Instead, he looks for projects in the fees were very high," recalls Pierre sidiaries in Gabon, Sierra Leone, lowest-risk developing countries, like Pollie, an import-export agent in Uganda, and Zamnbia, and it is looking at China, and with financing needs to Kinshasa, referring to the situation that other African markets. The continent is match the market involved. The bigger prevailed until the late 1990s. The user woefully underserved, even taking into the country risk, the more important it is of a Celtel GSM-standard mobile phone account the income level and conflicts in that a project is structured carefully and now finds that calls are declining in price the region. "The need is definitely there is landmark in nature, thus ensuring a while service is imnproving in a competi- and the solution is very simnple," says high profile. "This has been our policy all tive market. Pollie is able to get more Chopin. along, hut the current downturn rhelps us done because he handles simple tasks see that we are comfortable with this from his office rather than by constantly Yet conventional wisdomn suggests that position," Weurth notes. traveling around town. "Business is niche infrastructure projects-projects much easier." he declares, that are unique to a particular country, or African projects are a particularly hard small projects in high-risk countries, or sell. The continent tends to be perceived Netherlands-based Mobile Systems projects small relative to the size of the not as a hotspot for investment but for International Cellular Investments market-don't make sense for financiers conflict, instability, and the associated Holding (NISICIH) set up Celtel to when compared with large projects in risks. In the DRC, for example, then- acquire a license in the DRC and capi- more stable countries. As a result, President Laurent Kabila was assassi- talize on the obvious business opportuni- financiers are hardly knocking down the nated in January 2001, and the country ty created by the telecom market door for the chance to lend or invest in is only tentatively recovering from ethnic MP.E. M~~~~~~~~~;ue .2 F i FC- _ strife and civil war that has plagued the risk rise, compared to only 42 that funds at the holding company level. With country since 1994. "Africa just hasn't enjoyed lower risk perception. Higher a track record in the region, MSICIH's registered with commercial financiers," risk perception tends to translate into a Chopin claims a growing number of notes Randall Riopelle, an investment declining willingness to lend or invest, banks are more willing than in the past to officer at the International Finance especially in countries already rated high talk about future financing, even in Corporation, the private sector finance risk. today's difficult markets. arm of the World Bank Group, which has provided loans to MSICIH and its During headier days of capital flows, Jose Antonio Sousa, finance manager at subsidiaries. making the case for projects with lower Brazil's AGC, says that while the market profiles than large, landmark privatiza- for capital is not good, creative and Problems financing commercially viable tions might have been easier. Private complex deal structures would make it small projects extend beyond Africa. financing of infrastructure in developing possible to arouse interest among some Brazilian company Andrade Gutierrez countries boomed between 1990 and sources of finance. Even when he can Concessoes (AGC) is a leading partner 1997, increasing from less than $16 hold the attention of banks long enough, in infrastructure projects, including toll billion to more than $120 billion, however, his company may not be happy road and water concessions in the states according to the World Bank's Private with the outcome. "Our main concern is of Sad Paulo, Rio de Janeiro, and Participation in Infrastructure (PPI) pricing," says Sousa. Loans costing Parana. Yet when reviewing Brazilian 10-12 percent after inflation are fre- projects, particularly the more ordinary _ Ip1u _ quently too expensive to accept on ones, international sources of capital find Projects in Developing Countries, projects that don't produce immediate the present cocktail of neighboring 1990-2000 cash flow. Argentina's woes, the attack on the United States, and the global slowdown ' n 2000 ,ib' lion, Working with domestic and international unpalatable. Total development banks has helped AGC and its parent continue to fund projects Local sponsors like AGC say they 1990 17 during the current downturn. Sousa also continue to find good project opportuni- 1991 17 believes that 2002 will be a better year ties, prompting them to work out large 1992 26 for locating new sources of financing, domestic-only financing packages when 1993 39 although it is probably too early to possible. The company is confident that 1994 45 assess the full impact of Argentina's its experience and knowledge of the 1995 58 woes on Brazil. Meanwhile, his company local market make it especially well- 1996 85 will try to be creative in structuring deals placed to understand and successfully 1997 128 so that t can continue to finance water manage small and medium-sized and sanitation projects. projects and that Brazilian infrastructure 1998 108 is an especially promising sector. 1999 75 MSICIH uses its rapidly growing sub- 2000 91 scriber base to stir the initial interest One banker who has investigated work among financiers, but Chopin's with local sponsors emphasizes that challenge is to convince investors that lenders and investors have to take a database. When developing economies the risks for his type of projects are not long view it they want to work on projects faced trouble following the Asian nearly as great as conventional wisdom lacking a high international profile. But financial crisis, capital flowing to infra- holds. Chopin says he uses any the payoff can be strong if you find a structure projects declined in real terms attention he receives to get reluctant unique project at an early stage and then by 15 percent in 1998 and another 30 financiers to focus on the specific risks research your local partner well. "There percent in 1999. Surviving resources for they are concerned about and relate are incredibly volatile cycles in emerging private infrastructure were directed them to the project at hand rather than to markets and this makes it difficult to mainly toward projects with political risk general notions of regional or country finance small or large projects," he insurance or guarantees from multilater- risk. advises. But he continues, "If you are al development banks, according to willing to spend more time sniffing out PPI's analysis of the trends it document- Chopin and Sousa remain confident that the right sponsors. you can position ed. The appetite for expanding invest- the type of small infrastructure projects yourself to look at smaller projects." ment into specialized projects or they specialize in are gems in need of untested areas of infrastructure had greater appreciation. But unless they Global trends in infrastructure finance subsided among intemational financiers. and others promoting small but commer- only add to the challenge for small cially promising communications, port, projects in search of finance. Unfazed, MSICIH points to subscriber toll road, or utilities projects can effec- Infrastructure financing prospects in growth and its ability to control the risks tively make their case so that others emerging markets in 2001 soured related to the convertibility of local cur- understand risk the way they do, com- despite hints that the trend for private rencies, transferability of funds offshore, mercial financing is likely to remain hard infrastructure finance had turned the and expropriation of its networks. to come by. corner during the previous year. Even Diversification through the growing before the September 11 attacks in the portfolio of African networks provides the Desmond Dodd has covered finance and United States, Institutional Investor's risk parent company with the added level of capital markets on assignments in Asia, ratings showed a dramatic rise in confidence that it is prudently managing Europe, Latin America, North Amenca, perceived risk around the world. In its its risks. That diversification no doubt and the Middle East. He is an editor at the survey completed in mid-2001, 102 affords international financial institutions International Finance Corporation in countries saw investor perceptions of a greater comfort level for providing Washington, D. C IFCsssue - I Russlan Infrastructure Investment: A View from Moscow R ussia s infrastructure needs are and the much more tricky thing of changing because people are accustomed to these immense, and there is a growing attitudes of people towards what Is free and things as a free service and, frankly, you a.vareness of the importance of what has to be paid for The last part will be cannot simply cut off heating service when tl-e pnvate sector role /n order for perhaps the more difficult challenge for you have a temperature of minus 20 degrees Russia to r7eet those needs Still, important