Trends in Private Sector Investments in Crossborder

2.1 Infrastructure Projects

The last decade and a half witnessed a sharp decline in official development aid for infrastructure projects in developing Asia (Kirkpatrick and Parker 2004; Jones 2006). In contrast, private capital flows for infrastructure have increased significantly in the same period in response to the general trend towards privatization of infrastructure in developing countries.

From 1984 to 2006, private sector investment (PSI) for global national and crossborder infrastructure projects amounted to US$1.1 trillion (Table 1 [ PDF 24.2KB | 1 page ]). The Latin America and Caribbean region (LAC) ranked first, accounting for a 40% (US$443.22 billion) share of global PSI (Figure 1(a) [ PDF 19.4KB | 1 page ]). The Asia and Pacific (AP) and Europe and Central Asia (ECA) regions followed with investments of US$343.63 billion (31%) and US$206.48 billion (19%), respectively.

The upsurge in investment in infrastructure has been driven mainly by telecommunications (US$536.30 billion). However, investment varies across regions. For example, PSI in the AP region has been driven by the energy sector (US$127.69 billion), whereas it is telecommunications that has attracted majority of the PSI in the other regions.

Although private sector investment in both national and crossborder infrastructure has increased in the last decade and a half, its growth has been uneven and has fluctuated across regions. Global PSI was higher in the 1990s, compared to first half of the ongoing decade (Figure 2 [ PDF 20KB | 1 page ]), a trend that was much influenced by the AP and LAC regions. In contrast, the ECA, Middle East and North Africa (MENA) and Sub-Saharan Africa (SSA) regions have attracted higher PSIs in infrastructure development during 2001–2006 as compared to 1991–2000. Nevertheless, the trend in PSI in infrastructure development across regions has been rising, except for ECA, where the trend has decelerated in recent years.⁷

Compared to investments in infrastructure overall, however, PSI in crossborder infrastructure has been very low. From 1991 to 2006, only 1.36% of cumulative investment in infrastructure (US$13.08 billion) went into crossborder infrastructure, mainly in energy and transport (Table 1). The distribution of cumulative PSI in crossborder infrastructure across sectors has also been unbalanced. As shown in Table 1 [ PDF 24.2KB | 1 page ], energy alone has attracted 92.43% of total crossborder investments from the private sector (US$12.09 billion). Private participation in energy has increased presumably as a result of technological developments that have reduced the minimum size for efficient power plants, along with user-friendly financing mechanisms that have reduced the risks associated with the projects.

The annual investment for development of crossborder infrastructure has also been inconsistent across the world. It reached a peak of US$3.75 billion in 1998, and thereafter shrunk to less than US$500 million in 2006 (Figure 3 [ PDF 20KB | 1 page ]). Cumulative PSI in crossborder infrastructure was almost double during the 1990s (US$9.13 billion), when compared with the first half of the ongoing decade (US$3.95 billion).⁸

The LAC region has been relatively successful in attracting as much as 38% (US$5.08 billion) of global crossborder infrastructure investment for the period 1984–2007 (Figure 1(b) [ PDF 19.4KB | 1 page ]).⁹ With US$2.74 billion of investment, the SSA region comes next, where PSI in energy and transportation have been comparatively balanced. In contrast, PSI in the AP region has been very low with only 13% (US$1.25 billion) of total crossborder investment by the private sector, thus showing the region's challenges with respect to CBIPs.

Projects related to natural gas (plant and transmission) have attracted nearly US$10.88 billion of investment (Table 2 [ PDF 19.7KB | 1 page ]), indicating that crossborder infrastructure projects in the private domain are mostly driven by energy sector. With US$2.07 billion of private sector investments, electricity comes next. In terms of ranking, the AP region appears last in the league, where PSI has been restricted only to crossborder natural gas and electricity projects. It is seen that natural gas and electricity projects have the advantage of better revenue-generating potential in comparison to transport sector projects. Power projects that are driven by market demand thus have low revenue-generating risks, while transport projects have to be justified in economic terms and have higher revenue risks.

Private infrastructure projects have taken a number of forms, i.e., management and lease contracts, concessions, greenfield projects, and divestitures, of which greenfield projects have gained most in popularity.¹⁰ Greenfield crossborder projects have been largely developed in the energy sector (Table 3(a) [ PDF 19.7KB | 1 page ]), whereas concession remains the preferred mode for crossborder PSI in the transportation sector. The build, own, and operate (BOO) format has been the most preferred project structure for energy PSI (54.6%), whereas miscellaneous arrangements, such as rehabilitate, operate, and transfer; or build, rehabilitate, operate, and transfer; or rehabilitate, lease or rent, and transfer, accounted for 96.7% of transport PSI (Table 4 [ PDF 20.2KB | 1 page ](b)). Much of the private investment in electricity has been in greenfield projects with independent power producers implementing BOO or build, operate, transfer (BOT) contracts. About 28.9% and 16.54% of cumulative investments in the energy sector has been invested in crossborder projects implemented under BOO and Merchant categories. Unlike SSA, the AP region has witnessed a dissimilar trend in types of investment. During 1991–2006, greenfield projects, with an investment of US$1.25 billion, accounted for all the private sector investments in the AP region, of which public-private partnerships (PPP) were implemented under BOT or BOO routes.

Table 3(b): Project Structures of Crossborder Private Sector Investment [ PDF 18.6KB | 1 page ]

Finally, the AP region has attracted about 31% of global PSI (US$343.63 billion) in infrastructure, next to Latin America, where the crossborder component has been only 0.5%, amounting to US$1.25 billion. Given this low volume of private investment in crossborder infrastructure projects, the AP region ranked last among the five regions considered in this study.

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