Attracting Foreign Direct Investment Into Infrastructure: Why Is It So Difficult?

by Frank Sader

Overview

During the early 1990s, the Foreign Investment Advisory Service (FIAS), a joint facility of the World Bank and the International Finance Corporation (IFC), found that governments and foreign investors alike were concerned and frustrated about difficulties in successfully implementing private infrastructure projects. Governments were trying to attract these new types of investment without having established an appropriate policy framework. Therefore, there were no institutional structures to resolve impediments effectively and provide clear guidelines for the award of such large-scale projects. Legal frameworks tended to address traditional public-sector responsibilities and not investor concerns. Regulatory environments either did not exist or did not provide investors enough guarantees that their future operating environment would be sufficiently reliable. Consequently, FIAS has been advising many governments in the developing world on the best way to establish a policy framework attractive to foreign investors. FIAS typically combines its review of the institutional, legal and regulatory environment with investor roundtables and workshops for senior government officials to ensure that all the major concerns of both the government and the private sector are taken into account. Although each country has unique policy problems, FIAS has encountered common features in key areas that pose stumbling blocks for private infrastructure investments. This study synthesizes this experience and derives lessons for facilitating and encouraging foreign direct investment in infrastructure.

Product Details

ISBN-13:	9780821346020
Publisher:	World Bank Publications
Publication date:	11/09/1999
Series:	FIAS Occasional Papers , #12
Pages:	192
Product dimensions:	6.00(w) x 9.00(h) x 0.44(d)

Table of Contents

	Abstract	vii
	Preface	ix
	Acknowledgment	xi
	Abbreviations and Acronyms	xiii
	Executive Summary	xv
1.	Introduction	1
2.	Foreign Direct Investment--The Engine Behind the Private Infrastructure Revolution	6
3.	The Complex Nature of Greenfield Investments in Infrastructure: Incentives and Risks	17
3.1	The Contractual Web of a BOT-Type Project	19
3.2	Governments: Balancing Domestic Interests and Multiple Objectives	23
3.3	Sponsors: Creating a Viable Project Structure	24
3.4	Commercial Lenders--The Market Test of Bankability	26
4.	Risks Investors Face	28
4.1	Conflicting Opinions Within Government	32
4.2	Insufficient Coordination	33
4.3	Insufficient Expertise	37
4.4	Direct Negotiations versus Competitive Tenders	41
4.5	Unclear Tendering Rules	45
4.6	Political Interference	49
4.7	Unclear Market Entry Conditions	50
4.8	Lack of an Adequate Legal Framework	52
4.9	Difficulties During Operation	57
4.10	Social Concerns After the Fact	61
4.11	Political Commitment of Successor Governments	63
5.	Handling the Risks	69
5.1	The Role of Government Support Arrangements	70
5.2	The Importance of Overall Sectoral Liberalization	79
6.	Designing an Effective Policy Framework	88
6.1	The Usefulness of an Institutional Support Structure	89
6.2	Designing an Overarching Legal Framework	102
6.3	Regulating Private Infrastructure: Minimizing Risk and Abuse	122
6.4	The End Result: Expensive Potentials or Investment Booms	128
7.	The Impact of the Asian Crisis	132
8.	Conclusion	145
Annex I.	Methodology for Estimating FDI Flow	147
Annex II.	Summary Data Tables	155
	Notes	169
	References	171
	Figures
1.	Number of Private Infrastructure Transactions in Developing Countries	7
2.	FDI Inflows to Developing Countries from Infrastructure Projects	11
3.	FDI in Infrastructure, by Sector	12
4.	Different Strategies: Latin America and East Asia Compared	13
5.	Investor Origin, by Sector	15
6.	Actual Versus Potential Private Infrastructure Projects	18
7.	Structure of a BOT-Type Project	20
	Tables
1.	FDI Is Key in Private Infrastructure in the Developing World	9
	Boxes
1.	What Is a "BOT-Type" Project?	3
2.	The Trouble with Traffic Forecasts: The Dulles Greenway	29
3.	Project Preparation Is an Expensive Business	30
4.	Fighting State Monopolies: The Story of Econet	34
5.	Conflicting Authorities: The Subic Bay Container Terminal	36
6.	How Not to Do It: Mexican Tollroads	38
7.	Good Preparation Is Key: Airport Projects in Eastern Europe	40
8.	Dabhol: The Dangers of Direct Negotiation	42
9.	Privatization, Russian Style	46
10.	Privatizing Brazil's Telecommunications Sector	48
11.	Zimbabwe's Hwange: Politics and Business	50
12.	China's Telephones: The Power of State Monopolies	52
13.	The Value of Old Promises: Poland's Cellular Licenses	54
14.	The Costs of a Shaky Legal Framework: Turkey	55
15.	BOTs in China: A Slow Road to Progress	58
16.	The Question of Government Reliability: Hungary's Electricity Privatization	60
17.	Full-Scale Privatization: British Rail	62
18.	Who Pays the Toll? Portugal's Vasco da Gama Bridge	64
19.	The Risk of Politics: Venezuela's CANTV	65
20.	Pakistan's IPPs: How Reliable Are Sovereign Guarantees?	66
21.	Trouble with Sub-Sovereign Authorities: Tucuman Water	68
22.	Country and Project Risks	72
23.	Types of Government Support Arrangements	76
24.	Managing Contingent Liabilities	78
25.	Excess Capacity Through Private Competition: Argentina's Electricity Reform	82
26.	Indian Electricity: The Lack of Sectoral Reform	84
27.	Dealing with the Entire Network: Argentinean Rail Concessions	86
28.	The N-4 Tollroad: A First Success in Africa	90
29.	Developing a Procurement Process: Britain's Private Finance Initiative	96
30.	The Power of International Arbitration: Grenada Electricity	121
31.	The Role of a Strong Regulator: The Experiences of Argentina and Peru	123
32.	Hungary's Energy Office: Autonomy without Authority	124
33.	How to Make a BOT Really Expensive: The Example of an African Bridge	129
34.	The Philippines: Averting a Crisis Through Private Power	131
35.	Thailand's BERTS Saga	134
36.	Fallout from the Currency Crisis: Indonesian IPPs	136
37.	The Importance of Government Support: The Experience of Hungarian Tollroads	140
38.	Multilateral Support for Private Infrastructure Projects	142