developing countries and the financial crisis...
TRANSCRIPT
WORLD BANK GROUP
INFRASTRUCTURE RECOVERY AND ASSETS PLATFORM (INFRA)
Developing Countries and the Financial Crisis:
Infrastructure Diagnostic Tools
DRAFT FOR DISCUSSION May 1, 2009
SUSTAINABLE DEVELOPMENT NETWORK (SDN)
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TABLE OF CONTENTS
INFRASTRUCTURE DIAGNOSTIC TOOLS 1
1. Diagnostic Tools in the Context of INFRA 1
2. Two Perspective On The Impact Of The Crisis 2
2.1 Strategic Country Review 2 2.2 Infrastructure Portfolio Assessment Review 3
3. Uses of the Diagnostic Tools 4
3.1 Rapid Infrastructure Review 6 3.2 Proposed INFRA Eligibility Framework 14 3.3 In-Depth Infrastructure Review 20
4. Roll-Out of the Diagnostic Tools 21
ANNEX 1: Strategic Country Review 23
1. Introduction 24
2. The Transmission Channels 25
3. Assessment of Economic and Financial Constraints to Fiscal
Stimulus 27
3.1 Overall Fiscal and Financial Framework 27 3.2 Extension to Local Governments and SOEs 28 3.3 Tailoring the Basic Framework to Infrastructure 28
4. Assessment of Infrastructure Gaps, Actual Spending and
Deficits 33
4.1 Prioritization of infrastructure needs and spending 33 4.2 Revenue mobilization 34 4.3 Private sector participation in infrastructure 34 4.4 Infrastructure and Job Creation 35
5. Assessment of Quality of Institutions 40
5.1 Budget Execution Capacity and Institutional Efficiency 40 5.2 Decision-making Process for Infrastructure Spending 41 5.3 Legal and Regulatory Framework 41 5.4 SOE Governance Framework 43 5.5 PPP Contractual Framework 43
6. Political Economy Issues 48
7. Key Operational Response: AAA and TA Instruments 49
8. References 52
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ANNEX 2: Infrastructure Portfolio Assessment 55
1. Introduction 56
1.1 Background and Objective of the Infrastructure Portfolio
Assessment Review 56 1.2 Methodology 56
2. Transport Sector 58
2.1 Introduction and defining subsectors 58 2.2 Demand analysis 58 2.3 Supply analysis 59 2.4 Institutional analysis 64
3. Energy Sector 64
3.1 Introduction and defining sub-sectors 64 3.2 Demand analysis 65 3.3 Supply analysis 65 3.4 Institutional analysis 68
4. Water Infrastructure Sector 69
4.1 Introduction and defining sub-sectors 69 4.2 Demand analysis 70 4.3 Supply analysis 70 4.4 Institutional analysis 72
5. Urban Sector 73
5.1 Introduction and defining subsectors 73 5.2 Demand analysis 73 5.3 Supply analysis 74 5.4 Institutional analysis 77
6. Telecommunications Sector 78
6.1 Introduction 78 6.2 Demand analysis 78 6.3 Supply analysis 78 6.4 Institutional analysis 82
7. Synthesis: Ranking Country Infrastructure Priorities 84
7.1 Ranking the priority investment opportunities 84 7.2 Ranking of priority institutional and policy opportunities 84
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FIGURE
Fig 1 Infra Diagnostic Tools: Level and Uses 5
Fig 2 Economic Constraints and Infrastructure Gaps 7
Fig 3 Institutional Quality 8
Fig 4 Fiscal Space and Macro Economic Constraints 9
Fig 5 Investment Needs and Quality Gaps 9
Fig 6 Budget Execution Capacity and Social Protection 10
Fig 7 Distribution by Regions 11
TABLE Table 1 Methodologies to assess infrastructure investment needs 12
Table 2 Investment Need Gaps and Fiscal Space 13
Table 3 Template for Assessment of Economic and Financial Constraints to Fiscal
Stimulus 17
Table 4 Template for Assessment of Infrastructure Gaps, Needs and Spending 18
Table 5 Template for Assessment of Quality of Institutional Capacity 19
Table 6 Strategic projects: Investment needs, funding gap, and status of
completion 20
ANNEX 1: STRATEGIC COUNTRY REVIEW
FIGURE
Fig 1.1 Macroeconomic Transmission Channels 26
Fig 1.2 Financial Transmission Channels 26
TABLE
Table 1.1 Template for Assessment of Economic and Financial Constraints to
Fiscal Stimulus 31
Table 1.2 Template for Assessment of Infrastructure Gaps, Needs and Spending 37
Table 1.3 Template for Assessment of Quality of Institutional Capacity 45
ANNEX 2: INFRASTRUCTURE PORTFOLIO ASSESSMENT
TABLE
Table 2.1: Situation Analysis for the Transport Sector 60
Table 2.2. Transport sector - Benefits - INFRA specific priorities for portfolio
analysis 61
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Table 2.3. Transport sector - Risks and ease of implementation 62
Table 2.4. Energy sector - Benefits - INFRA specific priorities for portfolio
analysis 66
Table 2.5. Energy sector - Risks and ease of implementation 67
Table 2.6. Water Infrastructure sector - Portfolio Status Review 71
Table 2.7. Water Infrastructure sector - Benefits - INFRA specific priorities for
sub sector analysis 71
Table 2.8. Water Infrastructure sector - Risks and ease of implementation 72
Table 2.9. Urban sector - Situation analysis assets and service for urban programs
and projects 76
Table 2.10. Urban sector - Benefits - INFRA specific priorities for sub sector
analysis 77
Table 2.11. Urban sector - Risks and Ease of Implementation 77
Table 2.12. Telecommunication sector - Situation Analysis for the
Telecommunications Sector 80
Table 2.13. Telecommunication sector - Benefits - INFRA specific priorities for
sub-sector analysis 81
Table 2.14. Risks and ease of implementation 82
Table 2.15. First Ranking -- Country: Strategic ranking of all infrastructure
priority projects 85
Table 2.16. Second Ranking -- Country: Ranking of policy opportunities 85
Table 2.1.1. Projects Under Operations: Investment needs and expected funding
shortfall 86
Table 2.1.2. Projects under Construction: Investment needs and expected funding
shortfall 86
Table 2.1.3. Projects under Preparation & New Projects: Investment needs and
expected funding shortfall 86
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ACRONYMS
AAA Analytical and Advisory Activities
AICD Africa Infrastructure Country Diagnostic
Capex Capital Expenditures
DPL Development Policy Lending
DPOs Development Policy Operations
GDP Gross Domestic Product
ICT Information and Communications Technology
IFI International Financial Institution
IL Investment Lending
INFRA Infrastructure Recovery and Assets Platform
IPAR Infrastructure Portfolio Assessment Review
LIC Low-Income Country
MDGs Millennium Development Goals
MTEF Medium Term Expenditure Framework
OBA Output-Based Aid
ODA Official Development Assistance
OECD Organization for Economic Co-operation and Development
OPEX Operating Expenditures
OPCS Operations Policy and Country Services
PERs Public Expenditure Reviews
PETS Public Expenditure Tracking Surveys
PPA Participatory Poverty Assessment
PPP Public Private Partnerships
SCR Strategic Country Review
SIL Specific Investment Lending
SOE State Owned Enterprise
TA Technical Assistance
UMIC Upper Middle Income Countries
WRM Water Resources Management
WSS Water Supply and Sanitation
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WORLD BANK GROUP
INFRASTRUCTURE RECOVERY AND ASSETS PLATFORM (INFRA)
DIAGNOSTIC TOOLS
1. Infrastructure investment can play an important role as part of fiscal stimulus measures to pull
developing countries out of the crisis.1 In previous crises, lack of timely action resulted in significant
erosion of infrastructure assets, postponement of long-gestation infrastructure projects, and significant
slow-down in medium-term economic growth. In contrast, during the current crisis, there is significant
interest among clients and momentum among donors for supporting infrastructure investment, operation
and maintenance, including via the Infrastructure Recovery and Assets (INFRA) platform announced by
the World Bank Group. This note proposes the role of a set of infrastructure diagnostic tools in the
context of INFRA, describes their components and possible uses, and suggests next steps.
1. DIAGNOSTIC TOOLS IN THE CONTEXT OF INFRA
2. The INFRA platform would to support counter-cyclical spending on infrastructure and protect
existing assets and priority projects. It is intended to provide the foundation for rapid recovery and job
creation and to promote long term growth. INFRA aims to help countries stabilize existing infrastructure
assets, ensure delivery of projects that remain government priority, support Public Private Partnerships
(PPPs) in infrastructure, and support new infrastructure project development and implementation. It
would entail a significant increase in World Bank Group assistance, including possibly a 40-50% increase
in World Bank annual commitments, $__ billion in additional IFC flows, and a significant enhancement
of concessional lending for infrastructure.
3. A number of questions emerge as developing countries try to jumpstart their economies through
infrastructure investment and as the Bank and other donor agencies determine how to support such efforts
most efficiently and effectively in a resource constrained environment. How to set priorities for
infrastructure investment across countries in need? Within a given country, what should be the priorities
across infrastructure subsectors? What level of support would it be sensible to provide to a given
country? What enabling conditions should be required or put in place so that resources can be spent
effectively? What are the specific demand and financing challenges that critical infrastructure subsectors
are facing? Are there infrastructure programs or projects already in place that can help to channel
resources most expeditiously? How to ensure that infrastructure spending is truly setting the foundations
for longer-term growth?
4. Rapid response and good allocation and use of fiscal stimulus resources require readily available
information on countries, sectors, and program/project entry points. The global and long-term value
added of this information can be significantly increased if the data are organized according to clear
definitions and standards so that they can be contributed and collected by different actors, comparable
across countries and sectors, and systematically updated over time. Regrettably, in most countries,
information on infrastructure expenditure and sector performance is much scarcer and less well organized
than information on the performance of the education and health sectors. The Bank Group itself lacks
1 Besides replenishing a country‘s productive assets, there is increasing evidence of the positive employment generation impact
of infrastructure spending, and of the direct and in direct impact on the poor‘s income and living conditions (ILO, 2008;
Schwartz, Andres and Dragoui, 2009; Baker, 2008; Khandker et al., 2009; Lokshin and Yemtsov, 2005; Dercon et al., 2007).
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consolidated, comprehensive databases on infrastructure access, costs, and quality. The massive donor
effort of the Africa Infrastructure Country Diagnostic (AICD) is a commendable exception. The current
crisis underscores the importance of rebuilding the informational foundation for infrastructure investment
and provides an opportunity to do so.
2. TWO PERSPECTIVE ON THE IMPACT OF THE CRISIS
5. The infrastructure diagnostic tools allow the World Bank Group and its clients and development
partners to look at the impact of the financial crisis on infrastructure from two angles: (a) a macro, ―top-
down‖ perspective, identified here as the Strategic Country Review (SCR), which is presented in detail in
Annex I; and (b) a micro, ―bottom-up‖ perspective, called here the Infrastructure Portfolio Assessment
Review (IPAR), presented in detail in Annex II. These two perspectives are complementary and mutually
reinforcing. For instance, in a full-fledged infrastructure diagnostic, a SCR would normally precede the
IPAR. But these analytical tools can also be applied separately, depending on the information needs.
Also, as specified in the next section, simpler versions or subsets of each of these reviews can be used for
rapid response to very concrete information needs.
2.1 STRATEGIC COUNTRY REVIEW
6. The SCR has economy-wide and cross-sectoral scope. Its purpose is to help to address the
question whether and how a country can effectively utilize a fiscal stimulus channeled through
infrastructure investment to restore growth on a sustainable basis. The SCR therefore focuses on
questions regarding the overall economic, financial, and institutional context for infrastructure
investment. It also includes sector performance questions that can be applied across all infrastructure
sectors and can inform decision makers‘ choices on overall cross-sector priorities.
7. Essentially, the full-fledged SCR is a structured questionnaire designed in a modular way. This is
intended to give users the freedom to utilize either the full instrument or a subset of its modules
depending on the key policy questions to be tackled. The modules, summarized in Tables 5, 6 and 7 of
Annex I, include:
Economic and Financial Constraints on the Fiscal Stimulus, assessing the country‘s ability to
finance the infrastructure fiscal stimulus program without unduly jeopardizing the sustainability
of its macroeconomic balances. Includes variables covering:
a. Basic fiscal and financial framework – the key macro and financial variables for the
country, drawn from existing World Bank and IMF sources
b. Extension of the basic framework to local governments and SOEs – identifying the rules
that apply to off-budget infrastructure financing and delivering entities, such as SOEs,
local governments and special funds
c. Tailoring the basic framework to infrastructure – zooming-in on the public investment
rate, the impact of infrastructure prices and revenues, aid flows to infrastructure, and the
economic growth implications of infrastructure investment.
Assessment of Infrastructure Gaps, Needs and Spending, namely, the room for removing key
infrastructure bottlenecks to growth and to prioritize infrastructure projects based on their ability
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to satisfy critical needs and to generate sources of local employment and income. This module
includes questions on the following areas:
a. Infrastructure investment needs
b. Prioritization of public spending in infrastructure
c. Revenue mobilization
d. Private sector participation in infrastructure
e. Infrastructure and job creation
Assessment of Quality of Institutional Capacity, namely, the country‘s capacity to absorb the
fiscal stimulus effectively, scaling up public expenditure while protecting vulnerable groups.
This module includes variables covering:
a. Budget execution capacity
b. Decision making process
c. Legal and regulatory framework
d. PPP contractual framework
8. The tables in Annex I group the variables in the structured questionnaire that constitute the SCR
depending on the availability and ease of collection of the relevant data, and on the degree to which
governments may have at their disposal the levers to affect behavior.
9. The main country counterparts and information sources for the SCR include ministries of finance,
planning and economic ministries, and central statistical agencies. As work moves to a more detailed and
in-depth level, partnership with sectoral ministries, SOEs, and local governments also becomes important
in developing the SCR.
2.2 INFRASTRUCTURE PORTFOLIO ASSESSMENT REVIEW
10. In contrast to the SCR‘s top-down approach, this second perspective of the Infrastructure
Diagnostic Tools adopts a bottom-up approach for understanding a country‘s infrastructure investment
challenges, focusing on sub-sectors and their program and project portfolios. The purpose of the IPAR is
to understand the factors affecting the operation of specific infrastructure subsectors in the context of the
crisis, and to identify the country‘s priority infrastructure investment pipeline against the countries‘
economic and social goals, cognizant of financial constraints and quick-win opportunities. A full-fledged
IPAR essentially includes four subcomponents:
Demand Analysis: Building on the economy-wide assessment in the Strategic Country Review,
this subcomponent looks at the needs and demands in specific subsectors and how they may have
changed in the context of the financial crisis.
Supply Analysis: This subcomponent explains the key specific economic and technical features of
the subsectors. It also provides a snapshot of the subsector‘s project and program portfolio,
including the degree of completion of the projects, their financial status, their strategic
importance and benefits, the risks they face, and the ease of implementation.
Institutional and Policy Analysis: The capacity of the public and private actors to mobilize
resources, provide incentives through adequate regulatory frameworks, and implement and
monitor policies, programs and projects can influence the success of a program or project as
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much as the availability of financial resources. The broader look at these institutional factors is
provided by the SCR; however, some may vary across different sectors. Therefore, a careful
assessment of the actors and stakeholders in the specific subsector is an important component of
the IPAR.
11. Annex II elaborates on general supply, demand and institutional features of the following sectors
and subsectors, and on how the IPAR would be applied to them:
Transport, including the ports, roads and freight services subsectors;
Energy, distinguishing between generation, transmission and distribution;
Water, including the full water cycle from upstream water resources management, to irrigated
agriculture and drainage in agricultural areas, and water supply and sanitation in urban centers
and villages;
The Urban Sector, encompassing urban infrastructure funds, slum upgrading, affordable housing
projects, and rehabilitation and maintenance of urban infrastructure services; and
Telecommunications, covering international connectivity (submarine or terrestrial fiber optic
cables, satellite), domestic transmission (backbone), and local access networks in rural and urban
areas.
12. The main counterparts and sources for an Infrastructure Portfolio Assessment review include, in a
varying degree depending on the sector and subsector: sectoral ministries; regulatory agencies; service
administrators; main operators; investment promotion agencies; regional and local government agencies;
international, national or regional business organizations and sponsors; and banks and financiers in
general.
3. USES OF THE DIAGNOSTIC TOOLS
13. The motivation that drives the proposal for more systematic infrastructure diagnostics in the
context of the current crisis is that countries and donors need better information to be able to make
choices. In the context of restricted resources and of an urgent need for jump-starting economies, while
ensuring that the basis for long-term growth is not being eroded, well-informed selectivity is crucial.
Donors need to decide which countries to prioritize in the provision of stimulus funding, and then they
need to have the tools to decide whether a country is ready to receive those resources, in which amount,
and for which project.
14. At the same time, countries would want to make choices across their sectors and sub-sectors, and
across key projects, to ensure the maximum possible cost-effectiveness and impact – and they would need
to be able to persuade their own constituencies, as well as donors and financiers, that they are doing this
in a robust and transparent way. The information generated by the Infrastructure Diagnostic Tools,
therefore, should be of use to multiple stakeholders and for multiple purposes, some of which associated
with the INFRA initiative, and others associated with the long-term monitoring and management of
infrastructure programs and projects, by donors or by developing countries themselves.
15. This section distinguishes between three key uses of the diagnostic tools: (a) the rapid review,
(b) the INFRA eligibility framework; and (c) the in-depth review, depicted in figure 1.
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Fig 1
Infra Diagnostic Tools: Level and Uses
MID-LEVEL REV IEW
Econo mic & Financial
Constraints
Infrastructure Gaps, Needs and Spending
Institutional Capacity
Portfolio Scans
OUTCOME:
IN FRA ELIGIBILITY FRAM EWORK
Need for D onor assistance and
assessment o f overall gap
Prior itization of Sectors/Projects
Institutional W eaknesses
Instruments o TA
o Grants o Lending: D PL and/or SIL o Innovative Instruments:
Guarantees , S mart Subsid ies
OU TCOM E:
P RIOR ITIZE DONORS’ A CTIONS
Identif ication of key cr isis transmission
mechanisms
Snapshot of countries and projects most
vulnerable to the crisis
Country Taxonomy with identificatio n of cr itical country cases and polic ies
RAPID REVIEW
Econo mic Co nstra ints
Investment Need Gaps
Institutional Capacity
Financial Shortfa ll
OUTCOME:
DETAILED A NALYSIS
High Frequency Mo nitoring of Macro
and Micro Indicators
Benchmarking Analysis a t the Country,
Sectora l and Enterpr ise Level
Solid Foundation for country diagnostic, strategy and budget suppor t
Advise to Government that launch Infrastructure Stimulus Package
Detailed Modelling
Impact Evaluation
Standardization and Sharing of Information and Databases across Client
Countries, IFIs and Donors
IN DEPTH REVIEW
Econo mic & Financial
Constraints o Central Gvm
o Local Gvmt and SOEs o Infrast ructure
Infrastructure Gaps, Needs and
Spending o Prioriti za tion of Infra
Spending o Revenue Mobili zation o PP Is o Job Creati on
Institutional Capacity
o Budget Execution o Decision Making for
Spending o Regulat ory Governance o SOE & P PP C ontracts
Portfolio Review
o Demand and S upply An alysi s
o Ins tituti onal Analysis
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3.1 RAPID INFRASTRUCTURE REVIEW
16. The rapid review will aim to provide the World Bank Group and INFRA donors with a
periodically-updated glance at the vulnerability of countries‘ infrastructure to the impact of exogenous
shocks, starting with the current crisis. It will highlight critical countries, regions aspects of infrastructure
vulnerability. The rapid review focuses on a small selection of basic SCR economic and institutional
variables that are readily available for a wide set of countries from World Bank Group, IMF and
government sources, or that are easy to estimate based on commonly used models, for instance: estimates
of fiscal space, investment needs and gaps, and service and institutional quality assessments. Using the
rapid review approach, two products for immediate use by the development community can be easily
generated:
A global snapshot of the vulnerability of infrastructure investments in the face of the current
crisis. This consists of a tabular and comparative presentation of the selected variables. At a
glance, these data suggest that the great majority of developing countries with relatively high
investment needs face significant economic or financial limitations; and that, while this is a
challenge at all stages of development and income, lower income countries are relatively more
vulnerable to the crisis because of the relatively poorer capacity to execute and monitor the fiscal
stimulus measures, and
A developing country typology, which allows to quickly identify countries in particularly critical
condition that may require a closer look from the Bank Group and donors.
17. This chapter illustrates the key sets of variables, included in the rapid review. Section 3.1.1
presents the overall distribution of easily available indicators that capture the degree of vulnerability of
developing countries to the crisis, including lack of fiscal space, infrastructure gaps and institutional
capacity. Section 3.1.2 and 3.1.3 report the distribution of indicators by income and region. Section 3.1.4
proposes a preliminary taxonomy of countries that can be used to prioritize countries and tailor specific
policy recommendations. This rapid assessment could be updated periodically and offered as a service to
partner agencies and governments.
3.1.1. Summary Statistics
18. Low Fiscal Space is a major constraint to the implementation of infrastructure fiscal stimulus
packages. A key question that needs to be addressed is whether countries have room to loosen fiscal
policy and ability to take on additional debt without creating macroeconomic unbalances. In a recent
survey implemented by PREM, World Bank country economists were asked to rate twelve factors
(including fiscal balance, public debt, history of public debt, risk from contingent liabilities, current
account deficit, external debt, foreign reserves, exchange rate regime, exposure to easily reversible capital
flows, inflation, impact of commodity price decline on government revenues, and impact of commodity
price decline on government expenditures) constraining the ability of governments to undertake a
countercyclical fiscal stimulus.2 The vertical bars in Fig. 2 below show the proportion of countries
characterized by a different ranking (low, medium and high) according to the relevant variables. As
shown by the first vertical bar in Fig. 2 below, about 40% of developing countries are characterized by
low fiscal space, making the use of infrastructure stimulus packages challenging.
19. Infrastructure investments display high vulnerability to the crisis. Even though infrastructure
investment needs are expected to decline, as a consequence of the slowdown in growth, they are still
accounting for a significant percentage of GDP. The second and third vertical bars in Fig. 2 report
2 For more details on the fiscal space indicator ranking see the PREM assessment reported in World Bank (2009c).
7
respectively the proportion of countries characterized by a different ranking respectively in investment
needs and investment needs gaps resulting from the crisis. Only about 40% of the countries have low
investment needs and even a smaller percentage (about 25%) display low infrastructure investment gaps
as a result of the crisis. The vulnerability of infrastructure to the crisis is also confirmed by looking at
additional indicators. The fourth bar of Fig. 2 indicates the percentage of countries characterized by a
different ranking according to the degree to which infrastructure represent a significant bottleneck in
terms of growth and expansion by enterprises. Again only less than 20% of countries are characterized by
low bottlenecks in infrastructure. Finally, the last vertical bar reports the percentage of countries
characterized by different degree of vulnerability as measured by the percentage of public private
investments in infrastructure delayed as the result of the crisis. Around 45% of countries display
significant infrastructure bottlenecks in terms of investment needs generated by the crisis, which are also
reflected by the significant gaps in quality. 3
20. It is also worth noting that the great majority of the developing countries with high investments
needs are constrained by high economic and financial constraints to fiscal stimulus packages. More than
80% of the developing countries do not have fiscal room to implement the investment needed to remove
infrastructure bottlenecks. In addition, in more than 30% of countries, PPIs have been already affected the
impact of the crisis.
