Investment Climate

Support for Infrastructure

Private Capital

Bank's Products & Strategy

Thematic Perspectives

Supporting Private Sector Development and Infrastructure

Private markets are crucial for economic growth. But well-functioning private markets do not always develop spontaneously; they depend on sound institutional and policy environments. Growth, while the best way out of poverty, is not always enough for all to escape it. Efforts are needed to ensure effective social safety nets. Responding to these dual considerations, the World Bank’s private sector development effort aims to help countries strengthen their investment climates and improve the delivery of infrastructure services to poor people. New lending to support private sector development and infrastructure amounted to $5.6 billion, with the active portfolio at $47.3 billion as of June 30, 2001 (figures 3.2 and 3.3

Strengthening the Investment Climate

Economies open to trade and foreign investment flows and bound by the rule of law tend to grow faster (box 3.6). Moreover, foreign direct investment flows to developing countries continue to substantially exceed official aid flows (figure 3.4), although, particularly since the Asian crisis, these flows have been concentrated in a few middle-income and large countries. To help more countries attract private investment, the Bank is developing systematic methodologies to identify investment barriers and monitor progress on corrective efforts.

In fiscal 2001 the joint Bank-IFC Foreign Investment Advisory Service continued its foreign direct investment surveys in places as diverse as East Timor, Nigeria, and the Russian Federation. Such surveys—showing, for example, that the absence of land markets, an intrusive tax regime, and excessive foreign currency and customs regulations are impeding foreign investment in the Russian Federation—are helping authorities develop corrective strategies.

The Bank is also strengthening its support for small and medium enterprise (SME) development. A joint Bank-IFC SME department formed in fiscal 2000 is blending the Bank’s business-climate policy expertise with the IFC’s transaction and company-level experience. In Bosnia and Herzegovina, for example, IFC’s links with local business have fostered policy dialogue between firms and government.

Joint Bank-IFC work is promoting the investment climate for mining in low-income countries while encouraging environmental and social initiatives. A fiscal 2001 project in Mozambique, for example, will not only catalyze private investment but also promote private provision of infrastructure, HIV education, and SME support services to local communities. The Bank is also helping build Mozambique’s mining institutions, while improving the efficiency, capacity, employment, and environmental impact of the mining sectors of Poland and Ukraine.

Support for Infrastructure: Strengthening Private Participation, Services for the Poor

Infrastructure has multiple links to poverty reduction. Improved infrastructure can help create jobs and raise worker productivity. It can save time and human effort in transporting water, crops, wood, and other commodities. It can also improve health (by reducing indoor air pollution and emissions in urban areas and making clean water available) and education (by expanding access to schools, computers, and lighting).

The Bank provides advice, finance, risk mitigation, and knowledge and information services to help countries improve their infrastructure. A major objective relates to the design of sound legal and regulatory frameworks to promote private participation. While lending support (typically to middle-income countries) tapers off as they gain increased access to private finance, it will continue to be important—together with technical assistance for sector reform—in countries where such access remains limited. Subsector highlights for the year are noted below.

Water. Key priorities were to maximize the developmental impact of ongoing projects and ensure the quality of projects under preparation. For urban water and sanitation projects, this strategy has meant a shift toward competitive private management and financing of such services to improve utility performance and leverage the Bank’s financial products. Rural projects are emphasizing greater user involvement, not only in designing and implementing but also in contributing resources to the project.

Transport. Support to the sector in fiscal 2001 reflected the Bank’s dual emphasis on private participation and service provision for the poor. Assistance to Brazil helped extend rail concessions to urban railways while ensuring that the benefits of urban mass transit investments reach poor people. In India, the Bank supported the development of the Delhi-Noida Bridge, the country’s first major public-private toll bridge concession. A successful road maintenance project using multiyear output-based contracts, just closed in Argentina, offers another example of Bank support for innovation and private sector involvement; the project is being replicated in Brazil, Chad, Guatemala, and Uruguay.

Urban support. Demand for lending and nonlending services has been growing, spurred by a fiscal 2000 sector strategy and the Cities Alliance partnership. Many urban projects help regularize land tenure in slums and provide basic infrastructure services. Reflecting a new generation of projects aimed at scaling up efforts, a fiscal 2001 project in Mauritania has established a national slum-upgrading program, launched it in five cities, and created a national land-development program for low-income residents.

Telecommunications. The Bank’s support for telecommunications reform continues to lead to dramatic increases in private investment in telecommunications and public access to telephones. In Peru, over the course of Bank-supported reforms, investment increased from $28 million of public investment in 1993 to over $2 billion in private investment in 1998, while the share of poor households in Lima with a telephone increased from 1 to 21 percent. In Mauritania, the sale of the first mobile license and privatization of the state-owned operator, both with Bank assistance, have set records for telecommunications privatization proceeds in Africa and opened the way to full competition. The Bank is also supporting private provision of rural telephone services in Bolivia, Nepal, and Uganda, and community Internet access in Thailand—through efforts patterned after a Chilean model that expanded access from 85 to 99 percent of the population at modest cost to the public.

Energy. A new energy business renewal strategy emphasizes market-based efforts to improve access to cleaner energy for poor people; energy tax reform to promote fiscal stability and cleaner fuels; and support for good governance and private sector development in the energy sector. Important nonlending work over the year included a review of Nigeria’s petroleum sector and support to India and Bangladesh for use of cleaner fuels for indoor cooking to improve women’s health. A new global study on petroleum product taxation will help advise governments on how best to avoid adverse effects on the poor in structuring taxes and subsidies. Joint Bank-IFC support to Pakistan, meanwhile, for sector reforms, and private participation to develop local gas resources, should save the country large sums on imported oil.

Providing Guarantees to Increase Clients’ Access to Private Capital

In fiscal 2001 the Board approved a partial credit guarantee for the Bolivia-Brazil gas pipeline, which has opened up Bolivia’s huge gas potential and expanded energy markets in Brazil. Also this year, the Bank issued a $158.8 million IBRD policy-based guarantee for Colombia to help raise $1 billion at a time when U.S. capital markets were virtually closed to comparably rated borrowers. In April 2001 financing closed for the Haripur power project in Bangladesh, with backing from an IDA partial risk guarantee that played a catalytic role in mobilizing first-time, long-term funding from leading international banks. In addition, the Bank introduced guarantee facilities to facilitate export credits to private sector exporters in Africa, and similar support is under preparation to help the Russian Federation rehabilitate its forestry and coal sectors.

Updating the Bank’s Products and Strategy

In fiscal 2001 the Bank Group engaged in substantial analytical work and consultations toward development of a new private sector development strategy. Areas analyzed include the respective roles of the public and private sectors in development and the link between private sector development and poverty reduction.

The private sector development and infrastructure portfolio accounts for about 45 percent of the Bank Group’s total portfolio. The content of such work is changing (figure 3.3). It is shifting away from traditional investment lending to a new mix of advisory services (some of it fee-based), phased medium-term lending, and catalytic investment projects increasingly financed by IFC and MIGA with policy support from the Bank. One such example relates to output-based aid (box 3.7). An emerging knowledge product is the Rapid Response Unit Web site (rru.worldbank.org), which offers clients online "selfhelp" and "helpdesk" services, together with customized fee-based service for small advisory transactions.