Finance, private sector & infrastructure

Environmentally sustainable development in:

Private provision of infrastructure

Guarantee program

Working with partners

Private sector development

Increasingly, private sector solutions can meet development problems in virtually every area--from large-scale industry to small enterprises, environmental protection, and even the social sectors, which have traditionally been the preserve of public sector investment. The public sector has an important role in setting legal and institutional environments that allow the private sector to flourish and encourage investment in sectors that improve the quality of life.

The Bank Group supports private sector development with a number of products:

· Bank assistance to create an enabling environment for private investment through technical assistance and capacity building in regulatory work and policy reform and through innovative financing arrangements;

· Bank partial risk and partial credit guarantees;

· IFC equity financing in developing-country companies, and loans for, and equity and quasi-equity investments in, private ventures--these instruments are increasingly used in conjunction with Bank operations. IFC loans, lines of credit and equity investments totaled $8,118 million in fiscal 1997;

· MIGA's guarantee program, which covers new foreign private equity and debt investments in developing countries against major political risks, and its investment marketing services, which provide information dissemination and technical assistance to developing member governments on means to better attract foreign investment. In fiscal 1997, MIGA issued a record seventy guarantee contracts for $614 million in issued coverage, facilitating an estimated $4.7 billion in foreign investment in twenty-five developing countries.

· FIAS' freestanding technical assistance activities.

Greater efforts to coordinate the World Bank Group's support of private sector development were made in fiscal 1997. The main emphasis was to enhance the group's catalytic role in promoting private sector activities; encourage greater coordination at the policy, country, sector, and project levels; and improve outreach and partnerships with the international business community.

Two projects in the West Bank and Gaza included activities that reached across the Bank Group: (i) a technical assistance project for developing the legal and regulatory environment conducive to private sector development--the Bank and IFC worked together to strengthen the financial sector's ability to deliver credit, especially to small enterprises; and (ii) financing for a guarantee fund to provide political risk insurance for private investors in the West Bank and Gaza. The fund is managed by MIGA.

In fiscal 1997 the World Bank approved loans and credits for forty-three projects totaling $3.7 billion in sectors with the most potential for private sector involvement--power, oil and gas, industry and mining, and the financial sector. In addition, many of the fifty-four projects, totaling $5.2 billion, for transport, urban development, and water supply and sanitation approved in fiscal 1997 have significant private sector development impact and are expected to leverage substantial private flows (see figure 2-4). Many of these projects support policy changes that will facilitate the commercialization of state and municipal functions such as water companies and mines.

The Bank supports energy development when countries are taking steps to involve the private sector more actively. In Africa, for example, Bank assistance is helping countries to undertake comprehensive reform of the power sector, including privatizing and bringing in private investors and decentralizing the provision of rural energy. The Bank is also providing technical assistance to help southern African countries develop a power pool for regional interconnection.

With Bank support, Ukraine is restructuring its coal industry by closing unproductive mines, improving management, and more vigorously introducing the private sector into the industry. The Bank provided extensive financial, technical, and legal assistance to Zambia in support of the largest mining privatization in history. The process is almost complete; the state company has been broken up into eight entities, and the bidding process is under way. To help the Mongolian government privatize the mining sector, the Bank and FIAS helped write a new mining code in a record six months. And to stimulate interest in Africa's mining sector, MIGA organized its fourth annual African Mining Investment and Business Opportunities Symposium. Representatives from twenty-eight African countries outlined investment opportunities to more than 500 representatives of international mining companies.

While the private sector has taken over most of the direct investment in telephone companies in Bank client countries, the Bank plays an important role in telecommunications policy and in promoting the use of information technology for development purposes. An example of the increasing volume of nonlending services provided by the Bank is in telecommunications reform, where the Bank is providing support to some forty countries as they prepare state companies for commercialization, sell assets to the private sector, and prepare distribution strategies.