Fig 2
Economic Constraints and Infrastructure Gaps
Source: own calculation, based on World Bank (2009b), SDN (2009), ICA surveys and Izaguirre (2009)
21. Institutional quality also poses significant high challenges in addressing gaps. As shown in Fig. 3
below around 30% of developing countries are characterized by low budget execution capacity and low
standards in transparency of decision making. The first two vertical bars summarized the results from the
Country Policy and Institutional Assessment (CPIA) questions related to quality of budget and financial
management, efficiency of revenue mobilization, quality of public administration, transparency,
3 Quality gaps are based on the ICA survey related to the loss of sales due to power outages. PPI vulnerability is based from the
delays in PPI committed investment projects from August 2008 to January 2009 from the Impact of the financial crisis on PPI
database, as reported in Izaguirre (2009).
38.3% 38.8%
26.5%17.6%
52.7%
36.4% 31.9%
28.2%38.2%
14.5%
25.2%
45.3% 44.1%
32.7%29.3%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Fiscal Space Inv Needs Inv Needs Gaps Quality Gaps PPI Vuln
Low Medium High
8
accountability and corruption in the public sector and the Open Budget Index (OBI), which captures the
budget transparency. The third and fourth bars summarized the governance quality, in terms of
government effectiveness and control of corruption, two of the components of the country governance
indicators reported in Kaufmann et al (2008). About a third of the countries may be highly vulnerable to
lack of government effectiveness and low control of corruption.4
Low social protection coupled with high
income inequality also make countries less capable to implement a fiscal stimulus package without
hurting the poor. The final two bars report the proportion of countries ranked according to Gini
distribution ranking, as an index capturing income inequality and CPIA Social Protection questions
related to the quality of social protection policies and the equity of public resource use. High income
inequality affects more than 40% of countries whereas only about 15% are characterized by high social
protection mechanisms.
Fig 3
Institutional Quality
Source: Source: own elaboration, based on OBI, CPIA Kaufmann et al (2008) and WDI
3.1.2. Distribution by Country Income Level
22. Fiscal space is posing a significant challenge across all countries, especially for low income
countries. Around 46% of low income countries report low fiscal space and only 12% are able to finance
an infrastructure fiscal stimulus program without deteriorating their macroeconomic balances. This is
confirmed by the high level of external debt and lower levels of mobilization of revenues. Half of upper
middle income countries also face severe fiscal constraints. The relatively stronger macroeconomic
indicators confirm the higher ranking in terms of fiscal space.
4 The OBI index is a measure of the budget transparency. Government effectiveness and control of corruption are two of the
components of the country governance indicators reported in Kaufmann et al (2008). Gini distribution is based on WDI
indicators. CPIA indicators are used to assess Budget Execution and Social Protection. For building the first indicator, CPIA
questions related to quality of budget and financial management, efficiency of revenue mobilization, quality of public
administration, transparency, accountability and corruption in the public sector were used to build the first indicator. CPIA
questions related to the quality of social protection policies and the equity of public resource use were used to build the second
indicator.
30.3% 27.6%33.1% 29.9% 30.2%
22.4%
38.2%
60.3%
29.9% 34.6%29.2%
61.2%
31.6%
12.1%
37.0% 35.4%40.6%
16.4%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
OBI CPIA-Budget Gov Eff Corr Contr Gini Distr CPIA-Soc Prot
Low Medium High
Governance QualityIncome Inequality and Social
Protection
Budget Execution and
Transparency of Decision Making
9
Fig 4
Fiscal Space and Macro Economic Constraints
Source: World Bank (2009b), IMF WEO and WDI
23. Infrastructure still represents a major bottleneck at all stage of development and income, both in
terms of needs for investment and confirmed by the gaps in quality of the services reported by businesses.
Fig 5 unveils significant difference among the two set of indicators. Whereas investment needs do not
display significant variation across the different income groups, quality gaps are significantly lower in
upper middle income countries.
Fig 5
Investment Needs Quality Gaps
Source: own elaboration, based on SDN (2009) and ICA surveys
24. Lower income countries are more vulnerable to the crisis, due to the lower quality of institution to
execute the fiscal stimulus. This considerably reduces the room for maneuver for policy intervention,
including infrastructure fiscal stimulus. Fig 6 calls for significant assistance that countries need to be
46.3%
22.5%
50.0%
41.5%
37.5%
26.9%
12.2%
40.0%
23.1%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
LIC LMIC UMIC
Low Medium High
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
LIC LMC UMC
0.0%
50.0%
100.0%
150.0%
200.0%
250.0%
Government Revenues Tax Revenue
Government Spending External Debt
33.3%
18.4%27.8%
25.6%
23.7%
33.3%
41.0%
57.9%
38.9%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
LIC LMIC UMIC
Low Medium High
0.0%
11.9%
41.9%
20.9%
31.0%
51.6%
9.7%
50.0%
51.2%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
LIC LMIC UMIC
Low Medium High
10
given to improve budget execution capacity as well as to social protection. Not a single LIC country has
yet reach high standards in budget execution and ability to protect the poor. UMIC countries are instead
significantly higher standards in both indicators.
Fig 6
Budget Execution Capacity Social Protection
Source: own elaboration, based on CPIA
3.1.3. Distribution by Region
25. Challenges differ also by regions. MNA, SAR and SSA present major institutional challenges,
with a proportion lower than 10% of the countries endowed with high institutional capacity. ECA EAP
and LAC regions present relatively lower investment needs, but are characterized by higher institutional
capacity (see Fig. 7).
44.2%
21.4%12.9%
55.8%
76.2%
45.2%
41.9%
2.4%0.0%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
LIC LMIC UMIC
Low Medium High
34.9%
16.7% 12.9%
65.1%
71.4%
38.7%
45.2%
0.0%11.9%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
LIC LMIC UMIC
Low Medium High
11
Fig 7
Distribution by Regions
EAP ECA
LAC MNA
SAR SSA
Source: own elaboration
25.0%
90.0%
25.0%
37.5%
10.0%
50.0%
37.5%
25.0%
0.0%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Fiscal Space Inv Needs Inst Cap
Low Medium High
44.4%
66.7%
30.0%
22.2% 50.0%
33.3%
20.0%
0.0%
33.3%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Fiscal Space Inv Needs Inst Cap
Low Medium High
30.0%40.0%
20.0%
40.0%30.0% 70.0%
30.0%
10.0%
30.0%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Fiscal Space Inv Needs Inst Cap
Low Medium High
42.9%
14.3%
30.0%
42.9%
57.1%
60.0%
14.3%10.0%
28.6%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Fiscal Space Inv Needs Inst Cap
Low Medium High
33.3% 33.3%
0.0%
50.0% 50.0%
100.0%
16.7%
0.0%
16.7%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Fiscal Space Inv Needs Inst Cap
Low Medium High
44.7%
21.6%
41.5%
31.6%
40.5%
51.2%
23.7%
7.3%
37.8%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Fiscal Space Inv Needs Inst Cap
Low Medium High
12
3.1.4. Country Taxonomy
26. Countries with low and moderate fiscal space are less suited for the use of infrastructure
expenditure as a fiscal stimulus. Within this category of countries, it is important to highlight countries
characterized by high investment needs.
27. Countries with high investment need gaps need to explore alternative ways of financing the
infrastructure program. As summarized in Table 1 there are several more or less sophisticated
methodologies according to which it is possible to assess the countries‘ infrastructure investment needs.
As discussed in the previous sections, we will first use the benchmarking approach to assess the
infrastructure needed to support the growth targets set by the government. This assumes that there is a
relatively stable relation between the stock of infrastructure and its composition and growth. The
estimates are thus equivalent to a demand for infrastructure for a given growth target. Alternatively,
where available, the estimates generated at the sectoral level based on engineering assessment of the costs
of expanding services to reach targeted coverage or interconnections of networks should be used.
Table 1
Methodologies to assess infrastructure investment needs
“Benchmarking” Set target
Examples:
Stock target: what would it cost to get a
given country‘s infrastructure (per capita; per
unit of GDP; per km2) to the level of the
Regional leader; or to the level of another
region median?
Flow target: how does a given country‘s
expenditures on infrastructure compare to
peers.
Examples:
MDGs - what would it cost for a given country
to achieve universal service coverage in water
and sanitation, electricity and access to all year
round roads.
National Targets – what would it cost for a
given country to achieve targets under their
national plans2?
Econometric:
Growth: What level of infrastructure
coverage is needed to achieve x% level of
growth and reduce inequality by z%. This is
the approach followed by Calderón and
Servén (2004) applied by Estache (2005) in
the case of Africa.
Demand: What level of infrastructure
coverage will be demanded by firms and
consumers, for given growth projections. This
is the approach followed in Fay and Yepes,
2003 and extended by Bogetić and Fedderke
(2006) in the case of Africa.
Micro sectoral estimates:
These can be economic-engineering models that
price particular level of coverage and quality; or it
can be more ad-hoc, relying on sector data and
expert opinions.
- Power sector: well defined international
methodology, used by electricity companies to
estimate investment needed to maintain the
integrity of the network and satisfy predicted
expansion in demand.
- Roads: well defined methodology for
rehabilitation/maintenance expenditures;
combined with road sector expert opinion on
definition of major corridors and investment
needs for their completion.
13
Table 2
Investment Need Gaps and Fiscal Space
Investment Need Gaps
The higher the investment needs the greater the infrastructure investment gaps as a percentage of GDP
Low Medium High
Fis
cal
Sp
ace
T
he
hig
her
th
e fi
scal
spac
e th
e g
reat
er t
he
abil
ity
to u
nd
erta
ke
a fi
scal
sti
mulu
s p
rog
ram
and
fin
ance
su
ch a
pro
gra
m b
y t
akin
g o
n a
ddit
ion
al d
ebt
wit
hou
t und
uly
jeo
par
diz
ing
th
e su
stai
nab
ilit
y o
f it
s m
acro
eco
no
mic
bal
ance
s
Lo
w
Argentina Kyrgyz Rep.
Congo, Dem. Rep. Albania Madagascar Burundi Liberia
Croatia Brazil Poland* Egypt Malawi
Lao PDR Côte d'Ivoire Sri Lanka Gambia Mauritius*
Latvia Djibouti Turkey Georgia Mozambique
Mauritania Ethiopia Guinea Nicaragua
Sudan Ghana Guinea-Bissau Pakistan
Uruguay India Panama
Jamaica Senegal
Jordan Tajikistan
Togo
Mo
der
ate
Bangladesh Niger Burkina Faso Yemen Armenia South Africa*
Cambodia Philippines Central African Rep. Zambia Belarus Tanzania
Comoros Vietnam Haiti Benin Tunisia
Dominican Rep. Kazakhstan Bulgaria* Uganda
Indonesia Mexico* Colombia Ukraine
Kenya Nepal Costa Rica Honduras
Mali Romania* El Salvador Morocco
Mongolia Rwanda Guatemala
Hig
h
Angola Malaysia Algeria Russian Fed. Bolivia Paraguay
Botswana Nigeria Azerbaijan Sierra Leone Chile Swaziland
Chad Papua NG Cameroon Turkmenistan Ecuador Uzbekistan
China Thailand Peru Venezuela Iran
Gabon Lesotho
Source: preliminary own elaboration
Note: The country ranking of fiscal space is reported in World Bank 2009 (c). The country ranking of investment needs gap is based on the revised infrastructure needs estimated by the authors, based on Fay and Yepes
(2003) and Yepes (2008) for 2008-2015 compared to the pre-crisis baseline. 5
5 Countries marked with * are characterized by high institutional quality, as measured by the CPIA questions related to quality of
budget and financial management, efficiency of revenue mobilization, quality of public administration, transparency,
accountability and corruption in the public sector.
14
28. Different policy options best fit the different country-categories. Countries characterized by high
infrastructure investment needs, but with low and moderate fiscal space (highlighted in red in the right
hand side of Table 2) are less suited for the use of infrastructure expenditure as a fiscal stimulus. Such
countries are also particularly vulnerable in terms of low institutional quality, with the exception of
Mauritius, Bulgaria and South Africa. In this sense, tor this set of countries, low volume and highly
focused interventions are most appropriate. In particular, strict prioritization and selectivity in investment
and the quality of the governance and macro-economic policy framework are key to ensure that the fiscal
stimulus brought about by an increase in infrastructure investment will translate in sustainable growth.
29. In contrast, countries characterized by high infrastructure investment needs and high fiscal space
(highlighted in green in the left hand side bottom corner of Table 2) are more suited for the use of
infrastructure expenditure as a fiscal stimulus. This set of countries represents only 18% of the total of
developing countries. For this set of countries additional volume of lending would be safer.
30. Country rankings are dynamic and may be subject to changes as a result of the crisis and the
collection of new information. It is essential to consider that, as the crisis evolves and more detailed
information are available, the country taxonomy is expected to change and the position of countries
within the matrix will also be subject to revisions. In particular we expect investment need gaps to
become larger and fiscal space to be reduced.
3.2 PROPOSED INFRA ELIGIBILITY FRAMEWORK
31. A second use of the Infrastructure Diagnostic Tools is to provide a commonly agreed and simple
framework for deciding on whether a country would be eligible for INFRA resources. In essence this
diagnostic framework would help to determine whether donor resources are needed to fill infrastructure
financing gaps. If so, it would help to determine the size of the financing gap, opportunities for efficiency
and savings, institutional capacity gaps affecting the country‘s effective use of substantial stimulus
resources to address short-term job-creation needs or set the foundation for long-term growth, and the
selection of World Bank Group and donor instruments that may be best suited to help to fill the gap
(technical assistance, grants, lending in concessional terms or otherwise, guarantees, etc.)
32. The INFRA Eligibility Framework would consist of a subset of the SCR and IPAR variables that
can be collected or developed based on data from international, national or local sources for most of the
World Bank Group client countries. While this level of review encompasses a larger range of variables
than the ―rapid review,‖ these variables are still deemed relatively easy to collect for a large range of
countries.
3.2.1. Assessment of Economic and Financial Constraints to Fiscal Stimulus
33. As a first preliminary step, it is important to review the availability of budgetary room that allows
a government to provide resources for a desired purpose without jeopardizing the sustainability of a
government‘s financial position. Countries' response to the crisis has to balance the goal of mitigating the
impact of the crisis against the risk of damaging the macroeconomic stability. A country-by-country
judgment needs to be made on the appropriate balance. Key macro ratios to be looked at are the public
debt-GDP and external debt/GDP ratios. Desired targets to ensure long term balanced growth include
levels of public debt-GDP not greater than 65 percent and external debt-GDP ratio not greater than 45
percent.
34. Across countries, the organization of the provision of infrastructure services, as well as
expenditure channels can vary significantly. Most importantly, these services and expenditures can be
accounted for on-budget (e.g. directly in the national public sector accounts, and within these, at different
15
levels of government, from national to local), or off-budget (e.g. in separate budgets of the State Owned
Enterprises, SOEs, or Public-Private Partnerships, PPPs). The Africa Infrastructure Country Diagnostic
(AICD) provides standardized cross country datasets of fiscal indicators for infrastructure including extra-
budgetary financing vehicles, such as SOEs and PPPs, to the extent that the state or the operator still
relies on support by the government (in the form of implicit and explicit subsidies).6
Quasi fiscal deficits
have been estimated in selected regions, including ECA and SSA, according to the methodology
developed by Ebinger (2006).
35. A leading indicator of the size of the fiscal room for infrastructure is the government‘s capital
spending (public investment) as a share of GDP. The lower fiscal sustainability is, the narrower space the
governments have for infrastructure spending. Under the assumption that infrastructure demand is never
met, low public investment rates mean that fiscal space for infrastructure is already squeezed. The
vulnerability of this infrastructure-specific fiscal space can be gauged by looking at the share of
government recurrent spending in the total budget. The larger this share is, the higher the vulnerability.
3.2.2. Assessment of Infrastructure Gaps, Needs and Spending
36. Prioritization and better targeting of public spending could create additional fiscal room for
maneuver. Improving efficiency of current infrastructure entails addressing the questions below:
Which sector should be priority? Prioritization among infrastructure sectors has been a key
question for governments. In theory, it should be guided by rates of return on invested projects.
For instance Fan, et al. (2002) and Estache and Liu (2003) offer a methodology for prioritization
of public investments.
What are the immediate investment needs in infrastructure sectors? Key sector-specific
variables include investment requirements to: (a) maintain reserve margins of electricity systems
within the recommended ranges: (b) prevent congestion in key transport assets (airports, ports,
roads, railway); and (c) meet the gap between actual investments in the water sector vs.
government objectives in network expansion (increase in access) and service quality increase
(including wastewater treatment).
To what extent can quasi-fiscal deficits be reduced? At the sector level, financial
viability/sustainability is well represented by quasi-fiscal deficits, which can be composed by
underpricing, technical losses and nonpayment (insufficient metering and arrears). Additional
fiscal space can be created by reducing some of these quasi deficits.
Could PPI at an advanced stage be accelerated? Is there still investor interest in projects in
tenders? Are awarded projects or projects to be awarded facing problems on securing financing?
Which sector investment programs are able to generate highest local employment and income?
To answer such a question several indicators may be collected, including the share of capital
expenditure to be spent on labor and local materials, as well as the expenditure on labor and
estimate of job creation (if possible, with consideration of the effect on vulnerable group, for
instance by age, gender, geographic location) for different types of projects.
3.2.3. Assessment of Quality of Institutional Capacity
37. The concept of institutional efficiency relates to the degree to which administrative and
procedural mechanisms are in place to enable successful policy implementation and project execution.
6 See Briceño-Garmendia et al (2009).
16
38. A number of key questions may be posed to assess how transparent and accountable the decision
making processes are. Will there be enough time or political willingness to conduct sufficient investment
analysis before implementing the project? Indicators that could be used to capture execution capacity
include: Percentage of executed annual capital and maintenance spending; Average time needed to bring
projects to completion; Average delay in project implementation; and Average percentage of cost over-
run.
39. The way in which legal and regulatory systems are structured also ensures the greatest
effectiveness of the fiscal stimulus in the infrastructure sectors, while protecting all stakeholders,
including consumers and operators. In a crisis context, rate of return regulation may be more suited than
price cap regulation to protect investors. Pro poor regulation questions include: Can access for the poor
be ensured? What types of subsidies are used? Are there only subsidies for consumption (through the
tariff) or are access subsidies available? What targeting mechanism is used for life-line or other safety net
mechanisms?
40. The SOE governance framework is particularly relevant for understanding the likely success of
crisis-control if the investment interventions will be channeled through SOEs. State Owned Enterprises
(SOEs) are likely to be operating under tight budgets and under business plans and mechanisms
vulnerable to short-run fiscal adjustments, which makes them more vulnerable to the financial crisis. Key
questions include:
What is the degree of corporatization? Are SOEs allowed to earn a rate of return? Are they
issuing dividends? What is the degree of managerial autonomy in decision making?
41. The PPP governance framework is particularly relevant for understanding the existing framework
for renegotiation. Key questions include:
Is there a history of arbitration/renegotiation? Is there a depth of experience of PPP contracts
in the sector? What is the normal timeline of arbitration/renegotiation experienced? What level of
arbitration?
How vulnerable are the contractual structures of the infrastructure projects? The vulnerability
of PPIs need to be assessed based on the types of contracts, e.g., PPAs, risk allocations
(construction risk, commercial risk, market risk, fuel supply risk, location risks, and foreign
exchange risks), with the existence of government performance undertaking on behalf of the
public utilities or guaranteed commercial obligations of the public utilities and off-take through
take or pay provision, etc.
42. Table 3-5 below summarize the key issues analyzed above. The entry in the second column
distinguishes between variables on which policy makers and other stakeholders can influence/change the
behavior in the short term; variables that can be influenced in the short term, but at a higher cost (i.e. need
IFIs technical assistance, ST with TA); and finally variables that are completely outside the control of
policy makers/Bank and other IFIs and should be taken as constraints (at least in the short term).
3.2.4. Strategic project scan
43. The INFRA eligibility framework would include the scanning of the country‘s major project
portfolio in order to identify key entry points for INFRA support. Priority projects will include those with
particularly high strategic value (high growth and/or employment impact), which may be completed more
expeditiously, and/or may face particularly critical financing gaps. A sample data gathering tool is
propose in table 6.
17
Table 3
Template for Assessment of Economic and Financial Constraints to Fiscal Stimulus
Key Questions and Variables Policy’s Ability to
Modify Behavior
1. The Basic Framework
Can governments borrow foreign or domestic resources?
1. Capital market trends (e.g., M4/GDP) No
2. Gov and Ext Debt/GDP No
2. Extending the Basic Framework to SOEs
What is the hidden cost of SOE provision of services?
1. End-User Consumption No
2. Average Cost Recovery Price (Cost Recovery Tariff) MT with TA
3. Loss Rate (as a share of production)
Normative Loss Rate (as a share of Production)
MT with TA
4. Average Actual Tariff (Real Tariff) MT with TA
5. Collection Rate MT with TA
Can local governments/SOEs support borrowing and fiscal expansion
1. Domestic and external debt/GDP local governments/SOEs (if allowed to borrow) No
3. Tailoring the basic setting to infrastructure
What is the vulnerability of the fiscal space for infrastructure?
1. Infrastructure ODA/GDP (level and volatility) No
2 Average Actual Tariff (Real Tariff) relative to national income No
18
Table 4
Template for Assessment of Infrastructure Gaps, Needs and Spending
Key questions and variables Policy’s Ability to
Modify Behavior
1. Prioritization of infrastructure needs
What are the immediate investment needs in infrastructure sectors?
1. Investment requirements to maintain reserve margins of electricity systems
2. Revenue mobilization
To what extent can quasi-fiscal deficits be reduced?
1. Sector quasi-fiscal deficits (including under pricing, technical losses and nonpayment) ST with TA
3. Private sector participation in infrastructure
Will the private sector continue to play a major role in providing infrastructure services?
1. Is there still investor interest in projects in tenders? MT with TA
2. Are awarded projects (or projects) to be awarded facing problems on securing financing? MT with TA
Is the net present value of infrastructure assets positive or negative?
1. PPI projects and associated investments which will not require government support (subsidies,
government payments, financing, etc)
No
4. Infrastructure and Job Creation
Which sector investment programs are able to generate highest local employment and income?
1. Share of capital expenditure to be spent on labor and local materials at sector No
19
Table 5
Template for Assessment of Quality of Institutional Capacity
Key questions and variables Policy’s Ability to
Modify Behavior
1. Budget Execution Capacity
Do government agencies have good execution capacity on infrastructure expenditure?
1. % of executed annual capital infrastructure expenditure budget MT with TA
2 . % of executed annual budget for maintenance MT with TA
3. Percentage of budget overrun in recently implemented projects MT with TA
2. Decision Making Process
How quickly can policy interventions be on the ground to provide the required stimulus?