Russian officials centigrade Physically, it's also a very difficult questions ,emain about the nature of the to do because if you heat a whole ouilding or Russian infrastruicture market and pace of Impact: Do you see Russian officials doing a whole district you can't svvitch off an regulatory change To explore some key thcse four things that you laid out-the laws. apartment It's very difficult to enforce Issues in Russian infrastructure investment, regulation, enforcement and changing Afshmn Molavi of Impact magazine inter- public attitudes? Impact: There was a report by -he Russian viewed Edward Nassim, IFC's Moscow- Duma (Parliament) that noted that Russian based director of Central and Eastem Nassim: Yes, slowly They are doing them infrastructure could collapse by 2003 lust as Europe investments Nassim talks about the slowly It is not an easy task for them The debt levels are going to reach untenable need for regulatory enforcement and a country is now a democracy and if you are heights Is that a serious problemc change in the public view toward infra- trying to run for office, it's very difficult to win structure, tne durability of current Russian the election while tripling electricity bills So Nassim: That report is a bit exaggerated I nfrastructure, corporate govemance issues. they're steering this ground between remember visiting a power station in and the prospects for financing projects realizing it has to be done, but not willing to Moscow that was stiil operating from World be the first one to suggest that they're going War One, and it's still functioning The Impact: There is much talk of the critical to do it immediately in their area because of Russians have an incredible ability to keep need for private sector involvement in the the votes So that's why it's going to take old things operating That report sounds next phase of Russian infrastructure longer than people think alarmist building? How do you view the prospects for private pa-ticipation in Russian infra- In fact, a lot of the laws have already been Although I absolutely agree that there are structure? enacted, but there's always a question of substantial needs for substantial invest- implementation of those laws-how does ments, I don't see a collapse takingc place In Nassim I think there are tremendous one educate the Judges and the courts? So fact, as GNP dropped for so rrany years, opportunities It's a place that needs a it's a long process electricity usage and so on dropped also So, tremendous amount of investment in infra- although there are many power stations that structure Al one has to do is drive around. The process might move faster if the need to be decommissioned, I do not see fly around the country to see the immense economy continues to grow If the economy any sort of collapse imminent need Certa nly, the private sector will need keeps on growing at 3, 4, 5, 6 percent a year, to play a ke r role If you look at all forms of and people are better off, there wil be less Impact: What about financing? O ne of the Infrastructure in Russia, its telephones, resistance to paying for things If the troubles with investing in Russiar rifrastruc- roads, bndges, ports, and railways, and you economy is stagnant, it's very difficult to then ture is the lack of long-term financing added up the whole mass of this investment, ask people with stagnant wages and it's very diff cult to see it coming from the salaries, with unemployment, to pay for Nassim: Yes, the maximum you can get is public sector, because the public sector services they didn't have to pay for in the three-year local-currency financng with a doesn't have the resources So inevitably, past You can afford also to separately resetting of rates every year That's with a they're going to have to turn to the private subsidize the older population and younger partial guarantee from IFC of principal There sector There are two questions that are population who don't have the means to fully are going to be a limited number of issues raised will F'ussia take the necessary regu- pay for the costs of these serv ces So it All the issues that have taken place by now latory steps to turn to the private sector fast? depends on how fast you grow as a country have been by major oil companies How does the private sector make a return? How fast will this process take? We'll have to Impact: What about local Russian banks? On the f rst cuestion, we need to see regula- see If the economic situation gets bad, then Obviously, they are not in a pcsition to ton and en-orcement as a way to attract there could be some reversals finance large infrastructure projects, but are pnvate money to ensure adequate returns they moving toward that goal? We also need to see a change in attitudes Impact Is there a particular sector in Russians have not been accustomed to Russia that you think might be most Nassim Russian banks still have a long paying fees for telephones, electricity, or promising? way to go to reach that sort of 'inancing trains To change attitudes is quite tricky capacity needed for infrastructure projects because those charged with enforcing the Nassim: I think maybe the telephone and In general, they need to be reformed in order new rules are themselves unaccustomed to power are the sectors that offer the best to achieve their potential Most deposits are paying Thes don't always understand why prospects because they depend on the indi- in the Sber Bank, the savings bank of they should enforce rules they themselves vidual users, so it's easier to ask individuals Russia The rest of the banks, arcund 1,300 view as unfa r-after all, these services have to pay for these services To ask companies of them. are competing for the rest of the always been free is sometimes a bit more difficult, especially deposits when the companies are in bad shape, as Yes. It is clear that the private sector is they are in a lot of these regions When banking first started in Russia, it was needed Yes the Russians will turn toward either a vehicle to channel government prvatization to do it But how fast this occurs Railways will take a long time Water and subsidies through enterprises or a vehicle in depends on laws, regulations, enforcement, district heating will also take a long time to do which banks basically invested in govern- Issue - 2 ment securities. That's how they made their time. Russians are beginning to pay in the company. Most Russian companies money. With the collapse of '98 and the attention to corporate governance, and the who want IFC funds are getting to know our collapse of the government bond market, Securities Commission has published a stress on corporate governance as a pre- bankers had to think about how they would governance code, which is a voluntary code condition. make their living. So for the first time, they for the private sector. IFC was involved in actually started providing loans to the real the drafting of that code. We are engaged in Impact: What examples of Russian infra- [i.e., industrial) sector. That's what's technical assistance programs to help structure might be instructive to project happening still. Most of the banks we're Russians understand the need for financiers? working with are earning money through corporate governance. Corporate gover- fees and dealing with clients and providing nance classes are being taught in the uni- Nassim: An interesting one was the priva- loans to the real sector. versities. We are getting some of the uni- tization of Svyazinvest, a telephone versities around the country to work with company. A lot of people thought that it Now, on the other hand, that's been quite companies, to work with shareholders on could be easily privatized and transformed. small. So it's too early yet to expect that these issues. But people now realize how complex it is. It banks other than Sber Bank can begin to is a holding company of something like 98 provide financing for large infrastructure Russian infrastructure is still, mostly, in the regional telephone companies, which projects as well. We hope to be able to work hands of each state, or the state has a very makes things very complicated because it with Sber Bank because a number of large large share of it, like in telephones so far, cuts across the interests of the central gov- projects we're doing will need local and electricity. The oligarchs, however, are ernment, regional governments, the currency financing and the presence of a involved in banking, mining, transportation, companies, and the users. local bank. We are beginning to have dis- oil, and airlines. cussions with Sber Bank to be able to bring It is much easier to go and start a mobile them in. We can help them understand how As more Russian companies are listed on telephone company in a big city than it is to to do project finance better, and they can the stock exchanges in New York and try and face the issues of privatizing a provide long-term local funding that nobody Moscow. Russian businessmen are company with 98 subsidiaries, where else can provide, so we sort of complement beginning to understand the need for better there's private sector ownership, govern- each