WORLD BANK GROUP

INFRASTRUCTURE RECOVERY AND ASSETS PLATFORM (INFRA)

Developing Countries and the Financial Crisis:

Infrastructure Diagnostic Tools

DRAFT FOR DISCUSSION May 1, 2009

SUSTAINABLE DEVELOPMENT NETWORK (SDN)

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TABLE OF CONTENTS

INFRASTRUCTURE DIAGNOSTIC TOOLS 1

1. Diagnostic Tools in the Context of INFRA 1

2. Two Perspective On The Impact Of The Crisis 2

2.1 Strategic Country Review 2 2.2 Infrastructure Portfolio Assessment Review 3

3. Uses of the Diagnostic Tools 4

3.1 Rapid Infrastructure Review 6 3.2 Proposed INFRA Eligibility Framework 14 3.3 In-Depth Infrastructure Review 20

4. Roll-Out of the Diagnostic Tools 21

ANNEX 1: Strategic Country Review 23

1. Introduction 24

2. The Transmission Channels 25

3. Assessment of Economic and Financial Constraints to Fiscal

Stimulus 27

3.1 Overall Fiscal and Financial Framework 27 3.2 Extension to Local Governments and SOEs 28 3.3 Tailoring the Basic Framework to Infrastructure 28

4. Assessment of Infrastructure Gaps, Actual Spending and

Deficits 33

4.1 Prioritization of infrastructure needs and spending 33 4.2 Revenue mobilization 34 4.3 Private sector participation in infrastructure 34 4.4 Infrastructure and Job Creation 35

5. Assessment of Quality of Institutions 40

5.1 Budget Execution Capacity and Institutional Efficiency 40 5.2 Decision-making Process for Infrastructure Spending 41 5.3 Legal and Regulatory Framework 41 5.4 SOE Governance Framework 43 5.5 PPP Contractual Framework 43

6. Political Economy Issues 48

7. Key Operational Response: AAA and TA Instruments 49

8. References 52

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ANNEX 2: Infrastructure Portfolio Assessment 55

1. Introduction 56

1.1 Background and Objective of the Infrastructure Portfolio

Assessment Review 56 1.2 Methodology 56

2. Transport Sector 58

2.1 Introduction and defining subsectors 58 2.2 Demand analysis 58 2.3 Supply analysis 59 2.4 Institutional analysis 64

3. Energy Sector 64

3.1 Introduction and defining sub-sectors 64 3.2 Demand analysis 65 3.3 Supply analysis 65 3.4 Institutional analysis 68

4. Water Infrastructure Sector 69

4.1 Introduction and defining sub-sectors 69 4.2 Demand analysis 70 4.3 Supply analysis 70 4.4 Institutional analysis 72

5. Urban Sector 73

5.1 Introduction and defining subsectors 73 5.2 Demand analysis 73 5.3 Supply analysis 74 5.4 Institutional analysis 77

6. Telecommunications Sector 78

6.1 Introduction 78 6.2 Demand analysis 78 6.3 Supply analysis 78 6.4 Institutional analysis 82

7. Synthesis: Ranking Country Infrastructure Priorities 84

7.1 Ranking the priority investment opportunities 84 7.2 Ranking of priority institutional and policy opportunities 84

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FIGURE

Fig 1 Infra Diagnostic Tools: Level and Uses 5

Fig 2 Economic Constraints and Infrastructure Gaps 7

Fig 3 Institutional Quality 8

Fig 4 Fiscal Space and Macro Economic Constraints 9

Fig 5 Investment Needs and Quality Gaps 9

Fig 6 Budget Execution Capacity and Social Protection 10

Fig 7 Distribution by Regions 11

TABLE Table 1 Methodologies to assess infrastructure investment needs 12

Table 2 Investment Need Gaps and Fiscal Space 13

Table 3 Template for Assessment of Economic and Financial Constraints to Fiscal

Stimulus 17

Table 4 Template for Assessment of Infrastructure Gaps, Needs and Spending 18

Table 5 Template for Assessment of Quality of Institutional Capacity 19

Table 6 Strategic projects: Investment needs, funding gap, and status of

completion 20

ANNEX 1: STRATEGIC COUNTRY REVIEW

FIGURE

Fig 1.1 Macroeconomic Transmission Channels 26

Fig 1.2 Financial Transmission Channels 26

TABLE

Table 1.1 Template for Assessment of Economic and Financial Constraints to

Fiscal Stimulus 31

Table 1.2 Template for Assessment of Infrastructure Gaps, Needs and Spending 37

Table 1.3 Template for Assessment of Quality of Institutional Capacity 45

ANNEX 2: INFRASTRUCTURE PORTFOLIO ASSESSMENT

TABLE

Table 2.1: Situation Analysis for the Transport Sector 60

Table 2.2. Transport sector - Benefits - INFRA specific priorities for portfolio

analysis 61

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Table 2.3. Transport sector - Risks and ease of implementation 62

Table 2.4. Energy sector - Benefits - INFRA specific priorities for portfolio

analysis 66

Table 2.5. Energy sector - Risks and ease of implementation 67

Table 2.6. Water Infrastructure sector - Portfolio Status Review 71

Table 2.7. Water Infrastructure sector - Benefits - INFRA specific priorities for

sub sector analysis 71

Table 2.8. Water Infrastructure sector - Risks and ease of implementation 72

Table 2.9. Urban sector - Situation analysis assets and service for urban programs