1. Average (or specified mandatory) timeline of the decision-making process NO
2. How develop are channels for demand side of governance? MT with TA
3. Legal and Regulatory Framework
Regulatory Governance
Is the methodology for revenue determination and rate adjustments more similar to a rate of
return methodology or a price cap approach MT with TA
Pro-poor Regulation
1. Existence of safety-nets for infrastructure services (such as life-line tariffs) What are the
life-line consumption amounts? MT with TA
4. SOE Governance
Corporate Governance
1. Degree of corporatization MT with TA
Accounting, Disclosure and Performance Monitoring
1. Auditing of accounts MT with TA
5. PPP Contractual Framework
Is the sector able to manage re-negotiation?
1. Number of contracts gone for renegotiation and outcome of the process MT with TA
2 . Average length of renegotiation/ arbitration processes MT with TA
How vulnerable are contractual structures for PPP projects?
1 . Risk allocation (foreign exchange risk, fuel cost risk, demand risk, etc.). MT with TA
20
Table 6
Strategic projects: Investment needs, funding gap, and status of completion
Project Strategic value
(Growth,
employment)
Total Cost
[US$
Millions]
Status of
investment /
completion
Funding Needs
[US$ Millions]
Identified Funding Sources
[US$ Millions]
Expected
Funding
Shortfall [US$
Millions]/
Issues
2009 2010 2011 Debt Equity Govt. finance
1.
2.
3.
Total
3.3 IN-DEPTH INFRASTRUCTURE REVIEW
44. Finally, the in-depth level review, which encompasses the full set of variables comprised in the
SCR and IPAR, requires a significant investment of time and resources (including technical assistance for
the collection of some variables that would not be readily available in all countries or which need
particularly careful definition and processing). This investment would be justified, in full or by selected
modules, when policy makers are seeking answers to very specific policy questions. The full set of
variables for the SCR and IPAR are presented in Annex 1; guidance notes on Social Development Impact
and Greening Infrastructure complement this analysis, by spelling out the diagnostic method to assess
social and environmental benefits, costs, and institutions.
45. A number of uses of these diagnostic tools relate to the interest of donors in ensuring a better and
more expeditious allocation of international assistance. This include, particularly in the context of
INFRA:
Development of broad country typologies, and identification of critical country cases and policies
that apply to different country typologies, to guide and prioritize donor action. The limited set of
variables in the ―Rapid‖ country review lend themselves to this use, as illustrated in Annex II;
and
Access to INFRA concessional resources. INFRA is conceived as a donor platform, and
consistent criteria are necessary for vetting countries interested in getting access to INFRA
resources. A manageable set of variables such as the set in the ―Mid-Level‖ review could
become the commonly agreed standard of evaluation of candidates for INFRA resources.
46. More importantly, there are multiple uses of the diagnostic tools that can be of great interest to
developing countries (as well as donors). The diagnostic tools can be used by developing countries to
drive their fiscal stimulus measures,7 and they can also be used as ready guide for longer-term country
sector planning; cross-sector or cross-program prioritization; regulatory assessments and reform; and
decision on the sequencing of project investments. These uses may include:
7 Sections of the Country Assistance Review were pilot-tested in April 2009 in a mission to address assist the Government of
Peru in the design of its ―Plan for Sustaining Economic Growth, Employment, and Poverty Alleviation in a Global Crisis.‖
21
Benchmarking, country comparisons along specific variables: For instance, a group of ECA
countries will benefit from a AAA infrastructure benchmarking project, using sub-modules of the
Strategic Country Review;
Solid foundation for country diagnostics, strategy, and budget support (CEMs, PRSPs, CASs,
DPLs): Elements of the Infrastructure Portfolio Assessment Review have been pilot tested for
World Bank crisis response advice in EAP;
Impact evaluation, at the country, sector and subsector level;
Standardization and sharing of information across agencies and countries, to increase the value
added of the available information, facilitate rapid response, and improve consistency and
complementarity across donor agency interventions.
4. ROLL-OUT OF THE DIAGNOSTIC TOOLS
47. The concept of the Infrastructure Diagnostic Tools is being subject to pilot-testing in specific
country programs, and to internal World Bank Group sector specialist and management review. Base on
the outcome of the pilot, the tools will be fine-tuned. Management will undertake informal consultation
with key partners, including potential INFRA donors, to discuss the concept and benefit from shareholder
advice.
48. Once finalized, the Diagnostic Tools will be made available to all International Financial
Institutions, and particularly to those that would like to partner with the Bank in the INFRA platform.
The World Bank Group would stand ready to provide support to clients and to partner agencies in the
dissemination and implementation of the diagnostics guided by these tools. After undergoing vetting by
sector specialists, management and stakeholders, the Diagnostic Tools document will be revised,
enhanced to include more specific process, resources, and cost clarifications, and made publicly available.
49. As Annexes to this memorandum, the description of the full-fledged, in-depth Strategic Country
Review (Annex I) and the Infrastructure Portfolio Assessment Review (Annex II) follow below.
This paper is part of a broader SDN effort aimed at enhancing the analytical tools to provide rapid assessment of the
impact of the crisis on infrastructure and design diagnostic tools to support the INFRA platform. This task was led
by Maria Vagliasindi, under the guidance of Marisela Montoliu Muñoz. The team also included Daniel Benitez,
Federico Goñi, Atsushi Iimi, Karina Izaguirre, Yogita Mumssen, Tina Søreide and Natsuko Toba (all from FEU
Economics Team). We are very grateful to the INFRA Team, particularly Elio Codato and Patricia Veevers-Carter
(FEU), Jaehyang So, Marc Juhel and Fernando Navarro (ETW), Inger Andersen, Jose Luis Irigoyen, Vivien Foster
(AFTSN), an informal group of SDN economists led by Jordan Schwartz (LCR), Ranjit Lamech, Seema Manghee,
Wael Zakout (ECSSD), Sameer Akbar (ENV), Andrew Peter Norton, Cyprian F. Fisiy, Vara Vemuru, Elena Correa,
Carolyn Turk, Nilufar Ahmad (SDV) and PREM colleagues Louise Cord and Marijn Verhoeven for helpful
suggestions.
ANNEX 1: STRATEGIC COUNTRY REVIEW
Developing Countries and the Financial Crisis:
Infrastructure Diagnostic Tools
FEU ECONOMICS TEAM
Draft May 1, 2009
24
1. INTRODUCTION
1.1. This note describes the first component of the diagnostic tool package proposed under the
World Bank Group’s Infrastructure Recovery and Assets Platform (INFRA).8 INFRA would aim
to provide the foundation for rapid recovery and job creation and to promote long term growth by:
stabilizing existing infrastructure assets; helping to ensure delivery of projects that remain government
priority; supporting Public Private Partnerships (PPPs) in infrastructure; and assisting new infrastructure
project development and implementation. As one of the innovations with respect to the Bank‘s response
during previous financial crises, INFRA includes a package of quick-response diagnostic tools that can
help World Bank country teams and their clients to identify countries at risk, by assessing issues of fiscal
space, infrastructure gaps and institutional absorptive capacity which represents the first component of the
diagnostics tool package, namely the Strategic Country Reviews. The second component, namely the
Infrastructure Portfolio Assessment Reviews, identifies projects at risk, by assessing issues that could
affect projects under implementation (second component,). Both components will also identify priority
World Bank entry points target INFRA intervention to accelerate fundamental policy reforms and to
remove the most crucial infrastructure bottlenecks to growth and poverty reduction.
1.2. This note, therefore, focuses on providing country teams with an analytical approach and
concrete diagnostic tools for assessing the effectiveness of the use of infrastructure investment as a
fiscal stimulus. This first component of the INFRA diagnostic tool package, Strategic Country Reviews,
has two main objectives: (a) providing the elements for a taxonomy that can allow for a quick preliminary
assessment of the different ways in which the crisis impact different categories of countries, and (b) for
specific countries, identifying whether and to what extent infrastructure can be used as a fiscal stimulus.
The Strategic Country Reviews are divided in three key modules, addressing:
Economic and financial constraints to fiscal stimulus, that is, the country‘s ability to finance
the infrastructure fiscal stimulus program without unduly jeopardizing the sustainability of its
macroeconomic balances,
Infrastructure gaps, needs and spending, namely, the room for removing key infrastructure
bottlenecks to growth and to prioritize infrastructure projects based on their ability to generate
sources of local employment and income, and
Institutional capacity, namely, the country‘s ability to effectively scale up public expenditure
while protecting vulnerable groups.
1.3. Such tools provide step by step guidance in terms of diagnostic tables that can support policy
maker in:
Formulating of key policy questions and identification of transmission mechanisms through
which both macroeconomic and sector policy actions impact infrastructure allocation and
spending
Regularly tracking of selected indicators in crisis affected countries, that could be used for
measuring the impact of the crisis
8 See World Bank (2009a).
25
Using “checklists” to ensure that infrastructure allocations and lending will not be negatively
affected by the financial crisis
Identifying sector policy actions likely to have a positive effect on infrastructure allocation and
spending.
1.4. The paper is organized as follows. Chapter 2 provides a general backdrop on the relevant
transmission channels through which the crisis affects the infrastructure sectors. Chapters 3-5 present the
in-dept framework that can be used to analyze the effectiveness of infrastructure spending as a part of
stimulus packages, providing specific guidance to undertake the module by module assessment. Chapter
6, discusses how the political economy can affect the design and implementation of a stimulus package,
and proposes ways in which these key political economy insights can inform policy the focus and design
the stimulus package, to maximize its effectiveness. Finally, Chapter 7 presents the potential operational
response that could be tailored to suit the different countries and sectorial challenges, presenting also
entry points for infrastructure policy dialogue, drawing from the diagnostic analysis and the country
taxonomy.
2. THE TRANSMISSION CHANNELS
1.5. The crisis will operate through different transmission channels, whose overall impact on
infrastructure needs to be determined on a country-by-country basis. Different transmission
channels can counteract each other, and the direction of the final outcome cannot always be estimated ex-
ante. Moreover, the direction of the impact of the crisis on capital expenditures (capex) may differ from
that on operating expenditures (opex), with varying effects on infrastructure sector performance. This
section distinguishes between two transmission channels, macroeconomic and financial, and touches on
the impact on both capex and opex.
Macroeconomic transmission channels – Impact on capex. The economic slow down and the
fall of commodity prices is expected to reduce infrastructure investment needs. Fig. 1.1 illustrates
the transmission channels leading to a decrease in new capital investment needs. The economic
slow down is expected to affect the demand for infrastructure services, reducing investment
needs. Some infrastructure new investment may no longer be needed. The fall of commodity
prices, plus reduced global demand for construction services, could be expected to reverse recent
upward pressure on infrastructure unit costs, making the pipeline of projects relatively less
expensive than originally planned, and ultimately reducing the estimated need for additional new
investment funding.
Financing transmission channels – Impact on capex. On the other hand, deterioration in
revenue collection and reduced access to finance will reduce profitability and availability of funds
for infrastructure. Fig. 1.2 illustrates the financial transmission channels. Revenue collection
performance of utilities may deteriorate as consumers come under increasing financial pressure.
As a consequence, infrastructure companies may be in a weaker position to implement projects.
Financing will be more expensive and less available in the short-term. The most immediate
impact on infrastructure will be on the availability of finance from domestic and international
sources, for both State owned enterprises (SOEs) and government agencies that tap capital
markets as well as PPP projects and private companies. Private sector finance for new projects
(and those under implementation) could sharply drop, as it did in previous crises. Public
26
Revenue
Revenue collection
Access to finance:
Private Sector
ODA
Actual Infrastructure
Investment
Capex Opex
Infrastructure
Financial Shortfall
Demand for
infrastructure
Unit Cost for Infrastructure
GDP
Commodity
Price
Infrastructure
Investment Needs
Capex Opex
investment in infrastructure may also be subject to budgetary cutbacks. ODA may also be
reduced, due to budgetary pressures in donor countries.
1.6. The opex paradox: Financial crisis is not diminishing maintenance needs. Evidence from
past crises suggests that maintenance and operating expenditures (opex) are hit particularly hard in the
context of a crisis. Fiscal adjustments during past financial crises have exacerbated the bias against opex,
and the recovery has been slow. In the case of Indonesia, total public investment in infrastructure
dropped from about 7% of GDP in 1995-97 to 2% in 2000, whereas private investment plummeted from
2.5% of GDP to 0.09%. Infrastructure O&M spending, already at a very inadequate 0.048 % of GDP in
1996, dropped to 0.038% soon after the crisis. Since then, it recovered to 0.044 % of GDP in 2003, still
shy from its level in 1996. However, in spite of the expected decline in the demand for infrastructure
services in the context of a financial crisis, preliminary results from a simulation exercise show that
maintenance needs would continue to increase. Estimates for 2008 to 2015 suggest that, assuming that
new investment will occur though at a reduced pace, maintenance needs (in terms of GDP) in developing
countries would be on average 2% higher than they would have been in the absence of the crisis, despite
the fact that new investments needs would drop by about 12%. This result underscores the need to
safeguard maintenance resources to preserve the existing infrastructure stock as well as the new
investments (see SDN Policy Note, 2009).
Fig 1.1
Macroeconomic Transmission Channels
Fig 1.2
Financial Transmission Channels
27
3. ASSESSMENT OF ECONOMIC AND FINANCIAL CONSTRAINTS TO
FISCAL STIMULUS
3.1 OVERALL FISCAL AND FINANCIAL FRAMEWORK9
1.7. In order to assess the economic and financial constraints to the effectiveness of a
fiscal stimulus package it is essential to review the availability of budgetary room that
allows a government to provide resources for a desired purpose without jeopardizing the
sustainability of a government’s financial position. Fiscal sustainability namely the capacity of
a government to finance its desired expenditure programs to service any debt obligations and to
ensure its solvency.
1.8. The conventional rule to define fiscal sustainability entails ensuring that the
primary balance is greater than the debt service. If this rule is satisfied, then infrastructure
investment can be expanded without eroding debt sustainability and requiring sharp tax increases.
1.9. The primary balance is defined as the government net borrowing or net lending
excluding interest payments on consolidated government liabilities. It is fundamentally composed
of:
recurrent expenditure (excluding net interest payments) plus capital expenditure
minus tax and nontax revenues and grants.
capital losses caused by real exchange rate appreciation
seigniorage, namely, the amount paid by issuing new currency rather than collecting
taxes paid out of the existing money stock. Seigniorage has the effect of creating a de
facto tax that falls on those who hold the existing currency, as a result of its effective
devaluation through the introduction of additional money
domestic or foreign borrowing (with only a temporary effect)
Debt service is given by domestic and foreign real interest rate on domestic public debt.
1.10. It is worth noting that the conventional rule only looks at today’s deficit, ignoring
the assets created by investment. It may create a bias against investment, particularly in the
case of infrastructure projects, which are usually characterized by negative cash-flow in the short
term. Alternative fiscal rules beyond the targeted ―overall balance‖ combining simplicity and
rigor have been proposed by Buiter (2003).
The key questions below associated with this basic framework are:
Can infrastructure investment be expanded while fiscal sustainability is
maintained? Can infrastructure investment be expanded while avoiding an exploding
debt path, or a sharp increase in taxes, decrease in other expenditures, monetization or
debt repudiation?
How is fiscal space affected by the current financial crunch? Can government
borrow domestic or foreign resources? Can grants be increased or maintained?
9 The presentation on fiscal space in this section is based on analysis and collaborative work with the Poverty
Reduction and Economic Management network, and is included here as a backdrop for the remainder of the
diagnostic. For more details on vulnerabilities and fiscal policy option see World Bank (2009c).
28
Can real growth be sustained to support fiscal space? The basic reason is that
infrastructure could bring about a strong growth effect over the long run.
1.11. All these questions are closely interlinked, because ―infrastructure― is, in practice, often a
residual in the budget.
3.2 EXTENSION TO LOCAL GOVERNMENTS AND SOES
1.12. How is fiscal maneuvering room affected by the way infrastructure provision and
expenditures are budgeted and accounted for? Across countries, the organization of the
provision of infrastructure services, as well as expenditure channels can vary significantly. Most
importantly, these services and expenditures can be accounted for on-budget (e.g. directly in the
national public sector accounts, and within these, at different levels of government, from national
to local), or off-budget (e.g. in separate budgets of the State Owned Enterprises, SOEs, or Public-
Private Partnerships, PPPs). Some country studies have shown, for instance, that O&M
expenditures are substantially channeled via SOEs or local governments. Where this is the case,
it is important to know the flexibility and maneuvering room that the relevant entities have, as this
would affect the country‘s ability to expand the fiscal space for infrastructure expenditure. The
Africa Infrastructure Country Diagnostic (AICD) provides standardized cross country datasets of
fiscal indicators for infrastructure including extra-budgetary financing vehicles, such as SOEs and
PPPs, to the extent that the state or the operator still relies on support by the government (in the
form of implicit and explicit subsidies).10
Quasi fiscal deficits have been estimated in selected
regions, including ECA and SSA, according to the methodology developed by Ebinger (2006).
Key questions in this module include:
What is the hidden cost of SOEs?
Are local governments permitted to borrow domestically or abroad? If yes, what is the
stock of their (domestic and external) debt?
Are special funds permitted to borrow domestically or abroad? If yes, what is the stock of
their debt (domestic and external)?
Can SOE and local agencies mortgage assets? Can they borrow against them?
Can they issue unsecured debt? Local currency foreign exchange?
Can Treasury approve SOE borrowing? Can borrowing take place without the use of
guarantees? What is the level of fees and related risks of borrowing?
3.3 TAILORING THE BASIC FRAMEWORK TO INFRASTRUCTURE
1.13. When looking specifically at infrastructure, how large is the “current” fiscal room
and how vulnerable is it to the expected economic downturn? A leading indicator of the size
of the fiscal room for infrastructure is the government‘s capital spending (public investment) as a
share of GDP. The lower fiscal sustainability is the narrower space the governments have for
infrastructure spending. Public financing still accounts for approximately 80 percent of total
infrastructure investment in developing countries, despite some private financing (World Bank,
2005). And public investment is mostly in infrastructure. Hence, this is considered the level of
fiscal space that governments are currently allowed to use for infrastructure development. Under
the assumption that infrastructure demand is never met, low public investment rates mean that
fiscal space for infrastructure is already squeezed. The vulnerability of this infrastructure-specific
10 See Briceño-Garmendia et al (2009).
29
fiscal space can be gauged by looking at the share of government recurrent spending in the total
budget. The larger this share is, the higher the vulnerability. If the majority of public resources is
already devoted to recurrent spending, for political economy and other reasons, public
infrastructure expenditures would easily be marginalized, as experienced in Argentina and
Mexico in the late 1980s and 1990s (Calderón and Servén, 2004). As the depression deepens,
public revenues would likely be stagnant. However, recurrent spending cannot normally be cut at
the same pace.
1.14. Given the above, the following factors may be of particular importance from the
infrastructure point of view:
Public investment rate (government capital spending as a share of GDP): The variable
indicates the fiscal space that governments are currently allowed to devote for
infrastructure. Again, the lower this is, the narrower space the governments have for
infrastructure spending. When government revenues decline as the economy slows,
public infrastructure expenditures would easily be marginalized, as experienced in
Argentina and Mexico in the late 1980s and 1990s. The share of current expenditure in
government spending indicates the fiscal space that governments are currently allowed to
devote for infrastructure maintenance.
Infrastructure service prices relative to national income as a proxy of ―infrastructure
revenues‖: While it is true that many utility revenues are not directly reflected in the
budget, any infrastructure revenue from infrastructure users would eventually ease
economic and financial constraint either directly (e.g., vehicle or road tax) or through
reduced quasi-fiscal deficits of utilities. The higher prices, the larger fiscal space.
Aid for infrastructure: Many developing countries have high aid dependency for
infrastructure development. There will be a risk that those aid-dependent countries would
be faced with reduced aid flows, because donor countries are also experiencing a severe
economic depression. Since the 1990s, official infrastructure assistance has been much
less secured, while aid for social development has been firmly earmarked. External public
borrowing will also have an adverse effect on fiscal sustainability through debt, REER
and inflation, but these effects are expected to be marginal as long as the external public
borrowing is sufficiently concessional.
Economic growth associated with infrastructure investment (if possible): The
quantification of this dimension of the problem is still challenging. However, this can be
an infrastructure-specific variable to discuss fiscal space. Compared with the social
sector, infrastructure investment is affecting real growth in the relatively short term,
supporting the current fiscal space. Recent empirical work (Estache and Muñoz, 2007)
compares the growth-enhancing effect of public investment in infrastructure to those of
public investment in health and education. The model suggests, in the case of Uganda,
that a better way to finance infrastructure may be to improve existing capital stock by
allocating expenditures to O&M rather than to new investment. The model also shows
that spending on health and education raises output but is less efficient than infrastructure
investment. In Senegal, an alternative solution would be to spend a great deal more on
O&M, where the current level of spending is very low, or on health and education—all of
which have greater power than new infrastructure investment to stimulate growth in
output. No matter how spending is allocated, however, it worsens the ratio of debt to
GDP, reflecting the poor productivity of public spending in general. The better-connected
linkage between public investment and growth, the larger fiscal space.
30
1.15. Table 1.1 below summarizes the key issues analyzed above. Column 1 indicates
whether the data for the relevant variable or question are readily available for all countries, or
only for selected countries, via institutional documents, databases, or websites easily accessible to
Country Program teams. For those variables that are not already available to all countries,
Column 2 suggests the ease of collecting the missing data – whether they could be gathered by
Country Team members via well-known sources, or variables for which data collection would
require a major first-hand collection effort (e.g. through AAA/TA). Column 3 reports, for each
of the variables, the extent to which policy makers can modify the behavior of this variable. For
instance, Column 3 distinguishes between variables on which policy makers and other
stakeholders can influence/change the behavior in the short term; variables that can be influenced
in the short term, but at a higher cost (i.e. need IFIs technical assistance, ST with TA); and finally
variables that are completely outside the control of policy makers/Bank and other IFIs and should
be taken as constraints (at least in the short term).
31
Table 1.1
Template for Assessment of Economic and Financial Constraints to Fiscal Stimulus
Key Questions and Variables Extent of Data
Availability
Difficulty of Data
Collection, where
Missing
Policy’s Ability
to Modify
Behavior
1. The Basic Framework
Can governments borrow domestic resources?
1. Capital market trends (e.g., M4/GDP) Available na No
Can governments borrow more foreign resources?
1. Gov Debt/GDP Available na ST with TA
2. Ext Debt/GDP Available na No
Can grants be increased or maintained?
1. Grants/GDP (level and volatility) Available na No
2. ODA/GDP (level and volatility) Available na No
Can real growth be sustained to support fiscal space?
1. Projection of real growth rate for the next 2-3 years Available na No
1. Avg. real growth rate in the past 5-10 years Available na No
2. Min. real growth rate in the past 5-10 years Available na No
Can government print money?
1. M1/GDP Available na ST
2. Nominal interest rate Available na ST
2. Extending the Basic Framework to Local Government and SOEs
What is the hidden cost of SOE provision of services?
1. End-User Consumption Selected countries Low No
32
Key Questions and Variables Extent of Data
Availability
Difficulty of Data
Collection, where
Missing
Policy’s Ability
to Modify
Behavior
2. Average Cost Recovery Price (Cost Recovery Tariff) Selected countries Low MT with TA
3. Loss Rate (as a share of production)
Normative Loss Rate (as a share of Production)
Selected countries Low MT with TA
4. Average Actual Tariff (Real Tariff) Selected countries Low MT with TA
5. Collection Rate Selected countries Low MT with TA
Can local governments/SOEs support borrowing and fiscal expansion?