other. That is the only one now that corporate governance in order to increase ment ownership, regional government can provide large amounts of money. the value for their company. They realize influence, et cetera. that transparency in governance can Impact: Is Russia ready for public-private increase the value of their companies. As a Many difficult questions ensued: how do partnerships? result, even the oligarchs are beginning to you regulate telephone rates of the 98 talk about corporate governance, because regions of Russia? How do you enter and Nassim: My sense is it's still a bit early to they wonder, Why should an oil company in regulate the telephone rates between have that confidence between the two at Russia be worth a fraction of what the regions? International rates? It's very, very, this point. Private-public partnerships tend European or American oil company is complex. to work when there's real trust between the worth? Having acquired the asset, they two parties. I think at this point it's still a bit want to increase its value, so it makes It is the same with power. The power too early to get the level of trust between sense for them to move toward better company in Russia is one of the biggest private and public to be able to have a part- corporate governance. companies in the world. It employs nership. hundreds and hundreds and hundreds of One piece of good news is that whenever thousands of people. It has enormous gen- Impact: What sort of inquiries do you get you read a business paper in Russia right eration capacity, many power stations from project financiers around the world? now, there's always something mentioned including nuclear power stations, hundreds about corporate governance. Now, the key of transmission lines, and it serves 150 Nassim: Most of the inquiries we get are of course is how do all of these positive million people. To suddenly transform that either a combination of foreign investors signs translate into real corporate gover- company into a private company a la U.K.-- who see a market opportunity there despite nance in the true sense? you know, generation and distribution and whats happening in the world, and want to regulation--is not an easy exercise. So I continue with their plans in Russia or we get Initial steps are positive, but we will also think what people have realized is the com- inquiries from local investors. need the stick and the carrot. You need to plexity of what is needed. have the carrot that if people do behave The second group, the local investors, is a properly, the values of their enterprises go These are complex issues, but I am opti- group we hope to do more business with up. You need to have the stick that if you mistic about the progress we've seen so far because it will benefit the long-term health don't behave properly, the Securities in Russia and, for that matter, all of the of the Russian economy. They are Russian Commission and the court will impose region. If one looks at the whole macroeco- companies, who maybe are starting to various sanctions on companies who don't nomic situation in the region, the main trend understand transparency or corporate gov- behave properly. That's a beginning. in all those countries is positive for private ernance or international accounting sector development. The private sector has standards and which we feel we can work When you talked to Russians about a much more important role in the economy with. We see some opportunity for the corporate governance four or five years than it had in the past. That's taken place future with these companies. ago, the terminology seemed foreign. Now through a number of ways: privatization of they are very familiar with the concept. existing assets, foreign direct investment, Impact: You mentioned corporate gover- and new private businesses being estab- nance, which raises a point that many Impact: How does IFC deal with the issue lished. The emerging trend is that of a much foreign investors in Russia are concerned of corporate governance in its investments? more important role for the private sector in with, in light of Russia's reputation for lack the economy. of transparency and industrial domination Nassim: It is, of course, of great impor- by oligarchs. Can you get involved in, say, a tance to us. For example, we are consider- We must remember that these economies big power project without dealing with one ing a very large investment in coal mining in only began their transition ten years ago. I of the oligarchs? Russia, and we are using our corporate think we have seen substantial progress governance team to help the company get and we are staying engaged to contribute to Nassim: I think it's a very good question. It its corporate governance in order because the further development of the private is important to remember this: for the first that is one of the conditions of us investing sector in these countries. IFC Recent Trends in Private Sector Finance by International Financial Institutions O ver- past clecaue. international i1'F i" iF!; ..n (JFIs include development - 7ce snst'tutiors and - ' - agencies) have beconme increasirgly ir;vo1vied !n sector - -- in developtng countries. The w. 1'v!- in priv'ae s5t tccor coincided with development or expansion of private sector - lanfjoni or ;~t ~ ~ - I*> '' - . ' ' 1' e of over 25 of - , ',,,:ns it n.O s - to clocmnent how ''- role in private sector finance in ,- - :, n countries hcn evc- -vea. penoo ' - the . -, 'crisis f- - started in Asia in 1998. Recent Trends in IFI Finance Figure 1 shows the long-term financing and guarantees (excluding political risk insurance) provided by IFis to private sector projects in developing countries over the past decade. The growth through 1997 was very strong, with total financing approaching $30 billion. Since 1997 the investment has declined, although financing and guar- antees still exceeded $24 billion in 2000. The amount of financing and guarantees is quite significant compared with all global financial flows to the private sector in developing countries, exceeding 20 percent of debt flows and equal to over 7 percent of all flows. The flows are even more significant in the higher-risk regions of Africa, Europe, and the Middle East (figure 2). Long-Term Finance and Guarantees Provided by Finance Provided by DFIs and ECAs as a DFIs and ECAs to Private Companies, 1991-2000 Percentage of International Flows to the Billiona of Collars) Private Sector by Region, 2000 30 ---eent 20 - 25 20 | ECAs 15- 20-~~~~~~~~~~~~~~~~~~~~~~~1 15 Blea 10 - B - ______ ~~~~~~~M,5 -lhl 10 _ DF1,,- M E Z~~~~~~~ssure I IFC The dynamics of recent IFI finance to the private sector become more clear when the recent levels of finance and guarantees are compared over time with some major benchmarks-global debt flows to the private sector in devel- oping countries (figure 3) and total private infrastructure finance in developing countnes (figure 4). International investment trends have had an obvious effect on the intemational financial Ins.lilons. ,Ff shares of international debt flows, however, have been relatively stable, and the share 0;liriLuiable to the development finance institutions has actually increased significantly. r,f j l ... ^| ; m =S;vaI ' '' r-trWrSMMrZNit DM Financing and Guarantees provided by DFis and ECAs vs. Total to Private Sector in Developing Countries, 1991-2000 Private Infrastructure Investment in Developing Countries, 1991-2000 (Billions of olloars) (Biliton. of Dollars) Doilas -!- )ars Dollars *|lrr D.1 - Ddia,,~. . ' 20 020 10 5 E5 0 .~~~~~~~~~~~~~~~~~~~~~~~~~~~5 19 1990 190 1904 1090 10D6 1991 o 1094 DFI D FI EECA 3 CA Gob.1 Pr,i.to 0 ~~~~ ~ ~~~~~~~~~Debt 0 , 1In,ast ID91 1992 1993 199405 1095 09610 9819 000 1 09 192 1903 19 1995 1906 1097 0498 1990 2000 Source: IFC. Source IFC Figures 5and 6 'hnfi he r,gir:r.,li breakdown of the IFI finance from 1997 to 2000. The drop in financing by export credit agen ,es occurred largely in Asia, -lithoUgh there is some evidence of temporary effects of the financial crisis in Europe. Despite the generally stable trends for development finance institutions, the crises in Asia, Europe and Latin America appear to have had at least a temporary effect on the pace of finance. Financing by Development Finance Financing by Export Credit Agencies Institutions by Region, 1997-2000 and Guarantees by Region, 1997-2000 (Billions of Dollars) (Billions of Dollars) Doi ars 5 Dollars Source: IFC. Alrca 0 1997 51997 3 10998 1998 4 1099 1999 2000 2000 Sub- Asa Europe [alto M4:dd e Sub- Asia Europe [alt, iMod,e Sah....r Are,ca East: Sahra,a, A, r c E.oo: Air-a Norh ANDis NatO:, Source: IFC. Atra source: IFC. Alma. Implications The IFIs play a significant role in international finance, accounting for more than 20 percent of the debt flows to the private sector in developing countries. In higher risk regions, that role is even greater. Thus despite the rapid growth in private flows to developing countries, the risk-mitigating and project development contributions of the IFis support a significant amount of those flows. Although there has been some impact from recent global financial