and projects 76

Table 2.10. Urban sector - Benefits - INFRA specific priorities for sub sector

analysis 77

Table 2.11. Urban sector - Risks and Ease of Implementation 77

Table 2.12. Telecommunication sector - Situation Analysis for the

Telecommunications Sector 80

Table 2.13. Telecommunication sector - Benefits - INFRA specific priorities for

sub-sector analysis 81

Table 2.14. Risks and ease of implementation 82

Table 2.15. First Ranking -- Country: Strategic ranking of all infrastructure

priority projects 85

Table 2.16. Second Ranking -- Country: Ranking of policy opportunities 85

Table 2.1.1. Projects Under Operations: Investment needs and expected funding

shortfall 86

Table 2.1.2. Projects under Construction: Investment needs and expected funding

shortfall 86

Table 2.1.3. Projects under Preparation & New Projects: Investment needs and

expected funding shortfall 86

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ACRONYMS

AAA Analytical and Advisory Activities

AICD Africa Infrastructure Country Diagnostic

Capex Capital Expenditures

DPL Development Policy Lending

DPOs Development Policy Operations

GDP Gross Domestic Product

ICT Information and Communications Technology

IFI International Financial Institution

IL Investment Lending

INFRA Infrastructure Recovery and Assets Platform

IPAR Infrastructure Portfolio Assessment Review

LIC Low-Income Country

MDGs Millennium Development Goals

MTEF Medium Term Expenditure Framework

OBA Output-Based Aid

ODA Official Development Assistance

OECD Organization for Economic Co-operation and Development

OPEX Operating Expenditures

OPCS Operations Policy and Country Services

PERs Public Expenditure Reviews

PETS Public Expenditure Tracking Surveys

PPA Participatory Poverty Assessment

PPP Public Private Partnerships

SCR Strategic Country Review

SIL Specific Investment Lending

SOE State Owned Enterprise

TA Technical Assistance

UMIC Upper Middle Income Countries

WRM Water Resources Management

WSS Water Supply and Sanitation

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WORLD BANK GROUP

INFRASTRUCTURE RECOVERY AND ASSETS PLATFORM (INFRA)

DIAGNOSTIC TOOLS

1. Infrastructure investment can play an important role as part of fiscal stimulus measures to pull

developing countries out of the crisis.1 In previous crises, lack of timely action resulted in significant

erosion of infrastructure assets, postponement of long-gestation infrastructure projects, and significant

slow-down in medium-term economic growth. In contrast, during the current crisis, there is significant

interest among clients and momentum among donors for supporting infrastructure investment, operation

and maintenance, including via the Infrastructure Recovery and Assets (INFRA) platform announced by

the World Bank Group. This note proposes the role of a set of infrastructure diagnostic tools in the

context of INFRA, describes their components and possible uses, and suggests next steps.

1. DIAGNOSTIC TOOLS IN THE CONTEXT OF INFRA

2. The INFRA platform would to support counter-cyclical spending on infrastructure and protect

existing assets and priority projects. It is intended to provide the foundation for rapid recovery and job

creation and to promote long term growth. INFRA aims to help countries stabilize existing infrastructure

assets, ensure delivery of projects that remain government priority, support Public Private Partnerships

(PPPs) in infrastructure, and support new infrastructure project development and implementation. It

would entail a significant increase in World Bank Group assistance, including possibly a 40-50% increase

in World Bank annual commitments, $__ billion in additional IFC flows, and a significant enhancement

of concessional lending for infrastructure.

3. A number of questions emerge as developing countries try to jumpstart their economies through

infrastructure investment and as the Bank and other donor agencies determine how to support such efforts

most efficiently and effectively in a resource constrained environment. How to set priorities for

infrastructure investment across countries in need? Within a given country, what should be the priorities

across infrastructure subsectors? What level of support would it be sensible to provide to a given

country? What enabling conditions should be required or put in place so that resources can be spent

effectively? What are the specific demand and financing challenges that critical infrastructure subsectors

are facing? Are there infrastructure programs or projects already in place that can help to channel

resources most expeditiously? How to ensure that infrastructure spending is truly setting the foundations

for longer-term growth?

4. Rapid response and good allocation and use of fiscal stimulus resources require readily available

information on countries, sectors, and program/project entry points. The global and long-term value

added of this information can be significantly increased if the data are organized according to clear

definitions and standards so that they can be contributed and collected by different actors, comparable

across countries and sectors, and systematically updated over time. Regrettably, in most countries,

information on infrastructure expenditure and sector performance is much scarcer and less well organized

than information on the performance of the education and health sectors. The Bank Group itself lacks

1 Besides replenishing a country‘s productive assets, there is increasing evidence of the positive employment generation impact

of infrastructure spending, and of the direct and in direct impact on the poor‘s income and living conditions (ILO, 2008;

Schwartz, Andres and Dragoui, 2009; Baker, 2008; Khandker et al., 2009; Lokshin and Yemtsov, 2005; Dercon et al., 2007).

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consolidated, comprehensive databases on infrastructure access, costs, and quality. The massive donor

effort of the Africa Infrastructure Country Diagnostic (AICD) is a commendable exception. The current

crisis underscores the importance of rebuilding the informational foundation for infrastructure investment

and provides an opportunity to do so.

2. TWO PERSPECTIVE ON THE IMPACT OF THE CRISIS

5. The infrastructure diagnostic tools allow the World Bank Group and its clients and development

partners to look at the impact of the financial crisis on infrastructure from two angles: (a) a macro, ―top-

down‖ perspective, identified here as the Strategic Country Review (SCR), which is presented in detail in

Annex I; and (b) a micro, ―bottom-up‖ perspective, called here the Infrastructure Portfolio Assessment

Review (IPAR), presented in detail in Annex II. These two perspectives are complementary and mutually

reinforcing. For instance, in a full-fledged infrastructure diagnostic, a SCR would normally precede the

IPAR. But these analytical tools can also be applied separately, depending on the information needs.

Also, as specified in the next section, simpler versions or subsets of each of these reviews can be used for

rapid response to very concrete information needs.

2.1 STRATEGIC COUNTRY REVIEW

6. The SCR has economy-wide and cross-sectoral scope. Its purpose is to help to address the

question whether and how a country can effectively utilize a fiscal stimulus channeled through

infrastructure investment to restore growth on a sustainable basis. The SCR therefore focuses on

questions regarding the overall economic, financial, and institutional context for infrastructure

investment. It also includes sector performance questions that can be applied across all infrastructure

sectors and can inform decision makers‘ choices on overall cross-sector priorities.

