Infrastructure -- new opportunities for foreign investors
Home .Investment Infrastructure -- new opportunities for foreign investors
Infrastructure -- new opportunities for foreign investors
Monday, 22 December 2008 00:13

Good quality infrastructure is a prerequisite for economic and social development, and for exploiting the full benefits of globalization.  But in the developing world there are huge unmet needs for economic infrastructure, things like electricity, telecommunications, water and sewage, airports, roads, railways and seaports.  According to the World Bank, developing countries invest around 3-4 per cent of their GDP in infrastructure, while they would need to invest 7-9 per cent to achieve economic growth and poverty reduction needs.  This means that there are plenty of opportunities for private investors.  

From the 1950s to the 1980s, infrastructure was mainly handled by government, though sometimes through state-owned enterprises.  Government have since opened up infrastructure to private investors, and the state has increasingly assumed the role of regulator of infrastructure activities performed by private and often foreign investors.  

Infrastructure accounts for a rapidly growing share of FDI in both developed and developing countries.  This covers most infrastructure industries, but especially electricity and telecommunications , though less in transport and water.  The share of infrastructure in the global FDI stock is now 10 per cent, compared with only 2 per cent in 1990.  The least developed countries have been largely bypassed by this trend.

Multinational enterprises (MNEs) from developed countries dominate infrastructure industries, with enterprises from the US, Spain, France and the UK leading the way.  Developing country MNEs (for example, from Hong Kong, Malaysia and Singapore) are however becoming prominent investors in other developing countries in areas like telecommunications and transport.

MNEs committed some $246 billion to infrastructure investment in the developing world in the period 1996 to 2006.  But what else do they bring to the party?  Through their hard technology and also soft technology like organisational and management practices, MNEs have helped enhance productivity in services provision, as well as reliability and quality. 

But the impact of technology transfer depends on the diffusion of technology to other firms.  For example, in China's electricity generation industry, MNE participation in large joint venture projects has involved systematic and comprehensive project management cooperation between foreign investors and their Chinese counterparts which has enabled the latter to enhance its expertise and efficiency.

MNE investment can also bring great benefits in efficiency through improving competition.  But if MNE investment transforms a state monopoly into a private, foreign-owned monopoly (such as in the water industry), this limits competition and the scope for efficiency enhancement.

Overall, MNE infrastructure investment has generally increased the supply and improved the quality of infrastructure services in host countries.  This is more pronounced in telecommunications than in any other infrastructure industry, as many developing countries have experienced a mobile revolution.  The impact in the electricity and water industries has been more mixed.  In the absence of government subsidies to users, additions to supply capacity and productivity and efficiency improvements may be insufficient to keep low prices while covering costs thereby adversely affecting access for poor people.  Partly because MNE investments have not always met expectations of improved access, there have been cancellations of water consessions in countries such as Argentina, Bolivia and the Philippines.  Government policies are critical for all infrastructure industries, but, from a social perspective, more so in the case of electricity and water.  

All things considered, reaping the benefits of foreign investment in infrastructure requires an appropriate governance framework -- competitive restructuring, the introduction of regulations and the establishment of an independent regulatory agency should should precede opening up.  Inviting MNEs to deliver infrastructure services tends to place more, rather than less, responsibility on public officials.  Countries must therefore develop the expertise to determine the desirable level and forms of MNE involvement, to negotiate and monitor the implementation of projects.

Many investment disputes are related to infrastructure industries.  At the end of 2007, some 95 disputes (or one-third of all known treaty-based investor-state disputes were related to electricity, transportation, telecommunications, water and sanitation.  This should however be seen in the context of the huge number of infrastructure projects. 

Could home countries and the international community facilitate more infrastructure investments in countries that seek such inflows, especially low-income countries which lack domestic capabilities and fail to attract MNE involvement in their infrastructure?  Development finance institutions and bilateral donors could indeed provide catalytic finance to facilitate the development of such projects.  Risk mitigation measure by home countries and international organisations can help in the short term to mobilise private financing of infrastructure projects in developing and transition countries.

Reference:

World Investment Report 2008, UNCTAD 


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