crises on the absolute volumes of some IFis, the relative importance of the development finance institutions has actually increased in recent years. Amid growing global economic uncertainty, as foreign direct investment falls and private capital flows slow, the role of IFis in private sector actirvoy is likely to take on added importance. Arthur Karlin is a principal if --, J officer at the tnternational Finance Corporation. He led the recent r r . ;7 to analyze the private sector financing trends of the IFls. _~~~~~~~~~~~~~~~~~~~~s 29 Kookmin Bank K~I vK m wwnt__ Private I nvestment In As is the case, SOCF construction advisor and/or loan arranger, projects have increasingly needed a Kookmin Bank is the most active variety of investors for successful participant in investment banking in implementation; therefore, relevant Korea. Social legislation has been enacted and regulations have been amended to facilitate the investments in SOCF Investment Banking Ol~ v~e rh ea d projects. Since the introduction of of Kookmin Bank the practice that guarantees appro- priate profitability to the investors In the retail banking market, and apportions risks between the Kookmin Bank has secured a pre- C apla l ipgovernment and the private sector, dominant competitive advantage. companies, facility management Credit Bank in 1999 has increased companies, and overseas invest- the bank's know-how in the Facility ment funds are actively investing in corporate banking sector. After the projects in Korea. merger with Housing & Commercial Bank in 2001, Kookmin became the largest bank in Korea, with assets of Private Sector Investment and 189.1 trillion won as of the end of the Role of Financial Institutions 2001. n Korea, private sector For the successful implementation of Kookmin Bank has participated in capital has been flowing into SOCF construction projects, suc- numerous construction projects for social overhead capital cessful fund-raising of a significant SOCe, and one example is the con- facility (SOCF) for 5 to 6 amount of investment is crucial. In struction of the Inchon International years. The Korean government has Korea, generally 25%-30% of the Airport Expressway in 1995. This attracted private capital to invest in total project cost comes from project was significant in that it was large-scale SOCF construction investors' capital, while the rest is the first Korean SOCF project projects in order to harness the ore- financed by financial institutions, funded by the private sector. ativity and efficiency of the private Accordingly, the role of financial Kookmin Bank, the largest ender of sector in the construction and institutions is viewed as the most this project, granted a credit of 324 operation of SOCF, while reducing important among the parties interest- billion won out of the total loan of 1.2 the financial burden of the govern- ed. Cf all domestic financial institu- trillion won. The repayment of ment budget. tions undertaking the role of financial principal and interest will be covered Issue 2 Kookmin Bank advertisement feature Kookmin Bank i-I K. r __ by the road operation income. to Larfage HalHa Cement Corp., and project and structured finance. The Kookmin Bank arranged 136.5 also provided a total credit of 158.7 Bank will not confine its role to bank billion won for the syndicated loan of billion won to four other M&A loans only, but does capital invest- the Daegu Eastern Beltway con- projects. ment in promising venture struction in 2000. The total invest- companies based on in-depth feasi- ment in this project was 195 bYiltion Kookmin Bank has generated suc- Wiity studies, The investment in won, and Kookmin Bank was once cessful results in developing, overseas infrastructure projects will again the largest lender of the arranging and investing in new real be another field of interest for project. estate projects which are expected Kookmin. to create sufricient cash flow for In addition, Kookmin Bank has repayment. One example of a recent Kookmin Bank is In the process of extended credits of 315.9 billion won successful real estate development networking with other worldwide to 12 SOOF construction projects project is the Suwon Station investment banking institutions for including roads, seaports, airports, Development Project that cost 193 efficient funding and active participa- and environmental facilities. Other billion won. In this project, Kookmin tion in domestic and overseas than fund raising, Kookmin Bank has Bank had provided financial advisory projects, Through these networks, participated in 6 infrastructure services to ensure a stable business Kookmin plans to develop the oppor- projects as a financial advisor and is stucture for the companies involved luni_ies for arrangement and invest- currently providing consulting and served as the arranger for the ment in domestic and overseas services for 13 projects. Thanks to 75 billion won syndicated loan, infrastructure projects. the financial expertise provided by Overall, Kookmin Bank currently is Kookmin Bank, infrastructure providing credits for 7 real estate Mr. KI-Hyun Kim projects have successfully raised the development projects totaling 225 General Manager required funds, and are expected to billion won. Investment Banking Team yield the return required by the Tel 82 2317 2171 investors. Kookmin's Active Commitment to Mr. In-Jun Yoo Kookmin Bank provides not only Investment Banking Deputy General Manager Investment Banking Team credits to SOCF construction Tel 82 2317 2173 projects but also a variety of Kookmin Bank is expanding its financial services such as M&A investment banking business on the Mr. Jong-Hyuck Park Financing, Property Development strength of expertise and funding Manager Financing and ABS. Kookmin Bank ability. PFI (July, 2001) ranked Investment Banking Team had provided M&A fund by arranging Kookmin Bank at the top in Korea, pjhkky@kookmin co kr a syndicated loan of 250 billion won 3rd in Asia and 38th in the world for Tel 82 2 317 2183 Kookmnin Bank advertisement feature Ise. 44 A A IL~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ i - - _ - , By Javed Hamid and Dileep Wagle he sharp decline in global financial sectors but also correspond- assessments being updated every capital flows to emerging ing and significant improvements in quarter. The results provide a valuable markets during the recent past financial transparency, supervision and input into the World Bank Group's highlights the importance of regulation, corporate governance, and country dialogue with client govern- the business environment to countries legal and judicial regimes. Without ments in the region, with a view to in emerging markets. The Asian this, restoration of investor confidence influencing the content of its policy rec- financial crisis saw net international will be difficult, if not impossible. ommendations for strengthening the resource flows of private capital to role of the private sector, countries n the region falling to less We describe here an initiative intro- than half Df their 1997 peak of $110 duced in IFC's East Asia Department Why Are Strong Business billion, and they have yet to recover in early 2001 to assess and monitor on Environments Important? their former level. The fragility of a regular basis the business environ- financial and economic structures in ment in our major client countries, In simple terms, the importance of a these countries that was exposed by drawing upon the extensive knowledge good business environment stems the crisis led to a sharp decline in and familiarity with the business sector from the fact that private sector busi- investor confidence. compounded in of our country managers, supplement- nesses of all sizes need well-function- some countries by political and ed by the experience of the World ing markets to thrive and achieve com- economic volatility, which heightened Bank's private sector development petitive efficiency. And for markets to the risks of investing. Any real group. Currently, the initiative has function well, certain basic conditions recovery from the crisis will require not been introduced for China, Indonesia, must exist, including the absence of only the restructuring of corporate and the Philippines, and Thailand, with barriers to entry and exit. appropriate Issue 2 REGIONAL FEATURE regulatory institutions that administer Investors do not always need perfect perceived by investors, thereby the laws in a fair and just manner, business environments, often being making t easier to attract commercial sociopolitical stability, and adequate willing to take pioneering risks if capital flows. Helping improve the management of the macro economy. If potential rewards seem attractive business environment also provides these conditions do not exist, markets enough and special arrangements can international financial institutions with could fail to ensure competition, to be made to mitigate risks in some key a strong potential payoff in develop- allocate resources efficiently, or to areas. As the recent experience of mental terms, as even relatively small maximize productivity. Thus, the independent power