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Ensuring Accountability in Infrastructure Investments
Rita NangiaDirector
Asian Development BankManila, The Philippines
28 February 2006Kuala Lumpur
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Agenda
Asian Infrastructure─Status─Challenges
•New Framework
─Inclusive Development
─Coordination
─Accountability and Risk Management
•Way Forward
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Asia is growing rapidly
Source: World Development Indicators 2005
Major Trends
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Major Trends
Poverty is declining in Asia($ 1-day poverty as % of total population 2003)
%
Source: Asian Development Bank
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Asia’s Challenges …….
Asia is urbanizing rapidly(urban population as % of total population 2000)
Source: Connecting East Asia: A New Framework for Infrastructure
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Environmental costs are growing 2000 CO2 emissions (metric tons per capita)
Source: World Development Indicators 2005
Asia’s Challenges …….
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Environmental costs2000 CO2 emissions (kg per US$ of GDP)
Source: World Development Indicators 2005
Asia’s Challenges …….
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Access to Infrastructure varies...
...Electricity
Source: World Development Indicators 2004 & World Energy Outlook 2002
Asia’s Challenges …….
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Challenges and Opportunities
Source: Key Energy Statistics, 2005, International Energy Agency & World Development Indicators Online
Access to Infrastructure varies...
kwh ...Electricity use per capita
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Challenges and Opportunities
Access to Infrastructure varies...
...Telephone
Source: World Development Indicators 2004 & Connecting East Asia, 2005
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Quality of Infrastructure varies…
Source: The Global Competitiveness Report 2004-2005
Overall Infrastructure
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Overall Quality of Infrastructure varies…
Air Transport
Source: The Global Competitiveness Report 2004-2005
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Overall Quality of Infrastructure varies…
Ports
Source: The Global Competitiveness Report 2004-2005
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Overall Quality of Infrastructure varies…
Railroads
Source: The Global Competitiveness Report 2004-2005
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Overall Quality of Infrastructure varies…
Electricity
Source: The Global Competitiveness Report 2004-2005
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Overall Quality of Infrastructure varies…
Telephones
Source: The Global Competitiveness Report 2004-2005
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Average savings and investment(% of GDP 1990-2004)
Source: World Development indicators 2005
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Average savings and investment(% of GDP 1990-2004)
Source: World Development indicators 2005
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Infrastructure requires funding globally
Source: World Bank
Country Income Category
Expenditure Needs (% of GDP)
Financing Gaps (% of GDP)
Least Developed Countries
6.5-7.7% 3.1-4.3%
Lower Income Countries 1.5-9.0% 3.5-5.0%
Middle Income Countries 5.7-7.0% 2.9-4.3%
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East Asia alone requires more than US$200 billion per annum for infrastructureEstimated annual infrastructure need, East Asia, 2006-2010
USD (billion) Percent GDP
Source: Yeppes, 2004
-
20
40
60
80
100
120
140
160
180
by economicclassif ication
by country by sector
0
1
2
3
4
5
6
7
8
China Low income Middle income
Rail
Maintenance
Investment China
All excl. China
Electricity
Roads
Telecoms
Water and Sanitation
6.9 % 6.3 %
3.6 %
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… but sentiment is
positive
The private sector bubble has burst…
Investment in Projects with Private Participation
67%
24%
10%
88%
8%4%
increase sustain decrease
Global firms East Asian firms
firm expectations on future investment in the region is strongly positive
Attitudes towards infrastructure investment levels
0
20
40
60
80
100
120
140
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
$ bi
llion
EAP Total
$11.5 billion private sector investment in EAP infrastructure
Source: Connecting East Asia: A New Framework for Infrastructure
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Private finance is selective
0 100 200 300 400 500
Energy
Telecoms
Transport
Water andSanitation
$ billion
0 100 200 300 400 500
AFR
EAP
ECA
LCR
MNA
SAR
$ billion
Infrastructure Projects with Private Sector Commitments: 1990-2003Source: PPI Database
Sectors Regions
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Role of official financing varies by countryAid dependency in selected countries, East Asia, 2003
Malaysia 3,880 4 0.1 0.5
Thailand 2,190 -16 -0.7 -2.7
China 1,100 1 0.1 0.2
Philippines 1,080 9 0.9 4.9
Indonesia 810 8 0.9 5.2
Vietnam 480 22 4.5 12.9
Mongolia 480 100 19.7 51.0
Lao PDR 340 53 14.3 69.2
Cambodia 300 38 12.5 54.1
East Asia Average 1,070 4 0.4 0.9
Per capita income ($)
Aid per capita ($)
Aid as percentage of --
GNIGross Fixed Investment
Source: Connecting East Asia: A New Framework for Infrastructure
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Who pays for infrastructure?
