A. TNC's role in mobilizing financial resources and the impact
on investment in infrastructure industries
Expanding and upgrading infrastructure in keeping with developing countries’ growing requirements calls for substantial investment in infrastructure industries, which are typically capitalintensive due to the physical facilities and networks that they involve (section III.A.1). Many projects are very large and are characterized by economies of scale. They require huge capital outlays, while the stream of returns on capital is spread over many years. Thus the risks to investors are typically high.
Mobilizing the necessary financial resources from domestic or international capital markets is difficult for public or private enterprises in many developing countries. This has led a number of countries to open up to FDI and/or encourage other modes of TNC involvement, such as build own operate (BOO), build own transfer (BOT) or rehabilitate own transfer (ROT) concession arrangements (section III.B).
Indeed, TNCs may have a number of competitive advantages that enable them to contribute to the mobilization of financial resources for boosting investment in infrastructure industries, while also being directly involved in undertaking the investments and production activities for the provision of infrastructure services.
Financial strength and large cash flows are competitive advantages that foster rapid expansion of many TNCs operating in infrastructure (section III.D). In addition, large and well established firms are able to raise funds from home country and international markets as well as from host developing country markets, where the latter exist (section III.A.3).
This ability to mobilize and harness external financial resources for investment is particularly evident in concessions such as BOTs, in which a high proportion of the costs are covered by debt. However, the extent to which TNCs can contribute to financial resources for investment in infrastructure also depends on host country conditions and objectives, the specific infrastructure needs of a country and the gaps in domestic (State and private) resources and capabilities.
In the early 1990s, as more and more developing countries began to open up their infrastructure industries to private national and foreign companies, it was believed that TNCs could play a key role in securing financial resources to reduce the persistent gap between infrastructure needs and investments by the State, which was the main provider of the services. At the time, many of the countries concerned, especially in Latin America and Africa, were heavily indebted and turned to the private sector, including TNCs.
Since then, the financial situation has improved for some economies, but the investment gap in infrastructure still remains very large in the developing world as a whole (section III.A.2). Thus the ability of TNCs to mobilize financial resources for investment remains an important consideration for many countries.
Indeed, TNC participation in infrastructure in developing countries has resulted in the inflow of substantial financial resources. One indicator, allowing for data limitations, is the stock of infrastructure FDI in developing countries, which surged 29 fold between 1990 and 2006: from $6.8 billion to $199.4 billion (table III.4).
Another measure, the foreign investment commitments in private participation in infrastructure (PPI)2 projects (which include FDI, but also other investments that are an element of concessions), also indicates that TNCs have mobilized significant resources for investment in developing countries. During the period 1996-2006 such commitments amounted to about $246 billion (table III.7). The impact on infrastructure investment in developing countries arising from this mobilization of financial resources by TNCs is discussed below, including variations by region, industry and country.