# **1. Introduction**<sup>**1**</sup>

During the 1990s, private sector commitments to infrastructure projects in developing countries amounted to about US$805 billion, or about US$67 billion/year. Private sector investment represented about 20-25% of the investment expenditures of these countries during that period. This average figure hides the strong fluctuations caused by increased global financial instability. Indeed, commitments increased sharply up to 1997, when they started to decline rapidly after the Asia crises was followed by similar crisis in Russia, Brazil and more recently Argentina. In 2002, commitments totaled US$46.7 billion, the lowest level of investment since 1994.

It is now almost a panecea to state that the significant slow down in private investments in infrastructure is simply the reaction to unacceptable levels of risk from the point of view of potential infrastructure service operators. There is a sense that projects do not generate the cash flows needed to at least operate and maintain infrastructure. There is also a clear concern that exchange rate risk levels have become increasingly incompatible with the fact that the cash flows for many of the services are generated in local currency, while investors and borrowers want dividends and debt service in hard currency.

The decline in private sector commitments has fueled the debate on the realism of the expectation to have the private sector contribute to the infrastructure financing needs of the developing countries. Some observers are convinced that this is only a temporary slowdown and that the private sector will return. Many others are more skeptical not only about the return of private investors, but in some cases also the desirability of this return. The odds are, however, that the private sector will eventually return, at least in the high-potential countries. This is simply because these countries represent large markets with significant potential returns on investment in the long run. But public-private partnerships will also survive the current crisis because few developing countries will be able to address their extraordinary infrastructure needs from public resources alone.<sup>2</sup> Ultimately, the disagreement should probably be as to how fast the private sector will return to some countries and under what conditions.

When the private sector returns in larger numbers, it will indeed do so in very different forms from those we have observed in the 1990s. Their willingness to accept risk will be limited. This will require new contractual arrangements with different levels and types of risksharing arrangements. It will also imply new actors, including non-OECD (Organization for economic cooperation and development) actors willing to compete in risky environments they are more familiar with than OECD operators—e.g. South African infrastructure firms are increasingly present throughout Africa, Malaysian firms in Asia and Africa, Brazilian and Mexican firms throughout Latin America.

The new business models also demand better governance in business practices. An improvement in the accountability of all stakeholders in public-private partnerships will require much more transparency in the analytical and quantitative assessments of deals. These

> 1 This paper extends to all developing countries of  part of a database put together for Latin America by Sirtaine et al. (2004) for Latin America but covers a much shorter period and a lower number of return indicators. 2 For the poorest countries unable to attract private investment, the alternative is likely to be grants from richer countries.

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