Capital Flows to Infrastructure

Reunión Latinoamericana sobre el Financiamiento de la Infraestructura

Mansoor DailamiWorld Bank

Buenos AiresApril 2004

Overview

Recovery in private capital to developing countries

Steady decline in private capital flows to infrastructure

• Emerging frontiers in infrastructure finance - local-foreign blend, bond financing and scaling-up of multilateral role

0

50

100

150

200

250

300

350

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003*

$286 in 1997

$ billion

$200 in 2003Net private flows

Private capital flows recovered in 2003…but remain well below 1997 peak

0

50

100

150

200

250

300

350

1990 1992 1994 1996 1998 2000 2002

$ billion

Over longer-term, rotation from debt to equity

Net equity flows

Net debt flows

Economic fundamentals,

creditworthiness, external liability position

Investor preference,Narrowing of bond market

spreads

Easing of monetary policy,low interest rates, global

economic recovery

Increased investors’ risk appetite

Favorable external market conditions

Improved credit quality

Drivers of private capital flow recovery

subject to sudden shift

sound progress

cyclical in nature

External financing environment and domestic conditions led to spreads rally

300

500

700

900

1100

1300

1500

200

600

1000

1400

1800

2200

2600

Developing country spreadsBasis points

2002 2003 2004

Developing countries

Brazil

Basis points

Overview

Recovery in private capital to developing countries

Steady decline in private capital flows to infrastructure

• Emerging frontiers in infrastructure finance - local-foreign blend, bond financing and scaling-up of multilateral role

0

20

40

60

80

100

120

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

International investment in developing-country infrastructure has declined since 1997$ billion

Total international investment in developing country infrastructure

East Asia

Latin America

Due to domestic macroeconomic shocks, beginning with East Asian crisisAverage regional credit quality, 1995-2002

Credit rating (Moody’s)

B1

Ba3

Ba2

Ba1

Baa3

Baa2

Baa1

Dec-1996 Dec-1998 Dec-2000 Dec-2002

East Asia and Pacific

Latin America and Caribbean

Since 2000, global industry shocks in telecoms and electricityVolatility (standard deviation) in stock market price indices, 1995-2003

Stock market index

0

0.005

0.01

0.015

0.02

0.025

0.03

0.035

0.04

1995 1996 1997 1998 1999 2000 2001 2002 2003

Telecommunications

US electricity

Electricity

Increase in systemic risk of investing in telecoms

and electricity (March 1, 2000 to March 1, 2003

Return on a particular sector index = a + b*return on world index + c*dummy + d*(dummy)*(return on world index) + error term, using daily observations (January 1, 1995 to November 11, 2003)

Telecom US elect. Elect.

Constant (a) 0.00 0.00 0.00(1.40) (0.19) (0.09)

Return world index (b) 0.94* 0.37* 0.50*(34.68) (8.78) (20.76)

Dummy (c) 0.00* 0.00 0.00(-3.11) (-0.96) (-1.25)

Dummy*return world index (d) 0.23* 0.35* 0.08 (6.21) (5.96) (2.29)

Overview

Recovery in private capital to developing countries

Steady decline in private capital flows to infrastructure

• Emerging frontiers in infrastructure finance - local-foreign blend, bond financing and scaling-up of multilateral role

Phases in infrastructure finance – historical perspective

Until mid-1980s – public-sector financing and vertically integrated utility model in the US provided stability to infrastructure finance

Late-1980s and 90s – deregulation and competition in mature markets and liberalization in the developing world. Prior stability lost.

Looking into the future - frontiers in infrastructure finance

Increasing trend towards blending of local and foreign financing. Local banks participating in loan syndicates, increased local bond market financing

Driven by structural change in international banking industry

• Development of local capital markets and local banks’ expertise and capability

• Example BLCP power project in Thailand

• Example Autopista Central toll road in Chile

Structural change in international bank lending - cross-border lending has stagnated, local operations have increased

0

200

400

600

800

1000

1200

1400

1600

Lending of BIS-reporting banks to developing countries

$ billion

Total claims

International claims

1983 1987 1991 1995 1999

Local claims

2003

Project bond financing has emerged, concentrated in telecommunications

0

1

2

3

4

5

6

7

1992 1994 1996 1998 2000 2002

Bond financing for developing-country infrastructure, 1992-2003$ billion

Telecoms

Other sectors

Since 1996, average issuance = $4.9 bn

Spreads on project bonds are lower than on sovereign bonds

0

200

400

600

800

1000

1200

1400

1994 1995 1996 1997 1998 1999 2000 2001

Comparison between EMBI and sample of 150 project-bondsBasis points

Emerging-market sovereign bonds

Project-bonds

As proportion of total external financing, bond issuance has risen

0

50

100

150

200

Gross private debt flows to developing countries$ billion

Banks

Bonds

1995 1997 1999 2003

Investment grade issuers accounted for a bulk of bond issuance in 2003

0

5

10

15

20

Mex Rus Pol Cze Saf Chn Hun Chl Oth Bra Tur Phl Ven Idn Col Per Uke Oth

$ billion

Investment grade ($49bn) Non-investment grade ($37bn)

IncludingMys, Ind,

Tha IncludingRom, Dom, Mor

Multilateral commitments to infrastructure – decline in 90s…but evidence of pick-upMultilateral development bank commitments to infrastructure sectors, 1995-2002

Billions of US dollars

10

11

12

13

14

15

16

17

18

19

20

1995 1996 1997 1998 1999 2000 2001 2002 2003

Decline concentrated in energy sector

Scaling-up by multilaterals is needed

World Bank launched Infrastructure Action Plan

Development of instruments to address political, currency, contractual and regulatory risks

Increasing focus on sub-sovereign public utilities (such as municipal utilities)

Concluding messages

International capital markets are not being sufficiently tapped (even at 1997 peak total private flows to developing-country infrastructure were 3.6% of int. issuance)

Need a strong institutional framework, to protect investors

Strengthen local capacity of local capital markets

Multilaterals have important role to play