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Infrastructure policy post-2008:

Good for shared growth?

Antonio EstacheECARES

Universite Libre de BruxellesNovember 2010

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Overview• Main infrastructure policy changes since 2008 and

what they mean from a fiscal viewpoint

• What it means for the demand for and supply of infrastructure

• The real scope for strong private sector role in the sector to minimize the fiscal financing requirements

• The other roles of government in the sector

• The future ...

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Major infrastructure policy changes in infrastructure since the crisis…

• Infrastructure central to efforts to restore growth– Key anchor of post-crisis keynesian revival– Roughly 20-30% average of stimulus packages

• Committed average fiscal additional allocation to infrastructure for in 2008-2009: 0.4% of GDP/year– ~20% increase for infrastructure spending in OECD– But <10% for Developing Countries– =>some international consistency but also variance in the relative

importance of the instrument across countries

• => But…overall…strong fiscal commitments to the sector

• Good news for infrastructure operators• Good news for infrastructure workers• Less good news for tomorrow’s taxpayers…

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What do stronger fiscal commitments mean for infrastructure?

• Main short run impact

– Jobs? (more hope than impact)• and hence on growth…but slow• Moreover, some international leakages of

jobs and business

– Acceleration of some already planned high profile projects

• No huge volume of new ideas except in ICT for the new information society maybe

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What new fiscal commitment means for long run demand and supply of infrastructure?

• Changes in demand?– Not really

• Investment needs in World: 3-5% of GDP• Investment needs in LDCs: 6-8% of GDP• Associated O&M expenditures: add 50-150%

depending on regions– Some changes in the composition: greening demand

• Changes in supply?– Mostly catching up and acceleration of planned projects– Efforts to pick up labor intensive technologies in LDCs– Greening of supply to match greening of demand

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Keep in mind the basic context• The cold investment needs assessments hide the brutal

social cost of infrastructure financing gaps

• Households access?– Access to Electricity? about 1.5 billion people live without it--about

22% of world population

– Access to safe drinking water? about 925 million people without it; • almost 3 times as many lacked access to improved sanitation facilities

– Access to transport? 1 billion can’t easily access all-weather roads

– Access to phone? average mobile penetration is 57% in LDCs

– Overall: • much bigger problem in rural and peri-urban than in urban zones• progress is slow …catching up population growth is a challenge!

• Business access? – Infrastructure is among the top demands of investors in surveys

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So what are the basic infrastructure financing issues?

• Excessive supply unit costs…and not due to jobs: – Fix procurement and regulation!!

• Fiscal subsidy requirement won’t drop… even if cost recovery will slowly improve… – Full cost recovery in SA and SSA would demand 25-35%

of average income of the poor…unfeasible

• Is the tax handle capacity of the sector underestimated and hence underused outside of Europe?

• Good demand management and revenue policy….but is it equitable?

• => easy to underestimate long term fiscal cost of short term fiscal expansions…– but they are hard to avoid anyway

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How realistic is the continuous talk of a strong private sector financing role?

• Private sector financing is a must BUT: – For developing countries: private 20% of needs at best– For developed countries: subsidies are totally

underestimated by politicians – Still very much in telecoms and some energy– Still favoring some regions (the richest)– ...and when underegulated, underinvests and

overcharges

• In poor countries,– ODA around 10% of needs at most but risk of decline – …residual public sector financing still around 70% at

least– Need to consider international grants as complements

to loans for the poorest countries

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Impact of the crisis on private financing of infrastructure in developing countries?

(story driven by a few countries…)

Investment commitments to PPI projects reaching closure in developing countries, by quarter, 1995–2010

0

20

40

60

80

100

120

1995 2000 2005 2010

0

50

100

150

200

250

300

350

400

Q1 Q2 Q3 Q4 Number of projects

Source: World Bank and PPIAF, PPI Project and Impact of the crisis on PPI databases.

Note: Includes only investment commitments at financial or contractual closure. Does not include additional investment in subsequent quarters. * Adjusted by US CPI.

2009 US$ billions* New projects

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…keep in mind that governments are not just about macro fiscal concerns…

• The return of Planning: – UK, Australia, New Zeland take the lead

• The long awaited arrival of Regulation– Crisis has reinforced the case for sound regulation….in

finance but also in infrastructure service delivery!– Continues to be the weak spot of the sector– Evidence? Return on composite infrastructure funds

>x2 average stock, and x3 bonds returns!• Cream skimming which increases pressure on public

sector financing requirements• High rents, hardly shared with users and taxpayers

– …and really very few bankruptcies in sector…• But great financial engineering to get financing going

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Other challenges to keep on the government radar screens

• Improve accountability: – Increasing evidence of corruption

• Both a procurement and a regulation problem

• Coordinate environmental & infrastructure policies– Again, efficiency vs. equity issues

• Dealing with supranational infrastructure projects institutional demands (including regulation)

• Transport is relatively easy, but cross-border logistics reform still has a long way to go

• Regional power pool in Africa continue to be challenging• Similar issue on water bodies management

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Concluding comments (1)

• Infrastructure is needed for growth: no way out!• But needs financing at a time fiscal constraints are

becoming binding… real challenge• Will be fiscally costly because there is less scope

for PPP than many argue: – Moreover, access to private financing damaged

by • weakness of government institutions• damaging reversal of commitments (as in some

European countries)

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Concluding comments (2)• 4 questions for a real shared growth oriented

infrastructure policy for politicians to answer (e.g. in the context of the promised G20 diagnostic announced earlier in Nov. 2010)

1. how much will gvts REALLY continue to support infrastructure as part of global recovery efforts?

2. how much will their concern for debt and stabilization cut ODA and hence support to infrastructure in DCs?

3. How much will the emerging new financial regulation further limit the scope for creative but risky private project financing in infrastructure?

4. Will they finally take planning, procurement and regulation reform needs in the sector seriously?– Essential to cut costs and associated fiscal support

requirements and do so in a way that it fairer to taxpayers and poor infrastructure users

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So…• For now, good reasons to be worried with the

honest political answers to these questions

– Less money to infrastructure needed for growth in many developed or developing countries

– Less money to ODA needed for infrastructure in DCs

– Less scope for financial innovation in infrastructure

– …and little obvious commitment to do much more than talk a lot about how much the rules of the games matter…

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But…• Maybe it’s because talk is cheap and action

in infrastructure is politically and fiscally costly– …for now a lot more talk than action in

infrastructure except in a few countries (China, India, Brazil,…)

• But all this could change…if the G20 delivers a serious diagnostic of the growth, fiscal and social costs of mistaken infrastructure policy choices– …and uses it to take the necessary decisions!!!

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Thank you