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close this bookPrivate Sector Development in Low-Income Countries - Development in Practice (WB, 1996, 188 p.)
View the document(introduction...)
View the documentForeword
View the documentAcknowledgments
View the documentAcronyms and abbreviations
View the documentDefinitions and data notes
View the documentOverview
close this folderChapter 1-From state to market uneven progress
View the document(introduction...)
View the documentRecent policy reforms
View the documentFast and slow growers
View the documentThe drag of public
View the documentRegulation and barriers to competition a harsh business environment
View the documentPoor quality of physical infrastructure and human resources
View the documentThe reform agenda
close this folderChapter 2-Establishing an attractive business environment agile firms, agile institutions
View the document(introduction...)
View the documentThe private sector's assessment of the business environment
View the documentFoundations of a dynamic private sector
View the documentSecure, flexible transactions
View the documentCompetition-and simplified regulation
View the documentEnterprise development
View the documentEfficient infrastructure
View the documentThe agenda for developing an attractive yet competitive business environment
close this folderChapter 3-Reforming public enterprise farther performing and faster
View the document(introduction...)
View the documentPublic enterprises are not performing well
View the documentTurning to the private sector—slowly
View the documentThe way forward—farther and faster
close this folderChapter 4-Building robust financial systems— difficult but pressing
View the document(introduction...)
View the documentWhat went wrong?
View the documentWhat has been done?
View the documentWhat remains to be done?
View the documentThe path for reform
View the documentSelected bibliography

The agenda for developing an attractive yet competitive business environment

In China and India, the demand for infrastructure services outstrips supply, constraining fresh domestic and foreign investments. Delays in the delivery of coal cost China an estimated $70 billion in 1992. To maintain its planned economic growth, China will need to spend more than $100 billion by 2000 to upgrade its overburdened transport system. In India, chronic power shortages often cripple industrial production and cause production costs to soar, while frequent voltage fluctuations or sudden disruptions in supply damage equipment. In 1992-93, power shortages, estimated at 18 percent of peak capacity requirements, resulted in low capacity utilization and substantial production losses. Equally disruptive is the inefficient management of transport services, which often raises operating and inventory carrying costs. Poor management of ports in India, for example, adds $80 to each container of Indian exports.

The problems of infrastructure detailed above stem from poorly specified goals, lack of managerial autonomy and accountability, chronic financial distress, price controls, insufficient competition, and wage and labor problems. As a result, governments in many low-income countries are increasingly taking a fresh, pragmatic look at expanding the menu of options for delivery of infrastructure services.

At the heart of these new approaches is greater involvement of the private sector, more decentralized and participatory approaches to public infrastructure investments and maintenance, and stronger capacity of the public sector to oversee and regulate private sector involvement. Governments recognize that technological, institutional, and regulatory innovations now allow competitive private delivery of many services. They are increasingly unbundling infrastructure services and applying a range of market options to increase efficiency, competition, and private investment.

The menu of options ranges from management contracts, leases, and concessions to outright sales of assets. These approaches are increasing competition from substitutes (for example, natural gas for coal). They are also increasing competition in and for the market. In many Sub-Saharan African countries, such port activities as stevedoring, tugboat services, dredging,

Perhaps the greatest lasting benefit of private participation in infrastructure e is that governments can increase the allocation of resources to areas crucial to the long-term growth of the private sector and piloting are being handed over to the private sector. Viet Nam and Pakistan are considering leasing container terminals to private operators. In the water sector, concessions and leases to private operators are working well in Guinea and Cote d'Ivoire. In Sri Lanka and India, urban transportation has been deregulated to allow profitable operation of small vehicles by entrepreneurs. Private toll-road operations are planned in Ghana, India, and Pakistan. In countries as diverse as China, Ghana, Sri Lanka, and India, large parts of the telecommunications sector are being opened to private operators. In Sri Lanka, by 1993 four private cellular operators had been licensed—and competition between these operators has produced tariffs among the lowest in the world.

The power sector, particularly power generation, also has been opened to private participation in many countries. In Ghana and Guinea Bissau efforts are under way to bring in private firms under performance-based contracts, while in Tanzania and Cd'lvoire new projects will involve private investment. In Pakistan and India, private power generation in the form of independent power production is actively promoted and will contribute both to increasing efficiency and reducing the financial burden on governments. To stimulate this flow of private capital and management, many countries are revising their regulatory regimes and examining options for providing financial assurances to investors and lenders, often with help from IDA.