7. Essentially, the full-fledged SCR is a structured questionnaire designed in a modular way. This is

intended to give users the freedom to utilize either the full instrument or a subset of its modules

depending on the key policy questions to be tackled. The modules, summarized in Tables 5, 6 and 7 of

Annex I, include:

Economic and Financial Constraints on the Fiscal Stimulus, assessing the country‘s ability to

finance the infrastructure fiscal stimulus program without unduly jeopardizing the sustainability

of its macroeconomic balances. Includes variables covering:

a. Basic fiscal and financial framework – the key macro and financial variables for the

country, drawn from existing World Bank and IMF sources

b. Extension of the basic framework to local governments and SOEs – identifying the rules

that apply to off-budget infrastructure financing and delivering entities, such as SOEs,

local governments and special funds

c. Tailoring the basic framework to infrastructure – zooming-in on the public investment

rate, the impact of infrastructure prices and revenues, aid flows to infrastructure, and the

economic growth implications of infrastructure investment.

Assessment of Infrastructure Gaps, Needs and Spending, namely, the room for removing key

infrastructure bottlenecks to growth and to prioritize infrastructure projects based on their ability

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to satisfy critical needs and to generate sources of local employment and income. This module

includes questions on the following areas:

a. Infrastructure investment needs

b. Prioritization of public spending in infrastructure

c. Revenue mobilization

d. Private sector participation in infrastructure

e. Infrastructure and job creation

Assessment of Quality of Institutional Capacity, namely, the country‘s capacity to absorb the

fiscal stimulus effectively, scaling up public expenditure while protecting vulnerable groups.

This module includes variables covering:

a. Budget execution capacity

b. Decision making process

c. Legal and regulatory framework

d. PPP contractual framework

8. The tables in Annex I group the variables in the structured questionnaire that constitute the SCR

depending on the availability and ease of collection of the relevant data, and on the degree to which

governments may have at their disposal the levers to affect behavior.

9. The main country counterparts and information sources for the SCR include ministries of finance,

planning and economic ministries, and central statistical agencies. As work moves to a more detailed and

in-depth level, partnership with sectoral ministries, SOEs, and local governments also becomes important

in developing the SCR.

2.2 INFRASTRUCTURE PORTFOLIO ASSESSMENT REVIEW

10. In contrast to the SCR‘s top-down approach, this second perspective of the Infrastructure

Diagnostic Tools adopts a bottom-up approach for understanding a country‘s infrastructure investment

challenges, focusing on sub-sectors and their program and project portfolios. The purpose of the IPAR is

to understand the factors affecting the operation of specific infrastructure subsectors in the context of the

crisis, and to identify the country‘s priority infrastructure investment pipeline against the countries‘

economic and social goals, cognizant of financial constraints and quick-win opportunities. A full-fledged

IPAR essentially includes four subcomponents:

Demand Analysis: Building on the economy-wide assessment in the Strategic Country Review,

this subcomponent looks at the needs and demands in specific subsectors and how they may have

changed in the context of the financial crisis.

Supply Analysis: This subcomponent explains the key specific economic and technical features of

the subsectors. It also provides a snapshot of the subsector‘s project and program portfolio,

including the degree of completion of the projects, their financial status, their strategic

importance and benefits, the risks they face, and the ease of implementation.

Institutional and Policy Analysis: The capacity of the public and private actors to mobilize

resources, provide incentives through adequate regulatory frameworks, and implement and

monitor policies, programs and projects can influence the success of a program or project as

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much as the availability of financial resources. The broader look at these institutional factors is

provided by the SCR; however, some may vary across different sectors. Therefore, a careful

assessment of the actors and stakeholders in the specific subsector is an important component of

the IPAR.

11. Annex II elaborates on general supply, demand and institutional features of the following sectors

and subsectors, and on how the IPAR would be applied to them:

Transport, including the ports, roads and freight services subsectors;

Energy, distinguishing between generation, transmission and distribution;

Water, including the full water cycle from upstream water resources management, to irrigated

agriculture and drainage in agricultural areas, and water supply and sanitation in urban centers

and villages;

The Urban Sector, encompassing urban infrastructure funds, slum upgrading, affordable housing

projects, and rehabilitation and maintenance of urban infrastructure services; and

Telecommunications, covering international connectivity (submarine or terrestrial fiber optic

cables, satellite), domestic transmission (backbone), and local access networks in rural and urban

areas.

12. The main counterparts and sources for an Infrastructure Portfolio Assessment review include, in a

varying degree depending on the sector and subsector: sectoral ministries; regulatory agencies; service

administrators; main operators; investment promotion agencies; regional and local government agencies;

international, national or regional business organizations and sponsors; and banks and financiers in

general.

3. USES OF THE DIAGNOSTIC TOOLS

13. The motivation that drives the proposal for more systematic infrastructure diagnostics in the

context of the current crisis is that countries and donors need better information to be able to make

choices. In the context of restricted resources and of an urgent need for jump-starting economies, while

ensuring that the basis for long-term growth is not being eroded, well-informed selectivity is crucial.

Donors need to decide which countries to prioritize in the provision of stimulus funding, and then they

need to have the tools to decide whether a country is ready to receive those resources, in which amount,

and for which project.

14. At the same time, countries would want to make choices across their sectors and sub-sectors, and

across key projects, to ensure the maximum possible cost-effectiveness and impact – and they would need

to be able to persuade their own constituencies, as well as donors and financiers, that they are doing this

in a robust and transparent way. The information generated by the Infrastructure Diagnostic Tools,

therefore, should be of use to multiple stakeholders and for multiple purposes, some of which associated

with the INFRA initiative, and others associated with the long-term monitoring and management of

infrastructure programs and projects, by donors or by developing countries themselves.

