The energy sector dominated the 2017 Private Participation in Infrastructure, PPI, investments attracting 56 percent of the total investment and accounted for 203 out of 304 projects. A key reason for this attraction is shorter gestation periods of energy projects coupled with lower construction risk. Additionally, energy projects also tend to have greater revenue visibility in the form of contracted revenues through power purchase agreements, making them even more attractive.
Within energy, renewables are more attractive to the private sector. Renewables tend to be smaller and come online faster than thermal projects. In terms of number of projects, 88 per cent of PPI generation projects were for renewable energy. interestingly, we find that the share of renewable-energy PPI investment, by volume, dropped to 57 percent largely due to six6 large multi-billion-dollar coal projects in East Asia. This aside, it is notable that the public sector continues to invest heavily in thermal generation both in developing and developed countries.
Electricity transmission and distribution continue to be dominated by public investments and remain within state control, by and large in most developing countries. In 2017 only 6 six of the 203 energy projects were in transmission and distribution across four countries: Brazil, Mexico, India, China and Turkey.
Transport investments accounted for 39 percent of PPI, second to the energy sector. Transport’s share doubled in 2017 due mainly to a surge in investments in railways in Asia: a $6.8 billion high-speed railway (HSR) project in China; another HSR project in Indonesia worth $6 billion; and a $3.1 billion monorail project in Thailand.
While road investments are more ubiquitous in terms of number of projects and network length, the per-kilometer cost for building HSRs and monorails is enormous compared to road construction. So why do countries want to build costlier infrastructure? The answer: traffic congestion and climate change are enormous challenges for countries and they’re trying to bring in private sector expertise to build efficient, high-tech solutions especially to counter congestion and meet the ever-increasing demand for inter-city and intra-city transport.
Transport projects received more capital subsidies, as compared to energy projects which received more indirect support via payment/tariff guarantees. The majority of capital subsidies went to road projects in India, which is now encouraging road PPPs under a hybrid-annuity model where part of the project cost is funded by the government through a viability gap funding mechanism.
The ICT backbone sector also saw a sharp rise in investments from only $462 million in 2016 to $3.0 billion in 2017 due mostly to two mega projects for network development. Overall though, the sector accounted for 3 three percent of total PPI investments. Remember, this pertains only to ICT PPP projects; purely private projects are not included due to their commoditised nature. Thus, the comparatively low level of PPI investment in ICT backbone are not an indication of overall investment in this sector which is crucial for countries in this age of digital disruptions and IoT allowing developing countries to leap frog and do more with less.
In 2017, water and sewerage was the only sector that saw a decline in investments, albeit marginal. Providing universal access to water-supply services (SDG Goal 6), remains a serious challenge in a number of emerging markets. Notably, the 2017 data reveals that water utility projects tended to be mostly brownfield while the treatment plants were by and large greenfield projects. When considering water-utility investments, the private sector has a natural bias towards brownfield projects, as existing facilities with established track records are perceived as less risky.
However, as regulators and residents realize the health and environmental benefits accruing from improved sanitation, demand for wastewater and sewerage treatment is increasing. At the same time, significantly smaller proportions of residents in developing countries are connected to wastewater-treatment services as compared to those that have access to piped water supply. Due to a general lack of water treatment facilities they often have to be built from scratch, which partially explains the predominance of greenfield investments. Crucially, most treatment-plant projects in 2017 were in China which has a strong policy focus on water-pollution prevention (the Water Ten Plan).
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