1. Domestic and external debt/GDP local governments/SOEs (if allowed to borrow) Selected countries Medium No
2. Fiscal decentralization (local gov revenue/total) Selected countries Medium No
3. Guarantees needed to borrow Selected countries Medium MT with TA
3. Tailoring the basic setting to infrastructure
What is the vulnerability of the fiscal space for infrastructure?
1. Infrastructure ODA/GDP (level and volatility) Selected countries Low No
2. Government Spending Selected countries Low No
3 Average Actual Tariff (Real Tariff) relative to national income Selected countries Medium No
33
4. ASSESSMENT OF INFRASTRUCTURE GAPS, ACTUAL SPENDING AND
DEFICITS
1.16. Can governments create fiscal space for infrastructure investment? And, if so, how? The first principle is that fiscal space can be created fundamentally by increasing public savings
through (i) expenditure reprioritization and/or (ii) revenue mobilization (IMF, 2005; Heller,
2005). In addition, (iii) PPP may also be able to create some fiscal space by crowding-in private
investment resources, improving efficiency and freeing public resources for other uses, though
the extent to and ease with which this happens is debatable
4.1 PRIORITIZATION OF INFRASTRUCTURE NEEDS AND SPENDING
1.17. Reallocation and better targeting of public spending could create additional fiscal
space. The IMF‘s publication Guidelines for Fiscal Adjustment has long acknowledged that
cutting productive public capital spending and essential operation and maintenance expenditures
will damage growth (IMF, 1995). Improving efficiency of current infrastructure entails
addressing the questions below:
New investment or operation and maintenance? And how much is needed for operation
and maintenance? Operation and maintenance spending for infrastructure should be top
priority (see SDN Policy Note, 2009).
Are expenditures in maintenance and rehabilitation at appropriate levels? The value of
this variable (gap in O&M expenditure or opex) across all sectors can be estimated by
subtracting an estimate of minimum maintenance requirements from the annual
maintenance budget. Other sector-specific proxy variables may include indicators such
as the percentage of roads in good condition, fair condition, and bad condition (an
indicator of maintenance needs) or system losses as a share of total water/electricity
supplied. To assess in relative terms the severity of the deficit, the values of these
variables for a specific country can be compared with those for countries in the same
income bracket, regional average, etc.
Which sector should be priority? Prioritization among infrastructure sectors has been a
key question for governments. In theory, it should be guided by rates of return on
invested projects. For instance, et al. (2002) and Estache and Liu (2003) offer a
methodology for prioritization of public investments.
What are the immediate investment needs in infrastructure sectors? Key sector-
specific variables include investment requirements to: (a) maintain reserve margins of
electricity systems within the recommended ranges: (b) prevent congestion in key
transport assets (airports, ports, roads, railway); and (c) meet the gap between actual
investments in the water sector vs. government objectives in network expansion (increase
in access) and service quality increase (including wastewater treatment).
What is the potential for Green Infrastructure? Existence of analytical information
providing estimate of GHG emission from the sector and the potential for reduction.
Similar information available for vulnerability of infrastructure and the potential for
ensuring adequate climate resilience.
Is the crisis likely to lead to a substantial decrease in the infrastructure investment
needs? Some rapid assessment can be done using elasticities with GDP growth,
additional available information and controlling for initial conditions or by estimates of
34
infrastructure demand-supply imbalances (based on pre-crisis data on infrastructure
stocks quality and needs).
Is the crisis likely to lead to a substantial decrease in the unit cost for infrastructure? Rapid assessments can be done by simulating the impact of changes in input prices on
unit costs.
Is the crisis likely to lead to a substantial decrease in collection rates? Affordability
analysis can be complemented by simulation on declines in collection rates.
4.2 REVENUE MOBILIZATION
1.18. Two main sources to mobilize government revenues for infrastructure are user fees and
foreign aid.
Who should be charged? Users or taxpayers? When the quasi-fiscal deficits cannot be
resolved immediately, governments can always choose to charge taxpayers for such
deficits implicitly. Political economy factors (to be discussed later in this note) may
determine the feasible choice.
How secured is aid for infrastructure? Many developing countries have high aid
dependency for infrastructure development. There will be a risk that those aid-dependent
countries would be faced with reduced aid flows because donor countries are also
experiencing the financial crunch and deep economic downturn. Notably, in the past,
infrastructure assistance has been much less secured, while aid for social development
has been firmly earmarked since the 1990s.
Would additional infrastructure assets be able to maintain or improve the financial
viability of the sector? Indicators that could be used to address such a question include
the gap between the average tariff and average cost of service in the sector and the share
of the tariff deficit covered by government subsidies.
To what extent can quasi-fiscal deficits be reduced? At the sector level, financial
viability/sustainability is well represented by quasi-fiscal deficits, which can be
composed by underpricing, technical losses and nonpayment (insufficient metering and
arrears). Additional fiscal space can be created by reducing some of these quasi deficits.
What is the distortionary effect of leaving quasi-fiscal deficits on the economy? Effects
on demand for infrastructure, private investment, savings, and other markets, such as
labor market.
4.3 PRIVATE SECTOR PARTICIPATION IN INFRASTRUCTURE
1.19. Key questions in this sub-module would relate to the likelihood for increased private
sector participation and, if such an increase does take place, the prospects for it to enhance fiscal
space for infrastructure:
Increasing reliance on the private sector for infrastructure financing. The scope for
this can be assessed by benchmarking the country‘s performance in attracting private
investment in infrastructure against global comparators, and thereby evaluating whether
enough efforts have been made in those sectors where private investment is most likely to
be forthcoming.
35
Could the private sector take a larger role in providing infrastructure services? Is there
still investor interest in projects in tenders? Are awarded projects or projects to be
awarded facing problems on securing financing? The World Bank/PPIAF ―impact of the
financial crisis on PPI‖ database has shown that for low and middle-income countries as a
whole private infrastructure projects continued to reach financial closure over the period
August-January 2009, but at levels around 40% of those from the corresponding period in
2007. Projects are facing higher cost of financing, but the major impact to date is in
terms of projects being delayed or cancelled.11
Does PPI create fiscal space? Fundamentally, fiscal space can be created if economic
efficiency is improved through private sector involvement. Financial gains may or may
not be realized to finance capital expenditure. Some cautionary notes need to be made, as
for many developing countries PPPs have implied ―hidden‖ off budget expenditure,
contingent liabilities with non-negligible fiscal implications. The lack of globally
accepted accounting standards further complicates the issues.
Is the net present value of infrastructure assets positive or negative?
If NPV is positive, selling infrastructure assets may bring about a lump-sum gain to the
government
How vulnerable are the infrastructure capital and operational expenditures to the
foreign exchange rates and interest rates?
4.4 INFRASTRUCTURE AND JOB CREATION
1.20. Well targeted labor-intensive public works programs can further maximize employment
generation in the short term, while constructing or rehabilitating much needed public
infrastructure for the longer term. In addition, public works programs serve as an important
safety net, providing both income transfer and consumption-smoothing benefits to households
hurt by crisis.
Which sector investment programs are able to generate highest local employment and
income? To answer such a question several indicators may be collected, including the
share of capital expenditure to be spent on labor and local materials, as well as the
expenditure on labor and estimate of job creation for different types of projects (if
possible, including consideration of benefits to vulnerable group, such as by age, gender,
geography)12
. Job creation includes those within infrastructure sectors but also those in
other industries for which the proposed infrastructure investment would eliminate a
bottleneck.
Which sector has the highest multiplier? Infrastructure investment has a higher
multiplier than tax reduction. But public infrastructure investment can crowd-out the
private sector in the long run.
1.21. Table 1.2 summarizes, for this module, the key issues analyzed above. Column 1
indicates whether the data for the relevant variable or question are readily available for all
countries, or only for selected countries, via institutional documents, databases, or websites easily
11 For more details, see Izaguirre (2009). The crisis impact database includes 173 infrastructure projects with private
participation in developing countries which were trying to raise financing on project finance basis or were in
advanced tender stage between August and January 2009.). Those projects represented over 50% of total investment
commitments in 2004-07 as reported by the PPI project database. 12
The Social Development Impact Guidance Note provides methodological guidance on this subject.
36
accessible to Country Program teams. For those variables that are not already available to all
countries, Column 2 suggests the ease of collecting the missing data – whether they could be
gathered by Country Team members via well-known sources, or variables for which data
collection would require a major first-hand collection effort (e.g. through AAA/TA). Column 3
reports, for each of the variables, the extent to which policy makers can modify the behavior of
this variable. For instance, Column 3 distinguishes between variables on which policy makers
and other stakeholders can influence/change the behavior in the short term; variables that can be
influenced in the short term, but at a higher cost (i.e. need IFIs technical assistance, ST with TA);
and finally variables that are completely outside the control of policy makers/Bank and other IFIs
and should be taken as constraints (at least in the short term).
37
Table 1.2
Template for Assessment of Infrastructure Gaps, Needs and Spending
Key questions and variables Extent of Data
Availability
Difficulty of Data
Collection, where
Missing
Policy’s Ability to
Modify Behavior
1. Prioritization of infrastructure needs
Can expenditures be reprioritized to create fiscal space?
1. Total spending/GDP Available na ST
2. Recurrent expenditure/GDP Available na ST with TA
3. (Wage + Interest)/GDP Available na No
New investment or operation and maintenance? And how much is needed for operation and
maintenance?
Are expenditures in maintenance and rehabilitation at appropriate levels?
1. Gap between annual maintenance budget and minimum maintenance requirements Selected countries Medium ST
2. Percentage of roads in good condition, fair condition, and bad condition Selected countries Medium ST with TA
3. System losses as a share of total water/electricity supplied. Selected countries Medium ST with TA
Which sector should be a priority?
What are the immediate investment needs in infrastructure sectors?
1. Investment requirements to maintain reserve margins of electricity systems within the
recommended ranges, including projected demand growth for next three years Selected countries Medium ST with TA
2. Investment requirements to prevent congestion in key transport assets (airports, ports,
roads, railway) in the next three years Selected countries Medium ST with TA
3. Gap between actual investments in the water sector vs. those required to achieve
government objectives in network expansion (increase in access) and service quality
increase (including wastewater treatment)
Selected countries Medium ST with TA
What is the potential for Green Infrastructure?
1. Existence of analytical information providing estimate of GHG emissions from sectors
and the potential for reduction.
Selected countries Medium MT with TA
38
Key questions and variables Extent of Data
Availability
Difficulty of Data
Collection, where
Missing
Policy’s Ability to
Modify Behavior
2. Similar information available for vulnerability of infrastructure and the potential for
ensuring adequate climate resilience.
Selected countries Medium MT with TA
Is the crisis likely to lead to a substantial decrease in the infrastructure investment needs?
1. Assessment using elasticities with GDP growth, additional available information and
controlling for initial conditions
Selected countries Medium No
2. Estimates of infrastructure demand-supply imbalances (based on pre-crisis data on
infrastructure stocks quality and needs)
Selected countries Medium No
Is the crisis likely to lead to a substantial decrease in the unit cost for infrastructure?
1. Assessment using changes in input prices and its impact of unit costs
Selected countries Medium No
Is the crisis likely to lead to a substantial decrease in collection rates?
1. Assessment using changes in affordability
Selected countries Medium No
2. Revenue mobilization
Will additional infrastructure assets be able to maintain or improve financial viability of the
infrastructure sector?
1. Gap between the average tariff and average cost of service unit in the sector (KWh,
cubic meter of water, etc).
Selected countries Medium ST with TA
2. Share of the tariff deficit covered by government subsidies and total cost of subsidy as a
percentage of GDP
Selected countries Medium ST with TA
How secured is donor funding for infrastructure? And could additional donor funding be
raised for infrastructure?
1. Committed donor funding for infrastructure sectors Selected countries Medium ST
2. Possible new donor funding for infrastructure projects Selected countries Medium ST
To what extent can quasi-fiscal deficits be reduced?
1. Sector quasi-fiscal deficits (including under pricing, technical losses and nonpayment) Selected countries Medium ST with TA
2. Additional fiscal space can be created by reducing some of these quasi deficits Selected countries High ST with TA
39
Key questions and variables Extent of Data
Availability
Difficulty of Data
Collection, where
Missing
Policy’s Ability to
Modify Behavior
What is the distortionary effect of leaving quasi-fiscal deficits on the economy?
1. Effects on demand for infrastructure, private investment, savings, and other markets,
such as labor market.
Selected countries High No
3. Private sector participation in infrastructure
Will the private sector continue to play a major role in providing infrastructure services?
1. Is there still investor interest in projects in tenders? Selected countries Medium MT with TA
2. Are awarded projects (or projects) to be awarded facing problems on securing financing? Selected countries Medium MT with TA
Does PPI create fiscal space?
1. Value of economic efficiencies expected from the PPI projects (improvements in
technical and commercial losses and reduced project cost)
Selected countries High MT with TA
Is the net present value of infrastructure assets positive or negative?
1. PPI projects and associated investments which will not require government support
(subsidies, government payments, financing, etc)
Selected countries Medium No
2. PPI projects and associated investments which will require government support
(subsidies, government payments, financing, etc)
Selected countries Medium No
How vulnerable are PPI projects to the foreign exchange rate risk/devaluations?
1. Share of capital and operational expenditure foreign denominated currency Selected countries Medium No
2. Share of debt in foreign denominated currency Selected countries Medium No
3. Exchange rate volatility Selected countries Medium No
4. Gearing ratio Selected countries Medium No
4. Infrastructure and Job Creation
Which sector investment programs are able to generate highest local employment and income?
1. Share of capital expenditure to be spent on labor and local materials at sector Selected countries Medium No
2. Number of jobs created by unit of capital cost Selected countries Medium No
3. Performance of construction industry in terms of rate of completion, timeliness, etc Selected countries Medium No
40
5. ASSESSMENT OF QUALITY OF INSTITUTIONS
5.1 BUDGET EXECUTION CAPACITY AND INSTITUTIONAL EFFICIENCY
1.22. The concept of institutional efficiency relates to the degree to which administrative
and procedural mechanisms are in place to enable successful policy implementation and
project execution. At the more general level, the planning capacity of developing countries will
be judged upon the criteria used to allocate resources among different economic sectors (e.g.
education vs. infrastructure, education vs. health, etc.) and the legal framework guiding the
allocations for infrastructure sectors (both in terms of new capital investment or maintenance
expenditures). More specifically, a number of dimensions are relevant to assess the institutional
efficiency as it affects investment in infrastructure. One dimension of institutional efficiency is
the process of selection of investment projects. Unless the selection of investment projects
results from a rigorous technical screening process, it is possible that ―white elephants‖ (projects
with a negative Net Present Value) may be implemented. Another dimension is the
implementation of the investment project. If investment projects are starved or funds and/or
implementation capacity is weak, a project with a positive rate of return may never be completed.
As a result, a country may incur public investment without securing a productive asset at the end
of the process. Infrastructure projects often incur significant cost overruns and delays (Flyvbjerg,
2005), leaving certain ambiguity in ex ante project assessment and prioritization based on it. The
third dimension of efficiency is the unit cost of operating the completed project, which should be
close to an efficiency benchmark. This can be measured through normalized maintenance
expenditures. In the case of budget spending, unit maintenance levels can be calculated. In the
case of SOEs, it is also possible to normalize against the overall asset value.
1.23. Indicators that could be used to capture execution capacity include:
Percentage of executed annual capital and maintenance spending;
Average time needed to bring projects to completion;
Average delay in project implementation;
Average percentage of cost over-run;
Percentage of investment projects that are dropped / stalled prior to completion; and
Unit cost of investment projects.
1.24. Other observations that can yield a good sense of the country‘s institutional efficiency as
it pertains to infrastructure investment include:
What information and from whom (congress, finance, public sector, planning, audit
committees, etc) is taken into account in allocating public investment?
Do SOEs provide a ‗business plan‘? What are the underlying principles for forecasting
needs? Does any ‗central‘ agency provide guidance?
Is Cost-Benefit analysis done regularly/systematically? By whom?
Who monitors the quality of the investment portfolio? How are public investment
projects appraised and selected?
41
5.2 DECISION-MAKING PROCESS FOR INFRASTRUCTURE SPENDING
1.25. In principle, the more levels of controls involved in government spending, the more
informed are the decisions and the more checks and balances are usually in place. Access to
information for the public and a free press strengthens that relationship. At the same time, more
procedures hamper a quick response to a crisis situation. The ―emergency‖ situation may increase
the risk for biased decisions due to private agendas or pork barrel13 in the allocation of projects.
1.26. A number of key questions may be posed to assess how transparent and accountable
the decision making processes are. For instance: Is the decision-making process transparent:
e.g. are decisions discussed openly in parliament? Are decisions and budgets disclosed to the
public? What is the level of detail required for infrastructure interventions? How are the
budgetary decisions regarding infrastructure interventions related to asset ownership and
implementation? For example – the budget may be centralized while implementation is
decentralized. What is the normal timeline of the government decision-making process? Will
there be enough time or political willingness to conduct sufficient investment analysis before
implementing the project?
1.27. A selection of useful indicators includes:
Number of procedures behind government spending;
Access to information and freedom of the press;
Quality of monitoring mechanisms (audit general, parliamentary control on the executive,
independence); and
Country ranking in the Open Budget Index (indicates opportunities to control political
allocation). A potential red flag can arise due to the combination of a weak ranking in the
OBI index together with low level of detail in the investment scheme as approved by
parliament (which in turns opens opportunities for executive discretion), and indicators of
strength of lobby groups and/or the election of presidential and parliament members
directly elected by constituencies (which, in turn, indicate higher risk of pork barrel).
5.3 LEGAL AND REGULATORY FRAMEWORK
1.28. The questions below relate to how legal and regulatory systems are structured to
ensure the greatest effectiveness of the fiscal stimulus in the infrastructure sectors, while
protecting all stakeholders, including consumers and operators. Often, in the context of a crisis,
investment/fiscal interventions may be made without sufficient regard to medium and long-term
consequences. Policy analysts need to observe which legal and regulatory systems/frameworks
are in place to safeguard stakeholders, particularly the most vulnerable, and to ensure long-term
sustainability of the intervention. In the case of PPPs and private providers, it is crucial to check
whether the existing framework mitigates political risk, including renationalization.
1.29. The criteria according to which infrastructure regulatory governance is assessed
include autonomy, transparency, accountability, and tools. Several regions have been
benchmarked according to such criteria, including LAC (see Andres et al, 2008), ECA (Fay and
Vagliasindi, 2009) and SSA (Vagliasindi and Nellis, 2009).
13 The term pork barrel refers to spending that is intended to benefit constituents of a politician in return for their
political support, either in the form of campaign contributions or votes.
42
Autonomy can help to mitigate risks for investors in period of crisis. Key questions to
guide he assessment of the degree of autonomy are: is the agency free to hire/fire
commissioners? Has the agency guarantee financial autonomy? Can regulatory decision
be overturned by the government?
Transparency in a crisis context is of upmost relevance: Transparency can be
measured by the degree of publicity of key decisions through the agency‘s annual report,
its web-site and public hearings.
Accountability must counterbalance the degree of autonomy and allow investors
and consumers to appeal decisions in case of conflicts. It also guarantees an adequate
level of control of the agency‘s budget and performance by political authorities, namely
the Parliament
Finally, in a crisis context, rate of return regulation may be more suited than price
cap regulation to protect investors. Regulatory tools include tariff methodology and
quality monitoring. In a crisis context government may discover that tariffs are too high
and freeze tariff revision or limit pass-through of input costs. Some countries, like
Argentina during the financial crises, enacted a ―Law of National Economic Emergency‖
through which they froze infrastructure prices for several years, and extended it beyond
the end of the crisis. This points to the need of being cautious with the definition of a
crisis and what it triggers such a mechanism (see also section 6.3).
1.30. Specific questions related to environmental and pro-poor regulation are worth being
examined separately to ensure environmental sustainable outcomes and protection of the
poor.14
Some key principles are outlined below.
Environmental Regulation
Is the financial crisis affecting the promotion of green infrastructure? Is the
availability of grants and soft loans promoting clean infrastructure technologies to
ensure the financial viability of environmental friendly project being adversely
affected?
Is there an existing overall policy framework for addressing climate change?
Existence of overall or sectoral targets to reduce GHG emission? Are there
supporting policy/ regulatory/ fiscal incentive measure in place for facilitating
Greening of Infrastructure?
Pro Poor Regulation
Can access for the poor be ensured? What types of subsidies are used? Are there
only subsidies for consumption (through the tariff) or are access subsidies available?
Are there any life-line mechanisms for infrastructure services? What are the life-line
consumption amounts? What is the percent of average household income for the
lower quintiles spent on the specified service? What targeting mechanism is used for
life-line or other safety net mechanisms? Are there other welfare targeting
mechanisms (e.g. for health, education) that infrastructure services can piggy-back
on?
14 Separate guidance notes on Social Development Impact and Greening Infrastructure provide further detailed
methodological guidance on this subject.
43
Can improved access be promoted through Output Based Aid? Has an OBA
approach been applied/piloted in any context? How easily can geographic or self-
selection targeting mechanisms be used, for the given intervention?
1.31. The risk of insufficient focus on low income groups is difficult to estimate, yet we
want to know the extent to which a government is likely reduce the burden on the poor. A
combination of ranking in the Country Policy and Institutional Assessment (questions related to
the quality of social protection policies and the equity of public resource use) together with
poverty indicators (based on household survey) may be used to assess the effectiveness of pro-
poor regulation.
5.4 SOE GOVERNANCE FRAMEWORK
1.32. The SOE governance framework is particularly relevant for understanding the
likely success of crisis-control if the investment interventions will be channelled through
SOEs. State Owned Enterprises (SOEs) are likely to be operating under tight budgets and under
business plans and mechanisms vulnerable to short-run fiscal adjustments, which makes them
more vulnerable to the financial crisis.
1.33. SOE governance entails the implementation of a series of measures inside the
enterprise -- such as strengthening of the quality of shareholder voice and supervision, board and
management autonomy and mechanisms of accounting and disclosure measures aimed at
improving the external environment in which the enterprise operates, including outsourcing
to the private sector and the introduction of discipline coming from a competitive labor and
capital market (see Vagliasindi, 2008 and 2009).
1.34. In most of the regions, SOE governance assessments have been implemented, including
SSA (see Vagliasindi and Nellis, 2009) and LAC (Andres et al, 2009).
Key Questions on Internal governance
What is the degree of corporatization? Are SOEs allowed to earn a rate of return? Are
they issuing dividends?
What is the degree of managerial autonomy in decision making?
What is the degree of autonomy of the Board (as measured for instance by the presence
of independence directors)?
Key Questions on External governance
How do labor market conditions compared to the private sector (wages and benefit,
restrictions to dismiss employees)?
Are SOEs subject to capital market discipline (through public listing, bond issuance or
graduation from grants)? What are the legal and commercial constraints to (sub-
sovereign) borrowing?
Has there been any outsourcing to the private sector (metering, IT, HR functions)?