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Who pays for infrastructure?
In the first instance, users:
Infrastructure
growthUSERS
In a virtuous cycle, of growth and infrastructure funds itself
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In the second instance, users are subsidized by tax payers…
Infrastructure
growth
TAX PAYERS
USERS
SUBSIDIES
Who pays for infrastructure?
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Who pays for infrastructure?
Two institutional mechanisms channel the flows - the state budget, and service providers
Infrastructure
growth
TAX PAYERS
USERS
Infrastructure
growth
TAX PAYERS
USERS
STATE BUDGET
PROVIDERS
All government expenditure is a claim on tax payments – now, or in the future
Services may be provided by the government, a state entity, or the private sector
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Who pays for infrastructure?
Financiers have a key facilitating role…
Financing makes it possible to mobilize the current value of future tax payments…
Infrastructure
growth
TAX PAYERS
USERS
STATE BUDGET
FINANCIERS
PROVIDERS
… and flattens the cost profile for users over time
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Who pays for infrastructure?
Financiers have a key facilitating role…
This is the case when finance is concessional, or takes the form of grants
Infrastructure
growth
TAX PAYERS
USERS
STATE BUDGET
FINANCIERS
PROVIDERS
FOREIGNTAX
PAYERS
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Who pays for infrastructure?
INFRASTRUCTURE
growth
TAX PAYERS
USERS
STATE
BUDGET
FINANCIERS
PROVIDERS
The public and private sectors are complementary
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New Framework
Accountabilityand
Risk Management
Coordination
InclusiveDevelopment
Three Broad Approaches to Poverty
• Income or expenditure
• MDG
• Human Capabilities
Inclusive development is about improving the incomes and lives of all members of the society, especially poor
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Inclusive Infrastructure
Growth Service Access
Poverty Reduction
Infrastructure Growth Determinants
Access Determinants
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Coordination challenges for developing countries
1. Getting infrastructure spending right
• Coordinating investment and financing functions
• Coordinating fiscal space
2. Coordinating through decentralized agencies• Horizontal coordination• Vertical coordination
• Developing the missing middle
3. The special challenge of urban management
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Accountability and risk management
Accountability rewarding organizations that
consistently perform well for their stakeholders (and penalizing those that perform badly)
Risk management making risks and rewards
commensurate with each other, in order to drive good performance
…and how they’re related
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Mechanisms to strengthen accountability
Community participation
• From project selection to ongoing operations
• But likely to be limited to the last mile
Competition
• Most effective way of bringing accountability
• But East Asia not in the forefront, for a number of reasons
Regulation
• The problem of holding regulators accountable
• Independence is evolutionary
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Does ownership matter for accountability?
A poorly-regulated private monopoly performs as badly as a poorly-regulated public monopoly
But the private sector responds better than the public sector to good regulation or competition
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THE WAY FORWARD
Study provides a way of thinking about infrastructure issues in different situations
• Not a blueprint or toolkit
Policy messages reflect concerns raised during our consultations
• To improve infrastructure development and service delivery
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Policy Messages
• The center matters – infrastructure demands strong planning and coordination functions
• Decentralization is important – but raises host of coordination challenges
• Subsidy is not a dirty word – subsidies can be important, but are always risky, and should be handled with care
• Competition is hard to achieve in infrastructure – but it’s the best way to bring accountability
• Regulatory independence matters more in the long run than the short run
• Civil society has a key role to play in ensuring accountability in service provision
• Infrastructure has to clean up its act – addressing corruption is a priority
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Funding Messages
• Fiscal space for infrastructure is critical
• The private sector will come back – if the right policies are in place
• Public sector reform matters – but be realistic
• Local capital markets matter – but are not a panacea
• Infrastructure needs reliable and responsive development partners
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• Service commissions
• Regulators
• Supreme audit body
• Judiciary
• Ombudsman
• Legislature
Final Investment Choices
Process
• Interest Groups
• Civil Society Organizations
• Think tanks
• Political Parties
• Media
• External Groups
• Donors
• CPA
Holding Executive Accountable …….
Electorates