15. This section distinguishes between three key uses of the diagnostic tools: (a) the rapid review,

(b) the INFRA eligibility framework; and (c) the in-depth review, depicted in figure 1.

5

Fig 1

Infra Diagnostic Tools: Level and Uses

MID-LEVEL REV IEW

Econo mic & Financial

Constraints

Infrastructure Gaps, Needs and Spending

Institutional Capacity

Portfolio Scans

OUTCOME:

IN FRA ELIGIBILITY FRAM EWORK

Need for D onor assistance and

assessment o f overall gap

Prior itization of Sectors/Projects

Institutional W eaknesses

Instruments o TA

o Grants o Lending: D PL and/or SIL o Innovative Instruments:

Guarantees , S mart Subsid ies

OU TCOM E:

P RIOR ITIZE DONORS’ A CTIONS

Identif ication of key cr isis transmission

mechanisms

Snapshot of countries and projects most

vulnerable to the crisis

Country Taxonomy with identificatio n of cr itical country cases and polic ies

RAPID REVIEW

Econo mic Co nstra ints

Investment Need Gaps

Institutional Capacity

Financial Shortfa ll

OUTCOME:

DETAILED A NALYSIS

High Frequency Mo nitoring of Macro

and Micro Indicators

Benchmarking Analysis a t the Country,

Sectora l and Enterpr ise Level

Solid Foundation for country diagnostic, strategy and budget suppor t

Advise to Government that launch Infrastructure Stimulus Package

Detailed Modelling

Impact Evaluation

Standardization and Sharing of Information and Databases across Client

Countries, IFIs and Donors

IN DEPTH REVIEW

Econo mic & Financial

Constraints o Central Gvm

o Local Gvmt and SOEs o Infrast ructure

Infrastructure Gaps, Needs and

Spending o Prioriti za tion of Infra

Spending o Revenue Mobili zation o PP Is o Job Creati on

Institutional Capacity

o Budget Execution o Decision Making for

Spending o Regulat ory Governance o SOE & P PP C ontracts

Portfolio Review

o Demand and S upply An alysi s

o Ins tituti onal Analysis

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3.1 RAPID INFRASTRUCTURE REVIEW

16. The rapid review will aim to provide the World Bank Group and INFRA donors with a

periodically-updated glance at the vulnerability of countries‘ infrastructure to the impact of exogenous

shocks, starting with the current crisis. It will highlight critical countries, regions aspects of infrastructure

vulnerability. The rapid review focuses on a small selection of basic SCR economic and institutional

variables that are readily available for a wide set of countries from World Bank Group, IMF and

government sources, or that are easy to estimate based on commonly used models, for instance: estimates

of fiscal space, investment needs and gaps, and service and institutional quality assessments. Using the

rapid review approach, two products for immediate use by the development community can be easily

generated:

A global snapshot of the vulnerability of infrastructure investments in the face of the current

crisis. This consists of a tabular and comparative presentation of the selected variables. At a

glance, these data suggest that the great majority of developing countries with relatively high

investment needs face significant economic or financial limitations; and that, while this is a

challenge at all stages of development and income, lower income countries are relatively more

vulnerable to the crisis because of the relatively poorer capacity to execute and monitor the fiscal

stimulus measures, and

A developing country typology, which allows to quickly identify countries in particularly critical

condition that may require a closer look from the Bank Group and donors.

17. This chapter illustrates the key sets of variables, included in the rapid review. Section 3.1.1

presents the overall distribution of easily available indicators that capture the degree of vulnerability of

developing countries to the crisis, including lack of fiscal space, infrastructure gaps and institutional

capacity. Section 3.1.2 and 3.1.3 report the distribution of indicators by income and region. Section 3.1.4

proposes a preliminary taxonomy of countries that can be used to prioritize countries and tailor specific

policy recommendations. This rapid assessment could be updated periodically and offered as a service to

partner agencies and governments.

3.1.1. Summary Statistics

18. Low Fiscal Space is a major constraint to the implementation of infrastructure fiscal stimulus

packages. A key question that needs to be addressed is whether countries have room to loosen fiscal

policy and ability to take on additional debt without creating macroeconomic unbalances. In a recent

survey implemented by PREM, World Bank country economists were asked to rate twelve factors

(including fiscal balance, public debt, history of public debt, risk from contingent liabilities, current

account deficit, external debt, foreign reserves, exchange rate regime, exposure to easily reversible capital

flows, inflation, impact of commodity price decline on government revenues, and impact of commodity

price decline on government expenditures) constraining the ability of governments to undertake a

countercyclical fiscal stimulus.2 The vertical bars in Fig. 2 below show the proportion of countries

characterized by a different ranking (low, medium and high) according to the relevant variables. As

shown by the first vertical bar in Fig. 2 below, about 40% of developing countries are characterized by

low fiscal space, making the use of infrastructure stimulus packages challenging.

19. Infrastructure investments display high vulnerability to the crisis. Even though infrastructure

investment needs are expected to decline, as a consequence of the slowdown in growth, they are still

accounting for a significant percentage of GDP. The second and third vertical bars in Fig. 2 report

2 For more details on the fiscal space indicator ranking see the PREM assessment reported in World Bank (2009c).

7

respectively the proportion of countries characterized by a different ranking respectively in investment

needs and investment needs gaps resulting from the crisis. Only about 40% of the countries have low

investment needs and even a smaller percentage (about 25%) display low infrastructure investment gaps

as a result of the crisis. The vulnerability of infrastructure to the crisis is also confirmed by looking at

additional indicators. The fourth bar of Fig. 2 indicates the percentage of countries characterized by a

different ranking according to the degree to which infrastructure represent a significant bottleneck in

terms of growth and expansion by enterprises. Again only less than 20% of countries are characterized by

low bottlenecks in infrastructure. Finally, the last vertical bar reports the percentage of countries

characterized by different degree of vulnerability as measured by the percentage of public private

investments in infrastructure delayed as the result of the crisis. Around 45% of countries display

significant infrastructure bottlenecks in terms of investment needs generated by the crisis, which are also

reflected by the significant gaps in quality. 3

20. It is also worth noting that the great majority of the developing countries with high investments

needs are constrained by high economic and financial constraints to fiscal stimulus packages. More than

80% of the developing countries do not have fiscal room to implement the investment needed to remove

infrastructure bottlenecks. In addition, in more than 30% of countries, PPIs have been already affected the

impact of the crisis.

