Government Support to Private Infrastructure Projects in Emerging Markets

30 Pages Posted: 20 Apr 2016

See all articles by Mansoor Dailami

Mansoor Dailami

World Bank

Michael U. Klein

Frankfurt School of Finance and Management; Johns Hopkins University - Paul H. Nitze School of Advanced International Studies (SAIS)

Date Written: January 1998

Abstract

For citizens to reap the full benefits of private investment in infrastructure, infrastructure prices must be high enough to cover costs, and private investors must assume commercial risk. Good macroeconomic policy matters because it affects the credibility of a price regime and especially the trust in currency convertibility essential for foreign investors.

Driven by fiscal austerity and disenchantment with the performance of state-provided infrastructure services, many governments have turned to the private sector to build, operate, finance, or own infrastructure in power, gas, water, transport, and telecommunications sectors. Private capital flows to developing countries are increasing rapidly; 15 percent of infrastructure investment is now funded by private capital in emerging markets. But relative to needs, such private investment is progressing slowly. Governments are reluctant to raise consumer prices to cost-covering levels, while investors, mindful of experience, fear that governments may renege on promises to maintain adequate prices over the long haul.

So investors ask for government support in the form of grants, preferential tax treatment, debt or equity contributions, or guarantees. These subsidies differ in how they allocate risk between private investors and government. Efficiency gains are greatest when private parties assume the risks that they can manage better than the public sector. When governments establish good policies-especially cost-covering prices and credible commitments to stick to them-investors are willing to invest without special government support.

Privatizing assets without government guarantees or other financial support is possible, even where governments are politically unable to raise prices, because investors can achieve the returns they demand by discounting the value of the assets they are purchasing. But this is not possible for new investments (greenfield projects). If prices have been set too low and the government is not willing to raise them, it must give the investor financial support, such as guarantees and other forms of subsidy, to facilitate worthwhile projects that would not otherwise proceed. But guarantees shift costs from consumers to taxpayers, who subsidize users of infrastructure services. Much of that subsidy is hidden, since the government does not record the guarantee in its fiscal accounts. And taxpayers provide unremunerated credit insurance, as the government borrows based on its ability to tax citizens if the project fails, not on the strength of the project itself.

This paper - a joint product of the Regulatory Reform and Private Enterprise Division, Economic Development Institute, and the Private Participation in Infrastructure Group - was presented at the conference Managing Government Exposure to Private Infrastructure Projects: Averting a New-Style Debt Crisis, held in Cartagena, Colombia, May 29Ð30, 1997.

Suggested Citation

Dailami, Mansoor and Klein, Michael U., Government Support to Private Infrastructure Projects in Emerging Markets (January 1998). World Bank Policy Research Working Paper No. 1868, Available at SSRN: https://ssrn.com/abstract=614977

Mansoor Dailami (Contact Author)

World Bank ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

HOME PAGE: http://econ.worldbank.org/staff/mdailami

Michael U. Klein

Frankfurt School of Finance and Management ( email )

Adickesallee 32-34
Frankfurt, 60322
Germany

Johns Hopkins University - Paul H. Nitze School of Advanced International Studies (SAIS) ( email )

1740 Massachusetts Avenue NW
Washington, DC 20036-1984
United States

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