Infrastructure

Limitations with private participation simplified

(1) limited private sector investment in some areas of infrastructure (2) limited sustainability of some arrangements (3) high fiscal costs sometimes associated (4) backlash of public opinion (5) may not be profitable

Infrastructure assets share certain common attributes:

- Generally expensive to construct and to maintain - Usually monopolies with high barriers to competitive entry - Operate under the jurisdiction of government regulators - Demand for their services is inelastic. Thus direct investments in infrastructure tend to generate predictable, stable cash flows. - Infrastructure funds have therefore become very popular - Emerging market to account for nearly 3/4 of world's urban population by 2015

How does infrastructure facilitate trade?

- Hard trade-related infrastructure covers ports, airports, roads and rail lines - all critical for connecting a country to the outside world. - Less visible but no less important are the soft trade-related infrastructures of border and logistics management (shipping, air transport, telecommunications, business environment). - World Bank's Logistics Performance Index (LPI) Ranks 155 countries on a scale of 1 (worst) to 5 (best). Based on 6000 individual assessments by 1000 international freight forwarders who rates the 8 foreign countries their company serves most frequently. - Infrastructure the chief driver of LPI progress - E.g. Morocco's rank jumped from 113 in 2007 to 50 in 2012 throughout implementing a strategy combining border management reform and physical investments in their ports

What is infrastructure capital?

- In general, infrastructure is defined as electricity, gas, telecoms, transport and water supply, sanitation and sewerage. - However, because data on the physical stocks of these sectors, or their valuation, tends to be scarce, authors have often relied on stocks of public capital or specific subsectors as proxies for infrastructure. - Public sector ability to assess is worsening because importance of private sector in infrastructure has increased - Demand requires $57 trillion in investment by 2030

How does infrastructure affect economic growth?

- Positive correlation - Greater investment in infrastructure, high growth rates of GDP per capita

Why infrastructure matters

- Poverty reduction - Sustainable development, growth and prosperity - Impact on Income Inequality - Impact on growth - Facilitates trade

Why don't governments spend more money on infrastructure? Elaborate on at least three of them in detail

- Problems of corruption - Willing to announce investment when its during an election cycle but not often outside of it - Governments don't want to invest - Would rather invest where they can see the benefit, not necessarily where it is needed - White elephants, build grand structures with no benefit as a show

How does infrastructure matter for firms?

- Provides access to markets and contacts with potential clients (facilitates trade) - Affects logistic costs (facilitates trade) - Inventory levels - Productivity

How does infrastructure affect poverty?

- Reduces poverty - Infrastructure shortcomings have very significant impacts at the micro and macro level with impacts on individuals, families, businesses, and whole economies. - Nearly 1/2 of infrastructure services used as final consumption by households - Basic services are a significant fraction of poor households' budgets (water, electricity, etc.) - Hunger not the result of a lack of food but a lack of distance from food (food security depends on infrastructure) - Lack of infrastructure can lead to poor health and high mortality - Generations deprived of education due to poor infrastructure

The IFC note on infrastructure suggests that infrastructure depends on the development stage of the countries. Comment on this.

- SSA spends much more of their GDP on infrastructure - Needs highest for energy infrastructure in most regions - MENA countries spend less on infrastructure as a % of GDP and oil exporting countries even less - The more developed, the less infrastructure required (especially power generation) - Stage of development does not seem to matter - The less developed the country, the more likely infrastructure to matter - The more developed a country, the more other dimensions such as bottlenecks, diseconomies of scale, network effects, or technological lags tend to matter more than the aggregate infrastructure stock - Large supranational energy or transport project can have very significant payoffs at all stages of development - Relying only on past productivity gains from "local or national" investments may underestimate the gains from investing in larger networks for some countries, in particular when these investments have huge international network externalities

How does infrastructure affect sustainable development, growth and prosperity?

- port in Algiers - power plant in Ivory Coast - water pipeline in Jordanian desert - upgraded highway in Senegal - Facilitate trade, generate electricity, connect people with water, reduce commutes and improve access to airports and hospitals - Infrastructure projects create jobs - about 50,000 per $100 million invested - make cities more livable, and connect poor and remote areas of the world to the global economy

How does infrastructure affect income inequality?

Income inequality declines with higher infrastructure quality and quantity

How does infrastructure affect inventory levels?

Infrastructure levels and quality are strong determinants of inventory levels. U.S. businesses typically hold inventories equal to about 15 percent of GDP; however, inventories in many developing countries are often twice as large, and raw materials are often more than three times as large. What's the issue with this? - The financial costs associated with inventories can be quite high because the cost of capital in developing countries is usually well above 15 percent. The other associated costs of inventories—such as taxes, insurance, obsolescence, and storage—can add another 5 percentage points. Putting things into perspective, if the interest rate for financing inventory holdings is 15-20 percent—a conservative estimate in most developing countries—then the cost to the economy of the additional inventory holdings is greater than 2 percent of GDP. Given the high cost of capital in most developing countries, the impact of that quasi-dead capital—the value of those inventories on unit costs and productivity or competitiveness—is enormous.

What are the benefits with private participation in infrastructure development?

Innovative responses - Loon → internet provided to everyone by balloons - Solar powered internet plane Care about profitability and performance

What are the limitations with private participation in infrastructure development?

Limited private sector interest in some areas of infrastructure, - Some of it on the supply side - public sector has to place projects for private participation - Projects that are ideally suited for banks often don't appeal to the new moneymen - insurers and pension funds often dislike 'greenfield' projects - Would rather focus on straightforward deals - for roads and other well-understood kit - in predictable places such as Europe - Investing in 30 year projects further afield is too risky for most Limited sustainability of some arrangements for private participation, - Large currency devaluations in Latin America resulting in currency mismatch between dollar-denominated debt and local currency business revenues. - High incidence of renegotiated contracts with outcomes generally adverse to the users of the service. High fiscal cost sometimes associated with private participation - Unexpected fiscal costs because of the provision of poorly conceived guarantees and generous (to the operator) risk assignments in the concession contract. - In many cases, governments had to provide the private sector with various forms of guarantees to attract them into an untested environment or to compensate them for various types of project risk. - In other cases, the demand forecast for these new infrastructures proved to be unduly optimistic, leading to the activation of minimum revenue guarantees and substantial fiscal liabilities for the state Backlash of public opinion in some parts of the world. - Typical complaints include layoffs, lack of transparency in the transaction process, magnitude of private returns Moreover, from the private sector perspective, participation in infrastructure projects has not always proved to be as profitable as had been originally envisaged - E.g. water privatization in Bolivia (Aguas del Tunari)

What are the challenges with infrastructure investment? Or alternately how is infrastructure investment financed?

• Bidding costs • Operational risks • Political risks • Technical risks • White elephants • Poor choices • Domestic politics • Unreasonable expectations • Ineffective procurement • Lack of leadership • Lack of maintenance • Fuel supply • Local opposition • Construction delays • Regulatory barriers • Government budgets • Resettlement • Payment risks • Access to land • Corruption • Contracts • Lending constraints • Scarce resources • Enabling environment • Cost overruns • High up-front costs • Tariffs • Bottlenecks • Who pays