# **6. Are things improving since the beginning of the crisis?**

Now that the average mismatch between returns and risks has been established quantitatively, the remaining fact to document is the extent to which things have improved since the East Asia crisis. To do so we report the evolution of the CoE and the RoE on an annual basis between 1998 and 2002. Figure 9 does it for the infrastructure sector as a whole for the full set of countries as well as for each region. Figure 10 does it for each sector.

Our sample suggests that while returns on equity varied considerably across regions with a downward trend, the costs of equity has generally been essentially flat during the period. For the full sample, the gap between return and cost of equity has in fact increased suggesting that on average the prospects for private sector participation did not improve for the sector. In fact, they deteriorated between 1998 and 2002.

At the regional level, the only region with a clear positive story is East Asia where the gap between returns and costs has shrunk and has been almost eliminated by the end of 2002. South Asia and Eastern Europe is not too far behind but the volatility of the returns over time has continued to be a problem in both regions. For Africa and Latin America, the wedge between returns and the cost of equity has increased over time. Interestingly enough the two poorest regions, Africa and South Asia, were the only two to show a positive net return on equity at the beginning of the period but both loose that advantage over time, Africa much faster and dramatically than South Asia.

At this level of aggregation, the results are somewhat surprising for all regions but East Asia. The expectation was that regions would eventually recover everywhere but that expectation had not been met as of end of 2002. Every region seems to have its own dynamics, which adds to the bad reputation that the sector gained when many of the deals which had been signed in East Asia fell apart with the crisis. In South Asia, a number of sour deals in energy in India and Pakistan as well as a number of never closed high profile deals in all countries of the region may are maintaining the equity costs high. In Eastern Europe, a series of crisis in Russia and failed deals in a number of other countries of the region (toll roads and/or rail and water in Hungary, Poland, Ukraine,...) have contributed to the volatility over time of returns independently of the East Asia crisis. In Africa, frustration with high transaction costs have maintained cost high and the declining ability to generate cash from basic public services in many countries have contributed to a deterioration of equity returns. As for Latin America, the financial performance of the sector simply echoes the major financial crisis that it some of the largest actors in the infrastructure reform experience. It could be argued that in Brazil the Asian crisis had a dramatic effect since it hit many of the energy and toll roads deals that were about or had just been signed in the country. The slow adjustment of Brazil then had macroeconomic effects in Argentina where additional internal fiscal problems fueled the crisis that culminated in January 2002. Bolivia and Peru, the other two major countries with a large number of PPI deals saw their own versions of the macroeconomic crisis. In all countries, operators were hit on the cost side as well as on the return side through a rapidly shrinking demand stemming from rapidly rising levels of unemployment.

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