producers in South improvements in key areas can signifi- growth potential of the overall Asia has shown, however, such risks cantly sirengthen competition and pro- economy would be adversely affected. are sometimes very real and can easily ductivity in the economy through be underestimated. In general, a enhanced opportunities for the private By contrast, a dynamic business envi- strong business environment-in sector. ronment can help transform the ways which governments, for instance, show in which companies compete in the genuine and even-handed commit- The Initiative Described marketplace. A strong legal and regu- ment to the private sector and where latory infrastructure will elevate the judicial systems can be relied on to Taking advantage of IFC's decentral- level of competition, allowing enforce contracts-is the best way of ized structure in the East Asia region, companies with competitive ad- providing investors with the comfort whereby country managers have vantage, with unique products and they need in risky countries. specific responsibility for keeping track processes, to challenge those firms of and representing the Bank Group on with a traditional comparative The quality of business environments private sector development issues, the advantage based on abundant avail- is of particular relevance to internation- East Asia assessment model was built ability of the factors of production. al financial institutions like IFC, for around a set of indicators that are Over time, the increasing sophistica- which the mobilization of capital is an thought to be the key determinants of tion of market competition will lead to a important part of its role. the business environment. There were successive upgrading of the structure Strengthening the business environ- eight such indicators covering the of the overall economy, in effect ment is a key step to achieving a quality of commercial and foreign promoting economic development. lowering of the level of country risk direct investment (FDI) legislation and Ad-~~~~~~~~~~~~~A I ,~~~~~~I V~~~} ' _£ tg.4rrstt '\t 2 _. REGIONAL FEATURE AlizA ~ItINi Wr A _- t=-- t _9-a - * <',,> the abilit~ of existing institutions to minimize the possibility of subjectivity, In Indonesia, Thailand, and the administer regulations efficiently; the the rating system was made much Philippines, for example, political basic commitment of the government more disaggregated, so that the turmoil and government turncver have to the role of the private sector; its will- ratings for each of the indicators contributed to investor uncertainty. In ingness to remove barriers to market would be based on a much larger crisis-affected countries-Indonesia entry and exit, the willingness to number ot subcomponents. Further, and Thailand-there is concern about maintain a relatively distortion-free tax to reduce scope for differences in the effectiveness of regulatory institu- regime:, and the ability to maintain interpretation, fairly specific defini- tions. Businessmen have concerns socioeconomic and political stability. tions were provided for the two end- about the efficiency and reliability of (Details awe provided in the table that points of the ratings scale, and these government agencies and view follows this article.) country manager ratings were supple- them as a serious impediment to mented by information from specialist investment. In Indonesia, an otherwise Country mnanagers, in consultation staff in the Legal Department and sophisticated framework of commer- with their WVorld Bank colleagues spe- elsewhere. cial and FDI legislation hias been cialized in private sector development, rendered ineffective through major were aske-d to assign a rating on a 1- The Results Thus Far shortcomings in judicial and regulatory to-5 scale to each of these indicators. implementation. This has been corn- This information is to be combined The project began with an assessment pounded by major political and socioe- with macro- economic and market for Indonesia in the first quarter of conomic instability, the impact of which data, suc~h as inflation statistics, 2001. The scope of work expanded has encompassed the country's tax exchange rate movements, corporate gradually throughout the course of the regime. restructuring, and stock market year and now includes China, indices to provide a composite view of Thailand, and the Philippines (with For the Philippines, the assessment the state of play of the business envi- Vietnam to follow). Preliminary results includes a positive perception of the ronment, from the perspective of from the assessments offer a useful basic legal framework and its imple- those who might operate within it- broad-based picture of business con- mentation, as well as of the openness investors and private sector firms. To straints. of markets. On the downside, a serious ..Isse - 2 REGIONAL FEATURE deterioration in law and order in certain parts of the country has led to a decline in investor confidence, particu- larly among foreign investors. In China, which has been successful in maintaining its FDI inflows, factors such as the foreign investment 1 framework, soundness of economic - management, and socioeconomic S v - .L1arp arid If an parencv go pm,ale serls stability have been generally well t -- .1e.vEiomrjirnt polrv goals perceived. In areas more directly n;-.-- rsiitv ol poinEder applicable to domestic investors, such Progress In clieailure of st ne.i enlerpr,Ees as the availability and effectiveness of commercial legislation, the financial Clirit, ol r.-:onfsIbioIII of iuc,verrnmeni departlnl-nls infrastructure, the openness of - Sp-eed rransd ,er,: uf de-ciconr.nakir,z markets, and the tax system, there are t Acmuntilabiiit of dci5ion-rnakirng still many shortcomings. In almost all | - Regqlator' arrangements for tll seLor areas, however, improvements appear i Sxridress c, econon': mnraoemlt to be underway, and a comparison with 1 o - ratings assigned a few quarters hence 1*t should be interesting. m - Crmiroi c,n Irade C- Conerl,L+ll4y ,. i,r.urr, ric Next Steps? Con ircIc on new busillesses P rce cc.r,lrol; In addition to feeding into the World Bank Group's country dialogue with - governments, assessments should - Eoistence ci corlnralny lay provide staff and especially IFC man- -- -- - EL:tence of pledge 13U agement with regularly updated infor- - EiEsience of banrvuptcy legislation mation on country risk factors. Effectl:eness Of company law Assessments are shared with World _ Efie. Ivve,ns,s :f p-lvdye la% Bank country directors and in one F- - Effei:liver"n,s ,-,f bankuJptly legslatior. case, Indonesia, the Bank's country team is now actively involved in con- tributing to the ratings. - E nstenco ol rcgulationtc go,ernirg FrY Licensingireiulatior rro:eaures Results could also usefully be shared Repatriatlon of profiti with other international financial insti- - I Denership of property by foreigners tutions, which are already pooling - . VV-rI penrts ri *-ialriate orkeI : country-specific project information Nondiscrimmiaicrnr tawes aind le,,,e, through a collaborative database. This - - Iementalion of FDI regutationa would also help reinforce pressures on - Tranoarc ncv ci deesons governments to ensure that essential SponeItenc ied preiriclnbilt, of niplemenitann reforms are undertaken. There are no . Speed of decision.maI:in current plans to make findings more widely available outside the Bank E1 o Group (and perhaps other international - Exsten,e of l.egal *nd i-gularorJ nirastruclure financial institutions) on account of Wan - A:ccunting and a.dirinq practices concerns regarding the possible _- Barnking la3w Srzcurities lawsz ano( rcgulaitonz impact on market sentiment. To the . - Irisicer lr3o,rg extent that transparency and mm Regulatory r od,e, widespread dissemination might help f- Effeciwvenesr of vii,.s anti reguialions to mobilize public support for reform, - . flilel:ar o -,f:, lnijii al, *u.: tl=ndads however, sharing the results of the _ - Clear rules for tank,ng and suirl,ei act tipes assessments more broadly could X Enlorcemert arid rediei!. bY regulalor3 and CoLurts equally have a positive outcome. With the project in its early stages, these considerations will have to be - N o njsjcncn3rincidence weighed. Universalit of apphci:ion E ftr-enc:y of nl rIminnsiralicii, Javed Hamid is director of the East Asia Department at the International Finance -G CcrrUplion Corporation. Dileep Wagle is manager L3fi 3nd order and social tens'or1, of strategy, budget, and programming S,;cial safe,r nel in the East Asia Department at /FC. Issue 2 About the companv * POWERGRID, one of the largest Transmission Utilities in the world and recognised as Central Transmission Utility (CTU) of India owns and operates over 40,000 circuit kilometres of transmission lines and 68 sub-stations with a transformation capacity ofabout34, OOOMVA. * System 111'ailabiiliy)' maintained at over98% by deploying best O &Mpractices atpar withIl ntIioilloi-il Uttilities. * Turnover went up to U7S $ 560 million in 2000-01 from a modest US $ 130 million in 1992-93 andNet Profit increased to US $155 million in 2000-Olfrom US $50 million in 1992-93. --~ ~ ~ & pi6t6Sb :40,192 kms. ~~ossiton .....x, : Over 40,000 ckt. kms., Still we're not half the way. Come, join the vast network potential ! i Investment and opportunities * Govt. of India has planned to add around 1,00,000 MW of generation capacity by the year 2012. * Poised to establish a strong National Grid with an investment to the tune of US $ 16 billion. * Large scale opportunity for private investors to participate on their own strength as Independent Power Transmission Company (IPTC) as well as join hands with POWERGRID forming Joint Venture (JV) Company. * Global Expression of Interest (Eol) has already been invited under IPTC route fortransmission projects worth US $ 4.5 billion. Embarking upon telecom business * Embarked upon to establish countrywide National Backbone Telecom Network, thereby achieving synergy in its strong Transmission Network and Communication facilities. * Establishing broadband optic fibre network of about 14,000 kms. by December, 2003, connecting about 56 cities including State Capitals, major Industrial Cities and Towns of commercial importance. * Envisage to take the role of National Long Distance Operator (NLDO) in association with its Joint Venture Partner. Partnership and consultancy * Successfully provided consultancy to major clients such as Merz & McCellan, Price Waterhouse, U.K. and various State Electricity Boards. * Joined hands with M/s KEMA Consultancy, USA in the area of System Coordination and Control (EMS, SCADA) and ready to take up assignments at global level. * With strong Project Management Capability supported with cutting edge technology and economy, POWERGRID is ready to offer consultancy and take up works in all facets including Engineering, Procurement, Project Management & Financial Management, Institutional Development etc., POWERGRID is also keen to join hands as partner in the field of EHV Transmission, Grid Management and Telecom at global level. (A Government of India Enterprise) B-9, Qutab Institutional Area, Katwaria Sarai, New Delhi-1 10016 (India) Tel.: 91-011-6535408 Website: http//www.powergridindia.com : ri-i iIti7 MIGA--backed power project E _ tackles outages and safety -9J, --p E hazards l By Angela Gentile-Blackwell P cwer outages, fire, electrocu- The latest effort falls under a $200 face of penalties, to reduce power con- ton, unfulfilled economic million non-shareholder loan made by sumption by 20 percent. cpportunities... These are the Cibbank NA on behalf of a syndicate of unfortunate facts of life for banks, a portion of which is covered The crisis has mobilized Light to launch residents of Rocinha, one of Latin against the risks of transfer restriction a massive energy conservation America's largest and oldest slums, and expropriation by a MIGA guarantee. campaign to teach people ways to save where a lack of electricity and illegal The project is especially timely, given energy and cut costs. The messaging is connections affect life at the most basic Brazil's current energy crisis, important to all Brazilians, who have level. There's no one answer to the been asked to reduce power consump- problem. out a concerted effort to deal The drought tion by 20 percent until the rains with infrastructural inadequacies, replenish dwindling water supplies. "The provide essential services at low cost, With one of the most extensive river power crisis is changing people's and educate residents about proper networks in the world, Brazil obtains habits," says Vasco Barcellos head of power usage are making inroads, here more than 90 percent of its electricity investor relations at Light. "It is imposing and in other slums in Rio de Janeiro. from dams, and has invested little in certain limits, but people know it's better alternative sources of energy. The than having blackouts, which would be The se,vice is being provided by Light current drought is creating one of the pretty traumatic." Servi,os ce Electricidade SA, Rio's main worst power shortages the country has power provider, as part of an ongoing faced in decades. Lights on streets, in For residents of Rocinha, where a lack of program to upgrade the city's electricity offices, and homes are dimmed or electricity affects lives at the most basic transmission and distribution systems. switched off as Brazilians rally, in the level, this is not an unusual hardship. S . Issue - 2 X Here, Light is taking its campaign one the lines. Just the other day, 200 houses going door-to-door and talking with each step farther, dealing with infrastructural burned down in one of the local favelas." family. They also make presentations inadequacies in addition to educating Another real danger is electrocution, and hold community meetings, in residents about proper power usage. which is a fact of life in the slums. "A addition to taking stock of the current simple, cheap solution might turn out to situation, which is important in determin- Serving low-income clients be very expensive," she says. ing what steps the company needs to take. In September 1997, Light created the As in the other 250 favelas that Light has Program for Normalization of Informal already tackled-usually those with the In its latest endeavor, PRONAI is Areas. PRONAI, as it's called, aims to most egregious infrastructure prob- working with Rocinha XXI, a growing provide safe, legal power connections in lems-the Rocinha program works NGO in the foothills of the slum. At the the city's favelas (slums) and other low- hand-in-hand with local nongovernmen- top of a narrow stairway, a long white income communities by establishing and tal organizations to make sure people room is filled with young people sporting upgrading power networks and by understand what the effort entails and to green and white Light T-shirts. Among installing transformers and meters. get their buy-in. Local students, usually them is Deo Pessoa, a 29-year-old field Educational activities are a fundamental in their teens, are trained to be "Light assistant. Pessoa knows a lot about component. But the program doesn't just Agents," who reinforce the message by Rocinha. He grew up there. His father provide a steady, safe source of power for favela residents; it also documents _ proof of residence, necessary for getting I a phone and establishing credit, in - _ addition to other benefits. The recent power crunch has added a new urgency to the program, which in :A_ 2000 reached out to about 150,000 new - , low-income clients. By 2005, Light expects the PRONAI program to be - operational in 728 slums and 594 low- _ income communities and "irregular" areas-those with unregistered connec- I tions or "doctored" meters-adding 2 some 176,000 new clients. Program coordinator Marcia de Moraes - Coutinho, with 20 years of experience working in the favelas, moves confident- - - ly along the winding streets and paths of Rocinha. The slum is home to 25,000 families, whose average income is -AX R$200 a month. Set against the breath- taking backdrop of Rio's famous camel- back mountains are ramshackle homes built wherever there is a patch of land or anything stable eno-ugh to anchor a foundation. Plastic tubing carries water v: along rooftops, crisscrossing the , bundles of wires, or "gatos," that run - haywire throughout the community as they carry sporadic electricity, often illegally, into the dwellings. The PRONAI program, begun last year in Rocinha, picks up on work supported - by the World Bank in the early 1980s to C bring power to the favela. Coutinho says _4 the program is really three-pronged, aiming to "normalize" transmission lines and connections, remove safety risks, and educate people about safe power use and conservation. "People don't know the power lines are dangerous," she says. "They build their houses too close together, which makes it impossible for a fire truck to get -. O .-O. _SI through when there is a fire caused by Is. e 2Issu 7 IFC '9 X a jlotj§,, S / , X : s L ___ s y* _ l A&a-Al~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~1,~ was president of the municipality. His After the company installs the power live in better conditions. This program parents, who have since moved, lived network, each resident is connected to brings electricity into homes, on a steady there since the 1970s. the service and a meter is installed. For basis, which makes life easier and safer low-income residents, the connection It plays an important role inl helping the 'We have3 it in our blood," Pessoa says, costs about $30, providing a 42 percent local economy, by allowing workers in whose job it is to help explain the discount over the regular charge. Light cottage industries, to work at home and program to local residents5. It's not too has a microfinance program that allows giving them the address that is needed to hard of a sell, he says: 'The people residents to make 24 payments of R$3 to get credit, It also gives them a sense of here want the program. They know it's cover the expense. "It takes each neigh- citizenship." for the oetterment of the community. borhood about five years to generate a There's a great neeo here for this type profit," Coutinho says. The program takes good corporate citi- of serv ce. Sinice I was little, I've zenship to another level, donating witnesse-d the community's economic The setup is amajor change for residents, furniture and equipment. and funding and social development Light is a about half of whomn are estimated to be language, computer, and college prepara- private L usiness, but it gives us a good, siphoning off power illegally. "Stealing tory tra ning in local community centers. essential product.' power in Brazil is a socially acceptable The college entry training is going strong. crime," says Coutinho. "It's very easy to In its first year, 60 students passed the Local resident Sandra. 