14
A World Bank Study
Table 3.1 Shadow Claims within Sectors Sector Infrastructure Power Telecommunications Water Transport Total Infrastructure Selected others Oil and gas Hotel and real estate Contractor and exporter Mining Agribusiness
Number of claims 17 8 3 2 30 12 8 7 5 5
Source: World Bank data.
Analysis of the Data Around 30–40 years ago, the conventional underwriting analysis of the data would have found that the high incidence of infrastructure claims can be explained by the government’s natural role in providing essential services and that the high incidence of natural resource and land use claims can be explained by its desire to protect the national patrimony. Those considerations certainly remain a factor, but a complication has arisen in the past 20 years or so, which is the time period to which almost all the shadow claims relate. In that period, there has been a dramatic increase in the number of infrastructure projects that have been financed by foreign private investment on terms that were intended to improve or expand the availability of essential services while generating a profit for the investors. Once the services are in place, or nearly in place, many factors can upset the assumptions on which the investor’s projections were based. The investor’s expectation of a profit may run up against the expectation of the public that such services ought to be provided at no cost or at subsidized prices as “social rights”—an expectation that the government may encourage by legislation or by the lack of it. The investor’s financial projections may not have accounted for the reality that utility bills are uncollectible as a practical matter or are avoidable by easy theft of services. The investor’s market projections may have been unduly optimistic, and filing a political risk insurance claim may become an exit strategy. The host country’s government may experience an economic crisis that undoes everyone’s assumptions, and its crisis management strategy may include repudiating investment agreements that it can no longer afford. The situation is further complicated if the investment was made in conjunction with the privatization of a government-owned service provider, thereby putting the foreign private investor in conflict with public employee unions and other interest groups. Yet another complication is that so many of these projects were