Fig 2

Economic Constraints and Infrastructure Gaps

Source: own calculation, based on World Bank (2009b), SDN (2009), ICA surveys and Izaguirre (2009)

21. Institutional quality also poses significant high challenges in addressing gaps. As shown in Fig. 3

below around 30% of developing countries are characterized by low budget execution capacity and low

standards in transparency of decision making. The first two vertical bars summarized the results from the

Country Policy and Institutional Assessment (CPIA) questions related to quality of budget and financial

management, efficiency of revenue mobilization, quality of public administration, transparency,

3 Quality gaps are based on the ICA survey related to the loss of sales due to power outages. PPI vulnerability is based from the

delays in PPI committed investment projects from August 2008 to January 2009 from the Impact of the financial crisis on PPI

database, as reported in Izaguirre (2009).

38.3% 38.8%

26.5%17.6%

52.7%

36.4% 31.9%

28.2%38.2%

14.5%

25.2%

45.3% 44.1%

32.7%29.3%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Fiscal Space Inv Needs Inv Needs Gaps Quality Gaps PPI Vuln

Low Medium High

8

accountability and corruption in the public sector and the Open Budget Index (OBI), which captures the

budget transparency. The third and fourth bars summarized the governance quality, in terms of

government effectiveness and control of corruption, two of the components of the country governance

indicators reported in Kaufmann et al (2008). About a third of the countries may be highly vulnerable to

lack of government effectiveness and low control of corruption.4

Low social protection coupled with high

income inequality also make countries less capable to implement a fiscal stimulus package without

hurting the poor. The final two bars report the proportion of countries ranked according to Gini

distribution ranking, as an index capturing income inequality and CPIA Social Protection questions

related to the quality of social protection policies and the equity of public resource use. High income

inequality affects more than 40% of countries whereas only about 15% are characterized by high social

protection mechanisms.

Fig 3

Institutional Quality

Source: Source: own elaboration, based on OBI, CPIA Kaufmann et al (2008) and WDI

3.1.2. Distribution by Country Income Level

22. Fiscal space is posing a significant challenge across all countries, especially for low income

countries. Around 46% of low income countries report low fiscal space and only 12% are able to finance

an infrastructure fiscal stimulus program without deteriorating their macroeconomic balances. This is

confirmed by the high level of external debt and lower levels of mobilization of revenues. Half of upper

middle income countries also face severe fiscal constraints. The relatively stronger macroeconomic

indicators confirm the higher ranking in terms of fiscal space.

4 The OBI index is a measure of the budget transparency. Government effectiveness and control of corruption are two of the

components of the country governance indicators reported in Kaufmann et al (2008). Gini distribution is based on WDI

indicators. CPIA indicators are used to assess Budget Execution and Social Protection. For building the first indicator, CPIA

questions related to quality of budget and financial management, efficiency of revenue mobilization, quality of public

administration, transparency, accountability and corruption in the public sector were used to build the first indicator. CPIA

questions related to the quality of social protection policies and the equity of public resource use were used to build the second

indicator.

30.3% 27.6%33.1% 29.9% 30.2%

22.4%

38.2%

60.3%

29.9% 34.6%29.2%

61.2%

31.6%

12.1%

37.0% 35.4%40.6%

16.4%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

OBI CPIA-Budget Gov Eff Corr Contr Gini Distr CPIA-Soc Prot

Low Medium High

Governance QualityIncome Inequality and Social

Protection

Budget Execution and

Transparency of Decision Making

9

Fig 4

Fiscal Space and Macro Economic Constraints

Source: World Bank (2009b), IMF WEO and WDI

23. Infrastructure still represents a major bottleneck at all stage of development and income, both in

terms of needs for investment and confirmed by the gaps in quality of the services reported by businesses.

Fig 5 unveils significant difference among the two set of indicators. Whereas investment needs do not

display significant variation across the different income groups, quality gaps are significantly lower in

upper middle income countries.

Fig 5

Investment Needs Quality Gaps

Source: own elaboration, based on SDN (2009) and ICA surveys

24. Lower income countries are more vulnerable to the crisis, due to the lower quality of institution to

execute the fiscal stimulus. This considerably reduces the room for maneuver for policy intervention,

including infrastructure fiscal stimulus. Fig 6 calls for significant assistance that countries need to be

46.3%

22.5%

50.0%

41.5%

37.5%

26.9%

12.2%

40.0%

23.1%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

LIC LMIC UMIC

Low Medium High

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

LIC LMC UMC

0.0%

50.0%

100.0%

150.0%

200.0%

250.0%

Government Revenues Tax Revenue

Government Spending External Debt

33.3%

18.4%27.8%

25.6%

23.7%

33.3%

41.0%

57.9%

38.9%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

LIC LMIC UMIC

Low Medium High

0.0%

11.9%

41.9%

20.9%

31.0%

51.6%

9.7%

50.0%

51.2%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

LIC LMIC UMIC

Low Medium High

10

given to improve budget execution capacity as well as to social protection. Not a single LIC country has

yet reach high standards in budget execution and ability to protect the poor. UMIC countries are instead

significantly higher standards in both indicators.

Fig 6

Budget Execution Capacity Social Protection

Source: own elaboration, based on CPIA

3.1.3. Distribution by Region

25. Challenges differ also by regions. MNA, SAR and SSA present major institutional challenges,

with a proportion lower than 10% of the countries endowed with high institutional capacity. ECA EAP

and LAC regions present relatively lower investment needs, but are characterized by higher institutional

capacity (see Fig. 7).

