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Connecting East Asia:A New Framework for Infrastructure
Tokyo LaunchMarch 16, 2005
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What we’ll cover
• The Infrastructure Challenge– With a focus on the funding story
• The New Framework– Inclusive development– Coordination– Accountability and risk management
• The Way Forward– 12 key policy messages
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The Infrastructure ChallengeFive stories
• Economic• Spatial and demographic• Environmental• Political• Funding
– The focus of today’s presentation
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East Asia to require more than US$200 billion per annum for infrastructure
Estimated annual infrastructure need, East Asia, 2005-2010
USD (billion) Percent GDP
-
20
40
60
80
100
120
140
160
180
by economicclassif ication
by country by sector
0
1
2
3
4
5
6
7
8
China Low income Middle income
Rail
Maintenance
Investment China
All excl. China
Electricity
Roads
Telecoms
Water and Sanitation
6.9 % 6.3 %
3.6 %
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Who pays for infrastructure?
INFRASTRUCTURE
growth TAX
PAYERS USERS
STATE
BUDGET
FINANCIERS
PROVIDERS
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… but sentiment is positive
The private sector bubble has burst…
Investment in Projects with Private Participation
67%
24%
10%
88%
8%4%
increase sustain decrease
Global firms East Asian firms
firm expectations on future investment in the region is strongly positive
Attitudes towards infrastructure investment levels
0
20
40
60
80
100
120
140
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
$ bi
llion
EAP Total
$11.5 billion private sector investment in EAP infrastructure
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Many governments face budget constraints, post-stabilization… The case of Indonesia:
0
2
4
6
8
10
12
14
16
18
1996 2001
$ bi
llion
public private
sharp decline in public expenditure on infrastructure
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
1994 2002
$ bi
llion
infrastructure other
Infrastructure a declining priority in a shrinking expenditure envelope
Total nominal infrastructure expenditure Central government development spending
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Role of official financing varies by country
Aid dependency in East Asia and the Pacific, 2002
Income Aid Aid as percentage of:
Per Capita Per Capita National Gross
(US$) (US$) Income Investment
Malaysia 3,540 4 0.1 0.4
Thailand 2,000 5 0.2 1.0
Philippines 1,030 7 0.7 3.7
China 960 1 0.1 0.3
Indonesia 710 6 0.8 5.3
PNG 530 38 7.5
Vietnam 430 16 3.6 11.3
Mongolia 430 85 18.6 60.8
Lao PDR 310 50 17.3
Cambodia 300 39 12.7 54.7
EAP Average /1 960 4 0.4 1.2
1/ For low and middle income countries.
Source: World Bank, World Development Indicators 2004.
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Chapter 2: Inclusive Development
Accountabilityand
Risk Management
Coordination
InclusiveDevelopment
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• Income and equality dimension– Substantial decline in income poverty
• Quality of life – Progress on MDGs
• Capabilities and Participation
The impact of infrastructure on povertyThree dimensions of poverty
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How does infrastructure promote inclusive development?
Growth Service Access
Poverty Reduction
Infrastructure Growth Determinants
Access Determinants
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But the impacts of infrastructure vary…
by kind of infrastructuredepending on other policies depending on the nature of poverty
… and balances must be struck
between growth inducing and poverty reducing infrastructure
between poor and non-poor
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Inclusive development on the national scale
• Infrastructure and regional integration• Regional coordination – the case of Laos• Infrastructure and logistics
Inclusive development on the regional scale
• The case of Vietnam– Large scale – Hanoi-Hai Phong corridor– Small scale
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Chapter 3: Coordination
Accountabilityand
Risk Management
Coordination
InclusiveDevelopment
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Chapter 3: Coordination
The “big picture”:
The state’s ability to generate strategic vision and turn that vision into reality
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The “flying geese” theory of infrastructure
The advanced economy model of coordination:• The “high-flying” geese – Japan, Hong Kong
(China), Taiwan (China), Singapore, South Korea, Malaysia
• Senior policy makers, politicians and strategic vision
• Infrastructure driven by strong planning agencies• High growth helped maintain policy consensus• Investment anticipated demand; when following
demand, responses were rapid and strategic• Much of the inner-workings hidden from public view• But under increasing stress from the 1980s
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Coordination challenges for the “geese trying to catch up”
1. Getting the infrastructure expenditure allocation right • Coordinating investment and financing functions• Coordinating fiscal space
2. Coordination through decentralized agencies• Horizontal coordination: Managing spillovers, Excessive
fragmentation, and “Destructive Competition”• Vertical coordination• Developing the missing middle
3. The special challenge of urban management
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State of play in four East Asian developing countries
The Philippines• Long term vision undermined in a fluid and
fragmented political systemIndonesia• An incomplete progression from autocratic
technocracy to greater participation and decentralization
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State of play in four East Asian developing countries
China• Decentralization + centralized strategic
planning and long term vision
Thailand• Shifts in relative power in the definition of
strategic direction, but direction nonetheless
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Chapter 4: Accountability and Risk Management
Accountabilityand
Risk Management
Coordination
InclusiveDevelopment
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Chapter 4: Accountability and Risk Management
Accountability • a set of institutional tools which reward
organizations that consistently perform well for their stakeholders (and penalize those that perform badly)
Risk Management• a set of institutional tools which endeavor to make
risks and rewards commensurate with each other, in order to drive good performance
…and how they’re related
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When accountability and risk management fail:
• Poor performance• Financial crisis• Corruption
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Mechanisms to strengthen accountability
• Community participation– From project selection to ongoing operations– But likely to be limited to the last mile
• Competition– Most effective way of bringing accountability– But East Asia not in the forefront, for a number of reasons
• Regulation– The problem of holding regulators accountable– Independence is evolutionary
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Managing fiscal support
•Subsidies– Important for a number of reasons– But blur accountability and bring risk– Accountability is a challenge
•Contingent liabilities– Who bears risk is not always easy to tell
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Does ownership matter for accountability?
• A poorly-regulated private monopoly performs as badly as a poorly-regulated public monopoly
• But the private sector responds better than the public sector to good regulation or competition
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The Way Forward
• Study provides a way of thinking about infrastructure issues in different situations– Not a blueprint or toolkit
• Policy messages reflect concerns raised during our consultations– To promote the role of infrastructure in
underpinning growth and poverty reduction
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Messages on Coordination
1. The center matters – infrastructure demands strong planning and coordination functions
2. Decentralization is important – but raises host of coordination challenges
3. Fiscal space for infrastructure is critical
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Messages on Accountability and Risk Management
4. Subsidy is not a dirty word – subsidies can be important, but are always risky, and should be handled with care
5. Competition is hard to achieve in infrastructure – but it’s the best way to bring accountability
6. Regulatory independence matters more in the long run than the short run
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Messages on Accountability and Risk Management (2)
7. Civil society has a key role to play in ensuring accountability in service provision
8. Infrastructure has to clean up its act – addressing corruption is a priority
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Funding Messages
9. The private sector will come back – if the right policies are in place
10.Public sector reform matters – but be realistic
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Funding Messages (2)
11. Local capital markets matter – but are not a panacea
12. Infrastructure needs reliable and responsive development partners