The Role of Transnational Corporations in Infrastructure in Developing Countries. Background Paper and Liiterature Survey

Abstract

During the 1980s and 1990s, given an increasingly disappointing performance of many state-owned monopolies, an old paradigm of the provision of infrastructural services by state-owned enterprises (SOEs) had been replaced by a new one, that is, the private provision of infrastructure services. The new paradigm was manifested by the deregulation of service markets and massive privatization (or so called commercialization) of SOEs in developed in and many developing and transition countries. In privatizing infrastructure, many countries turned to foreign investors for participation in sales of SOEs (especially countries in Latin America and Africa as well as transition countries) or for undertaking greenfield investment (Asia). FDI in infrastructure, especially in telecommunication and electricity, surged during the 1990s, fuelling FDI in general and further increasing the role of services in worldwide FDI. Foreign involvement in some infrastructure industries (roads, railways, airports and airport management, water and waste management) has taken the form of non-equity arrangements (such as concessions, leases or BOT arrangements) that go unrecorded by FDI statistics. Ten years after the infrastructure FDI peak, reports on disillusionment and disappointment with many projects on the part of all stakeholders ― foreign investors, governments and the public ― multiplied. The period of cooling of and perhaps reflection followed. FDI subsided, partly because many countries completed privatization programmes and there were few new candidates to initiate new privatizations and, partly, because of greater caution of stakeholders. Investors (both TNCs and financiers ― large projects are often financed by consortia) lost some appetite for investment in infrastructure. Governments were caught between huge investment needs, far exceeding the capacity of the public purse, and disappointment of parts of populations with expensive and often unaffordable (though in most cases better than before) services, especially for the poor. The paper examines various forms of TNC involvement in infrastructure in host countries, including non-equity forms, and documents the growth and decline of FDI in infrastructure. It then discusses positive and negative consequences of FDI for developing and transition countries, offering an explanation for discontent surrounding FDI in infrastructure services. Noting that TNCs participated in over 85% of private infrastructure projects in the developing world, the paper concludes by reviewing policies to benefit from FDI in infrastructure and to address concerns related to this FDI.