PPI in LDCs

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PPI in LDCs

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• Antonio Estache
• World Bank and ECARES,
• Université Libre de Bruxelles
• November 2006

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Historical Context(Late 80s-mid 90s)

• Major Fiscal Crisis
• Lack of Investment in public services
• Declining service quality
• Excess supply of funds on international capital
  markets
• Ideological changes favoring market driven
  economies among leaders of all political sides
• Widespread popular support for reforms including
  privatization creation of independent regulator

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Snapshot of reforms in 2004
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The promises of PPI

• Contribution to fiscal stabilization
• Efficiency gains
• Increased investments
• Growth payoffs
• Contribution to poverty reduction
• Improved governance

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To what extent were goals achieved? (1)

• Fiscal benefits yes in short run, more complex
  in long run
• Short run sales of assets and reductions from
  transfer of Opex and capex obligations to private
  operators
• Long run renegotiations associated with
  increased changes on fiscal effects of reforms
• Return of capex subsidies in utilities
• Return of opex subsidies in passenger transport

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To what extent were goals achieved? (2)

• Efficiency gains ok in general
• Lots of evidence from partial performance
  indicators
• Confirmed by papers looking at economic concepts
  of efficiency (TFP, TE, TEC)
• Noteworthy
• evidence of changes in allocative efficiency
  changes for a few papers on electricity
• Evidence that regulatory regime drives efficiency
  often more than ownership
• No difference in water
• Major difference in rail and ports
• Jury still out on energy

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To what extent were goals achieved? (3)

• Investment not clear
• Fast increase till 1997, decline since, some
  recovery in last 2 years
• Not as much as expected
• Drop in CAPEX from 8-10 in 1970s to 1-3 since
  mid 1990s
• And it is not only a result of efficiency gains
• Not as private as expected (mostly in middle
  income countries)
• 20 of the actual investments in the sector
• 10 of the needs
• Significant cream-skimming problems
• Typically urban better off than rural

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How much investment is taking place?
Assuming developing countries invested around
4 of their GDP in infrastructure (WDR 94).
Investment flows to PPI include only investment
in facilities (sector expansion). Investment in
acquiring government assets have been excluded.
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Are these investments profitable (1)?
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Are these investments profitable (2)?
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Look at the cost of capital (98-02)
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To what extent were goals achieved? (4)

• Growth payoffs not clear
• Direct effect of PPI generally non-significant
• Butstrong evidence that infrast. matters in LDCs
  
• But lower investment/cream skimming linked to
  lower growth for utilities
• Positive payoff from freight transport reforms
• Useful counterfactual studies on growth
  consequences of infrastructure gaps associated
  with reforms
• See various papers in Easterly and Serven (2003)

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To what extent were goals achieved? (5)

• Improved governance not clear
• Institutional changes tend to be associated with
  better outcomes in terms of access
• High renegotiation rates (Guasch (2004)
• Yet corruption continues to be an issue

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So who gained and who lost from these mixed
outcomes?

• Three ways of looking at it
• Regions
• Sectors
• Actors

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Winners and losers by region 1990-2005
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Winners and losers by sectors, 1990-2005
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Winners and losers by Actors

• The actors in the payoff matrix
• The users (access ( but not as much as expected
  and distributional issues), affordability(-),
  quality ())
• The taxpayers (cash! in SR, -/ in LR)
• The workers (jobs cash - in SR, in LR)
• The operators (cash in the SR and IRRgt COC in the
  LR for a few! ( in SR, ? for LR)
• The local owners (cash! in SR and LR)
• The foreign owners (cash! in SR, /- in LR)
• The bankers (cash! in SR and LR)
• The politicians (cash! in SR and LR)
• The donors (???)

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Concluding comments

• Globally net welfare impact seems to be globally
  positive but distributional issues have been
  really poorly addressed
• THERE ARE EQUITY-EFFICIENCY TRADE-OFFS!
• Main tough challenges
• Actually addressing the distributional
  implications
• Strategic behavior of actors (demand and costing
  games)
• Dealing with renegotiation and FOREX risks
• Water and some of the transport sectors where
  cost of capital too high for viable average
  tariffs
• New macro teams seeing long term fiscal costs
• People fed up with corruption issues
• people interested in new sources of rent
• NGOs
• Change in ideology
• main issue really isthe need for a political
  commitment on the parts of ALL actors

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• THANK YOU
• FOR YOUR PATIENCE