33, who runs a doctor meters. Of course it's illegal to test. Last year that number was 240, for small gro)cery shop overlooking a sharp steal power, and we could ask for three an average of 80 percent getting into uni- precipice, agrees. A lifetime resident of years of back payment, but PRONAI versity, including some of the most com- Rocinha. she says the program is wipes the slate clean." For Light, the main petitive. "legal." using a play on words to say it is benefit is that the program will help literally egal as well as "cool." "With a reduce power losses. A measure of success of any effort is meter and connections," she says, "we whether it is good enough to be replicat- will not have problems with power To Coutinho, the effort boils down to ed elsewhere. PRONAI's development shortages. Now things will be better." something very human: "People need to impact has been so significant that it is *ue - w .@' ,~~~~~I$ - 2t No t_ _* . being extended to another 500 or so favelas in Rio alone, and even into other states. MIGA Created in 1988 as a member of the World Bank Group, MIGA promotes , , r*4i foreign direct investment into eme-rging economies to improve people's lives and reduce poverty. The agency does this through its investment guarantee (insurance) program, encouraging inves- , tors to venture into the world's poorest countries where perceptions of noncom- mercial risk often inhibit investment, and through its investment marketing and dispute mediation services, helping countries improve their investment climates and know-how for attracting new 4 business. Since its inception, MIGA has .- issued more than 500 guarantees and more than $9.1 billion in coverage, facili- tating some $41 billion in foreign direct ... - -w investment across the globe. For more about MIGA, visit wwwmiga.org. " g - Ji The company Light Servi,os de Electricidade SA has 3.4 million customers in the 30 munici- palities it serves in the state of Rio de w w Janeiro. With more than 5,000 employees, it is one of the region's largest employers. The century-old New meters wth special locks company is currently owned by Electricite . __=_ I. Lght techni- de France (64 percent), AES Cor- ,, '-- -, : - ,-,: *expected to poration (24 percent), the public (11 . - ' , . m .nergytneft. percent), and the Brazilian government - n tei (1 percent). Light gen-erates about 15 percent of the energy it distributes, and has eight power plants. Since its privati- a f : zation four years ago, which MIGA also supported, Light has made good progress on a $1 billion investment program. Technological improve- ments have led to reductions in the IL duration and frequency of outages, and the company's work to improve conditions in the city's slums has made strong pro- gress. Angela M Gentile-Blackwell is a commu- . _ ., 5' nications officer at MIGA. She has worked v_ for the World Bank since 1993 and has . extenslve experience in the field of devel- fbf opment communications. IFIssue 2 infrastructure .101 -1RNAL Emerging Markets Infrastructure News Highlights Algeria - Euro 3 million. It said the late payments of polyethylene and 520,CCO tpy of had already been taken into account in ethylene to be sold domest cally and Tesco gets pact to December when Agbar said it expected to internationally. Export revenues will drill wells in Algeria produce a net profit of Euro 139 million exceed $1 billion over the I fe of the (US$122 million) in 2001 on revenues of project and the volume sold in the Euro 2.6 billion, increases of 14 and 15 domestic market will resul. in Brazil TgreemesoCo drp. lhasix entered ints an percent respectively. remaining a net exporter of polyethylene. western Algeria. The company said the In addition, the project will create signifi- project is ts second commercial Casing cant employment opportunities for the Drilling project of 2002. It is being done municipality of Duque de Caxias and the Dhrilngh project ofg2002.eIt wish b teingpe State of Rio de Janeiro. The Clifford through an agreement with Steppe Br il Chance team, lead by Jeremy Connick. Forage, a major Algerian water-well- Brazil - was composed of lawyers from the drilling contractor. The contract will be AES completes Washington, New York, London and SAo performed over a period of approximately six months and is valued at about CAD Eletropaulo share Paulo offices and acted on all aspects of the project for Rio Polimeros, tne special $1.5 million (US$942,000), the company swap with EdF purpose company set up to manage the said. It wiil be the first time that the Pproecmaystu omng h sasid.t Drillig poess therst tmen t thed oproject on behalf of the project sponsors. Casing Dri ling process has been used on AES Corp has acquired a controlling Signed on October 26th 2001 and funding a water-well-drilling program, Tesco interest in Brazilian energy concern this week, the project will start-up in mid officials said, and the first time the Eletropaulo-Eletrcidade De Sao Paulo 2004 so that production may commence company has drilled with casing outside after completing a share swap with shortly thereafter. The financing for this of North America. Electricite de France. AES said it deal is split 60:40 debt to equity and exchanged its 24 per cent stake in Light involves a three-tranche loan package Servicos de Eletricidade for EdF's 88 per with US Ex-Im Bank, a syndicate of com- cent stake in AES Elpha, which owns a mercial lenders acting under insurance stake in Eletropaulo. "We now begin a cover from SACE, the Italian export credit Argentina - new chapter in our service to the people agency, and BNDES, the Brazil an devel- Financial Crisis of Brazil. Acquiring a controlling interest opment bank, as the lenders This is in in Eletropaulo has been an important, fact the first time US Ex-Im BanK has lent could cost Agbar long-standing AES objective," said AES money directly to a project, rather than US$ 28 million Chairman Roger Sant. providing insurance. The economic crisis in Argentina could cost Aguas de Barcelona (Agbar), the Spanish water and waste treatment company Euros 32 million (US$27.68 Brazil - Chile - million). Agbar, which like many other Clifford Chance AES unit secures loan Spanish companies has a significant presence in the Latin American country, advises on $1.1 billion to restructure debt will take a charge of Euros 20 million Brazilian Project against company reserves and Euro 12 EnergiaVerdeS.A.,aChileanunitofAES million against profits when it reports Financing - the first Corp. has received a US$25 nmI lion syn- 2001 earn ngs, daily El Pais said. Citing in the petrochemical dicated loan from local banks to restruc- company sources, the paper said that the ture its debt. Energia Verde, which figures do not include an increase In late sector in Brazil generates electricity and steam using payments oy Agbar's Argentine clients. It waste from the timber industry, is owned said Agbar's investments in Argentina The Rio Polimeros project financing is the by Chile's AESGener, which n turn is had a theoretical accounting value of first in the petrochemical sector in Brazil owned by the US power giant AES. The Euro 236 million. "This value will be and involves setting up what will be one loan, with a five-year matLity, was updated .. taking into account the long- of the single largest polyethylene plants provided by Chilean bank Banco Credito term concessional character of the invest- in the world. It is also one of the few truly Inversiones and ScotiaBank's Chilean ments ...," a report said. limited recourse financings to have branch. Energia Verde has four plants in closed in Brazil. Located 30km north of Chile, supplying 180 million kilowatts of The impact of late payments in Argentina the City of Rio de Janeiro, the plant will power annually and over 900,000 tonnes on Agbar's 2001 results was estimated at produce up to 540,000 tpy (tons per year) of steam for the woodpulp industry. Issue - 2 i;e China - network and provide software upgrades India and network optimization for four Ericsson networks. Ericsson meanwhile won IP to issue reveals backbone deals with four operators. four overseas Nortel will implement its fifth expansion plans in China of Xinjiang Mobile's GSM 900 network, calls licenses increasing capacity from 600,000 sub- Ericsson will create another 29,000 jobs scribers to 1 million. In addition, the India will issue licences by March to four in China and triple exports from the Canadian vendor will provide network firms