FUNDING FOR PROJECTS

Funding for Projects

Funding for Projects

Introduction

Private investment in infrastructure has increased rapidly over the past few decades (Lamech and Saeed, 2003). The World Bank reports that, while private investment in infrastructure amounted to $100 million in 1988, by 1996 this figure was up to $20 billion (Irwin et al, 1997). A large body of conventional wisdom lies behind the drive to increase the privatization of previously public infrastructure such as roadways, water and sanitation systems, and telecommunications networks. Due to their unambiguous profit motives, private firms typically have stronger incentives than government enterprises to build, operate and maintain infrastructure facilities at low costs (Donahue, 1989, Panayatou 1997). Easy access to capital, greater efficiency in decision making due to the absence of state bureaucracies and the ability to improve the host government's fiscal position by making available the same quality of service with smaller budgetary subsidies, are some of the other reasons commonly cited in favor of the privatization of infrastructure projects (Sader, 1999).

However, private infrastructure projects have had a history of subjecting investors to major risks and in some cases, to cancellations of the project (Harris et al, 2003). Delays in project start-ups, contract cancellations and legal disputes have frequently overshadowed the potential success of many projects. The U.K. based consultancy firm Merchant International Group published a report in early 1999 estimating that multinational companies lost about US$24 billion during 1998 in their foreign private infrastructure investment activities because of specific emerging market country risks (Irwin et al, 1997).

Indeed, case studies abound in virtually every industrial sector on infrastructure privatizations that did not lead to the efficiency gains or the outcomes that were expected by various stakeholders at the onset of the project. In the transportation sector, tramways built in Brazil in the 19th century and toll roads built in Bangkok in the 1990's led to situations wherein the private investors had to sell their stakes at a huge loss, under pressure from the local governments (Wells and Gleason, 1997). In the water supply and sanitation sector, the attempt to privatize the water system in Cochabamba, Bolivia led to large-scale riots and street protests within months of starting the project (Nickson and Vargas, 2002). The contract in this case was quickly cancelled. In the telecommunications sector, Indosat, an Indonesian subsidiary of ITT, a private telecommunications firm, was forcibly bought by the government at a price that was purported to be below the value of the firm (Wells and Gleason, 1997). In the power sector, the Dabhol power plant project in India in the 1990's is a case in point. The election of a new government that was not supportive of the project led to renegotiation of tariff rates that reduced the profitability of the private firm (Sader, 1999).

Logical Sequences

Why are these projects so risky? Theodore Moran argues that since most infrastructure activities are monopolies, they are exposed to easy inspection and regulation from governments. The goal conflicts that result in this principal agent relationship can lead to ...