44.2%

21.4%12.9%

55.8%

76.2%

45.2%

41.9%

2.4%0.0%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

LIC LMIC UMIC

Low Medium High

34.9%

16.7% 12.9%

65.1%

71.4%

38.7%

45.2%

0.0%11.9%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

LIC LMIC UMIC

Low Medium High

11

Fig 7

Distribution by Regions

EAP ECA

LAC MNA

SAR SSA

Source: own elaboration

25.0%

90.0%

25.0%

37.5%

10.0%

50.0%

37.5%

25.0%

0.0%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Fiscal Space Inv Needs Inst Cap

Low Medium High

44.4%

66.7%

30.0%

22.2% 50.0%

33.3%

20.0%

0.0%

33.3%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Fiscal Space Inv Needs Inst Cap

Low Medium High

30.0%40.0%

20.0%

40.0%30.0% 70.0%

30.0%

10.0%

30.0%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Fiscal Space Inv Needs Inst Cap

Low Medium High

42.9%

14.3%

30.0%

42.9%

57.1%

60.0%

14.3%10.0%

28.6%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Fiscal Space Inv Needs Inst Cap

Low Medium High

33.3% 33.3%

0.0%

50.0% 50.0%

100.0%

16.7%

0.0%

16.7%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Fiscal Space Inv Needs Inst Cap

Low Medium High

44.7%

21.6%

41.5%

31.6%

40.5%

51.2%

23.7%

7.3%

37.8%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Fiscal Space Inv Needs Inst Cap

Low Medium High

12

3.1.4. Country Taxonomy

26. Countries with low and moderate fiscal space are less suited for the use of infrastructure

expenditure as a fiscal stimulus. Within this category of countries, it is important to highlight countries

characterized by high investment needs.

27. Countries with high investment need gaps need to explore alternative ways of financing the

infrastructure program. As summarized in Table 1 there are several more or less sophisticated

methodologies according to which it is possible to assess the countries‘ infrastructure investment needs.

As discussed in the previous sections, we will first use the benchmarking approach to assess the

infrastructure needed to support the growth targets set by the government. This assumes that there is a

relatively stable relation between the stock of infrastructure and its composition and growth. The

estimates are thus equivalent to a demand for infrastructure for a given growth target. Alternatively,

where available, the estimates generated at the sectoral level based on engineering assessment of the costs

of expanding services to reach targeted coverage or interconnections of networks should be used.

Table 1

Methodologies to assess infrastructure investment needs

“Benchmarking” Set target

Examples:

Stock target: what would it cost to get a

given country‘s infrastructure (per capita; per

unit of GDP; per km2) to the level of the

Regional leader; or to the level of another

region median?

Flow target: how does a given country‘s

expenditures on infrastructure compare to

peers.

Examples:

MDGs - what would it cost for a given country

to achieve universal service coverage in water

and sanitation, electricity and access to all year

round roads.

National Targets – what would it cost for a

given country to achieve targets under their

national plans2?

Econometric:

Growth: What level of infrastructure

coverage is needed to achieve x% level of

growth and reduce inequality by z%. This is

the approach followed by Calderón and

Servén (2004) applied by Estache (2005) in

the case of Africa.

Demand: What level of infrastructure

coverage will be demanded by firms and

consumers, for given growth projections. This

is the approach followed in Fay and Yepes,

2003 and extended by Bogetić and Fedderke

(2006) in the case of Africa.

Micro sectoral estimates:

These can be economic-engineering models that

price particular level of coverage and quality; or it

can be more ad-hoc, relying on sector data and

expert opinions.

- Power sector: well defined international

methodology, used by electricity companies to

estimate investment needed to maintain the

integrity of the network and satisfy predicted

expansion in demand.

- Roads: well defined methodology for

rehabilitation/maintenance expenditures;

combined with road sector expert opinion on

definition of major corridors and investment

needs for their completion.

13

Table 2

Investment Need Gaps and Fiscal Space

Investment Need Gaps

The higher the investment needs the greater the infrastructure investment gaps as a percentage of GDP

Low Medium High

Fis

cal

Sp

ace

T

he

hig

her

th

e fi

scal

spac

e th

e g

reat

er t

he

abil

ity

to u

nd

erta

ke

a fi

scal

sti

mulu

s p

rog

ram

and

fin

ance

su

ch a

pro

gra

m b

y t

akin

g o

n a

ddit

ion

al d

ebt

wit

hou

t und

uly

jeo

par

diz

ing

th

e su

stai

nab

ilit

y o

f it

s m

acro

eco

no

mic

bal

ance

s

Lo

w

Argentina Kyrgyz Rep.

Congo, Dem. Rep. Albania Madagascar Burundi Liberia

Croatia Brazil Poland* Egypt Malawi

Lao PDR Côte d'Ivoire Sri Lanka Gambia Mauritius*

Latvia Djibouti Turkey Georgia Mozambique

Mauritania Ethiopia Guinea Nicaragua

Sudan Ghana Guinea-Bissau Pakistan

Uruguay India Panama

Jamaica Senegal

Jordan Tajikistan

Togo

Mo

der

ate

Bangladesh Niger Burkina Faso Yemen Armenia South Africa*

Cambodia Philippines Central African Rep. Zambia Belarus Tanzania

Comoros Vietnam Haiti Benin Tunisia

Dominican Rep. Kazakhstan Bulgaria* Uganda

Indonesia Mexico* Colombia Ukraine

Kenya Nepal Costa Rica Honduras

Mali Romania* El Salvador Morocco

Mongolia Rwanda Guatemala

Hig

h

Angola Malaysia Algeria Russian Fed. Bolivia Paraguay

Botswana Nigeria Azerbaijan Sierra Leone Chile Swaziland

Chad Papua NG Cameroon Turkmenistan Ecuador Uzbekistan

China Thailand Peru Venezuela Iran

Gabon Lesotho

Source: preliminary own elaboration

Note: The country ranking of fiscal space is reported in World Bank 2009 (c). The country ranking of investment needs gap is based on the revised infrastructure needs estimated by the authors, based on Fay and Yepes

(2003) and Yepes (2008) for 2008-2015 compared to the pre-crisis baseline. 5

5 Countries marked with * are characterized by high institutional quality, as measured by the CPIA questions related to quality of

budget and financial management, efficiency of revenue mobilization, quality of public administration, transparency,

accountability and corruption in the public sector.