5.5 PPP CONTRACTUAL FRAMEWORK
1.35. In a crisis context, it will be critical to understand the existing framework for
renegotiation. During crisis, the incidence of re-negotiation and even renationalization of forms
of private sector participation emerge as a crucial risk. Guasch (2004) represents the most
44
comprehensive study analyzing a sample of more than 1,000 concessions granted in LAC during
1985–2000. The incidence of renegotiation is very high, amounting respectively to 30% and
more than 40% of the sampled concessions (excluding the telecommunications sector). There are
several policy implications that can be drawn from this study. First, most renegotiated
concessions underwent renegotiation soon after their award, with an average of 2.2 years between
concession awards and renegotiations (1.6 years after concession award in the water sector) --
whereas the average time lapsing between financial closure and project cancellation is about 5.3
years. Second, the vulnerability of concession to renegotiation was lower in the presence of a
regulatory agency and when a rate of return type of regulation was used. Key questions include:
Is there a history of arbitration/renegotiation? Is there a depth of experience of PPP
contracts in the sector? What is the normal timeline of arbitration/renegotiation
experienced? What level of arbitration?
How vulnerable are the contractual structures of the infrastructure projects? The
vulnerability of PPIs need to be assessed based on the types of contracts, e.g., PPAs, risk
allocations (construction risk, commercial risk, market risk, fuel supply risk, location
risks, and foreign exchange risks, with the existence of government performance
undertaking on behalf of the public utilities or guaranteed commercial obligations of the
public utilities and off-take through take or pay provision, etc.
Do contracts include adjustment mechanisms? For which types of risks? How is foreign
exchange risk addressed? Other costs? How comprehensive is the adjustment
mechanism? How often used in practice?
1.36. Table 1.3 summarizes the key issues analyzed above. Column 1 indicates whether the
data for the relevant variable or question are readily available for all countries, or only for
selected countries, via institutional documents, databases, or websites easily accessible to Country
Program teams. For those variables that are not already available to all countries, Column 2
suggests the ease of collecting the missing data – whether they could be gathered by Country
Team members via well-known sources, or variables for which data collection would require a
major first-hand collection effort (e.g. through AAA/TA). Column 3 reports, for each of the
variables, the extent to which policy makers can modify the behavior of this variable. For
instance, Column 3 distinguishes between variables on which policy makers and other
stakeholders can influence/change the behavior in the short term; variables that can be influenced
in the short term, but at a higher cost (i.e. need IFIs technical assistance, ST with TA); and finally
variables that are completely outside the control of policy makers/Bank and other IFIs and should
be taken as constraints (at least in the short term).
45
Table 1.3
Template for Assessment of Quality of Institutional Capacity
Key questions and variables Extent of Data
Availability
Difficulty of Data
Collection, where
Missing
Policy’s Ability to
Modify Behavior
1. Budget Execution Capacity
Do government agencies have good execution capacity on general expenditure?
1. % of executed annual capital expenditure budget Selected countries Low MT with TA
2 . % of executed annual budget for maintenance Selected countries Low MT with TA
3. Percentage of budget overrun in recently implemented projects Selected countries Low MT with TA
Do government agencies have good execution capacity on infrastructure expenditure?
1. % of executed annual capital infrastructure expenditure budget Selected countries Medium MT with TA
2 . % of executed annual budget for maintenance Selected countries Medium MT with TA
3. Percentage of budget overrun in recently implemented projects Selected countries Medium MT with TA
2. Decision Making Process
How transparent and accountable is government decision making?
Are decisions and budgets disclosed to parliament and/or public?
1. Open Budget Index ranking Available na MT with TA
2 . Financial Accountability PFM Performance Measurement Framework (PI: 5 & PI: 10) Available na MT with TA
Is there a requirement to disclose use and monitor progress/implementation? Are audit reports
provided? Is there a supreme audit institution in the country?
1. Performance on PFM Measurement Framework (PI: 26-28). Available na MT with TA
How quickly can policy interventions be on the ground to provide the required stimulus?
1. Average (or specified mandatory) timeline of the decision-making process Selected countries High NO
2 . Implementation challenges related to budgetary decisions regarding infrastructure
interventions related to asset ownership and implementation (e.g. budget centralized while
implementation decentralized)
Selected countries High NO
46
Key questions and variables Extent of Data
Availability
Difficulty of Data
Collection, where
Missing
Policy’s Ability to
Modify Behavior
3. Legal and Regulatory Framework
Regulatory Governance
Is the regulatory framework fulfilling some basic criteria of autonomy, transparency and
accountability and tools?
1. Autonomy (legal, managerial and financial) Selected countries Medium MT with TA
2. Transparency i) Are regulatory decisions clearly published, with access provided to the
public?
Selected countries Medium MT with TA
3. Accountability: i) existence of appeal procedure (through local courts or arbitration) ii)
independence of appeals
Selected countries Medium MT with TA
4. Tools (Pricing methodology and Quality monitoring)
i) Is the methodology for revenue determination and rate adjustments more similar to a rate
of return methodology or a price cap approach
ii) What is the time-frame for tariff adjustments – in policy and in practice?
Selected countries Medium MT with TA
Environmental Regulation
Incentives to promote green infrastructure
1. Grant and soft loan promoting clean infrastructure technologies Selected countries Medium MT with TA
2. Feed in tariff and other mechanisms Selected countries Medium MT with TA
Pro-poor Regulation
Can access for the poor at minimum required levels be ensured?
1. Existence of safety-nets for infrastructure services (such as life-line tariffs) What are the
life-line consumption amounts?
Selected countries Medium MT with TA
2. Percent of average household income for the lower quintiles spent on the specified
service
Selected countries Medium MT with TA
3. Other safety net mechanisms (for the social or other sectors) Selected countries Medium MT with TA
Medium
Can improved access for the poor be promoted through Output Based Aid? Medium
1. OBA scheme been piloted in country Selected countries Medium MT with TA
2. Existence of clearly identifiable target groups through either geographic targeting or self-
selection targeting, or through (usually for MICs) existing social welfare systems which can
provide a (usually means-tested) targeting platform
Selected countries Medium MT with TA
47
Key questions and variables Extent of Data
Availability
Difficulty of Data
Collection, where
Missing
Policy’s Ability to
Modify Behavior
4. SOE Governance
Corporate Governance
1. Degree of corporatization Selected countries Medium MT with TA
2. Degree of managerial and board autonomy Selected countries Medium MT with TA
Accounting, Disclosure and Performance Monitoring
1. Auditing of accounts Selected countries Medium MT with TA
2. Existence of performance contracts monitored by a third party Selected countries Medium MT with TA
5. PPP Contractual Framework
Is the sector able to manage re-negotiation?
1. Number of contracts gone for renegotiation and outcome of the process Selected countries Medium MT with TA
2 . Average length of renegotiation/ arbitration processes Selected countries Medium MT with TA
3. Capacity of institution who undertakes the arbitration/ renegotiation process? Selected countries Medium MT with TA
4. Availability of alternative adjudicatory institutions, such as special tribunals or formal
advisory panels
Selected countries Medium MT with TA
How vulnerable are contractual structures for PPP projects?
1. Types of contracts (management contracts, BOT, DBO, concession, etc) and average
length of contract
Available Low MT with TA
2 . Risk allocation (foreign exchange risk, fuel cost risk, demand risk, etc.). Selected countries Medium MT with TA
3. Types of adjustment mechanisms included in contracts Selected countries Medium MT with TA
4. Type of Regulation (rate of return vis a vis price cap regulation) Selected countries Medium MT with TA
48
6. POLITICAL ECONOMY ISSUES
1.37. This section lists some political constraints that might be relevant to understand
shortcomings in initiatives to reduce the consequences of the financial crisis. The questions
and variables described look at issues of political economy and how they can shape and determine
the potential effectiveness of fiscal interventions in the infrastructure sectors – in general and
more specifically during the financial crisis. The key political economy relevant sub-issues are
explained below.
A. Bank-country relationship
What is the existing framework for Bank intervention in the sector? Is the sector mainly
supported through budget support, DPLs or SIL’s? The form of intervention for crisis
support should take into account the existing modus operandi for the Bank in that
country/sector and understand the steps required if another modus operandi is chosen.
What is the level of donor co-ordination required for the sector’s interventions? Key
indicators to be considered include steps required; average timeframe; history of
―emergency‖ decision making. The relevance of this question is that in the Bank is part of
a partnership framework with clear rules.
B. Winners and Losers Analysis
Political decisions will often be shaped by losers from change. Obviously, there are
many losers from the financial crisis, yet difficult to identify groups which are harmed by
intervention and at the same time influential and organized enough to block infrastructure
investment. There are, however, those who lose out because infrastructure is prioritized to
other social goals and the packages will also imply bigger future tax burden. These
concerns may cause hesitation among politicians and thus prevent majority for welfare-
enhancing decisions. There will also be winners from interventions. The influence of
private sector interests and lobby groups is difficult to estimate. General uncertainty
about effective solutions can be exploited to redirect resources to specific industries.
C. Risk of inaction and ignorance
There are several reasons for political inaction (that is failure to act on the crisis,
which is likely despite agreement that action is needed) and some are very relevant in the
discussion about financial crisis initiatives. One main challenge is asymmetric
information between voters and politicians - where politicians are convinced about the
benefits of action while voters are not.
Politicians want to be seen as accountable. If unable to convince the public
about the benefits of a certain decision, their concerns about re-election or party
popularity may prevent them from doing what they think is to the benefit for the
society at large.
Another reason for inaction is the challenge of compensating losers. This
may cause hesitation to act for welfare-enhancing solutions because the
―accountable politician‖ prefers a decision that will please as many groups as
possible. A third reason for inaction is the lack of knowledge and experience.
Failure to act is not surprising when policymakers do not know what to do. In a
lack of knowledge different parties may have different suggestions and then it
49
becomes difficult to achieve majority for action – even if all are convinced that
action is needed.
D. The importance of communicating the rationale behind intervention
The ability to convince the public about the strategy depends on the extent to which the
suggested efforts are in accordance with party politics. If strongly in accordance with
the party program, infrastructure investment may be seen as an attempt of exploiting an
emergency situation to promote party politics - and may not get needed support.
Are there possibilities to communicate advantages of reform and the need to involve
minority leaders? What are the possibilities for the use of media? What is the extent of
consensus building that has been used/seems feasible regarding potential interventions?
E. Crisis and cross-border collaboration
The financial crisis may reduce the propensity to initiate cross-border collaboration - even if two countries agree that a joint venture project would be the best solution for
both countries. The lack of trust in the other country‘s solutions is one issue. Another
issue is the difference across countries in their exposure to the crisis. If two countries are
harmed very differently they may not be able to initiate cross border projects. One will
decline because of the risk/investment ratio; the other may decline because of own
uncertain financial situation. The key question to be addressed is how collaboration
across countries can be promoted despite the crisis.
F. Focus on vulnerable groups
A final section of the political economy analysis can focus on the specific benefit and
impact on vulnerable groups, and on the risk diversion of capture of investment resources
by other groups. (This aspect will be considered in more detail in the Social Development
Impact Guidance Note)
7. KEY OPERATIONAL RESPONSE: AAA AND TA INSTRUMENTS
1.38. The INFRA initiative represents an innovative approach to Bank response to the
financial crisis, which includes diagnostic tools and associated follow-up in terms of AAA
that can improve countries response to future financial crises. As part of the World Bank
Group‘s broader Vulnerability Financing Facility, the INFRA initiative includes enhanced Bank
support in three areas: (a) direct financing; (b) parallel financing; and (c) concessional financing.
The second component of the INFRA diagnostic tools package, described in a separate document,
focuses on assisting country teams in the identification of projects appropriate for INFRA
support. This first component of the INFRA diagnostic tools focuses, in a complementary way,
on broader economic and sector performance factors. The preceding chapters have proposed a
broad framework for the assessment of the fiscal space for infrastructure, and the opportunities
and constraints, in a country-specific context, for enhancing this fiscal space and using
infrastructure investment effectively as a fiscal stimulus in the context of the current crisis. They
have also presented a quick assessment and taxonomy, based on existing data relating to a limited
set of variables, that allow to start thinking of country cases at most risk and possible areas for
action.
1.39. In addition to enhanced financing, INFRA innovations would include a more balanced
approach between investment lending enhanced financing and Development Policy Operations
(DPOs). The latter are becoming more prevalent in a period of crisis because of their faster
50
deployment. SDN will work with OPCS in preparing a guidance note on the use of DPOs for
infrastructure. DPOs can also be an effective conduit for policy dialogue and reform to
strengthen infrastructure-sector and economic resilience in the face of financial crises.
1.40. The Bank is well placed to provide governments with policy advice that can also be
included the inclusion of infrastructure-related reforms in enhance the governments’ capacity,
in the medium term, to manage financial crises like the one we are facing today. This advice
may address, for instance, issues related to identification / prioritization of projects (i.e. cost-
benefit analysis), strategic planning (i.e. through better coordination between different
infrastructure sectors, or through different modes of infrastructure provision), and strengthening
legal and regulatory frameworks, governance and financial management
1.41. A few selected policy recommendations that need to be tailored to the country and sector
context include:
Monitoring expenditure against identified needs and priority & reallocate spending across
sectors if needed, ensuring that limited resources are devoted to address critical
bottlenecks. This can take place through Public Expenditure Reviews (PERs) and Public
Expenditure Tracking Surveys (PETS) so as to avoid repeating the phenomenon of the
―lost decade‖ of growth.
Improving budget execution, by removing the institutional bottlenecks (better planning of
projects, earlier completion of feasibility studies, more efficient procurement and move to
medium term multi-year budgeting). Government ability to implement multi-year
projects should also be strengthened through Medium Term Expenditure Framework
(MTEF) to protect multi-year investments and avoid unexpected cost overruns through
inadequate planning.
Using advisory services to help improve SOE governance and financial management and
to reduce the risk of misallocation of resources and avoid use of emergency situation to
allow undue deviations from control mechanisms.
Simple tools that may prove important in a situation when other procedures are simplified
are to demand parliamentary control on funding allocated during this period. Line
ministries should be asked to write up all spending and defend their spending to the
parliament. Documents reporting the spending for the parliament should as far as possible
made available to the public.
Strengthening legal/regulatory/contracting frameworks, using the financial crisis to
leverage needed reform in the sector better tackle needed economic and financial
restructuring/renegotiation of PPP projects (e.g. developing automatic adjustment
mechanisms for fuel and foreign exchange costs, regulating the equity/debt ratio to limit
the cost of capital or limiting the exposure of companies to demand or input price
fluctuations).
Reviewing the investment plan, during crises, if users cannot afford the cost of new
investments (capex in tariff), and assuming that the government won‘t (or cannot)
contribute to it, the tariff structure can be reviewed and investments postponed.
1.42. Finally, several implementation challenges to the use of infrastructure as a part of a
fiscal stimulus package must be taken into account. Analytical components addressing these
issues could be incorporated more systematically in the future as part of Country Economic
Memoranda or infrastructure AAA, and TA instruments could also be applied to address these
issues.
51
Implementation and absorption capacities are important in actually spending funds that
are allocated for fiscal stimulus.
New infrastructure spending can have long lags before making an impact on the
economy, unless the authorities are accelerating projects already under implementation.
This concern is particularly strong for large public sector projects that require additional
due diligence and planning. It is also true for PPPs where additional time may be needed
to design a ―bankable‖ project.
Crowding-out of private sector borrowing may become a key concern in the medium-
term.
Projects characterized by a large proportion of expenditure on imported equipment or
inputs might also be less effective as a fiscal stimulus. On the other hand, labor-intensive
infrastructure works that can be implemented quickly and provide employment
opportunities might be more effective. Such activities could also serve the dual purpose
of protecting the poor from the worst effects of the crisis. Increase pro-cyclical fiscal
transfers to sub-national governments/entities may also be more effective.
52
8. REFERENCES
Andres, L., Guasch, J. L. and S. Lopez Azumendi (2008) ―Regulatory Governance and Sector
Performance: Methodology and Evaluation for Electricity Distribution in Latin America‖,
Policy Research Working Paper 4494. The World Bank, Washington, DC.
Blanchard, O. (1990), Suggestions for a New Set of Fiscal Indicators, Working Papers No. 79,
OECD Economics Department
Braga, Carlos (2008) ―Do countries have space for a fiscal stimulus program?‖, PRMED Policy
Note.
Briceño-Garmendia, C.; Smith, K. And V. Foster (2009) ―Financing Public Infrastructure in Sub-
Saharan Africa: Patterns and Emerging Issues‖, AICD, forthcoming.
Buiter, W. (2003) ―Ten Commandments for a Fiscal Rule‖, Oxford Review of Economic Policy
2003; 19: 84-99
Calderón, C., and L. Servén. 2004. The Effects of Infrastructure Development on Growth and
Income Distribution. Policy Research Working Paper 3400. The World Bank,
Washington, DC.
Celasun, O., X. Debrun, and J.D. Ostry (2006), Primary Surplus Behavior and Risks to Fiscal
Sustainability in Emerging Market Countries: A ―Fan-Chart‖ Approach, IMF Working
Paper WP/06/67
Drazen, Allan (2000) Political Economy in Macroeconomics, Princeton University Press,
Princeton
Ebinger, J. (2006) Measuring Financial Performance in Infrastructure, Working Paper Series,
World Bank, Washington DC
Estache, A. and R. Muñoz (2007), ―IMF Financial Programming vs the Growth Enhancing Power
of Education, Health and Infrastructure Investment: Lessons from Senegal and Uganda‖,
World Bank, mimeo
Estache, A. and R. Liu (2003), ―Social rates of return on World Bank Infrastructure projects: a
review of a 40 years experiment‖, World Bank, mimeo
Fan, Shenggen, Linxiu Zhang and Xiaobo Zhang (2002) ―Growth, inequality, and poverty in rural
China: the role of public investment‖ Research Report 125, International Food Policy
Research Institute, Washington D.C.
Fay, M. and M. Vagliasindi (2008), ―Regulatory Governance Benchmarking: the case of Eastern
Europe and Central Asia‖, World Bank, mimeo
Fay, M. and T. Yepes (2003), ―Investing In Infrastructure: What Is Needed From 2000 to 2010?‖,
World Bank Policy Research Working Paper 3102, July 2003
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Flyvbjerg, Bent (2005) ―Policy and planning for large infrastructure projects: problems, causes,
cures‖ World Bank Policy Research Working Paper No. 3781, The World Bank.
Hauner, D., D. Leigh, and M. Skaarup (2007), Ensuring Fiscal Sustainability in G-7 Countries,
IMF Working Paper WP/07/187
Heller, P. (2005), Understanding Fiscal Space, IMF Policy Discussion Paper PDP/05/4
Izaguirre, Karina (2009) ―Assessment of the Impact of the Crisis on New PPI Projects‖, World
Bank and PPIAF
Ley, E. (2006), Fiscal (and External) Sustainability, World Bank, mimeo
SDN (2009) ―The Impact of the Global Economic Crisis on Core Expenditures: Infrastructure
Maintenance‖, SDN Briefing Note.
Vagliasindi, Maria (2008) ――Governance Arrangements for State Owned Enterprises‖, World
Bank Policy Research working paper 4542, World Bank.
Vagliasindi, Maria (2009) ―How to Improve the Performance of State-Owned Enterprises‖,
World Bank and PPIAF, forthcoming
Vagliasindi, M. and J. Nellis (2009) ―Building Infrastructure Institutions‖, forthcoming in AICD
Flagship Report
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World Bank (2008) ―Swimming against the tide: how developing countries are coping with the
global crisis‖ PREM Policy Note
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Preliminary Findings‖, PREM Policy Note
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support infrastructure during the crisis, Concept Note, World Bank, Washington DC
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Lens‖, PREM Policy Note
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Policy Option‖, PREM Policy Note
Yepes, T. (2008) ―Investment Needs for Infrastructure in Developing Countries 2008–15‖,
mimeo, The World Bank.
This paper is part of a broader SDN effort aimed at enhancing the analytical tools to provide rapid assessment of the impact
of the crisis on infrastructure and design diagnostic tools to support the INFRA platform. This task was led by Fernando
Navarro (ETW). The team included Lucio Monari, Pedro Antmann and Jessica Lin (ETWEN); Abel Mejia, Daryl Fields, and
Martha Jarosewich-Holder (ETWWA); Marc Juhel, Peter O'Neill, and Andreas Dietrich-Kopp (ETWTR); Abha Joshi-Ghani
and Judy Baker (FEU-Urban); Nitin Jain (WSP); and Doyle Gallegos and Arturo Muente Kunigami (CITPO). We are very
grateful to the members of the FEU Economics Team, Marisela Montoliu Munoz and Maria Vagliasindi; to the members of
the INFRA Team, particularly Jaehyang So (ETW) and Elio Codato and Patricia Veevers-Carter (FEU); Ranjit Lamech,
Seema Manghee, Wael Zakout (ECSSD); Sameer Akbar (ENV) for helpful suggestions.
ANNEX 2: INFRASTRUCTURE PORTFOLIO ASSESSMENT
Developing Countries and the Financial Crisis
Infrastructure Diagnostic Tool
ETW INFRA TEAM
With contributions from CITPO and FEU
Draft May 1, 2009
56
1. INTRODUCTION
2.1. This note describes the second component of the diagnostic tool package proposed under
the World Bank Group‘s Infrastructure Recovery and Assets Platform (INFRA). INFRA would
aim to provide the foundation for rapid recovery and job creation and to promote long term
growth by: stabilizing existing infrastructure assets; helping to ensure delivery of projects that
remain government priority; supporting Public Private Partnerships (PPPs) in infrastructure; and
assisting new infrastructure project development and implementation. As one of the innovations
with respect to the Bank‘s response during previous financial crises, INFRA includes a package
of quick-response diagnostic tools that can help World Bank country teams and their clients to
identify countries at risk, by assessing issues of fiscal space, infrastructure gaps and institutional
absorptive capacity which represents the first component of the diagnostics tool package, namely
the Strategic Country Reviews. This second component, namely the Infrastructure Portfolio
Assessment Review, provides the elements for an in-depth assessment of infrastructure sub-
sectors and identification of projects at risk. Both components will also identify priority World
Bank entry points target INFRA interventions to accelerate fundamental policy reforms and to
remove the most crucial infrastructure bottlenecks to growth and poverty reduction.
1.1 BACKGROUND AND OBJECTIVE OF THE INFRASTRUCTURE PORTFOLIO ASSESSMENT REVIEW
2.2. The recent downturn in global credit markets has created uncertainty regarding the
availability and cost of medium to long term funding for meeting infrastructure sectors
investment targets. Some projects have witnessed a withdrawal of potential financiers while
others have seen an increase in funding costs to prohibitively high levels. Still others are finding
more stringent project approval thresholds as required by potential lenders in a credit-constrained
environment. Sponsors are seeing a withdrawal of commercial lenders from major potential
infrastructure projects loan syndications due to capital constraints while others are preserving
their capital base to remain sufficiently liquid and meet reserve requirements.
2.3. The inability of client countries to meet their infrastructure investment targets will have
an adverse impact on economic growth, employment, and access to essential infrastructure
services by the poor, while also delaying the achievement development goals. Governments
would need to make a careful reassessment and prioritization of using public resources to fund the
infrastructure investments while also seeking alternate funding to meet investment needs. The
objective of this second component of the Diagnostic Tool – the Infrastructure Portfolio
Assessment Review – is to (i) identify the short-to-medium term impact of the credit constraints
and global economic slowdown on the on-going and future capital investment plans and programs
in the infrastructure sectors of the World Bank Group‘s client countries, and (ii) prioritize
stimulus responses under the World Bank Group‘s Infrastructure Recovery and Assets Platform
(INFRA).
