Who’s taking risks?: how the World Bank pushes private infrastructure and finds resistance in some surprising places

This paper looks at efforts of the World Bank to increase private investment in infrastructure projects in the risky markets in developing countries through the promotion of a range of new instruments called fiscal supports. These guarantees and subsidies help to ensure corporate profitability can pose serious risks and costs for taxpayers. They also reveal a double standard: while subsidies for public infrastructure are criticised as financially unsustainable, fiscal supports that prop up risk-averse private providers are touted as innovative solutions for poverty reduction.

However, some voices within the World Bank and IMF have begun to raise questions about the private provision of networked infrastructure, and openly challenge the appropriateness of fiscal supports for the private sector.

This paper:

• explores market conditions and government actions that affect the behavior of private infrastructure providers
• describes the main financial instruments that are used to lure the private sector into markets with poor consumers, and the World Bank’s role in developing those instruments
• identifies highly contradictory positions taken by different actors within the international financial institutions, and reveals the fault lines of an internal debate which has not been resolved.

The paper recommends that governments should be allowed to define their own development priorities, rather than imposing a narrow view of effectiveness such as efficiency or profitability. Key questions for policy makers to ask include:

• Regulatory capacity: Risky investment environments are usually characterized by weak (or absent) regulators. Is the same government that is asked to provide resources to support private profit levels is likely to negotiate "the best deal" for users? Will it have the oversight and authority necessary to ensure that the provider achieves equity and efficiency goals?
• Costs: Subsidising poor people or expanding the network under government provision entails real costs, but these can be measured with some degree of precision, and adjusted if expectations are invalid. Many of the costs associated with attracting private provision attractive are "off-budget" or contingent on specific events. Which option involves more "up-front" costs, and how much could contingent costs add to fiscal stress? Given the inevitability of "learning by doing" under any kind of reform, what are the costs of making mistakes, and how long are those costs likely to be borne? Under private contracts, can provisions based on misjudgments or inaccurate information be reversed at all?
• Country "ownership": experience with policy- making suggests that political legitimacy, which is derived from genuine country ownership, can be even more important to sustaining reforms than technical design or financial resources. Given an open and public dialogue about distinct choices for reforming utilities, which enjoys more home-grown support among constituents that matter to government?

The purpose of asking these questions before adopting policies to reform utility services is not to rule out the possibility of private provision. Indeed, in the event that government ultimately chooses private provision, the very act of conducting such an assessment is likely to improve contractual provisions, the regulatory framework and popular support. But by explicitly assessing the costs and risks fiscal supports, government and citizens can put the option of public sector reform back on the table.[adapted from author]