Rita Nangia Director Asian Development Bank Manila, The Philippines

Ensuring Accountability in Infrastructure Investments

Rita NangiaDirector

Asian Development BankManila, The Philippines

28 February 2006Kuala Lumpur

Agenda

Asian Infrastructure─Status─Challenges

•New Framework

─Inclusive Development

─Coordination

─Accountability and Risk Management

•Way Forward

Asia is growing rapidly

Source: World Development Indicators 2005

Major Trends

Major Trends

Poverty is declining in Asia($ 1-day poverty as % of total population 2003)

%

Source: Asian Development Bank

Asia’s Challenges …….

Asia is urbanizing rapidly(urban population as % of total population 2000)

Source: Connecting East Asia: A New Framework for Infrastructure

Environmental costs are growing 2000 CO2 emissions (metric tons per capita)



Environmental costs2000 CO2 emissions (kg per US$ of GDP)



Access to Infrastructure varies...

...Electricity

Source: World Development Indicators 2004 & World Energy Outlook 2002


Challenges and Opportunities

Source: Key Energy Statistics, 2005, International Energy Agency & World Development Indicators Online


kwh ...Electricity use per capita

Challenges and Opportunities


...Telephone

Source: World Development Indicators 2004 & Connecting East Asia, 2005

Quality of Infrastructure varies…

Source: The Global Competitiveness Report 2004-2005

Overall Infrastructure

Overall Quality of Infrastructure varies…

Air Transport



Ports



Railroads



Electricity



Telephones


Average savings and investment(% of GDP 1990-2004)

Source: World Development indicators 2005

Average savings and investment(% of GDP 1990-2004)

Source: World Development indicators 2005

Infrastructure requires funding globally

Source: World Bank

Country Income Category

Expenditure Needs (% of GDP)

Financing Gaps (% of GDP)

Least Developed Countries

6.5-7.7% 3.1-4.3%

Lower Income Countries 1.5-9.0% 3.5-5.0%

Middle Income Countries 5.7-7.0% 2.9-4.3%

East Asia alone requires more than US$200 billion per annum for infrastructureEstimated annual infrastructure need, East Asia, 2006-2010

USD (billion) Percent GDP

Source: Yeppes, 2004

-

20

40

60

80

100

120

140

160

180

by economicclassif ication

by country by sector

0

1

2

3

4

5

6

7

8

China Low income Middle income

Rail

Maintenance

Investment China

All excl. China

Electricity

Roads

Telecoms

Water and Sanitation

6.9 % 6.3 %

3.6 %

… 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


Private finance is selective

0 100 200 300 400 500

Energy

Telecoms

Transport

Water andSanitation

$ billion

0 100 200 300 400 500

AFR

EAP

ECA

LCR

MNA

SAR

$ billion

Infrastructure Projects with Private Sector Commitments: 1990-2003Source: PPI Database

Sectors Regions

Role of official financing varies by countryAid dependency in selected countries, East Asia, 2003

Malaysia 3,880 4 0.1 0.5

Thailand 2,190 -16 -0.7 -2.7

China 1,100 1 0.1 0.2

Philippines 1,080 9 0.9 4.9

Indonesia 810 8 0.9 5.2

Vietnam 480 22 4.5 12.9

Mongolia 480 100 19.7 51.0

Lao PDR 340 53 14.3 69.2

Cambodia 300 38 12.5 54.1

East Asia Average 1,070 4 0.4 0.9

Per capita income ($)

Aid per capita ($)

Aid as percentage of --

GNIGross Fixed Investment


Who pays for infrastructure?


In the first instance, users:

Infrastructure

growthUSERS

In a virtuous cycle, of growth and infrastructure funds itself

In the second instance, users are subsidized by tax payers…

Infrastructure

growth

TAX PAYERS

USERS

SUBSIDIES



Two institutional mechanisms channel the flows - the state budget, and service providers

Infrastructure

growth

TAX PAYERS

USERS

Infrastructure

growth

TAX PAYERS

USERS

STATE BUDGET

PROVIDERS

All government expenditure is a claim on tax payments – now, or in the future

Services may be provided by the government, a state entity, or the private sector


Financiers have a key facilitating role…

Financing makes it possible to mobilize the current value of future tax payments…

Infrastructure

growth

TAX PAYERS

USERS

STATE BUDGET

FINANCIERS

PROVIDERS

… and flattens the cost profile for users over time


Financiers have a key facilitating role…

This is the case when finance is concessional, or takes the form of grants

Infrastructure

growth

TAX PAYERS

USERS

STATE BUDGET

FINANCIERS

PROVIDERS

FOREIGNTAX

PAYERS


INFRASTRUCTURE

growth

TAX PAYERS

USERS

STATE

BUDGET

FINANCIERS

PROVIDERS

The public and private sectors are complementary

New Framework

Accountabilityand

Risk Management

Coordination

InclusiveDevelopment

Three Broad Approaches to Poverty

• Income or expenditure

• MDG

• Human Capabilities

Inclusive development is about improving the incomes and lives of all members of the society, especially poor

Inclusive Infrastructure

Growth Service Access

Poverty Reduction

Infrastructure Growth Determinants

Access Determinants

Coordination challenges for developing countries

1. Getting infrastructure spending right

• Coordinating investment and financing functions

• Coordinating fiscal space

2. Coordinating through decentralized agencies• Horizontal coordination• Vertical coordination

• Developing the missing middle

3. The special challenge of urban management

Accountability and risk management

Accountability rewarding organizations that

consistently perform well for their stakeholders (and penalizing those that perform badly)

Risk management making risks and rewards

commensurate with each other, in order to drive good performance

…and how they’re related

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

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 improve infrastructure development and service delivery

Policy Messages

• The center matters – infrastructure demands strong planning and coordination functions

• Decentralization is important – but raises host of coordination challenges

• Subsidy is not a dirty word – subsidies can be important, but are always risky, and should be handled with care

• Competition is hard to achieve in infrastructure – but it’s the best way to bring accountability

• Regulatory independence matters more in the long run than the short run

• Civil society has a key role to play in ensuring accountability in service provision

• Infrastructure has to clean up its act – addressing corruption is a priority

Funding Messages

• Fiscal space for infrastructure is critical

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

• Public sector reform matters – but be realistic

• Local capital markets matter – but are not a panacea

• Infrastructure needs reliable and responsive development partners

• Service commissions

• Regulators

• Supreme audit body

• Judiciary

• Ombudsman

• Legislature

Final Investment Choices

Process

• Interest Groups

• Civil Society Organizations

• Think tanks

• Political Parties

• Media

• External Groups

• Donors

• CPA

Holding Executive Accountable …….

Electorates

Documents

Rita Nangia Director Asian Development Bank Manila, The Philippines