1.2 METHODOLOGY
Structure
2.4. This component of the Diagnostic Tool first considers the sectoral and sub-sectoral
implications of the financial downturn‘s through a demand-supply analysis; it then proposed a
specific financial asset analysis of the sector portfolio, identifying priority investments shortfalls;
subsequently, the policy and institutional dimensions are considered; and, finally, and these
57
investments undergo a benefits risk screening. Specifically, the infrastructure Portfolio
Assessment Review includes the following components and processes:
2.5. Demand analysis: Broadly describes the current and post financial crisis infrastructure
conditions of the respective infrastructure sector in a client country, including changes in present
and future demand for particular sub-sectors.
2.6. Supply analysis: The diagnostic considers the current changes in the sector‘s situation
and its project portfolio, with an aim to assist client countries overcome the challenges of the
crisis and sustain development. The supply analysis is not limited to short-term activities aimed at
employment generation but also considers longer-term country objectives and priorities, and
medium-term projects aimed at facilitating economic activity, including in an upturn scenario.
The portfolio situation and status, inclusive of the financial constraints faced by ongoing and
planned projects, is defined as an aggregate of the status of development of individual projects.
Projects could either be currently operational, under construction, or under preparation. The
assessment review would flag projects that are more advanced in terms of completion and
delivery of services:
For projects that are operational, focus should be on reducing costs and increasing
efficiency, including sustaining priority maintenance, and supporting capital expansions
and enhancement. In these cases, the cost and efficiency ratio would be measured against
reduced costs. In the case of projects under construction, the recommended course of
action could be financing to stabilize investments, acceleration of project schedules or
design modifications.
Projects under preparation should be prioritized and possibly modified, aiming to
stabilize their financial situation, and accelerated where projects risks are manageable
(discussed below). Indicators to prioritize projects on status include: are not just the
funding needs, sources and costs, but a relative parameter, the percent of budget already
disbursed and expected disbursements over the next three years, help filter and rank these
projects.
For projects under construction, the cost of termination (e.g. contractual penalties, etc.)
should be taken into account.
2.7. However, this hierarchy should not be the only factor dictating project prioritization, as
project that may yield high benefits may be in earlier stages of development. The type of project
should also be factored; newly constructed projects have different cost and scheduling risks and
social benefit implications than rehabilitation projects. At the same time, projects that are only
subjected to operations and maintenance have operational implications from longer-term
investment costs and efficiency benefits.
2.8. Institutional and policy analysis. Institutional capacity is a critical element in
infrastructure development. In many areas, policy and institutional capacity remain weak,
compromising the ability to manage water resources and deliver water services on a cost-recovery
basis. Similarly, policy responses during the crisis period can aid in infrastructure maintenance
and resumption of infrastructure financing as the crisis attenuates. The institutional and policy
parameters have a sometimes only subtle impact on the effectiveness decision making and
performance of infrastructure services, but they should be valued equally to infrastructure
investments, as INFRA will also fund technical assistance for policy development and
institutional strengthen.
2.9. Benefits and risk screening. The portfolio and financial analysis would be combined with
the institutional and policy analysis of the project portfolio, in an iterative process, to identify
―quick response‖ opportunities. The tabular form that would be used to represent this evaluation
58
is presented at the end of this document: (i) projects could be ranked strategically according to
their economic and social benefits, on the one hand, and to the ease of implementation, on the
other; and (ii) institutions and policies could also be ranked according to their potential mid-term
impact and their ease of execution as well. The analysis of benefits and risks may include
specific social variables (age, gender, income level, geographic, etc.) to maximize the benefit to
vulnerable groups Not all projects would have similar risk profiles, and these risk profiles may
shift unequally in times of economic downturn, whether as a consequence of the economic
downturn/crisis (e.g., at the national level, the drain of on foreign exchange reserves, equipment
delivery) or as a result of inherent risk of the project (e.g., inability to strengthen institutional
capacity or foster appropriate policy mechanisms). Risk tolerance may also shift to favor projects
that are likely to disburse quickly and/or be resilient to bottlenecks.
2. TRANSPORT SECTOR
2.1 INTRODUCTION AND DEFINING SUBSECTORS
2.10. The proposed approach to diagnosing the impacts of the global economic slowdown on
the transport sector and developing a response program includes two main components, 1) a
situation analysis assessing what is happening to the portfolio of urban projects in the context of
the crisis; and 2) identifying priorities for urban infrastructure spending under the crisis. Tools for
assessing the fiscal space and financing in a given country are covered in other companion tools.
2.2 DEMAND ANALYSIS
2.11. The risks to economic growth are great, in a time of diminishing government revenues,
uncertainty around demand and cost/benefit of intervention. Transport projects create
employment opportunities, generate economic activity, and access to opportunity.
2.12. Without continuation of current levels of investment in growth enabling programs from
the transport sector client countries run the risk of further deceleration of support to economic
growth. The best of these programs, focused, impacting, and value-for-money offer many benefits
in a time of economic downturn particularly in the areas of promotion and planning for
restoration of economic activity alongside the opportunity of employment and need to protect
existing asset value.
2.13. One of the distinguishing features of investments in the transport sector is the fact that
they are generally longer term than other infrastructure sectors and require a long-term forecast of
demand. Therefore, there is a risk that a finite decrease in spend today could have a
multiplicatively detrimental effect in the future. More precisely, depending upon the sub-sector
involved transport has varying characteristics of demand. For instance, the demand for extension,
rehabilitation and maintenance in the rural roads sector is constant and in many countries of
enormous scale. 30% of agricultural productivity is lost due to lack of access to an all-season
route to market. Significant rural communities are severely burdened due to lack of access to
health, education, markets, and opportunity. This demand is not affected to any significant degree
by economic downturn. Highways and inter-regional roads have a different demand characteristic
that is affected by economic downturn.
2.14. In the port and shipping sector demand is related to current and forecasted activity.
Demand has dropped significantly due to a slowdown in shipping. The temptation here is to stall
planning, but the time lost in stopping the planning process can not be recovered.
59
2.15. In the railway and mass transit sector demand is more buoyant for intended projects, but
again there is a temptation to postpone. Of high priority is appropriate and timely maintenance to
protect the value of existing assets.
2.16. It is therefore recommended that demand should be evaluated in the three priority
subsectors of the transport sector: Ports, Road Transport, and People and Freight Transit as
follows:
Ports
2.17. Ports and their services may have been particularly affected by a reduction in freight
traffic and current demand. The actual demand upon upturn remains the objective to fulfill in the
medium term strategy for facilitating economic activity. Long lead-in times could indicate that
time-disruptions to the process may not be recovered. Flexibility is low to recover interruptions to
the design and implementation process
2.18. The main factors for analysis are: the temporary and recent decline in trade (% tonnage),
with effect on staffing and supply chains. Data would be collected on projects that have halted,
slowed and been postponed. Data would also be collected on the direct causal effect of lower
freight throughput temporarily stunting the demand for expansion of infrastructure and services.
We would also evaluate whether the demand identified by shippers and Government planning for
ports been reprioritized.
2.19. The team would consider the before crisis planning for port and port services demand and
current Governments‘ and Port Authority‘s views on pipeline projects, shippers forecasts in
addition to the current projections of future traffic.
Road transport
2.20. The demand for road transport is fairly robust, especially in the rural areas. There may be
a slight reduction of demand on regional highways due to lesser freight use. The upturn will
require the infrastructure in place to facilitate trade and for larger capital projects flexibility is
low. For rural and smaller investments there is greater flexibility.
2.21. The main sub-sectors that we would consider include the following: arterial, urban, and
rural. For each subsector, the team would identify the transport benefits as well as the future risks
associated with delaying investments. Further analysis is recommended on the year on year
reduction of Kms constructed, rehabilitated, maintained. The readiness to participate in economic
activity is also dependent upon the infrastructure asset preparedness. For instance all-season
access conversion (% surfaced) and within two miles of settlements (existing data). The demand
reduction may be seen in Government and agency pre-crisis plans and current values of spending
on maintenance as a percentage of estimated needs that would maintain the asset value.
People and Freight Transit
2.22. Here there is little flexibility in the project cycle. The key factors for analysis include the
demand reduction for projects in consideration and analysis of options. Completing commenced
projects and maintenance would remain the priority. A survey of how railways, in particularly
affected regions, have cut back their maintenance and investment programs and by how much. A
review of the Strategic development plans compared to current Government and parastatal views
on future requirements in view of the economic downturn.
2.3 SUPPLY ANALYSIS
2.23. The situation analysis will look at the transport sector and sub-sectors in client countries
including an inventory of commitments on capital and operations of transport projects, the
60
content of labor and local resources, and how the crisis has affected the demand or relevance for
those projects. The assessment would also look at which programs are being delayed or having
problems, why, and whether help is needed, and classify those projects in terms of long-term
objective or short-term stimulus or safety-net support. Rural roads projects primarily and
port/highway infrastructure projects would be the best candidates for a detailed analysis of their
impacts in the short term as economic stimulus and as long-term investment in infrastructure.
Table 2.1: Situation Analysis for the Transport Sector
Evaluation Questions
for Sub-sector
Information/analysis
Situation analysis assets and service programs and projects in transport sector
a) What is the situation in the public
expenditure program, transport?
What are the existing country investment commitments on capital,
rehabilitation and maintenance accounts in transport that are progressing?
Existing country and local commitments on capital operation and
maintenance in urban projects that are being executed
Cost and scope of these programs
Content of labor spent and use of local resources
How small and medium firms are being used and opportunities to
increase their participation
b) What are recent developments
since fiscal crisis began?
Has/will the crisis lead to significant slowdowns in demand for certain
transport infrastructure services?
shortfalls as a consequence of tighter credit restrictions
shortfalls as a consequence of higher financing costs, due to a higher risk
averseness and new market regulations.
Shortfalls in public finance:
shortfalls in tax revenues,
shortfalls in terms of political commitments and structural budget
reallocations
Existing estimates of transport demand-supply imbalances (pre-crisis
data on infrastructure stocks and needs) data on spend (former and
existing/projected)
Investment commitments on projects that have already spent e.g. 30% or
more of allocations
What is happening with disbursements
Are there significant backlogs in maintenance and rehabilitation?
Spending on maintenance as a percentage of estimated needs that would
maintain the asset value.
Allocation of transport budget on capital and maintenance by main
sectors
Investment commitments to existing projects?
c) What is the status of the
implementation of the Government
program?
Areas of programs not progressing and why
Identification of projects that are being postponed and attributable cause.
% of overall program
Identification of progress and stage of these postponed projects?
What facilitation is needed to complete these projects?
d) What are the trade-offs between
projects that are long term priorities
and those that are more effective to
cope with the crisis?
Identify/reaffirm priority investment projects (including for broad policy
objectives, including climate change)
Identification of operational and maintenance shortfalls. Identify/reaffirm
priority investment projects including:
-Long term policy objectives
-Immediate impact on job creation and the local economy
Portfolio Status and Financial Analysis
2.24. Tables in Annex 2 are templates for identifying specific ―quick-response‖ projects,
differentiated for transport subsectors and separated by the state of status of their completion i.e.
projects which are being implemented, projects under construction and projects in preparation
61
together with new projects. The portfolio information from these tables will be evaluated and
filtered through a benefit and risk screening process to define priority investments.
Benefits analysis for infrastructure
2.25. If INFRA supports new infrastructure project development and implementation other
demand considerations might play a role. Given the long life cycle of infrastructure and given the
heterogeneity of countries needing the INFRA support, restrictions on the modal structure of
investments seem to be difficult to justify. At least in part the infrastructure investment is meant
to generate demand not to respond to it.
2.26. As a first step demand analysis could focus on the identification of repressed demand for
infrastructure service, i.e. the identification by analyzing current congestion patterns, across
traffic modes.
2.27. Within the context of INFRA‘s strategic priorities, Table 2.8 is a platform for a benefits
analysis for refining priorities for spending in the transport sector under the crisis would require
analysis of the role of each type of transport sector and their projects in achieving economic and
social benefits aligned with country strategic priorities. The funding should be allocated to
minimize the opportunity costs of the ongoing projects.
Table 2.2. Transport sector - Benefits - INFRA specific priorities for portfolio analysis
Evaluation Questions
For Sub-sector
Information/analysis
2. Priorities for infrastructure investment in the transport sector
a) Strategic importance criteria Determining ranking of economic and social benefits and their
strategic importance
Correct for past biases in infrastructure policies
Increase the share of resources allocated to maintenance.
Returns from maintenance are often higher than from new
investment and have a higher employment effect.
Invest in responses to major changes in development patterns
- Rapid urbanization
- Changing climate: adaptation
1. Take account of external benefits and costs of transport
Take account of the wider benefits of transport, beyond travel
time savings
- Gains from trade, internationally like mentioned in the diagnostic
but also regionally and between cities.
- Improvement of functioning of urban labor and goods markets by
improved accessibility at the city level
- Help to provide public services (health, education, extension
services, marketing facilities) by increasing catchment areas of
service provision
- Give particular attention to direct and indirect employment effects
Take account of environmental effects of transport and the
resulting modal consequences in the future
- Reduction of local air pollution
Increasing transport safety
Contribution to a climate change agenda
Take account of the coordinating function of large scale transport
investment, in the perspective of changing expectations of
private investors
62
Evaluation Questions
For Sub-sector
Information/analysis
- access/MDG Contribution to MDGs
Access to road networks
- job creation/employment Evaluate the opportunity of local labor intensive infrastructure
projects.
Availability of labor/seasonal labor
Local resource opportunity
Impact of spending on different types of transport projects:
For typical projects expenditure resource spending of various
methods of construction. Main headings (machinery, labor,
materials), split out by imported/domestic. Sectors: highways,
rural roads, ports.
Expenditure on labor and estimate of jobs provided/people hired
per $1mn for different types of projects
- impact on growth/development Analysis of where investment is most effective
Evaluation of the various sectors of transport intervention and
possible growth outcomes
Evaluation of major infrastructure investments and trends
Assessment of growth potential from transport infrastructure
investments
- impact on poverty mitigation Analysis on major contribution of types of transport intervention on
facilitation access of poor communities to health, education, markets,
employment, social needs, opportunity
Impact on poor people of particular type of project
b) Country priorities Country infrastructure priorities
Risk analysis and ease implementation
2.28. As part of a benefit – risk analysis to screen through priority projects, a risks analysis
through a series of parameters (see Table 2.3) would provides for understand the implementation
record of transport projects looking at the capacity of the government (s), project quality, and
adaptability to redesign or scaling up under the crisis. With this information, it would be possible
to identify a list of priorities for spending in the transport sector with a clear rationale.
2.29. The diagnostic should identify the consequences in terms of benefits forgone (opportunity
costs of projects) by dropping or delaying ongoing projects. The diagnostic should give an
estimate of the financing needs according to a priority ranking of the projects. In particular, it
should inform on shortfalls in private finance:
Table 2.3. Transport sector - Risks and ease of implementation
Ease of implementation/risks Determining implementation issues, time lag of impact, stage of
completion, easiness to redesign
- Government‘s capacity to execute
projects within 3-year time frame Past Government performance on spending vs. allocations
In-country capacity to design and implement high quality
projects
Local government capacity for implementation
- Construction sector and suppliers
capacity to support implementation Local private sector capacity (industry and consultants) and
performance
-completion rates,
-timeliness
-extent of local/national competition
- Project quality and adaptability What stage is the project at in terms of implementation or
completion
What is the time lag of impact
What are issues / risks for redesign
63
Ease of implementation/risks Determining implementation issues, time lag of impact, stage of
completion, easiness to redesign
Project relevance to national strategy (if exists)
Maintenance of infrastructure assets
Likely to quickly achieve major benefits - economic and social.
Under or near to construction
Option to modify easily
Little alternative to complete project
Risk of failure to complete
- What are the options and/or
implications to modify project design Postpone
Scale down
Re-structure / re-sequence
Redesign
Accelerate
Front-end
- What are the optimal financial
instruments for easing implementation Investment Lending (IL)
Development Policy Lending (DPL)
Additional Financing
Parallel Financing
Donor support
Private Sector
Other multilaterals
Other innovative financing
What are the main indicators for project
quality?
Ensuring that projects are optimal and focused to deliver intended outputs and outcomes
Primary
National and regional transport strategy plan adherence
Generation of new activities, or changes in the way that current
activities are undertaken that have calculated benefit and
produce sustainable economic growth
Generation and reduction in the cost and barriers to Trade and
transportation of people
Government Priority
Enables compliance with regulation and certification
Demand and likelihood of client acceptance
Secondary
Reduction in vehicle, aircraft/ship operating costs and
subsequent freight charges
Time savings
Reduction in traffic casualties
Promotion of transport services
Transportation projects often produce public goods that cannot
necessarily be charged directly to the beneficiaries.
What sectoral areas should have priority
Ports
Analysis of trade decline (%tonnage), with effect on staffing
and supply chains. Attributable areas
View on trade inefficiency, the market, time savings achievable
and where.
Data on Projects halted, slowed and postponed
64
Ease of implementation/risks Determining implementation issues, time lag of impact, stage of
completion, easiness to redesign
View on Investment in port infrastructure, governance or
service to prepare for trade upsurge
Confirmation of government prioritization for completion of
nearing completion projects (over 75%)
Identification of new projects
Road transport
Analysis of sector contribution, arterial, urban, rural. Indicators
of transport benefits.
Analysis of year on year reduction of Kms constructed,
rehabilitated, maintained. Value of all-season access conversion.
(% unsurfaced) within two miles of settlements (existing data)
View on barriers of lack of infrastructure to economic
growth/social deprivation
View on Investment in arterial, urban, road, to maximize
objectives, benefit analysis.
Confirmation of Government prioritization for completion of
nearing completion projects (over 75%)
Identification of new projects that conform to agreed eligibility
criteria.
Mass and Freight Transit
Projects in consideration and analysis of options. A survey of
how much railways in particularly affected regions have cut
back their maintenance and investment programs, and what they
would need to scale them back up.
Support maintenance work with implementation programs to
shorten the backlog of maintenance for infrastructure and
rollingstock that is needed to serve expected future demand.
To support productive investment expenditures to serve future
traffic. Track investments (rehabilitation, double tracking) that
are labor intensive.
2.4 INSTITUTIONAL ANALYSIS
2.30. The institutional analysis is indirectly captured in the sections above.
3. ENERGY SECTOR
3.1 INTRODUCTION AND DEFINING SUB-SECTORS
2.31. Adjusted versions of the investment programs must take into consideration new demand
forecasts, financial conditions, and the physical degree of completion of the different assets at the
moment the crisis erupted. Although this condition is specific to each project, it is possible to
define some general guidelines for the evaluation of the energy subsectors:
Generation projects imply in general big investments concentrated in 3 to 5 year
construction periods. Flexibility to reschedule them within the construction period is
generally low. In addition, paralyzing advanced construction works leads to high
65
financial and operational costs and should be avoided. It might also imply significant
contractual penalties to the sponsor due to unilateral holdbacks.
Transmission projects are mixed: there may be some big investments related to
reinforcement of the backbone connecting generation plants and consumption centers,
which show similarities with generation projects. But there is also a set of relatively small
or medium size projects aimed at attending growth of existing demand and renovation
and replacement of equipment used for that purpose.
Individual distribution projects, either to connect new electricity consumers or attend
growth of demand and service quality requirements of existing users, imply relatively
small investments. In general it is possible to adjust their time schedule to match it with a
new demand scenario.
2.32. Projects in the investment programs previously classified as described in above should
also be evaluated according to their situation in terms of progress in physical execution. As a
general rule, construction works close to termination should be completed, as the financial,
operational costs and contractual penalties of interruption could be even higher than remaining
investments. Although this is valid for all kind of works, the quantitative impacts are particularly
relevant in generation and large transmission projects.
3.2 DEMAND ANALYSIS
2.33. Growth of electricity demand is perhaps the main determinant of investment needs in the
power sector of developing countries. As the cooling of the economy is already visible in most
countries, the pre-crisis investment needs must be reassessed, based on updated forecasts of
demand evolution. This is likely to lead to adjusted time schedules of the existing investment
programs, which will also be related to the duration of the economic slowdown. Eventual changes
in scope of those programs will depend on the evaluation of the scenario defined by new prices of
energy resources and equipment resulting from the crisis.
2.34. Three important caveats need to be made at this point stressing the dynamic and
diachronic nature of the assessment we will be carrying out:
Demand-driven adjustment of investment programs may imply postponements in
implementation of some components but is unlikely to change the need of high financial
support to develop them.
Adjustment of generation and transmission plans must contemplate in particular, impacts
on transmission investments of the new sequencing of generation projects.
If economic recovery is faster than projected, there is risk of potential mismatching
between demand and supply.
These three aspects also need to be evaluated.
3.3 SUPPLY ANALYSIS
2.35. Projects in investment programs affected by the credit crunch can be classified in the
following categories:
Large generation and transmission projects with construction works close to termination
(80 percent progress or more): provision of financial support allowing effective
completion appears as the best option.
66
Large generation and transmission projects in early stages of development: they need to
be reassessed, based on the conclusions of the demand-driven analysis of the pre-crisis
investment programs. This will lead to identify the projects having high priority and the
financial gap faced by each of them as a consequence of the credit crunch.
Medium and small transmission and distribution projects: although the general concepts
are equally applicable, the size of each individual project makes in general possible to
complete those close to termination without significant financial effort, as well to
reschedule others in early stages to match adjusted demand.
High-priority projects focused on energy efficiency (both demand and supply side) and
access of the poor to electricity services through grid extension, mini-grids and individual
systems using renewable energy resources: they will be identified and evaluated
separately, taking into consideration specific options for financing.
Portfolio Status and Financial Analysis
2.36. The financial downturn might have affected investment projects in different stages of
development, from early planning to advanced execution (there is clear evidence that this actually
happened in several client countries). Within a broader sector assessment, a country‘s energy
investment portfolio assets need to be analyzed on a case-by-case basis, actions to be taken
depend on status of implementation. The tables in Annex 2 are templates for identifying specific
projects, differentiated by subsectors (generation, transmission and distribution). Separate tables
are considered to contemplate differences in status of completion i.e. projects which are being
implemented, projects under construction and projects in preparation together with new projects.
2.37. The energy sector is capital intensive; energy infrastructure requires significant up-front
capital allocations to be amortized over long time periods. The current financial crisis has
severely curtailed the provision of debt and equity for ongoing projects. The lack of completion
of energy projects could have a significant negative impact in both the level of provision of
services and profitability of public and private utilities. Therefore, priority is given to projects
under construction over those at earlier stages of development.
Benefits analysis for infrastructure
2.38. The benefits related to each specific energy project are evaluated through the INFRA
priority criteria. Each practitioner would be able to value the strategic importance of any given
project. A relative ranking for the energy sector would be attached to those criteria. Table 2.4
includes INFRA Initiative but other criteria might be specifically identified as well on a country
basis. The benefits analysis would aim to determine the overall value of the benefits that the
execution of any given project might generate; and a relative ranking of the energy projects for
any given country.
Table 2.4. Energy sector - Benefits - INFRA specific priorities for portfolio analysis
Evaluation
Questions
For Sub-sector
Information/analysis
Priorities for energy infrastructure investments
a) Strategic
importance criteria
Determine ranking of economic and social benefits and their strategic importance
- Access/MDG
Contribution to access to electricity
-Job creation /
employment
Evaluate the opportunity of local labor-intensive energy infrastructure projects.
