___________________________________________________________________________

2019/SOM3/EC/WKSP2/005

Techniques for Evaluation of Infrastructure Projects

Submitted by: IDB

Best Practices Workshop on Public Investment Systems

Puerto Varas, Chile 28-29 August 2019

Techniques for Evaluation of Infrastructure ProjectsJose LariosInter-American Development Bank – Senior Specialist(Fiscal and Municipal Management Division)

Best Practices on Public Investment Systems (EC 08 2018A)

Puerto Varas, August 2019

Conceptual Framework

• Different methodological approaches• Net Present Value

• Multicriteria Analysis

• Infrastructure and equality

• Hedonic Prices

• Gender (Composition of technical teams)

Institutional setting and methodological approaches

• Fiscal Federalism and decentralized investment in USA

• Central government level decision making with technical rigor: The Latin American experience

• The role of minimal standards in analyzing investments

Review of literature on institutions and public investment

• The role of government

• Investment in a decentralized government structure

• Barry Weingast’s “Tragic Brilliance”

• Strengthening fiscal pillars of local governance

• Planning as a coordinating tool among different levels of government and sectors.

Decentralization and Territorial Comparative Advantage

• Each level of government has a set of spending and investing responsibilities.

• Planning or coordination or both?

• Economy-wide vision with local complementarities

• Gap Analysis at the central level

• Gap analysis at the regional and local levels

• Who funds what type of infrastructure?

• The role of APP’s

Institutional Context of Public Investment Management and Execution: Planning, Decentralization, Coordination

Infrastructure gaps are not being resolved

Source:OECD (2017), Investing in Climate, Investing in Growth, OECD Publishing, Paris.

http://dx.doi.org/10.1787/9789264273528-en,

7

0

0.5

1

1.5

2

2.5

3

Energydemand

Telecoms Energy supply- Power and

electricity T&D

Water andsanitation

Energy supply- Primary

energy supplychain

Transport

USD 2015 trillion Global investment needs by sector, 2016-30

8

4

8

9

9

9

10

10

11

11

13

14

17

Depreciation of capital s tock

Fiscal pressures

Adaptation to climate change

Social imbalances

Research and Development

Digital Economy

Climate change mitigation

Provision of basic infrastructure

Asset maintenance

Regional imbalances

Demography

Transport bottlenecks

Number of countries

Source: OECD (2018), Survey on Capital Budgeting and Infrastructure Governance

Closing infrastructure gaps drive infrastructure plans

Public Investment is a Shared responsibility among different levels of government: The role of decentralization

58.8%65.58%

11,6%

95%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

Can

ada

Bel

giu

mJa

pan

Mex

ico

*A

ust

ralia

**G

erm

any

Swit

zerl

and

Spai

nA

rgen

tin

aP

eru

*O

ECD

9C

zech

Rep

ub

licFr

ance

OEC

D3

4B

razi

l*K

ore

aIs

rael

Un

ited

Sta

tes

OEC

D2

5It

aly

Fin

lan

dSl

ove

nia

EU2

8P

ola

nd

Net

her

lan

ds

Swed

enC

olo

mb

ia*

Po

rtu

gal

Au

stri

aD

enm

ark

No

rway

Icel

and

New

Zea

lan

d*

Luxe

mb

ou

rgH

un

gary

Irel

and

Ho

nd

ura

s*Tu

rkey

***

Un

ited

Kin

gdo

mEc

uad

or*

El S

alva

do

r*Sl

ova

k R

epu

blic

Esto

nia

Gu

atem

ala*

Gre

ece

Par

agu

ay*

Ch

ile*

Co

sta

Ric

a*

States and Local Local States

Subnational Public Investment in OECD and LAC countries

Note: 2013 for Latin American countries and New Zealand, 2012 for Australia and 2011 for Turkey. OECD averages are weighted. Source: Based on OECD (2016) and “Subnational Government Structure and Finance”, OECD Regional Statistics (database), http://dx.doi.org/10.1787/05fb4b56-en. and OECD/UCLG (2016) http://www.oecd.org/regional/regional-policy/sngs-around-the-world.htm .

Examples

Application of new management practices and tools to Peru: From SNIP to Invierte.pe

Why the Reform?

• Economic and institutional reasons behind the reform

• The need to manage the investment cycle

• The need to strengthen coordination between investment office and budgeting

• The need to strengthen management, technical, and information gaps at the local level

• The role of technology

The role of local governments in preparing and executing public investment increased between 2006 - 2014.

Growth of public investment in Peru prior to the reform

Spending executed by level of government - Perú (Millions of New Soles)

-

5,000.00

10,000.00

15,000.00

2006 2007 2008 2009 2010 2011 2012 2013 2014

Gobierno Central Gobierno Regional Gobierno Local

Fuente: Cálculos propios FMM.

¿How did Peru invest in 2014?

