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)