Availability of labor/seasonal labor
Local resource opportunity
67
Evaluation
Questions
For Sub-sector
Information/analysis
Impact of spending on different types of energy projects:
For typical projects expenditure resource spending of various methods of energy
infrastructure construction. Main headings (machinery, labor, materials), split out by
imported/domestic for the following sub-sectors: generation, transmission, and distribution
Expenditure on labor and estimate of jobs provided/people hired for different types of
projects
- Impact on growth
/ development
Analysis of where investment is most effective
Evaluate various sectors of power/energy intervention and possible growth outcomes
Evaluate major energy infrastructure investments and trends
Assess growth potential from energy infrastructure investments
- Impact on
poverty mitigation
Analysis on major contribution of types of energy intervention on facilitating access for poor
communities lighting, health, education, markets, employment, social needs,
Impact on poor people of particular type of project
b) Country
priorities
Country infrastructure priorities
Risk analysis and ease implementation
2.39. Risks involved in the implementation and the likelihood of execution of any of the energy
projects under consideration need to be considered. . Table 2.5 below outline the basic parameters
to screen the project portfolio for investments; however they likely will need to be tailored for a
specific country.
Table 2.5. Energy sector - Risks and ease of implementation
Ease of implementation/risks Determining implementation issues, time lag of impact, stage of
completion, easiness to redesign
- Government‘s institutional capacity to
execute projects within 3-year time frame Past Government performance on spending vs. allocations
In-country capacity to design and implement high quality
projects
Local government capacity for implementation
- Construction sector and suppliers capacity
to support implementation Local private sector capacity (industry and consultants) and
performance
-Completion rates,
-Timeliness
-Extent of local/national competition
-Project quality and adaptability What stage is the project at in terms of implementation or
completion
- What is the time lag of impact
- What are issues / risks for redesign
Project relevance to national strategy (if exists)
Maintenance of infrastructure assets
Likely to quickly achieve major benefits - economic and social.
Under or near to construction
Option to modify easily
Little alternative to complete project
Risk of failure to complete
- What are the options and/or implications to
modify project design Postpone
Scale down
Re-structure / re-sequence
Redesign
Accelerate
Front-end
- What are the optimal financial instruments Investment Lending (IL)
68
Ease of implementation/risks Determining implementation issues, time lag of impact, stage of
completion, easiness to redesign
for easing implementation Development Policy Lending (DPL)
Additional Financing
Parallel Financing
Donor support
Private Sector
Other multilaterals
Other innovative financing
3.4 INSTITUTIONAL ANALYSIS
2.40. Considering the long construction period of large generation and transmission projects,
there is a risk of potential mismatching between demand and supply if economic recovery is
faster than projected. Some policy issues with potential high impact on the matter include:
A mechanism to address this is to maximize the scope and depth of permanent actions for
energy efficiency. Documentation is available which indicates countries that gave high
priority to this issue experienced sustained reduction of electricity demand. A set of tools
are available to achieve these results, for which the most important of them is an
operational and valid tariff system with rates reflecting actual costs of efficient supply. It
is unrealistic to implement energy efficiency if prices of energy products and services do
not provide users with the right signals on actual costs of supply; this is an absolutely
necessary condition to promote the optimization of consumption. Application of subsidies
provides disincentives to save energy.15
On the other hand, ample evidence worldwide
shows that higher energy prices induce substantially lower demand.
Energy subsidies are often justified as protecting poor people, but the bulk usually goes
to the better-off consumers. This is the case in most developing countries, even the
poorest in Sub-Saharan Africa, where rates of access to basic energy services are very
low. This creates an extremely unfair and socially regressive situation: amounts allocated
to subsidize existing consumers who can afford to pay cost reflective prices could be
better used to favor the poorest (those currently without access to energy services).
The sharp reduction of prices of oil and other primary energy resources is actually a
positive side effect of the economic downturn and credit crisis. Cost-reflective rates can
be applied for currently subsidized users able to pay for them, together with the
implementation of social nets aimed at protecting poor and low-income consumers.
Differently from previous times, when this implied significant tariff increases, in many
countries this could be done now by not fully transferring into existing rates the effects of
lower prices of oil and other primary energy resources. The difference between both
situations, in terms of political feasibility and social acceptability, seems to be enormous.
The opportunity should not be lost. Willingness of the WBG to provide support to client
countries through DPL and other tools provides the opportunity to move forward in such
a critical issue.
15 Current amount of global energy subsidies is around $300 billion a year (around 0.7 percent of world GDP), and
$220 billion of that amount corresponds to developing countries. This is completely inconsistent with any serious
attempt to induce global energy efficiency.
69
4. WATER INFRASTRUCTURE SECTOR
4.1 INTRODUCTION AND DEFINING SUB-SECTORS
2.41. At times of economic uncertainty, investment responses need to be guided by a set of
rigorous long-term principles yet be flexible to adapt to the current circumstances. For example,
The World Bank Group operates on a set of guiding principles tailoring its global, regional or
country-level approach to the specific circumstances through key water sector strategies.16
The
strategies are designed to provide effective, tailored assistance to client to support access,
efficiency and optimal resource use for sustainable development and poverty alleviation.
2.42. However, longer-term infrastructure development plans are at risk during the economic
downturn, through changes in revenue and financing constraints, including diverting government
funds to social programs. The INFRA diagnostic tool concentrates on immediate actions to
maintain or support momentum in infrastructure development, consistent with longer-term
principles and strategies.
2.43. The water sector consists of a range of investments, which can be categorized into three
main sub-sectors:
Water supply and sanitation (WSS). Access to water supply and sanitation is a critical
indicator within the Millennium Development Goals (MDGs). The costs of inadequate
WSS are high, but challenges and opportunities in water supply differ from those in
sanitation, and these in turn differ in rural and urban contexts. This is reflected not only
costs and economies of scale, but also differences in poverty and institutional capacity for
investment and management. The greatest challenge lies in building competent, efficient,
business-like, and service-oriented institutions, public and private support is affected
during economic and financial downturns; and sustainable service provision is only
possible where customers themselves cover the costs of operation and maintenance;
capital cost recovery is not always possible, but often requires predictable public
subsidies. Both in the rural and urban setting, within the context of INFRA priorities,
WSS rehabilitation projects are low cost yet labor intensive; while water infrastructure
projects such as hydropower investments, necessitates specialized employments and has
longer-term implications maybe crucial to priority investments in the power sector.
Irrigated agriculture and drainage. Investments in irrigated agriculture and drainage
have driven rural growth in many developing countries, creating jobs and reducing
poverty; yet the productivity of agriculture will have to continue to increase to meet the
ever-rising demand for food, now more than every before with the world is facing an
unprecedented food crisis. Water use in agriculture consumes more than 75 percent of
water in the developing world. Increased demand for water will have to be balanced with
the competing demands of other sectors. Water productivity will have to be raised. Water
use in agriculture consumes more than 75 percent of water in the developing world,
however in with the economic downturn there will be decreased funding to support
16 The World Bank Water Resources Sector Strategy – Strategic Directions for World Bank Engagement (World Bank,
2004) has a pragmatic but principled approach to water resources management was designed to provide effective,
tailored assistance to client to improve water resources management – with a mission to reengage with high reward
infrastructure ranging from energy infrastructure to flood management. Water for people addressed through The
World Bank Group‘s Program for Water Supply and Sanitation (World Bank, 2004) recognizes improving water
supply and sanitation services is key to achieving broader poverty reduction goals, through sound policies and
institutions and building capacity at the local level and secure necessary financing to rebuild infrastructure and
expand service coverage and quality. Reaching the Rural Poor A Renewed Strategy for Rural Development (World
Bank, 2003) highlights scaling up innovations and successful investment for water for food by increasing
productivity of water use.
70
increased demand for water will have to be balanced with the competing demands of
other sectors, investments will be needed to create effective and sustainable institutional
arrangements, including by establishing and strengthening water users‘ associations,
promoting the involvement of the private sector, and ensuring that irrigation systems are
financially viable.
Water resources management (WRM). Water resources management integrates a number
of water sub-sectors agriculture, flood protection, power generation, natural resource
management and resource development. The use of an integrated water resources
perspective ensures that social, economic, environmental, and technical dimensions are
taken into account in the management and development of surface waters inclusive of
water for the environment for flood management and multi-purpose basin projects,
which require perhaps a longer gestation period, with lower employment implications but
these broader water resource management investments and programs should remain
equal players as part of a country‘s priority assets portfolio, for technical assistance for
policy and institutional capacity building in the immediate-term for longer-term benefits.
2.44. While each sub-sector has its own set of risks, benefits and financial architecture;
however, the diagnostic tool is generalized across the sector for ease of application.
4.2 DEMAND ANALYSIS
2.45. The demand for water infrastructure is largely driven by non-market, social or
environmental pressures. Some of these are captured by the Millennium Development Goals (e.g.,
water supply and sanitation); while others have less well-defined definitions of demand/need
(e.g., water infrastructure for flood management or environmental quality). A corollary is that the
demand for these services is relatively insensitive to changes in economic conditions, linked more
directly to population growth, urbanization, and public development priorities. However, some
water services (e.g., water supply, irrigation) may be delivered through varying degrees of market
mechanisms. In these sub-sectors, the economic downturn may manifest in lower demand or,
more likely, reduced payments and collections.
Three important implications from the demand side, therefore, are:
Demand for water infrastructure and water services are relatively insensitive to general
economic activity, so there will be little offsetting reduction in demand (or demand
growth) over the crisis period
Demand may be more appropriately measured by development objectives (e.g.,
Millennium Development goals), necessitating articulation of priorities based on policy
and/or political judgment informed by national investment plans (where available) rather
than measures of economic (market) value
Downturn in collections and revenues may compromise perceptions of long-term
risk/reward as well as short-term sustainability (maintenance) of existing infrastructure.
4.3 SUPPLY ANALYSIS
2.46. The list of potential investment projects should be assembled based on existing
national/sectoral plans, critical or backbone operations and risk of financial stress.
Portfolio status
2.47. The supply analysis includes an assessment of the status of development: projects are
either currently operational, under construction or under preparation (see Table A Portfolio Status
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Review). Generally, priority should be given to more advanced projects in terms of completion
and delivery of services. For projects that are operational, focus should be on reducing costs and
increasing efficiency, including sustaining priority maintenance; in these cases, the cost and
efficiency ratio would be measured against reduced costs. Responses to projects under
construction could be financing to stabilize investments, acceleration of project schedules or
designs modified. Projects under preparation should be prioritized and possibly modified afforded
stabilizing finances and possibly accelerated where projects risks (see Table 2.8 below) are
manageable. Indicators to prioritize projects on status include: percent of budget already
disbursed and expected disbursements over the next three years. For projects under construction,
the cost of termination (e.g. contractual penalties, et.) should be taken into account. However, the
proposed hierarchy should not dictate project prioritization as some very important projects (vis a
vis benefits) may be in earlier stages of development.
Table 2.6. Water Infrastructure sector - Portfolio Status Review
Evaluation Questions
for Sub-sector
Information/analysis
Situation analysis assets and service programs and projects in water
a) What is the situation in the public
expenditure program, urban? Existing country and local commitments on capital operation
and maintenance in water projects that are being executed
Cost and scope of these programs
b) What are recent developments since fiscal
crisis began? What is happening with disbursements?
Investment commitments to existing projects?
c) What is the status of the implementation
of the Government program? Areas where water programs are facing problems
Water projects that are being postponed due to crisis
Identification of stage and progress of these projects
What facilitation is needed to complete these projects
Benefits analysis
Table 2.7. Water Infrastructure sector - Benefits - INFRA specific priorities for sub sector analysis
Evaluation Questions
For Sub-sector
Information/analysis
Benefits analysis: Priorities for infrastructure investment in the water infrastructure sector
a) Strategic importance
criteria
Determining ranking of economic and social benefits and their strategic
importance for country and water sector
- access/MDG Extent to which spending will contribute to MDG 7, development objectivess
- job creation/employment Expenditure on labor and estimate of Jobs provided / people hired for different
types of projects
Assessment of opportunities for local labor
Use of labor intensive approaches
- impact on
growth/development
Assessment of growth potential from (direct and indirect) water infrastructure
investments
- impact on poverty
mitigation
Assessment if investments are targeted to the poor (e.g. rural water supply
irrigated agriculture))
b) Country priorities Country infrastructure priorities
2.48. The specific indicators of benefits/importance are contingent on an individual country‘s
specific needs and can be informed by the Country Strategic Review. However, priority
investments are likely to be those that target economic growth, employment, and access to
infrastructure services by the poor.
Risks and ease of Implementation
2.49. Not all projects have similar risk profiles, and these risk profiles may shift unequally in
times of economic downturn whether as the consequences of the economic downturn/crisis (e.g.,
72
at the national level, the drain of on foreign exchange reserves, equipment delivery) or as an
inherent risk of the project (e.g., inability to strengthen institutional capacity or foster appropriate
policy mechanisms). Risk tolerance may also shift to favor projects that are likely to disburse
quickly and/or be resilient to bottlenecks.
Table 2.8. Water Infrastructure sector - Risks and ease of implementation
Evaluation Questions
For Sub-sector
Information/analysis
Risks and Ease of Implementation: Priorities for infrastructure investment in the water
infrastructure sector
- Government‘s capacity to execute
projects within 3-year time frame
Past Government performance on spending vs.
allocations
Determining implementation issues, time lag of impact,
stage of completion, easiness to redesign
In-country capacity to design and implement high quality
projects
Local government capacity for implementation
- Construction sector and suppliers
capacity to support implementation
Local private sector capacity (industry and consultants)
and performance
-completion rates,
-timeliness
-extent of local/national competition
- Equipment supply risks Are suppliers dependable in new economic conditions?
Is bridging foreign exchange manageable?
- Institutional risks Are investments institutionally complex?
Will management‘s attention remain in project
implementation?
Are PPP commitments at risk (e.g. risk sharing, financial
resources, performance)?
- Project quality and adaptability What stage is the project at in terms of implementation
or completion
What is the time lag of impact
What are issues / risks for redesign
Project relevance to national urban strategy (if exists)
Maintenance of urban infrastructure assets
4.4 INSTITUTIONAL ANALYSIS
2.50. Institutional capacity is a critical element in water infrastructure development. In many
areas, policy and institutional capacity remain weak, compromising the ability to manage water
resources and deliver water services on a cost-recovery basis. Policy responses during the crisis
period can aid in infrastructure maintenance and resumption of infrastructure financing as the
crisis attenuates. Two areas of concern in the crisis period are planning and policy development:
Planning: Large water resources infrastructure projects (especially for flood
management and multi-purpose water allocation) have long gestation periods, from
identification to feasibility to construction and implementation. Further, the pipeline or
stock of well-identified projects is limited in most countries, the result of the past decades
of lack of planning. There is now a recognized need for public sector initial planning to
identify priorities and reduce risk in future investments, and so accelerate financing once
the crisis attenuates.
Policy development: Policies may help offset risks to existing service providers while
improving the investment climate for resumption of investment. Some policy issues have
73
also long gestation periods and may be difficult to re-start if abandoned. Examples
include tariff policy, water policy, and environmental and social policies (e.g.,
resettlement and rehabilitation).
2.51. Prioritization of policy and planning initiatives will be country and sub-sector-specific.
However, the basic criteria identified for investments can be applied to institutional initiatives,
namely: status of reforms/planning; benefits/importance; and risks to complete. However,
priority should be given to policy and planning initiatives that: (i) are currently underway or
mobilized; (ii) have a direct impact on attracting financial resources as the crisis attenuates; and
(iii) stabilize current service providers and existing infrastructure.
5. URBAN SECTOR
5.1 INTRODUCTION AND DEFINING SUBSECTORS
2.52. The ongoing financial crisis and associated economic slow down are expected to have a
major impact on the urban sector in several ways. First, the decline in economic activity will lead
to a shortfall of fiscal resources, reducing the capacity to fund service provision and long-term
infrastructure. Second, increased levels of poverty and shrinking disposable incomes will
augment the dependence of the population on public provision of basic services and income
support. Third, local and national government will be forced to re-assess priorities, balancing the
urgent needs of the short-term with the need to keep and maintain infrastructure assets.
2.53. The crisis may provide a unique opportunity for the government (central and local) to
address institutional constraints that have affected the provision of services. For example in the
case of housing for the poor, as we expect a shift in the demand for low-income housing,
developers may take an increased interest in this market, developing affordable and progressive
units with the aid of micro-credit schemes and local participation. Local governments may take an
interest in citywide slum upgrading programs as the pressures from their constituencies will
increase. Governments may even use this crisis to get rid of dated land regulations and controls
that have pushed households into informality.
2.54. The urban sector is defined as the envelope of activities that ensures the economic
functioning of a city and the well being of its inhabitants. This includes housing and shelter for
the urban poor, urban infrastructure (roads, drainage, solid waste, water and sanitation), land
markets, municipal finance, urban planning and management, urban environment and climate
change, and governance.
5.2 DEMAND ANALYSIS
2.55. The demand for investment in the urban sector is closely linked to growth, as well as
social and equity concerns. Cities are an important driver of growth and job creation. This
message is reinforced by the recent WDR, Reshaping Economic Geography.17
2.56. Job losses. The crisis is anticipated to impact on labor markets through reductions in
wages and labor demand. Urban areas are expected to be hardest hit, particularly in the financial,
manufacturing and construction sectors. Evidence from past crises also shows evidence of labor
reallocation; during the 1997 Asian Crisis, some 30-40 percent of displaced urban workers moved
back to agricultural. Workers, which are likely to be most vulnerable (as in past crises), are the
17 World Development Report, 2009 ―Reshaping Economic Geography‖ World Bank, Washington DC. 2008
74
unskilled, women, youth, migrants, and older workers who may face greater obstacles in re-
entering the labor market later.
2.57. Urban poverty. The job losses and wage reductions in urban areas are anticipated to push
some into poverty, and those that are already poor are anticipated to fall into extreme poverty. A
decline in remittances will also have negative impacts on urban households. The financial crises
in East Asia and Mexico showed that urban households felt the impacts disproportionately. In
Mexico‘s 1994/5 ―peso crisis‖, urban households with workers in financial services and
construction suffered the greatest income declines (48% and 35% respectively). The lack of
agricultural production as a safety net for households to fall back on also makes urban households
more vulnerable.
2.58. Decreasing incomes means more difficulty in satisfying the basic needs of households,
including nutrition and education, and more urgency to extend safety nets. Cost recovery schemes
used to finance urban infrastructure – especially water and sanitation utilities – may not be
sustainable as initially designed. Poor households may have reduced access to basic services for
lack of affordability. Utilities that depended on a steady stream of revenues may be unable to
operate without financial help from the government.
2.59. Social problems. Cities are prone to problems of crime and violence, and social unrest
due to stark inequalities. These problems can become more pronounced during times of rising
unemployment and economic hardship leading to widespread protests, riots, and social unrest.
Some recent examples include cities in Russia, Lithuania, France, Greece, and Iceland, with deep
concerns elsewhere such as in China. These problems create demand for investments which
contribute to job creation as well as improving equity through the provision of basic urban
services and slum upgrading in low income areas.
5.3 SUPPLY ANALYSIS
Local Governments face declining resources.
2.60. The crisis is impacting local government resources through falling tax revenues, a credit
crunch, and uncertain (and decreasing) intergovernmental transfers. This will translate into cuts
for current expenditures as well as capital and infrastructure investments. The two largest banks
which specialize in local government lending, Dexia and DEPFA, are facing major solvency
issues and have received assistance through bailout packages.
2.61. On the expenditure side, local governments will likely face increased demand for social
safety net expenditures, requests from utilities for subsidies and grants, and renegotiation of
contracts with suppliers. Some projects based on private sector participation or financed partly by
cost recovery mechanisms may find themselves without sufficient financial return to remain in
the public expenditure program. Local capacity will be seriously stressed
2.62. During times of economic crisis, a critical response to preserving jobs, creating new ones,
and building lasting assets for economic and social development is investing in infrastructure in
cities. This includes maintaining existing spending, and where possible, ramping up spending.
There is much demand for public investments in urban infrastructure, slum upgrading, and for
rehabilitation, operations, and maintenance of existing infrastructure. Affordable housing could
also have much potential in assisting client countries to overcome the challenges of the crisis.
The following instruments should be considered from the broader spectrum of urban investments:
Urban Infrastructure Funds, also known as Municipal Development Funds are a
financing instrument that lends to local governments, local utilities, or communities for a
range of infrastructure investments. Perhaps the most important distinctive feature is that
these projects use local institutions to do the work of identifying, appraising, and
75
channeling finance to sub-national entities on behalf of International Finance Institutions
or national governments. This way, resources can reach a large number of municipalities
(including smaller cities and towns). Some have been designed for financial
intermediation aimed at strengthening municipal finance to build infrastructure systems
and sustainable credit market. Others are poverty oriented grant funds, which work with
communities for basic services and community infrastructure and can be designed to
promote labor-intensive approaches for some investments. A recent World Bank review
of Urban Investment Funds shows that they have performed well.18
Slum Upgrading. With estimates of approximately one billion slum dwellers globally, the
infrastructure needs in slums are immense. Living in slums poses major risks due to the
overcrowded living conditions and resulting health impacts, vulnerability to disasters and
climate change as a result of living in precarious areas, and in some places social
problems of crime and violence. Investments in water and sanitation, electricity, and
roads, as well as social and community infrastructure in slums have demonstrated long-
term benefits for the urban poor. Slum upgrading programs rely very much on local
participation and during times of crisis can be effective at local job creation in the short
term and longer-term investments in community infrastructure. In some cases, upgrading
may not be viable and relocation may be a more effective strategy and can be addressed
with investments as discussed below.
Affordable housing projects will be critical as many of the conventional subsidized
housing loans may face difficulties due to the reduced government capacity. In addition
to helping governments in restructuring those loans, instruments such as micro-finance
for incremental housing could spur investments at the household level and create
additional supply for the rental market in the form of rooms to rent, etc.
The rehabilitation, maintenance, and operations of existing urban infrastructure will also
create jobs while ensuring that infrastructure does not fall into disrepair. Evidence from
previous crises shows that such spending is often neglected with spending cuts. Yet
spending on the repair of roads, maintaining water systems, drainage systems and
community facilities is important in both the short run and long run as lack of
maintenance can shorten the productive value of these assets, ultimately resulting in
higher long term costs.
2.63. Other investments such as slum prevention and land subdivision projects also are
important but would potentially be secondary priorities in times of crisis. With the rapid
urbanization in many developing countries, investing in sites and services can help to mitigate the
proliferation of new slums, and spur private investments in housing. In such programs
investments in basic services are made on empty lands typically in peri-urban areas around fast
growing cities, which are then opened up for affordable purchase by low-income residents. With
links to low income housing finance schemes and to transport networks, such programs can
provide viable alternatives to slums, are ultimately more cost effective than retrofitting, and can
create jobs in the short term. Such efforts can also help to ensure more environmentally
sustainable efforts to urbanization and minimize the poor‘s vulnerability to natural disasters
particularly given the known threats of climate change. Land subdivision projects will help
reduce supply constraints and can provide tax revenues to local authorities in case land lease or
sale is auctioned. This may be a great opportunity to have the private sector interested in
developing some projects with serviced land included.