Besides new private investments, privatization of existing infrastructure utilities is an option available to low-income countries, particularly where the need to control persistent budget deficits leaves the public sector with limited resources for maintaining and expanding infrastructure capacity. In many middle-income countries, particularly in Latin America, privatization of infrastructure has been pursued to relieve overextended government budgets, improve operating efficiency, increase capacity, and reduce the cost of services to private firms. Infrastructure privatizations in developing countries mobilized about $25.4 billion between 1988 and 1993, of which $5.2 billion were raised through bond and equity sales in international markets (World Bank 1994e). The privatizations were mainly in the telecommunications and power sectors with Latin America, followed by East Asia. accounting for most of them (table 2.4).

Few low-income countries have yet pursued the privatization of infrastructure aggressively. In light of rapid changes in the infrastructure sectors in middle-income countries, low-income countries will have to step up their efforts to maintain the competitiveness of domestic firms and increase their access to international markets. True, the privatization of infrastructure in lowincome countries poses special problems—embryonic domestic capital markets, limited domestic entrepreneurial capacity, weak regulatory mechanisms.

TABLE 2.4 INFRASTRUCTURE PRIVATIZATIONS IN DEVELOPING COUNTRIES, 1988-93 (percent)


1988

1989

1990

1991

1992

1993

Region

100

100

100

100

100

100

Latin America

100

9

79

95

74

38

East Asia

0

91

20

4

25

25

Other

0

0

1

1

1

37

Sector

100

100

100

100

100

100

Telecommunications

75

9

94

90

35

35

Power

25

91

0

5

36

46

Gas

0

0

0

0

23

2

Other

0

0

6

5

6

17

Total (billions of dollars)

0.4

2.3

4.3

6.3

8.3

3.8

Note: Privatizations include sales in local markets and exclude airlines, shipping, and road transport.

Source: World sank 1994d, e: Sader 1993.

But options to overcome these problems are being applied in some countries. These issues are discussed in detail in chapter 3.

Perhaps the greatest lasting benefit of private participation in infrastructure is that governments can increase the allocation of resources to areas crucial to the long-term growth of the private sector, but where private participation is often difficult. One is rural infrastructure, an area of considerable underinvestment in most low-income countries.

In Sub-Saharan Africa, the neglect of rural roads, education facilities, small-scale irrigation facilities, and telephone and power connections often cuts farmers and processors off from urban markets and from export markets. It also cuts them off from access to improved inputs, equipment, and technology. On average, road density is 34 miles per square kilometer in Africa, compared with more than 500 in India. In Cameroon, more than 80 percent of the unpaved road network—predominantly in rural areas—is in need of complete reconstruction and compaction. In India, it has been estimated that the decline in public investment in rural infrastructure during the 1980s led to a decline in the growth of private rural investment, from 2.8 percent a year in the 1970s to 1.9 percent in the 1980s.

Several low-income countries are attempting to redress the imbalance in infrastructure investment between rural and urban areas. In this effort, they are decentralizing implementation and relying more on community-based approaches to rural infrastructure development and maintenance—approaches that lead to better project effectiveness and resource mobilization. Ghana, for instance, has set aside 25 percent of its road funds for rural roads. In Ethiopia, a community organization, Gurage Road Construction, has mobilized resources for maintaining and improving more than 350 kilometers of roads. In Sierra Leone, Tanzania, and Zambia, district councils are taking on the responsibility for road maintenance.

These approaches, in tandem with greater private sector involvement, will permit increased spending on education at the primary and secondary levels and on primary health services—areas in which public investment in real terms has yet to climb back to levels of the 1 970s. They will also permit governments in South Asia to tackle, the massive problem of rural illiteracy.

In sum, the growth of a dynamic private sector requires a business environment that:

· Encourages and welcomes private entrepreneurship and reduces uncertainty and risks through continuity and consistency of policies.

· Encourages market relationships through legal and judicial systems that protect property rights and provide a framework for their exchange.

· Fosters competition through open, neutral, and nondiscriminatory policies for trade, regulatory, and investment.

· Reduces transaction costs through simple regulations, well-managed institutions of public finance, and well-functioning infrastructure.

· Commits governments to support enterprises through facilitation of trade and investment, innovative use of public investment programs, and investments in technology and skills development.

· Forges lasting partnerships between governments and the private sector—with a view to overcoming private sector concerns about policy reversals and systematically eliminating impediments that the private sector views as most onerous.

Countries that have achieved this business-friendly competitive environment have done so through a determined effort by the government to develop competent and responsive institutions that work closely with private firms, labor organizations, and civic societies. The financial and technical assistance of the donor community can do much to support what must remain a local initiative and effort.