J. Davydova, A. Omelchenko, A. Malovichko
Donetsk national university of economics and trade named after Mikhail
Tugan-Baranovsky, Ukraine
GLOBAL
TRENDS OF TNCs’ INVOLVEMENT IN INFRASTRUCTURE INDUSTRIES
The
actuality of this theme is defined by the increasing role of transnational
corporations in world’s business life. Their activity covers different areas
year after year. One of them is infrastructure industries.
The
purpose of this article is to consider main features of TNC’s involvement in
this area.
There is the
rising trend in TNC involvement in infrastructure industries, focusing on
developing and transition economies. Developments since the 1990s have
historical parallels, since infrastructure services were commonly provided by
private enterprises in the past, quite often by foreign investors. After a rise
in infrastructure FDI in the 1990s, mostly by TNCs from developed countries,
the turn of the century witnessed a decline in infrastructure FDI flows,
followed by a recovery more recently. Moreover, while developed country TNCs
divested from some failed or difficult projects, several developing-country
infrastructure TNCs emerged, and are increasingly becoming significant players
worldwide.
TNCs participate in infrastructure projects through
equity or non-equity legal forms, or a combination of the two. In addition, given
the high risk, long gestation period and high capital intensity of such
projects, they may enter host countries either as sole investors, or via
special purpose vehicles or consortiums in cooperation with other investors.
The overall range of modalities extends from 100% equity ownership to fully
contractual forms, without any equity involvement.
Privatization sales and greenfield projects are forms
which entail equity participation by TNCs. Privatization sales resulting in FDI
occur when a foreign TNC buys an equity stake in a former Stateowned enterprise
through a direct asset sale. This can be a full privatization(s) (i.e. the
government sells 100% of the equity in a State-owned company to the new owner)
or a partial one (the government sells only part of the equity). Privatization
sales can be accompanied by additional investments. Greenfield FDI projects may
be wholly owned by foreign investors or take the form of a joint venture with
local (private or State-owned) partners. Foreign investors obtain ownership of
assets at the beginning of such a project and build a new facility, with the government
normally providing no guarantees of revenue. The investor also assumes
construction, operating and market risk for the project.
Non-equity forms, such as management and lease
contracts, usually involve no ownership by participating firms. Firms assume
the management responsibilities of State-owned assets for a fixed period, while
ownership and investment decisions remain in the hands of the State. In a
management contract, the government pays the foreign firm a fee for managing
the facility, while the operational risk remains with the government. In a
lease contract, the government leases the assets to the foreign firm, which
also takes on the operational risk.
Other forms of TNC participation, such as build, operate,
transfer (BOT) contracts, combine equity and non-equity elements: TNCs invest
equity capital for the period of their engagement in the contract, and normally
obtain control over the operations of the project. However, the TNCs also
provide nonequity finance in order to carry out their contractual obligations.
In the majority of infrastructure projects, TNCs leverage their equity with
significant debt, and the latter is often the higher of the two. Combined
contracts are of two types: “greenfield” projects, if TNC participation
involves a “build” phase in the project, or “brownfield” projects, if
participation involves the rehabilitation of existing facilities. There is also
a distinction between “concessions” (if at the end of the contractual period the
assets revert to the State) and “other equity-based projects” (if at the end of
the contractual period the TNC retains ownership of the facilities).
A range of factors affect the concrete form of TNC
involvement in a given infrastructure project. Apart from issues such as
regulations and the availability of takeover targets, other aspects include the
scale, capital intensity and complexity of projects, their geographical extent
(e.g. they may be regional in scope), the characteristics of the TNC and the
level of risk involved. Hence, there is no uniform pattern in the evolution of
legal forms of TNC participation in infrastructure industries: the modalities
vary between industries and regions, and over time.
Trends in TNC involvement in infrastructure industries
are difficult to discern because data are scarce and partial. The picture of
global trends presented here therefore relies on multiple sources of
information, including data on FDI, cross-border mergers and acquisitions (M&As)
and investment commitments, each with their respective strengths and
limitations. Available data on global
inward FDI stocks suggest that the share of infrastructure
industries in total FDI globally currently hovers at close to 10%, but this represents
a large increase over their roughly 2% share in 1990. The biggest jump in this
ratio occurred in the early 1990s, after which there was little change, despite
a large absolute increase in infrastructure FDI. Indeed, the share of
electricity, gas and water as a group remained at around 2%, or less, of total
FDI between 1995 and 2006; while that of transport, storage and communications
reached a peak of 7% in 2000, but fell back to 6% in 2006. This global picture
in FDI stock is also true at the regional level, with some exceptions, such as
the relatively high share of electricity, gas and water industries in FDI to
Latin America and the Caribbean during the 1990s.