0%1%1%2%2%3%4%5%8%11%11%

51%

0% 20% 40% 60%

Protección Social

Act.recreativas,…

Vivienda y Serv.…

Servicios Públicos…

Otras Act. Econ.

Defensa

Central Government

0%0%1%2%2%3%4%8% 15%17%19% 28%

0% 10% 20% 30%

Defensa

Energía

Servicios Públicos…

Educación

Regional Governments

0%2%2%2%3%4%

7%7%

9%13%

25%27%

0% 10% 20% 30%

Defensa

Salud

Servicios Públicos…

Educación

Local Governments

Fuente: Cálculos propios FMM.

Example of Infrastructure gaps in Peru (2016)

• Stock of highway network represents one third of theLAC’s region. Peruvian economists: Zambrano y Aguilera(2011) estimated that the highway gap is 15% of GDP

• Gap in electricity is 11% of GDP; highway quality is 5 % ofGDP; and water and sanitation is 0.6% of GDP

III. Focusing on measuring and closing infrastructure and service Gaps through the Public Investment Cycle: New Technical Approach and Methods

The new approach: Focus on closing gaps and manage the full investment cycle

• Develop infrastructure gap analysis as the basis for a new multiyear investment plan

• Improve coordination con budgeting priorities

• Strengthen local institutions and human capital

• Introduce technological tools to gather information to foster better monitor and control of the investment cycle

• Introduce the infrastructure acquisition process as part of the investment cycle

• Promote ex – post analysis to measure development impact of public investment

Estimating gap on Health sector: Example in Argentina

• Index of Need: Algorithm that estimates the need of agiven population group to have Access to a Health Unitin the territory, as a function of population density andtheir distance to the asset

• Index is estimated as a function of accessibility toexisting infrastructure (quantity and capacity ofhospitals, population and distance to hospitals)

Units of measurement Sectoral Gaps Total Gap

Renovation outpatient clinics

Renovation in patient hospitals

Digital tools for imaging diagnostics

Updating medical equipmentt

Basic level on infrastructure

Intermediate level of

infrastructure

Equipment

Connectivity

Basic water service

Drainage or Sewage

system

Electrical connections

Housing

Public Space and public

roads

Education Gap

Health Gap

Gap on low income

neighborhoods

Total Infrastructure Gap

1.

2.

3.

Multi criteria approach in Argentina to measure infrastructure gaps

Dirección Nacional de Inversión Pública

Secretaría de Evaluación Presupuestaria, Inversión Pública y PPP

Infrastructure and Inequality

Could Long-Term Investments inInfrastructure Reduce Inequality?

• Test for possible link b/w infrastructure and inequality:

• use US state-level panel data from 1950 to 2010

• Ginis data from van der Weide and Milanovic (2014):

• bottom 40% and top 40%

• Infrastructure data from US Census Bureau:

• health, education, highways, judicial, etc

• Regress Ginis in year t on real growth rate of infrastructure

• spending in decade prior to time TAuthors: Emma Hooper1 Sanjay Peters2 Patrick A. Pintus3/1Aix-Marseille University/ 2Columbia University3Banque de France

Measuring the impact of infrastructure spending (o lack thereof) on equality

• Inequality correlates negatively with past infrastructure

spending growth

• Highways and higher education spending most significant

• Results stronger with bottom inequality and for highways

• Data neither reject causal effect from infrastr. to inequality

• nor support reverse pattern (caveat: no causality test)

• Counterfactual exercise identifies losers/winners

Winners and Losers for Highway growth

Winners and losers due to higher education growth

Closing infrastructure gaps that affect equality: The example of USA

• Lack of infrastructure in education affects test results and access to higher levels of education in the medium term

• Lack of investment in roads and networks affect generation of economic opportunities in the long run

Gender Composition of Evaluating Teams Matters

Introducing variables to close environmental and gender gaps

• IDB studies show that more women participating in the investment cycle decision making process promotes more investments in health, education, climate resilience infrastructure.

• IDB study by Yanez-Pagan 2014.

Using hedonic pricing to measure Gaps in Urban Quality of Life: Lack of basic infrastructure and

amenities

• Households that lack solid waste management services, report a13% lower level of life satisfaction than households that enjoy theService.

• These households are situated in the lower two income deciles.

• Individuals who have solid waste management services that have acoverage that is 10% lower than average, report:

• 1% lower level of life satisfaction.

• 2% lower level of satisfaction with the neighborhood.

• Furthermore, housing values fall around 3% of their marketvalue.

Source: Quality of Life in City of Guatemala, 2012, (IDB)

Need to expand the theoretical framework to new methods of project analysis

Variety of technical approaches influenced by institutional arrangements

Team composition matter

Final Thoughts

Techniques for Evaluation of Infrastructure ProjectsJose Larios

Best Practices on Public Investment Systems (EC 08 2018A)