Connecting East Asia:A New Framework for Infrastructure

Tokyo LaunchMarch 16, 2005

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

The Infrastructure ChallengeFive stories

• Economic• Spatial and demographic• Environmental• Political• Funding

– The focus of today’s presentation

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 %

Who pays for infrastructure?

INFRASTRUCTURE

growth TAX

PAYERS USERS

STATE

BUDGET

FINANCIERS

PROVIDERS

… 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

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

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.

Chapter 2: Inclusive Development

Accountabilityand

Risk Management

Coordination

InclusiveDevelopment

• 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

How does infrastructure promote inclusive development?

Growth Service Access

Poverty Reduction

Infrastructure Growth Determinants

Access Determinants

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

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

Chapter 3: Coordination

Accountabilityand

Risk Management

Coordination

InclusiveDevelopment

Chapter 3: Coordination

The “big picture”:

The state’s ability to generate strategic vision and turn that vision into reality

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

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

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

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

Chapter 4: Accountability and Risk Management

Accountabilityand

Risk Management

Coordination

InclusiveDevelopment

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

When accountability and risk management fail:

• Poor performance• Financial crisis• Corruption

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

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

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

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

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

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

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

Funding Messages

9. The private sector will come back – if the right policies are in place

10.Public sector reform matters – but be realistic

Funding Messages (2)

11. Local capital markets matter – but are not a panacea

12. Infrastructure needs reliable and responsive development partners