14

28. Different policy options best fit the different country-categories. Countries characterized by high

infrastructure investment needs, but with low and moderate fiscal space (highlighted in red in the right

hand side of Table 2) are less suited for the use of infrastructure expenditure as a fiscal stimulus. Such

countries are also particularly vulnerable in terms of low institutional quality, with the exception of

Mauritius, Bulgaria and South Africa. In this sense, tor this set of countries, low volume and highly

focused interventions are most appropriate. In particular, strict prioritization and selectivity in investment

and the quality of the governance and macro-economic policy framework are key to ensure that the fiscal

stimulus brought about by an increase in infrastructure investment will translate in sustainable growth.

29. In contrast, countries characterized by high infrastructure investment needs and high fiscal space

(highlighted in green in the left hand side bottom corner of Table 2) are more suited for the use of

infrastructure expenditure as a fiscal stimulus. This set of countries represents only 18% of the total of

developing countries. For this set of countries additional volume of lending would be safer.

30. Country rankings are dynamic and may be subject to changes as a result of the crisis and the

collection of new information. It is essential to consider that, as the crisis evolves and more detailed

information are available, the country taxonomy is expected to change and the position of countries

within the matrix will also be subject to revisions. In particular we expect investment need gaps to

become larger and fiscal space to be reduced.

3.2 PROPOSED INFRA ELIGIBILITY FRAMEWORK

31. A second use of the Infrastructure Diagnostic Tools is to provide a commonly agreed and simple

framework for deciding on whether a country would be eligible for INFRA resources. In essence this

diagnostic framework would help to determine whether donor resources are needed to fill infrastructure

financing gaps. If so, it would help to determine the size of the financing gap, opportunities for efficiency

and savings, institutional capacity gaps affecting the country‘s effective use of substantial stimulus

resources to address short-term job-creation needs or set the foundation for long-term growth, and the

selection of World Bank Group and donor instruments that may be best suited to help to fill the gap

(technical assistance, grants, lending in concessional terms or otherwise, guarantees, etc.)

32. The INFRA Eligibility Framework would consist of a subset of the SCR and IPAR variables that

can be collected or developed based on data from international, national or local sources for most of the

World Bank Group client countries. While this level of review encompasses a larger range of variables

than the ―rapid review,‖ these variables are still deemed relatively easy to collect for a large range of

countries.

3.2.1. Assessment of Economic and Financial Constraints to Fiscal Stimulus

33. As a first preliminary step, it is important to review the availability of budgetary room that allows

a government to provide resources for a desired purpose without jeopardizing the sustainability of a

government‘s financial position. Countries' response to the crisis has to balance the goal of mitigating the

impact of the crisis against the risk of damaging the macroeconomic stability. A country-by-country

judgment needs to be made on the appropriate balance. Key macro ratios to be looked at are the public

debt-GDP and external debt/GDP ratios. Desired targets to ensure long term balanced growth include

levels of public debt-GDP not greater than 65 percent and external debt-GDP ratio not greater than 45

percent.

34. Across countries, the organization of the provision of infrastructure services, as well as

expenditure channels can vary significantly. Most importantly, these services and expenditures can be

accounted for on-budget (e.g. directly in the national public sector accounts, and within these, at different

15

levels of government, from national to local), or off-budget (e.g. in separate budgets of the State Owned

Enterprises, SOEs, or Public-Private Partnerships, PPPs). The Africa Infrastructure Country Diagnostic

(AICD) provides standardized cross country datasets of fiscal indicators for infrastructure including extra-

budgetary financing vehicles, such as SOEs and PPPs, to the extent that the state or the operator still

relies on support by the government (in the form of implicit and explicit subsidies).6

Quasi fiscal deficits

have been estimated in selected regions, including ECA and SSA, according to the methodology

developed by Ebinger (2006).

35. A leading indicator of the size of the fiscal room for infrastructure is the government‘s capital

spending (public investment) as a share of GDP. The lower fiscal sustainability is, the narrower space the

governments have for infrastructure spending. Under the assumption that infrastructure demand is never

met, low public investment rates mean that fiscal space for infrastructure is already squeezed. The

vulnerability of this infrastructure-specific fiscal space can be gauged by looking at the share of

government recurrent spending in the total budget. The larger this share is, the higher the vulnerability.

3.2.2. Assessment of Infrastructure Gaps, Needs and Spending

36. Prioritization and better targeting of public spending could create additional fiscal room for

maneuver. Improving efficiency of current infrastructure entails addressing the questions below:

Which sector should be priority? Prioritization among infrastructure sectors has been a key

question for governments. In theory, it should be guided by rates of return on invested projects.

For instance Fan, et al. (2002) and Estache and Liu (2003) offer a methodology for prioritization

of public investments.

What are the immediate investment needs in infrastructure sectors? Key sector-specific

variables include investment requirements to: (a) maintain reserve margins of electricity systems

within the recommended ranges: (b) prevent congestion in key transport assets (airports, ports,

roads, railway); and (c) meet the gap between actual investments in the water sector vs.

government objectives in network expansion (increase in access) and service quality increase

(including wastewater treatment).

To what extent can quasi-fiscal deficits be reduced? At the sector level, financial

viability/sustainability is well represented by quasi-fiscal deficits, which can be composed by

underpricing, technical losses and nonpayment (insufficient metering and arrears). Additional

fiscal space can be created by reducing some of these quasi deficits.

