A country's economic development and welfare of its citizens depend in large part on the level of infrastructure services. Infrastructure plays a central role and is now viewed as a major contributor to growth, poverty reduction, and the achievement of the Millennium Development Goals (MDGs). Traditionally, most investment in infrastructure has been publicly funded with about 70% of the total spending, and the private sector has contributed roughly 20% to 25%, while official development assistance has financed only around 5% to 10%. Towards the end of the 1980s, governments and aid agencies started to encourage private sector investment in infrastructure. As a result, private infrastructure financing accelerated especially in the developing countries in the late 1990s. This trend was abruptly reversed and total private sector project commitments plummeted from the 1997 peak of US$ 128 billion to US$ 50 billion in 2003 (PPI Database). Infrastructure provision is no longer assumed to be the sole responsibility of the public sector nor that of the private sector, but increasingly it is about public-private partnerships. The decline of private infrastructure investment resulted from insufficient recognition of basic requirements for sustainable private capital flows. Infrastructure typically implies investments with regulated low returns and long depreciation periods. The three key prerequisites for attracting private financing are therefore: (i) efficient financial markets which can provide funding at suitable terms and tenors, (ii) reliable and transparent investment and regulatory frameworks; and (iii) project revenues that are predictable and ensure the payment of debt service and a reasonable rate of return on equity. However, as these prerequisites exist in only few developing countries, private sector investment is unlikely to quickly regain its previous peak levels. In the face of budget constraints in most developing countries and the impediments to private investments, the World Bank aims to help developing countries mobilize all available resources and reverse the decline in private investment by offering innovative financial instruments, such as risk mitigation arrangements, guarantees, sub-sovereign financing solutions, and output-based-aid (OBA) supports. Contact Person: Monika Kosior |
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