Private Financing and Infrastructure Provision in Emerging Markets

This Article addresses the key policy, legal, and regulatory issues that arise in the private financing and provision of infrastructure in emerging markets.(1) Many of these issues have their genesis in the experiences of developed countries. However, the need in developing countries to increase the overall quantity of infrastructure stocks and to improve the quality of infrastructure services justifies a focused treatment of the financing instruments and the key legal issues, as well as of the more complex requirements of industry structure, competition, and regulation specific to emerging markets. New investment in infrastructure in developing countries represents four percent of their national output and one-fifth of their total investment, that is, some US$200 billion a year.(2) At stake is not just the sustainable availability of these large amounts but also efficiency in investment and in delivering services. The role of the private sector both in providing and in financing infrastructure development is growing rapidly. As the private sector takes greater responsibility and the role of government is redefined, the stability and nature of the legal and regulatory framework become important factors in the risk equation. Infrastructure development and the financing of infrastructure present a number of formidable challenges. Existing poor performance has to be tackled, not only in terms of the lack of maintenance but also in terms of the gross over-staffing of many government service providers. For example, almost half of the labor in African railways is superfluous.(3) But perhaps more importantly, the amount of investment required to meet present demand is beyond the capabilities of governmental resources, making private sector participation and private financing essential sustaining many countries' economic development. This participation involves tapping both domestic and foreign capital sources in order to make substantial investments in infrastructure. At present, taking all developing countries together, about ninety percent of financing is channeled through government sponsors, which in turn bear the project risks. Nonetheless, the emergence of private sector participation in infrastructure sectors using innovative financing techniques is having a marked effect. Furthermore, the gap between the amount of investment needed to meet present suppressed demand alone (excluding demand growth) and the amount of available funds from government sources will mean that private capital and these financing techniques will play an increasingly important role. This Article will address these issues by: (a) looking, in Part II, at regulation and regulatory instruments and at some of the key policy decisions that surround the development of a sustainable regulatory system; (b) providing, in Part III, an overview of various financing and project development techniques employed and, in particular, the contractual matrix forming the typical project financing in infrastructure sectors; and (c) examining, in Part IV, sources of external financing such as World Bank Group financing. While the Article does not attempt to cover all legal issues raised by the financing and provision of infrastructure, it tackles and emphasizes those issues particularly relevant to emerging markets. II. Regulation and Regulatory Instruments The need for regulation does not acutely arise when infrastructure is provided on a monopoly basis by a government or a government-owned institution. The provider of infrastructure in such cases either provides it according to its own rules or applies it according to rules imposed by legislation or decree as part of the system of government. Thus, regulation in this situation is subsumed within state ownership as a control mechanism. The situation differs, however, when infrastructure is to be provided in whole or in part by the private sector. In such cases, as the role of the government moves from that of service provider to that of supervisor of those providing the service, some form of a regulatory framework will be required. …