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