To help countries develop strategies to enhance their economic competitiveness, the Bank has mounted a program to share knowledge and technical assistance with client countries. In northeast Brazil, for example, nine states participated in a Bank-supported workshop to identify how to remove local constraints to firm-level competitiveness. The participants, from government and the private sector, focused on business prospects in tourism, fruit-based agriculture and agroindustry, and grains. The resulting action program is changing policy to make the province more competitive. Similar assistance is being provided to Malaysia on a fee-for-service basis. In partnership with international training institutions, EDI and the Bank held a competition policy training course in New Delhi. Ministry officials, private sector leaders, academic and research institute leaders, and lawyers from ten Asian countries participated in the program.

Financial sector development

The importance of a sound financial sector for economic development to be sustained is increasingly evident as a growing number of countries encounter financial instability. A report issued in the spring of 1997 by a committee of representatives from industrialized countries, emerging markets, and international institutions, and endorsed by the G-10 countries, emphasized the Bank's key role in supporting developing countries seeking to strengthen their financial systems. The Bank has provided technical assistance to over seventy countries, focusing on financial institution and market infrastructure development and upgrading financial sector policy, law, regulation, and supervision; and covering banking, micro- and rural finance, housing finance, contractual savings, and capital markets. The Bank also sponsored large-scale training programs for staff from central banks, other regulatory and supervisory agencies, and financial intermediaries from over eighty countries.

The Bank's Strategic Compact provides additional funding to build and strengthen the Bank's own capacity. In fiscal 1997, renewed emphasis was placed on coordinating activities with the IFC, the International Monetary Fund (IMF), the regional development banks, and the various international organizations such as the Basle Committee on Banking Supervision and the International Organization of Securities Commissions.

Improving the financial sector's structure and operations has been a top priority in fiscal 1997. The Bank supported many countries facing a combination of weak macroeconomic conditions and a banking system plagued with bad debts and inadequate supervision, through lending and nonlending services. Some of these operations are described in the discussions on the regions in this Annual Report (also see Operations Approved: Finance. In some cases these efforts were undertaken in partnership with the IMF. The Bank also provided support to countries reforming their pension systems, insurance industries, and payment systems.

Private provision of infrastructure

The World Bank Group aims to help countries create the right mix of policy initiatives and investment resources to enable their private sectors to play a bigger role in investing in the enormous infrastructure needs that characterize Bank client countries. Estimated at $200 billion to $250 billion over the next ten years, these requirements can only be met by private provision of infrastructure (PPI), with domestic and foreign investors supplying the capital. Through its financial support the World Bank Group is an important catalyst in enabling PPI (see table 2-3), and its most active instrument remains investment lending with strong policy content. Increased PPI operations in fiscal 1997 were again concentrated in this type of instrument.

Among PPI projects approved in fiscal 1997 were many innovative operations. In Poland the Port Access and Management Project is enhancing private sector ownership of port operating companies in three major ports. The Taiz Water Supply Pilot Project in Yemen, while mitigating water shortages through water supply investments, is establishing community water associations and preparing a management contract to privatize the local water utility. And in Uruguay the Forest Products Railway loan helped create a special-purpose concession to haul wood products from producers to port. This project is one of several high-impact railway concessioning operations that the Bank has supported in eighteen countries over the last decade (see box 2-3).

A worldwide shift toward greater private participation in infrastructure in at least eighty countries has resulted in nearly 1,200 projects in telecommunications, energy, water, and transport. As governments retreat from their earlier role as owners and operators of infrastructure facilities, they need to emphasize their new role of establishing sustainable regulatory frameworks. The Bank has established the International Forum for Utility Regulation (IFUR), a worldwide learning forum, so that utility regulators can exchange cross-country information on best practices and improve their regulatory regimes.

Guarantee program

Because guarantees lower project risks and induce private capital, they are an increasingly important tool for development finance. The Bank's executive directors approved three guarantee operations totaling $420 million in fiscal 1997. They support two private sector operations and one public sector operation:

· an innovative $120 million partial risk guarantee scheme in Ukraine to support a facility designed to enable private sector exporters to access commercial financing.

