Funding investments: In what ways does privatization help meet the challenges of funding network expansion? To what extent does public ownership help meet the challenges of funding network expansion?

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[Response by Sanford Berg, May 2009]

Private finance for infrastructure hit a peak in 1998. Privatization has not been a panacea for promoting capacity expansion. In fact, obtaining the political backing and general citizen support for private participation has proved to be difficult in many regions of the world. Citizen perceptions differ widely regarding the desirability of private ownership. The sale of assets provided funds to the national Treasuries which sometimes led to increased government funding for rural or peri-urban infrastructure projects that were (otherwise) commercially unviable. Greenfield projects in energy brought new production capacity into many countries, though the associated contracts with independent power producers have often led to re-contracting issues

Perhaps the most comprehensive examination of the impacts of privatization is by Andres, et. al. (2008) who found that privatization has been associated with the following:

  • substantial employment reductions in operators—freeing up resources for investment;
  • mixed impacts on prices (depending on initial conditions);
  • quality improvements in many (but not all) instances;
  • access and service coverage improvements;
  • mixed impacts on returns to investors (relative to the cost of capital);
  • reduced national subsidies to infrastructure;
  • increased flows to national treasuries (from the sale of SOE assets);
  • productivity improvements; and
  • mixed impacts on consumers—new customers gained (with network expansion) while existing customers tended to pay more (but received higher quality service).

Just as privatization has had mixed results, the success or failure of public ownership in expanding network infrastructure is situation-specific. Some countries have used public funds to invest in capacity additions, improving service coverage and quality. Of course, such funds represent cash flows over and above those obtained through sales of the service. Thus, if price is far below cost, it is likely that public funds will go to covering operating costs rather than to network expansion. Utilizing scarce public funds to provide infrastructure services takes funds away from other services, including education and health.

Strategies for rural electrification and increased coverage of other infrastructure businesses are addressed in the FAQs related to tackling the needs of poor consumers. However, there is a consensus that dedicated funds seem to work best with bidding for subsidy systems. Of course, arrangements for a country with 20% electrification need to be very different from those in a nation with 80%+ electrification.

 

Resources

The Impact of Private Sector Participation in Infrastructure: Lights, Shadows, and the Road Ahead
The World Bank, 2008, pp. xxv-351.
Luis A. Andres, J. Luis Guasch, Thomas Haven, and Vivien Foster