The share of developing countries in global FDI stock
in infrastructure increased between 1990 and 2000, from 27% to 37%, but fell
back to 25% in 2006. Despite divestments from Latin America and the Caribbean,
the region remained the largest host in 2006 for electricity, gas and water. In
transport, storage and communications, developing countries accounted for 37%
of world FDI stock in this industry in the peak year of 1995, but for only 25%
in 2006. This decline was partly because of divestments in Latin America and
the Caribbean. The share of this region fell behind that of Asia, which by 2006
had emerged as by far the largest developing host region, accounting more than
half of the inward FDI stock in the industry in developing countries.
The origin of FDI stocks in infrastructure is predominantly
from developed countries though the relative share of developing and transition
economies in total outward FDI stock in infrastructure has increased markedly.
In electricity, gas and water, the share of developing and transition economies
in FDI stock in the industry had reached 7% by 2006, while the equivalent share
in transport, storage and communications was 9%. These two groups of industries
also feature prominently in the outward FDI strategies of a number of
developing and transition economies.
In terms of individual countries, the United Kingdom,
France, Spain, the United States and Canada – in that order – are estimated to
account for the largest share of worldwide of FDI stock in infrastructure.
TNC involvement is an important source of infrastructure
financing for developing countries. For instance, according to the World Bank
PPI Database, the share of foreign
investors in total investment commitments in developing economies
in infrastructure industries was 29% over the period 1996–2006. By region, the
ratio of foreign to total commitments was relatively low in Asia (20%), where
domestic private investment plays a relatively important role, and higher in
Africa and Latin America and the Caribbean (36% and 33% respectively). The
ratio for South-East Europe and CIS was higher than that of any developing
region in all infrastructure industries except telecommunications and water and
sewage. In telecommunications, the share of foreign investors in total commitments
was high, exceeding 40% in all developing and transition regions, except Asia.
In other industries, foreign investors’ share of commitments was significant in
all regions, exceeding 15% in transport and 20% in energy and water (except in
Asia).
Data on FDI
flows in infrastructure industries show that since the 1990s, TNC
involvement in infrastructure industries has been rising, with a major surge
(primarily in telecommunications) in the late 1990s and a downward correction
in 2001-2003. The period 2004-2006 was characterized by a partial recovery.
Cross-border M&A data for all infrastructure industries and for the
majority of countries (including developing countries) confirm and complement
this picture. As in most industries, developed countries accounted for the bulk
of cross-border M&As in infrastructure in1991-2007.
The worldwide industry composition of TNC involvement
in infrastructure has changed over time. For example, the latest M&A data
indicate a relative shift in emphasis towards electricity and away from other
infrastructure industries, especially telecommunications. In recent years,
except 2006, transport and water have been more modest target industries.
Patterns of TNC involvement in infrastructure are largely determined by trends
in mega transactions.
So that, we can make such conclusions: year after year
TNCs are more and more getting involved into different infrastructure
industries. TNCs participate in infrastructure projects through equity
(privatization sales and greenfield projects) or non-equity legal forms
(management and lease contracts), or a combination of the two (BOT contracts). A
range of some factors usually characterize the involvement of TNC into some
infrastructural project:
1) regulations and the availability of takeover targets;
2) the scale, capital intensity and complexity of projects;
3) geographical extent of a project;
4) the characteristics of the TNC;
5) the level of risk involved.
The share of
developing countries and countries with transition economies in global FDI
stock in infrastructure is increasing and foreign investors play an important
role for this process. These investors are mostly from developed countries.
Branches serving the common life of people (such ad telecommunications,
electricity) became the most attractive for TNCs during last years.
References:
1.
World investment report. Transnational
corporations and infrastructure challenge, 2008
2.
Electronic resource. - http://korrespondent.net.
3.
Electronic resource. - http://www.expert.ru.