· a $200 million guarantee for the Sea Launch Project, a joint venture involving American, Norwegian, Russian, and Ukrainian companies, to construct a facility to launch commercial satellites from the Pacific Ocean. The Bank guarantee covers the risks of government interference in Russia and Ukraine, where important components of the facility will be produced.

· a partial credit guarantee to support a public sector power restructuring project in Lebanon. The operation guarantees a bond issue of $100 million to support the Electricité du Liban, the national electric utility.

Bank coverage is provided when neither the private market nor IFC or MIGA operations are sufficient to mobilize funds. Its guarantees are intended to bring broader benefits by facilitating financing for projects that will provide benchmarks for subsequent projects that might otherwise attract limited or no coverage. The Bank continues to refine and accelerate implementation of its guarantee program, building on the success of completed operations. The pipeline of prospective guarantee operations, which is dominated by privately sponsored operations, continues to expand. It includes more than fifty projects across all regions and covers all major infrastructure sectors.

To more actively integrate the guarantee program into the Bank's development assistance package, guarantee processing has been speeded up by streamlining documentation requirements and developing model agreements. Various information materials have been issued to help Bank clients better understand both the nature of guarantees and how they are prepared, appraised, and negotiated.

In parallel with its guarantee program, the Bank expanded its efforts to help governments attract project finance, with particular emphasis on private financing for infrastructure investments. These efforts include advice on developing contractual arrangements and competitive bidding packages for selecting private sponsors to undertake projects. Substantial project finance advisory services were extended to China, Colombia, Pakistan, and the Philippines in fiscal 1997, including advice on setting up government guarantee programs and structuring transactions.

In fiscal 1997, FIAS completed thirty-two new advisory projects in twenty-eight countries. These included advice on attracting foreign direct investment (FDI) in infrastructure for the Philippines and Zimbabwe; on removing administrative barriers to investment for Mozambique and Swaziland; and establishing strategies and institutions for investment promotion in China, Croatia, and El Salvador. FIAS also conducted or participated in a number of multicountry conferences on investment issues, including a roundtable for Asian countries on the role of government policies and programs in encouraging outflows of FDI from the newly industrialized countries of Asia. Two occasional papers based on the proceedings of earlier roundtables for promoting FDI in the infrastructure sector in Eastern Europe and in Africa were put out by FIAS during the year.

Working with partners for greater effectiveness and impact

One of the Bank's guiding principles for increasing development effectiveness in the area of private sector development is working with partners. The Bank, bilateral donors, and private companies have joined together in five global partnerships that disburse $35 million annually from trust funds contributed by official and private donors and the World Bank. These partnerships facilitate the sharing of knowledge and best practice as well as leveraging development assistance resources for clients.

The World Bank/UNDP Water and Sanitation Program provides urban and rural water supply services increasingly oriented toward community-based and private sector-led solutions.

The Energy Sector Management Assistance Program (ESMAP) provides technical assistance to help countries privatize and restructure their power sectors; develop oil and gas trade; promote private sector involvement in rural energy; develop renewables such as solar, wind, and biomass energy options; as well as support environmentally sustainable energy options.

The Consultative Group to Assist the Poorest (CGAP) develops global best practice and promotes pilot programs in the field of microcredit. Since its inception two years ago, CGAP has generated enormous interest in microcredit programs and has committed about $15 million (out of the $30 million total approved by the Bank in fiscal 1994) for pilot projects, including women's banking in Latin America, a credit union for poor entrepreneurs in Senegal, and a network organization servicing six microfinancing affiliates in the Philippines. CGAP serves as coordinator and clearinghouse for information on the more than $300 million-worth of projects that are being implemented by all donors.

The privatization technical assistance program, combining trust funds from the Japanese government and the World Bank, supports freestanding technical assistance for privatization that is not specifically linked to project preparation--thus giving countries an opportunity to collaborate with the Bank on creative analytical and policy work. In fiscal 1997 the program supported two privatization networks of informal groups of government officials, private sector managers, and academics in Asia and the Pacific and in Latin America and the Caribbean.