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Are returns to private infrastructure in developing countries consistent with risks since the Asian crisis?

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  • A. Estache
  • M.E. Pinglo

Abstract

This paper presents a basic assessment of the financial performance of infrastructure service operators in developing countries. It relies on a new database of 120 companies put together to track the evolution of the cost of capital, the cost of equity and the return to equity for electricity, water and sanitation, railways and port operators in 31 developing countries distributed evenly across low-income, low-middle income and upper-middleincome countries. The paper shows that between 1998 and 2002, the average cost of capital in developing countries varied from less than 9% to over 15% across regions and sectors while the cost of equity varied from around 11% to over 21%. Low-middle-income countries have recovered relatively well from the East Asia crisis, while low-income and upper-middle-income countries have seen their situation deteriorate since the crisis. At the regional level, the main story is that East Asia is recovering quite well from its crisis, and that the financial performance of the operators in Africa and Latin America has deteriorated. Eastern Europe and South Asia are doing relatively better but show a large volatility of returns over time and within sectors. At the sector level, the railways and the water sectors have seen their performance deteriorate significantly over the period, while the energy and port sectors have done relatively better. In all sectors and regions, the average return to equity has been lower than the cost of equity since the Asian crisis.

Suggested Citation

  • A. Estache & M.E. Pinglo, 2005. "Are returns to private infrastructure in developing countries consistent with risks since the Asian crisis?," Competition and Regulation in Network Industries, Intersentia, vol. 6(1), pages 47-75, September.
  • Handle: RePEc:sen:journl:v:6:i:1:y:2005:p:47-75
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    References listed on IDEAS

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    1. Alexander, Ian & Estache, Antonio & Oliveri, Adele, 2000. "A few things transport regulators should know about risk and the cost of capital," Utilities Policy, Elsevier, vol. 9(1), pages 1-13, March.
    2. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
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    Cited by:

    1. Asian Development Bank & World Bank & Japan Bank for International Cooperation, 2005. "Connecting East Asia : A New Framework for Infrastructure," World Bank Publications - Books, The World Bank Group, number 7267, December.
    2. Rocha, Katia & Camacho, Fernando & Braganca, Gabriel, 2007. "Return on capital of Brazilian electricity distributors: A comparative analysis," Energy Policy, Elsevier, vol. 35(4), pages 2526-2537, April.
    3. Antonio Estache, 2006. "PPI Partnerships vs. PPI Divorces in LDCs," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 29(1), pages 3-26, September.
    4. Anton Eberhard & Orvika Rosnes & Maria Shkaratan & Haakon Vennemo, 2011. "Africa's Power Infrastructure : Investment, Integration, Efficiency," World Bank Publications - Books, The World Bank Group, number 2290, December.
    5. Dethier, Jean-Jacques & Moore, Alexander, 2012. "Infrastructure in developing countries: An overview of some economic issues," Discussion Papers 123305, University of Bonn, Center for Development Research (ZEF).
    6. Stephane Straub, 2011. "Infrastructure and Development: A Critical Appraisal of the Macro-level Literature," Journal of Development Studies, Taylor & Francis Journals, vol. 47(5), pages 683-708.
    7. Parola, Francesco & Notteboom, Theo & Satta, Giovanni & Rodrigue, Jean-Paul, 2013. "Analysis of factors underlying foreign entry strategies of terminal operators in container ports," Journal of Transport Geography, Elsevier, vol. 33(C), pages 72-84.
    8. Mr. Shaun K. Roache, 2006. "Domestic Investment and the Cost of Capital in the Caribbean," IMF Working Papers 2006/152, International Monetary Fund.
    9. Sirtaine, Sophie & Pinglo, Maria Elena & Guasch, J. Luis & Foster, Vivien, 2005. "How profitable are private infrastructure concessions in Latin America?: Empirical evidence and regulatory implications," The Quarterly Review of Economics and Finance, Elsevier, vol. 45(2-3), pages 380-402, May.
    10. Meunier, David & Quinet, Emile, 2007. "Chapter 4 The contracting of investment and operation, and the management of infrastructure funding bodies," Research in Transportation Economics, Elsevier, vol. 19(1), pages 81-109, January.
    11. Antonio Estache & L. Wren-Lewis, 2008. "Towards a Theory of Regulation for Developing Countries: Following Laffont's Lead," Working Papers ECARES 2008_018, ULB -- Universite Libre de Bruxelles.
    12. Nadine Gatzert & Thomas Kosub, 2014. "Insurers’ Investment in Infrastructure: Overview and Treatment under Solvency II," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 39(2), pages 351-372, April.
    13. Patricia Clarke Annez & George E. Peterson, 2007. "Financing Cities : Fiscal Responsibility and Urban Infrastructure in Brazil, China, India, Poland and South Africa," World Bank Publications - Books, The World Bank Group, number 6735, December.
    14. Luis A. Andrés & J. Luis Guasch & Thomas Haven & Vivien Foster, 2008. "The Impact of Private Sector Participation in Infrastructure : Lights, Shadows, and the Road Ahead," World Bank Publications - Books, The World Bank Group, number 6545, December.
    15. Jensen, Olivia & Blanc-Brude, Frederic, 2006. "The handshake : why do governments and firms sign private sector participation deals ? Evidence from the water and sanitation sector in developing countries," Policy Research Working Paper Series 3937, The World Bank.
    16. Tan, Jeff, 2012. "The Pitfalls of Water Privatization: Failure and Reform in Malaysia," World Development, Elsevier, vol. 40(12), pages 2552-2563.
    17. Bahman Kashi, 2014. "Risk Management and the Stated Capital Costs by Independent Power Producers," Development Discussion Papers 2014-03, JDI Executive Programs.
    18. repec:idb:brikps:358 is not listed on IDEAS
    19. Singh, Kewal & Singh, Anoop & Prakash, Puneet, 2022. "Estimating the cost of equity for the regulated energy and infrastructure sectors in India," Utilities Policy, Elsevier, vol. 74(C).
    20. Cecilia Briceño-Garmendia & Karlis Smits & Viven Foster, 2009. "Financing Public Infrastructure in Sub-Saharan Africa," World Bank Publications - Reports 28238, The World Bank Group.
    21. Ekholm, Tommi & Ghoddusi, Hamed & Krey, Volker & Riahi, Keywan, 2013. "The effect of financial constraints on energy-climate scenarios," Energy Policy, Elsevier, vol. 59(C), pages 562-572.
    22. Vivien Foster & José Luis Guasch & Luis Andrés & Thomas Haven, 2008. "The Impact of Private Sector Participation in Infrastructure: Lights, Shadows, and the Road Ahead," IDB Publications (Books), Inter-American Development Bank, number 59818, February.
    23. Shaun K. Roache, 2006. "Domestic Investment and the Cost of Capital in the Caribbean," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 6(3).

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