The provision of good quality infrastructure is a prerequisite for economic and social development. Indeed it is considered one of the main preconditions for enabling developing countries to accelerate or sustain the pace of their development and achieve the Millennium Development Goals (MDGs) set by the United Nations. Moreover, the future investment needs of developing countries in infrastructure far exceed the amounts being invested by governments, the private sector and other stakeholders, resulting in a significant financing gap. On average, according to World Bank estimates, developing countries currently invest annually 3–4% of their GDP in infrastructure; yet they would need to invest an estimated 7–9% to achieve broader economic growth and poverty reduction goals.

Infrastructure industries account for a rapidly expanding share of the stock of inward FDI. Over the period 1990–2006, the value of FDI in infrastructure worldwide increased 31-fold, to $786 billion, and that in developing countries increased 29-fold, to an estimated $199 billion. Throughout the period it continued to grow in most infrastructure industries, but most significantly in electricity and telecommunications, and much less in transport and water. As a whole, the share of infrastructure in total FDI stock globally currently hovers at close to 10% compared to only 2% in 1990.

Although developed-country TNCs still dominate in infrastructure industries internationally, there has been a marked rise involvement by developing-country TNCs. In some industries, such as telecommunications, they have emerged as major players, and in others, such as transport, they have even become world leaders. Of the top 100 infrastructure TNCs in the world in 2006, 14 were from the United States, 10 from Spain, and 8 each from France and the United Kingdom. However, of the top 100 infrastructure TNCs, no less than 22 were headquartered in a developing or transition economy. The largest number of such firms was from Hong Kong (China) with 5 firms, and Malaysia and Singapore with 3 each.

Competitive or ownership advantages of infrastructure TNCs are primarily related to specialist expertise or capabilities, such as network design and operation, engineering skills, environmental knowhow, project management capabilities and tacit, hands-on skills. Specialized business models and financial prowess are important in some industries and segments, such as telecommunications.

Financial constraints faced by governments were a major reason for an increasing number of developing countries to open up to FDI and TNC participation in infrastructure industries in the 1990s. TNC participation in infrastructure in developing countries has resulted in the inflow of substantial financial resources. The stock of infrastructure FDI in developing countries, an indicator of the extent to which TNC participation mobilizes financial resources, surged after 1990, as mentioned above.

TNCs in infrastructure bring both hard technology (e.g. specialist equipment for water purification) and soft technology (e.g. organizational and managerial practices) to their operations in host countries. As regards hard technology in telecommunications, for instance market entry by international operators from both developing and developed countries has contributed to lowering the threshold of access to and usage of information and communication technologies for developing countries. TNCs also transfer soft technology to host-country operations, for instance by re-engineering operational processes, improving procurement and subcontracting practices, and enhancing client records and collection methods. Overall, studies show that in a number of cases the introduction of hard and soft technology by foreign affiliates has helped enhance productivity in services provision, as well as its reliability and quality. However context matters, and performance gains as a consequence of TNC (and more generally private) involvement depend very much on a welldefined regulatory environment.

The participation of TNCs has generally increased the supply and improved the quality of infrastructure services in host countries, but their impact on prices has varied. In some instances this has caused concern over services being priced beyond the reach of the poor. In particular, the affordability of services is jointly determined by the price of services and the disposable income of consumers in an economy. The impact of TNC participation on access to services can thus differ among segments of a society: improvements in industry performance do not necessarily translate into increased availability and affordability of services for all members of a society, especially the poor and people living in rural, remote and economically deprived areas.

Host countries need to consider when it is appropriate to draw TNCs into the development and management of infrastructure. They also need to find ways of ensuring that projects with TNC involvement lead to the expected development effects. This is a complex policy challenge. As policy priorities and options vary between countries, so too does the optimal mix of public and private (including TNC) investment. Designing and implementing appropriate policies to harness the potential role of TNCs in infrastructure require adequate skills and capabilities. Governments need to prioritize among competing demands for different projects, establish clear and realistic objectives for the projects chosen, and integrate them into broader development strategies. This means that government agencies have to possess the necessary institutional capacity and skills to guide, negotiate, regulate and monitor the projects. This applies not only at the central level, but also in provincial and municipal governments.

The trend towards opening has been more widespread among developed countries and the relatively advanced developing and transition economies. While the nature of liberalization has varied, all groups of countries are now more welcoming to TNC activities in infrastructure than they were two decades ago. However, there are significant variations by industry. Openness is the highest in mobile telecommunications, and the lowest in water. Countries are generally more open to TNC involvement in industry segments that are relatively easy to unbundle and expose to competition. Openness also appears to be greater in countries with more developed institutional and regulatory capabilities. At the same time, some governments are becoming more careful about allowing foreign companies to take control of certain infrastructure, including power generation and distribution, port operations and telecommunications. New restrictions have been proposed based on national security or public interest concerns.

Without an adequate institutional and regulatory framework, the risk increases that countries will lose out by opening up to TNC participation. Moreover, once a country liberalizes, it is often hard to reverse the process. This is why the sequencing of reforms is important. Ideally, competitive restructuring, the introduction of regulations and the establishment of an independent regulatory agency should precede steps towards opening up. Such a sequence helps clarify the rules of the game for potential investors and makes governments better prepared for engaging in a specific project. However, in reality, opening up to foreign investment has often preceded comprehensive reform, with less positive outcomes as a result. Until credible regulatory bodies can be established, developing countries are likely to be better off keeping their utilities in the public sector.

An issue that has attracted increased attention in recent years is the rise of disputes related to infrastructure investments. At the end of 2007, some 95 disputes (or one third of all known treaty-based investor-State disputes) were related to electricity, xxiv World Investment Report 2008: Transnational Corporations and the Infrastructure Challenge transportation, telecommunications, water and sanitation. The disputes have provoked debate over the implications of international investment agreements (IIAs), and especially BITs.

It is important to consider the potential role of home countries and the international community in facilitating more foreign investments into countries that seek such inflows. This is particularly relevant from the perspective of low-income countries, which lack domestic capabilities and have generally failed to attract significant TNC involvement in infrastructure. Without some form of subsidies, it is difficult to attract TNC investment into economies, communities and industry segments that are characterized by weak purchasing power and poor records of payment. In these cases, development finance institutions can act as catalytic financiers. Especially in such industries as electricity, water and transport, there is significant potential for synergies between foreign investment and overseas development assistance (ODA). By making more funds available, development partners and the home countries of the investing firms could play a major role in helping to “crowd in” foreign investment into infrastructure projects in developing countries.

Risk-mitigation measures by home countries and international organizations can help in the short term to mobilize private financing of infrastructure projects in developing and transition economies. Special attention may have to be given to measures aimed at mitigating three broad types of risk: political risk (including sub-sovereign and contractual and regulatory risks), credit risk and exchange-rate risks. OVERVIEW xxv Despite the plethora of risk-mitigation instruments available, current programmes are insufficiently tailored to the situation of low-income countries. For example, local currency financing by development finance institutions typically requires a well-established currency swap market. Where such a market exists, intervention by development finance institutions is less likely to be needed. At the same time, risk-mitigation instruments should not be seen as a panacea. Too much risk mitigation may lead to problems of moral hazard and encourage reckless risk-taking on the part of investors and lenders. While risk-mitigation tools can facilitate the mobilization of private debt and equity, they do not make poorly structured projects more viable. This underscores the importance of capacity-building efforts.