18 Annez, Huet, Peterson, 2008. ―Lessons for the Urban Century‖, Decentralized Infrastructure Finance in the World
Bank.
76
2.64. All of these investments can be designed to maximize employment generation through
including labor-intensive approaches where appropriate. This can serve as an important safety net
for some by providing both income transfer and consumption-smoothing benefits to households
hurt by crisis. By setting wage rates low, programs attract only the poor in need through self-
targeting, promoting poverty alleviation.
Portfolio status
2.65. The analysis will look at the urban portfolio in client countries including an inventory of
commitments on capital and operations of urban projects, the content of labor and local resources,
and how the crisis has affected the demand or relevance for those projects. The assessment would
also look at which programs are being delayed or having problems, why, and whether help is
needed, and classify those projects in terms of long-term objective or short-term stimulus or
safety-net support.
Table 2.9. Urban sector - Situation analysis assets and service for urban programs and projects
Evaluation Questions
for Sub-sector
Information/analysis
Situation analysis assets and service programs and projects in Urban
a) What is the situation in the public
expenditure program, urban? Existing country and local commitments on capital
operation and maintenance in urban projects that are being
executed
Cost and scope of these programs
Content of labor spent and use of local resources
How small and medium firms are being used and
opportunities to increase their participation
b) What are recent developments since fiscal
crisis began? Has/will the crisis lead to significant increase or slowdown
in the demand for urban projects (by type of project).
What is happening with disbursements?
How has/will the crisis affect:
-The demographic flows within and outside the city
-Projected income for the urban poor
-Unemployment
-Affordability of basic services
-Housing and informality – will there be a shift of more
people to informal settlements?
Investment commitments to existing projects?
c) What is the status of the implementation
of the Government program? Areas where urban programs are facing problems
Urban projects that are being postponed due to crisis
Identification of stage and progress of these projects
What facilitation is needed to complete these projects
d) What are the trade-offs between projects
that are long-term priorities and those that
are more effective to cope with the crisis?
Identify/reaffirm priority investment projects including:
-Long term policy objectives
-Immediate impact on job creation and the local economy
2.66. Defining priorities for spending in the urban sector under the crisis would require analysis
of the role of each type of urban project in achieving economic and social benefits aligned with
country strategic priorities. These generally include impacts on access to basic services and
meeting the MDG target of improving the living conditions of 100 million slum dwellers,
employment creation, economic growth, and impacts on poverty. Analysis would also be carried
out to understand the implementation record of urban projects looking at the capacity of the
government (s), project quality, and adaptability to redesign or scaling up under the crisis. With
this information, it would be possible to identify a list of priorities for spending in the urban
sector.
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Benefits analysis
Table 2.10. Urban sector - Benefits - INFRA specific priorities for sub sector analysis
Evaluation Questions
For Sub-sector
Information/analysis
Priorities for infrastructure investment in the Urban Sector
a) Strategic importance criteria Determining ranking of economic and social benefits and
their strategic importance for country and urban sector
- access/MDG Extent to which spending will contribute to MDG 7, Target
4 and other MDGs
- job creation/employment Expenditure on labor and estimate of Jobs provided /
people hired for different types of projects
Assessment of opportunities for local labor
Use of labor intensive approaches
-impact on growth/development Assessment of growth potential from urban infrastructure
investments
- impact on poverty mitigation Assessment if investments are targeted to the poor (slum
upgrading, affordable housing, urban infrastructure)
b) Country priorities Country infrastructure priorities
Risks and Ease of Implementation
Table 2.11. Urban sector - Risks and Ease of Implementation
Evaluation Questions
For Sub-sector
Information/analysis
Priorities for infrastructure investment in the Urban Sector
Ease of implementation/risks Determining implementation issues, time lag of impact,
stage of completion, easiness to redesign
- government‘s capacity to execute
projects within 3-year time frame Past Government performance on spending vs. allocations
In-country capacity to design and implement high quality
projects
Local government capacity for implementation
- construction sector and suppliers
capacity to support implementation Local private sector capacity (industry and consultants) and
performance
-completion rates,
-timeliness
-extent of local/national competition
-project quality and adaptability What stage is the project at in terms of implementation or
completion
What is the time lag of impact
What are issues / risks for redesign
Project relevance to national urban strategy (if exists)
Maintenance of urban infrastructure assets
5.4 INSTITUTIONAL ANALYSIS
2.67. Institutional capacity at both the national and local level for planning and implementation
of urban projects is critical. This capacity varies greatly from country to country, but at the local
level, can be quite weak. Many local governments do not have adequate staffing, technical skills,
or financial capital to tackle existing problems let alone taking on new challenges. This is an area
of concern which can be addressed in the context of project preparation and design through the
provision of technical assistance and training in promoting technical, administrative and financial
capacity.
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6. TELECOMMUNICATIONS SECTOR
6.1 INTRODUCTION
2.68. Information and Communications Technologies (ICT) may be considered a general
purpose technology; an enabler that acts as a platform for innovation and growth in other sectors.
Recent research19
attempts to quantify the positive boost that ICTs can provide to general
economic growth. For instance, in developing countries, a 10 per cent increase in mobile
telephony penetration could increase economic growth by 0.81 per cent; while for broadband
penetration the boost could be as high as 1.438 per cent.
6.2 DEMAND ANALYSIS
2.69. Even though the global financial crisis may have a negative impact on demand, its
magnitude could be relatively smaller in telecommunications than in other sectors. Although
growth in end-user demand may slow-down due to the financial crisis, research suggests20 that
access to ICT services is relatively income-inelastic (i.e. a change in income does not alter in the
same magnitude the demand for access to ICT services). Indeed, cost reductions in other
economic activities, such as travel or business conferences, may actually boost demand for ICT
services, through substitution. Industry projections show slower growth, but no decline in demand
for ICT services in developing countries.
2.70. The bigger risk is that reduced investment could contribute to higher pressure on supply.
Recent studies21
suggest that global demand for broadband could exceed total capacity at the
access layer by 2012. There might already be a gap between the investment required to meet this
demand and the actual investment from the industry. If anything, this gap will increase as demand
remains almost constant and supply faces financing constraints. As a result, some developed
country governments, such as Italy, Greece, or Australia, have announced active intervention in
national broadband strategies to avoid next-generation network (NGN) deployment being
delayed.
2.71. With a possibility of a slight drop in global demand‘s growth, specific country
assessments need to be carried out. In general, existing services may see a relatively small drop in
demand‘s growth, while new services and network expansion plans will probably be slowed
down or stalled due to constraints on the supply side. However, we recommend each specific
country to closely monitor their own telecommunications sector through sector statistics
(especially traffic statistics as this is a leading indicator of general economic activity) and close
interaction with regulatory agencies and operators.
6.3 SUPPLY ANALYSIS
2.72. The primary sets of assets exposed to the effects of the financial crisis are those in the
midst of deployment or about to be deployed. The financial crisis has hit telecommunications
operators by increasing the cost and availability of credit (financing in general), and this in turn
has affected planned investments and network expansion. In markets highly competitive markets,
competitive pressure from competing networks and operators might prove to be a strong reason
not to postpone investments. Overall, these assets can be classified in four different categories,
depending on the services provided and/or objective market segment:
19 See World Bank, ―Information and Communication for Development 2009: Extending Reach and Increasing
Impact‖, especially analysis in Chapter 3. 20 See ITU, ―Confronting the Crisis: Its Impact on the ICT Industry‖, February 2009. 21 See ITU, Op.Cit.
79
International connectivity (submarine or terrestrial fiber optic cables, satellite)
Domestic transmission (backbone)
Local access networks in rural areas
Local access networks in urban areas
2.73. In countries with open and competitive markets, local access networks in urban areas are
highly competitive, while all other segments may be less competitive. It is therefore expected that
investment plans in the first three categories might be halted or stalled, even in competitive
environments.
2.74. In general, public-private partnerships (PPP) are at risk. Many projects that have strong
social components and long-term benefits for operators have been designed under some form of
PPP approach. These projects, when analyzed in isolation, are sometimes not attractive for private
operators to undertake on their own, and so a PPP scheme is designed to make the project
attractive for commercial investors. As many of them are tendered to maximize efficiency,
winning operators tend to bid for the minimum required public participation that would make the
project worthwhile. It is under these circumstances where a steep increase in financing costs
could jeopardize project execution.
2.75. For example, projects funded by universal service funds might be affected. Universal
service funds have been set-up by many developing countries to increase access to
telecommunications services in rural and low-income areas. These funds often bid out projects,
for instance under reverse auctions, asking for operators to bid for the lowest subsidy that would
allow them to provide pre-specified services in pre-defined locations. For ongoing tenders,
projects that have recently been awarded, or projects that are starting their deployment, the
increase in the cost of financing (or lack of it) introduced by the global crisis could have deep
repercussions: it could increase the requested subsidy beyond expected levels in the case of
ongoing tenders; or it could impact delivery timelines and profitability in those cases where an
operator has already been awarded. Universal service funds in developing countries are typically
under spent, due to bureaucratic management practices, but may become more important during a
credit crunch because of the lack of availability of commercial funding sources.
2.76. In addition, projects that were previously viable without any intervention from the
Government might now require a PPP approach. Big, investment-intensive telecommunications
infrastructure projects with long-term returns might also be affected by the current crisis. For
example, a company about to install a regional submarine cable that was to connect several
countries has now announced that it will have to cut the scope of the project and exclude at least
one country from the initial plans due to the increase in financing costs. The additional overall
costs of including this country sometime in the future, after the main project is concluded, plus
the opportunity cost of having the country connected to this cable (in terms of consumer welfare
and indirect economic growth) make it worthwhile to consider a PPP scheme with the operator to
bring these countries back in the project.
A Diagnostic Approach for the Telecommunications Sector
2.77. Available indicators for the telecommunications industry might not capture the effects of
the crisis. There is a wealth of indicators that are available for the telecommunications industry in
general. However, because of their global nature, many existing databases update relatively late.
For instance, statistics from the International Telecommunications Union (ITU) for year-end 2008
will not be available until September 2009. These indicators might not capture the latest effects of
the financial crisis on individual countries.
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2.78. A reliable diagnostic approach requires surveys and up-to-date statistical information. It
is recommended that the Assessment Team carry out an in-situ review in order to get a better
understanding of the impact of the crisis on the telecommunications sector as impacted by the
crisis. In general, it is recommended that household surveys and/or focus groups be organized to
better understand the extent of the impact of the crisis on the demand for telecommunications
services. Additionally, in-depth interviews with the following stakeholders are strongly
recommended to collect up-to-date information:
Regulatory Agency and / or sector Ministry
Universal Service Fund Administrator, if available
Main operators
Investment promotion agencies, if available
Regional organizations / sponsors (in case of international fiber optic transmission
projects)
Bankers and financiers
2.79. The Diagnostic approach has been divided in two parts: (i) a situation analysis that will
allow a better understanding of the current situation of existing projects and the effect of the
crisis; and (ii) a prioritization analysis that will allow policy makers channel available resources
among existing projects. The following table provides a quick reference on the main issues and
information required for a rapid assessment of the telecommunications sector.
Table 2.12. Telecommunication sector - Situation Analysis for the Telecommunications Sector
Evaluation Questions
For Sub-sector
Information/analysis
Situation analysis assets and service programs and projects in telecommunications
a) What is the situation in the
telecommunications public expenditure
program?
Existing commitments on telecommunications
projects that are being executed
Cost and scope of these projects, identification of
private and public portions in case of PPPs
Identification of job creation components in case of
labor intensive works
b) What are recent developments since
fiscal crisis began? Have operators / regulatory agencies observed a
decline in demand in terms of:
(i) shipments,
(ii) new installations,
(iii) churn,
(iv) traffic, and
(v) average revenue per user – ARPU?
What is the situation of private sector investment
commitments to existing projects, especially those in
rural and urban areas sponsored and partially
financed by the Government?
c) What is the status of the
implementation of programs with
Government participation?
What are the areas where telecommunications
projects may face / are facing problems?
Which are the main telecommunications projects
financed by the Government that are being postponed
due to the crisis?
Will projects that previously did not require public
financing stall or stop because of the financial crisis?
Is it worth to consider public financing?
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Evaluation Questions
For Sub-sector
Information/analysis
Identification of stage and progress of these projects
Assessment of resources required to complete these
projects
d) What are the trade-offs between
projects that are long-term priorities and
those that are more effective to cope
with the crisis?
Identify / reaffirm priority investment projects
including:
o Long term policy objectives
o Immediate impact on job creation and the local
economy
Benefit analysis
2.80. Telecommunications projects are an engine of growth. In general, ICT network
infrastructure investments (especially nationwide broadband backbone and access projects) could
be included as part of economic stimulus action plans due to several reasons, mainly:
(i) many of these projects can be initiated quickly and require a significant amount of labor
with strong multiplier effects; and
(ii) nation wide broadband investments may create a platform for overall economic growth in
the medium to long term.
2.81. Given the characteristics of the demand for ICT services described above, these projects
represent a long-term growth investment that addresses many of the short-term issues posed by
the global crisis.
2.82. Many OECD countries have already included broadband infrastructure rollout in their
stimulus plans. The organization has recently released a draft report ―The Role of communication
Infrastructure Investment in Economic Recovery‖, which provides a rationale for this kind of
investments as part of recovery plans. Moreover, at least thirteen OECD countries have already
included specific broadband initiatives as part of their economic growth strategies and / or
stimulus packages, with an estimated $140 billion investment from public and private. For
instance, the US government has included more than US$7 billion for rural broadband in the
economic stimulus package while the Australian government recently announced that it would
build a national broadband network, aiming a universal converge by the year 2012, at an
estimated cost of A$43 billion.
Table 2.13. Telecommunication sector - Benefits - INFRA specific priorities for sub-sector analysis
Priorities for infrastructure investment in the Telecommunications Sector
a) Strategic importance criteria Determining ranking of economic and social benefits
and their strategic importance for country and
telecommunications sector
- access/MDG Extent to which project completion will contribute to
relevant MDGs and / or National
Telecommunications Strategy
- job creation/employment Expenditure on labor and estimate of Jobs provided /
people hired for different types of projects
Assessment of opportunities for local labor
-impact on growth/development Assessment of growth potential from
telecommunications infrastructure investments
- impact on poverty mitigation Prioritization of telecommunications projects aimed
at rural and low income areas
Social welfare created by access to
telecommunications in rural and low income areas
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Priorities for infrastructure investment in the Telecommunications Sector b) Country priorities Country infrastructure priorities
Risks and ease of implementation
Table 2.14. Risks and ease of implementation
Ease of implementation/risks Determining implementation issues, time lag of impact,
stage of completion, easiness to redesign
- government‘s capacity to execute
projects within 3-year time frame Assessment of current mechanisms for government
spending (i.e. are Universal Service Funds in place?)
and institutional arrangements
Past Government performance on telecommunications
projects similar to those identified as at-risk
Local government capacity for implementation
- construction sector and suppliers
capacity to support implementation Local private sector capacity (industry and consultants)
and performance
Potential job creation opportunities based on previous
projects
-project quality and adaptability What stage are the projects at in terms of preparation,
implementation, or completion?
In the case of projects in preparation, what is the
timeline for execution and completion?
What are issues / risks for redesign in the case of
projects in preparation or implementation?
Project relevance to national telecommunications
strategy (if available)
6.4 INSTITUTIONAL ANALYSIS
2.83. There are two different reasons why public authorities should consider allocating
emergency resources to the telecommunications sector: (i) to rescue projects that might be at risk
due to the impact of the global financial crisis on their financing structure; and (ii) to provide their
countries with a long-term investment that will also mitigate the short-term effects of the financial
crisis.
Capacity
2.84. A specific solution for a country will depend on the relevant demand and supply
characteristics, and the strength of the governing body and policies. The process will also allow
the team to pinpoint specific institutional or capacity building bottlenecks that could hinder any
attempted solution. Different options have to be considered for viable and timely solutions. There
are many alternatives that government authorities could considered to mitigate the impact of the
financial crisis on the telecommunications sector in their country. Some of them are:
bridging the gap in financing (in terms of rates spread and / or availability of resources)
with respect to pre-crisis situations and gradually converge with market conditions;
consider the inclusion of financial guarantees and / or demand guarantees (in the form,
for instance, of capacity purchases)
technical assistance to re-evaluate projects and redefine their scope and timeline for
deployment;
redefine projects at risk to turn them into national connectivity projects;
83
consider direct public participation in investment projects that have been seriously
affected; among others
2.85. Strengthen capacity to undertake monitoring and evaluation: if an intervention is agreed,
a monitoring and evaluation framework has to be rapidly implemented. The key is to include
relevant yet readily available indicators, in order to measure the result and impact of any
intervention carried out by local authorities. These usually include:
List of areas benefited
Users / subscribers and pricing and traffic information
Overall investment, divided public and private
Jobs created or sustained
2.86. Baseline studies are recommended also to measure the overall impact of the project. It is
important to note that due to the nature of telecommunications projects, baseline studies can be
carried out simultaneously with project rollout (unless they are required to support the economic
benefits and hence be part of the evaluation of the project).
Financing
2.87. Developing countries might also consider adapting intervention mechanisms being used
by several OECD countries. While there are many variations and details still missing from the
actual approach to be followed by these countries, the main principles behind their strategies are:
Ambitious goals in terms of coverage (many of them aiming at near-national coverage of
broadband networks) and timing
Government to provide partial or total financing (including loans and guarantees)
Private sector participation considered key, as investor and as operator of the infrastructure
Market-based competitive selection of private party to provide the infrastructure
2.88. Leverage existing mechanisms for fast track financing. Finally, design of the actual
solution will have to consider existing mechanisms that can provide an easy and fast way to
channel the required resources. After the economic evaluation proves the intervention to be
socially desirable, a fast implementation arrangement has to be designed. It is recommended that
it is build over existing institutional arrangements as they would require fewer resources for
implementation and would be readily available for rapid execution.
Economic evaluation
2.89. An economic evaluation of the intervention is worth carrying out. All interventions to be
considered should undergo an economic analysis to determine whether it is worth doing or not.
This analysis should be forward-looking and consider the costs of re-activating / continuing a
project against the potential benefits of the project, without including previously committed
resources (―sunk-costs‖), but including the opportunity cost of delaying or postponing the project.
As thorough as this analysis ought to be, time will be of the essence and a rapid methodology may
have to be developed to streamline this kind of evaluations.
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7. SYNTHESIS: RANKING COUNTRY INFRASTRUCTURE PRIORITIES
2.90. Through the Second component assessment process a country‘s infrastructure, investment
opportunities and technical assistance needs for priority investments are ranked: first, a strategic
ranking of priority investment opportunities according to its Benefits and Ease of Implementation
analysis; and secondly, an institutional and policy ranking reflects its potential mid-term impact
and Ease of Execution as well.
7.1 RANKING THE PRIORITY INVESTMENT OPPORTUNITIES
2.91. Identifying the priority investment opportunities in the context of INFRA is only one step
in the process. Projects should be prioritized by considerations related to financial resources and
also by the focus needed in an emergency situation where the readiness to respond is not
constrained by limitations related to human resources and institutional capacity. With the INFRA
Diagnostic Tools practitioners are asked to identify the Benefits associated with any given set of
projects, in the context of INFRA Initiative‘s criteria but the tool remains open to accommodate
other country specific criteria.
2.92. In a double-entry evaluation matrix (see Table 2.15 below) the Benefits associated with
any given project should help define its strategic importance, or one of the ways to position the
project under consideration (horizontal axis). The other measurement criteria are defined under
Implementation Ease (vertical axis), or a weighting of the risks and key considerations affecting
the potential implementation any given project. As identified in the sector discussion above ,
some of the parameters to ease implementation or provide constraints could include but not
limited to the institutional execution capacity that might be constrained by the crisis; policy
bottlenecks; input risks such as limitations affecting suppliers or volatility in a wide sense; the
degree of flexibility in project design that might ease changes in course of action as we go; degree
of advancement of the project as active within the portfolio of any IFI or major donor, etc.
7.2 RANKING OF PRIORITY INSTITUTIONAL AND POLICY OPPORTUNITIES
2.93. The current crisis might pose opportunities for institutional and policy reform dimensions
that should be also taken into consideration in line with INFRA‘s technical assistance support.
Defining institutional and policy opportunities through the assessment process might allow some
client countries to reform essential aspects that could boost economic recovery and/or turn such
growth into more sustainable once the economy determines a steadier pace. Consequently,
priority projects should be ranked as well to help us understand their economic potential and
implementability.
2.94. The Assessment process maps out a country‘s priority infrastructure projects. The
ranking to be executed in the Strategic Country Review module will have introduced by the
Assessment signaling the fiscal space status of any given country and the importance of
infrastructure needs, providing a relative positioning compared with peer countries. As illustrated
in Table B below, the two rankings to be executed at the end of the Infrastructure Portfolio
Assessment Review should allow us to prioritize projects according to its strategic importance
that can be measured and implemented within a 3-5 year timeframe: weighing the likelihood of a
successful execution and its potential benefits; and understanding the potential impact from a
policy perspective.
85
Table 2.15. First Ranking -- Country:
Strategic ranking of all infrastructure
priority projects
Strategic Importance /
Benefits
Low
Mediu
m High
Imp
lem
enta
tio
n
Ea
se
(Wei
gh
tin
g o
f th
e ri
sks
and e
ase
of
imp
lem
enta
tio
n)
Lo
w
Mo
der
ate
Hig
h
Table 2.16. Second Ranking -- Country:
Ranking of policy opportunities
Benefits
(Time span should be limited to 3-5
years)
Low Medium High
Ex
ecu
tio
n E
ase
(Wei
gh
tin
g o
f th
e ri
sks
and e
ase
of
imp
lem
enta
tio
n)
Lo
w
Mo
der
ate
Hig
h
86
Annex 2.1 Templates for Financial Analysis of Project Portfolio
Table 2.1.1. Projects Under Operations: Investment needs and expected funding shortfall
Projects Under
Operation
/Project Type
Total Cost
[US$
Millions]
Funding Needs
[US$ Millions]
Identified Funding Sources
[US$ Millions]
Expected Funding Shortfall
[US$ Millions]/Issues
Status of Investment
(if expansion or additions required)
2009 2010 2011 Debt Equity Govt.
finance
% budget (works)
disbursed
funds to be disbursed
within 3-years
approx. cost of
termination
1.
2.
3.
Total
Table 2.1.2. Projects under Construction: Investment needs and expected funding shortfall
Projects Under
Construction
/Project Type
Total Cost
[US$
Millions]
Expected
Completion Date
Funding Needs
[US$ Millions]
Identified Funding Sources
[US$ Millions]
Expected Funding
Shortfall [US$ Millions]/Issues
Status of Investment
2009 2010 2011 Debt Equity Govt.
finance
% budget
(works)
disbursed
funds to be
disbursed within
3-years
approx. cost of
termination
1.
2.
3.
Total
Table 2.1.3. Projects under Preparation & New Projects: Investment needs and expected funding shortfall
New Projects/Project
Type Total Cost
[US$
Millions]
Expected Completion
Date
Funding Needs
[US$ Millions]
Identified Funding Sources
[US$ Millions]
Expected Funding Shortfall [US$
Millions]/Issues
2009 2010 2011 Debt Equity Govt. finance
1.
2.
3.
Total