that want to start international long country by 2005 in an aggressive plan to software upgrades to support advanced distance phone services when state strengthen its position in the rapidly intelligent network functionality in monopoly over the business ends on 1 growing market. The Swedish firm, Xinjiang Uygur Autonomous region, April, a government official has said. which has begun a cost-cutting plan that Hunan and Shaanxi provinces, and the Shyamal Ghosh. federal telecoms could see it shed 22,000 jobs elsewhere, municipality of Tianjin. These upgrades secretary. told reporters on the sidelines said last month it would double invest- will increase subscriber capacity for the of a business seminar in Calcutta that mentin China over the 2001-2005 period four operators. Sweden's Ericsson has two Internet Service Providers and two to more than US$5 billion, including won contracts with Chongqing Mobile, domestic long distance carriers had investments by Chinese joint venture Hunan Mobile, Yunnan Mobile and applied for permission for international partners. Asia-Pacific president Ragnar Xinjiang Mobile. The IP backbone long distance service. He did not give Back told an economic conference in equipment is expected to be installed at details. Ghosh has said that two of the Beijing that investment would create the end of the year. For Chongqing applicants for international long distance another 29,000 jobs in China, the firm's Mobile and Xinjiang Mobile, Ericsson will were Indian telecoms group Bharti biggest market and an island of growth deploy its AXI 580 and AXI 520 series IP Enterprises and Internet access in the slowing global telecommunica- routers (which are based on Juniper company Data Access, the Indian unit tions sector. "We predict that our invest- M160, M40 and M20 routers). It is also of Hong Kong's Pacific Century ment in five years will also double the supplying LAN switches from Extreme Cyberworks, "We expect to issue the employment opportunities to 58,000 Networks and managing the integration licences by March, if not by the end of people and triple our export growth to with the existing equipment. For Hunan February," Ghosh said on Monday when $4.5 billion by year 2005," Back said. He Mobile, Ericsson is also providing AXI asked when the four firms would get per- said the company, which makes wireless 580 and AXI 520 routers, plus customer mission to start international long network gear and mobile phones with services such as installation, support distance services. The government, Chinese joint ventures, also planned to and training. And for Yunnan Mobile, it which has steadily deregulated its boost its exports from China from $1.5 will supply the routers, LAN switches telecoms sector in the past three years, billion this year to $4.5 billion by 2005. from Extreme and nternally developed is ending the monopoly of Videsh Last month, other top mobile phones and AXC 711, 623 and 270 Tigris access Sanchar Nigam Ltd over the internation- wireless gear makers also revealed routers. The vendor will also supply al calls business which it plans to throw aggressive investment plans in China. training, project management, system open to unlimited competition. where mobile operators are building support and hardware replacement networks to handle tens of millions of services. Nortel said it has won new users. Nokia said it would set up a contracts in China totaling over $1.2 research and development centre for billion since the beginning of the year. high-speed third-generation (3G) The Canadian vendor said it has won networks in China, while Motorola said it wireless contracts in 17 of China's 31 Peru would invest $6.6 billion in China over provinces. Ericsson said it has IP extends the next five years. With more than 136 backbone contracts with 17 of China million mobile phones users and a Mobile's provincial subsidiaries. deadline for growth rate of about five million sub- bid scribers per month, China is an outpost Utility bids of strong wireless telecommunications growth at a time when growth in Europe Peru's privatisation commission said it and the United States has fallen slack. has extended the closing date for offers Analysts say China also offers the added Egypt for the sale of two electricity generators attraction of a low-cost production base d.%frw to 30 April from 30 March, after t$280 million the companies which pre-qualified allocated requested more time. The commission said offers for Egasa, which supplies to transportation electricity to Peru's second city, China - development in Egypt Arequipa, in the south of the country; China - and Egesur, which supplies Tacna, near Nortel and The Egyptian Prime Minister, Atef Ubeid, the Chilean border, had been due by 27 Ericsson said that the government allocates 1.3 March. The privatisation commission did billion Egyptian Pounds ($280 million) not name the companies involved in the win contracts annually to supporting services, railway bidding process. Peru aims to raise with China Mobile facilities and land transportation som e $700 million this year through pri- services. There are 21 airports in Egypt, vatisations - mainly of utilities - anid has of which 11 are international. The said it may take in over $1 billion. Nortel and Ericsson both announced existing railway network carries nearly GSM network expansion deals with sub- one million passengers per day, which sidiaries of China Mobile. Nortel won a eases the heavy traffic movement in the US$78 million contract to expand one country. X Cssue 2 Peru - investing in the Philippines' National South Africa and France Power Corporation (Napocor) due to be Positive Kuczynski privatised later this year. According to a sign transport deal details Peru 2002 statement by the Presidential palace, President Gloria Macapagal Arroyo met An agreement under which France privatisations with officials from National Grid (UK) would assist South Africa on various Plc. Edison Mission Energy (EME), transport-related issues has been signed Peruvian Economy Minister Pedro InterGen, MidAmerican Energy in Pretoria, South Africa. These included Pablo Kuozynski has said electricity Holdings, and Hydro-Quebec during civil aviation, road safety, port and sales would generate the bulk of more her visit to the three countries. maritime transport matters, said than US$1 billion revenue from privati- Napocor, the country's main power Transport Minister Dullah Omar at the zation that the government has supplier, is due to be privatised in the signing ceremony. His visiting French targeted for 2002. "What is going to second quarter of 2002. It is set to counterpart, Jean-Claude Gayssot, was generate the $1 billion to $1.2 billion in auction about 70 percent of its assets a co-signatory. "In particular. we have revenue that we are expecting are worth between US$5.2 billion and decided to combine our efforts in civil electricity companies." he said. US$6.0 billion. Energy Secretary aviation in order to promote co-operation Vincent Perez said in the same in the field of training for black pilots. We "This is t"e main part. There are some statement the plan was to first privatise are aware that there is a shortage of other things (to privatize) but they are the power firm's transmission such skills among people from the his- not impcrtant from a fiscal point of companies before its generation torically underprivileged communities.' view," he added. Kuczynski said that companies - which got the backing of Omar said Gautrain, the envisaged high- interests of holding company JORBSA foreign investors speed train between Pretoria and (Jose Rodriguez Banda SA) now could Johannesburg via Johannesburg be sold off. JORBSA, a unit of Grupo International Airport. was also Gloria, originally had been awarded a mentioned. "I pleaded with Gayssot to 30 percent interest in four regional encourage the French private sector to utilities -- Electro Norte, Electro Norte Ph bid for the construction of th s transport Medio (Hidrandina), Electro Centro and Philippines - system." The minister said that, in terms Electro Noroeste (Enosa) -- with a WorldWater signs of the agreement. France would offer $145.5 million bid in a 1998 partial pri- support and assistance in South Africa's vatization. But JORBSA failed to agreement with road safety campaign. Omar was excited secure funding to boost its stake and Dept. of Agriculture about the forthcoming 22nd World Road seek control It has agreed to relinquish Congress, to be held in Durban next its 30 percent stake. Peru's privatiza- WorldWater Corp. signed agreements year, saying it would create an opportu- tion commnission said oni Friday Spain's with the Department of Agriculture in nity for road experts ot the two countries Union Fenosa, which previously had te Phippines nd the a d to meet. Gayssot, who is in te country flired wth jinin JORSA. ayb DeePhloppmnent agncy theUSTrdAe tod on a three-day visit, announced that flired wth jinin JOBSA.may e DeelopentAgeny (UTDA)to Thales. a French aeronautic and arms interested in buying the companies. implement a UIS$52 million program manufacturer, was currently presenting a Kuczyns