Could PPI at an advanced stage be accelerated? Is there still investor interest in projects in

tenders? Are awarded projects or projects to be awarded facing problems on securing financing?

Which sector investment programs are able to generate highest local employment and income?

To answer such a question several indicators may be collected, including the share of capital

expenditure to be spent on labor and local materials, as well as the expenditure on labor and

estimate of job creation (if possible, with consideration of the effect on vulnerable group, for

instance by age, gender, geographic location) for different types of projects.

3.2.3. Assessment of Quality of Institutional Capacity

37. The concept of institutional efficiency relates to the degree to which administrative and

procedural mechanisms are in place to enable successful policy implementation and project execution.

6 See Briceño-Garmendia et al (2009).

16

38. A number of key questions may be posed to assess how transparent and accountable the decision

making processes are. Will there be enough time or political willingness to conduct sufficient investment

analysis before implementing the project? Indicators that could be used to capture execution capacity

include: Percentage of executed annual capital and maintenance spending; Average time needed to bring

projects to completion; Average delay in project implementation; and Average percentage of cost over-

run.

39. The way in which legal and regulatory systems are structured also ensures the greatest

effectiveness of the fiscal stimulus in the infrastructure sectors, while protecting all stakeholders,

including consumers and operators. In a crisis context, rate of return regulation may be more suited than

price cap regulation to protect investors. Pro poor regulation questions include: Can access for the poor

be ensured? What types of subsidies are used? Are there only subsidies for consumption (through the

tariff) or are access subsidies available? What targeting mechanism is used for life-line or other safety net

mechanisms?

40. The SOE governance framework is particularly relevant for understanding the likely success of

crisis-control if the investment interventions will be channeled through SOEs. State Owned Enterprises

(SOEs) are likely to be operating under tight budgets and under business plans and mechanisms

vulnerable to short-run fiscal adjustments, which makes them more vulnerable to the financial crisis. Key

questions include:

What is the degree of corporatization? Are SOEs allowed to earn a rate of return? Are they

issuing dividends? What is the degree of managerial autonomy in decision making?

41. The PPP governance framework is particularly relevant for understanding the existing framework

for renegotiation. Key questions include:

Is there a history of arbitration/renegotiation? Is there a depth of experience of PPP contracts

in the sector? What is the normal timeline of arbitration/renegotiation experienced? What level of

arbitration?

How vulnerable are the contractual structures of the infrastructure projects? The vulnerability

of PPIs need to be assessed based on the types of contracts, e.g., PPAs, risk allocations

(construction risk, commercial risk, market risk, fuel supply risk, location risks, and foreign

exchange risks), with the existence of government performance undertaking on behalf of the

public utilities or guaranteed commercial obligations of the public utilities and off-take through

take or pay provision, etc.

42. Table 3-5 below summarize the key issues analyzed above. The entry in the second column

distinguishes between variables on which policy makers and other stakeholders can influence/change the

behavior in the short term; variables that can be influenced in the short term, but at a higher cost (i.e. need

IFIs technical assistance, ST with TA); and finally variables that are completely outside the control of

policy makers/Bank and other IFIs and should be taken as constraints (at least in the short term).

3.2.4. Strategic project scan

43. The INFRA eligibility framework would include the scanning of the country‘s major project

portfolio in order to identify key entry points for INFRA support. Priority projects will include those with

particularly high strategic value (high growth and/or employment impact), which may be completed more

expeditiously, and/or may face particularly critical financing gaps. A sample data gathering tool is

propose in table 6.

17

Table 3

Template for Assessment of Economic and Financial Constraints to Fiscal Stimulus

Key Questions and Variables Policy’s Ability to

Modify Behavior

1. The Basic Framework

Can governments borrow foreign or domestic resources?

1. Capital market trends (e.g., M4/GDP) No

2. Gov and Ext Debt/GDP No

2. Extending the Basic Framework to SOEs

What is the hidden cost of SOE provision of services?

1. End-User Consumption No

2. Average Cost Recovery Price (Cost Recovery Tariff) MT with TA

3. Loss Rate (as a share of production)

Normative Loss Rate (as a share of Production)

MT with TA

4. Average Actual Tariff (Real Tariff) MT with TA

5. Collection Rate MT with TA

Can local governments/SOEs support borrowing and fiscal expansion

1. Domestic and external debt/GDP local governments/SOEs (if allowed to borrow) No

3. Tailoring the basic setting to infrastructure

What is the vulnerability of the fiscal space for infrastructure?

1. Infrastructure ODA/GDP (level and volatility) No

2 Average Actual Tariff (Real Tariff) relative to national income No

18

Table 4

Template for Assessment of Infrastructure Gaps, Needs and Spending

Key questions and variables Policy’s Ability to

Modify Behavior

1. Prioritization of infrastructure needs

What are the immediate investment needs in infrastructure sectors?

1. Investment requirements to maintain reserve margins of electricity systems

2. Revenue mobilization

To what extent can quasi-fiscal deficits be reduced?

1. Sector quasi-fiscal deficits (including under pricing, technical losses and nonpayment) ST with TA

3. Private sector participation in infrastructure

Will the private sector continue to play a major role in providing infrastructure services?

1. Is there still investor interest in projects in tenders? MT with TA

2. Are awarded projects (or projects) to be awarded facing problems on securing financing? MT with TA

Is the net present value of infrastructure assets positive or negative?

1. PPI projects and associated investments which will not require government support (subsidies,

government payments, financing, etc)

No

4. Infrastructure and Job Creation

Which sector investment programs are able to generate highest local employment and income?

1. Share of capital expenditure to be spent on labor and local materials at sector No

19

Table 5

Template for Assessment of Quality of Institutional Capacity

Key questions and variables Policy’s Ability to

Modify Behavior

1. Budget Execution Capacity

Do government agencies have good execution capacity on infrastructure expenditure?

1. % of executed annual capital infrastructure expenditure budget MT with TA

2 . % of executed annual budget for maintenance MT with TA

3. Percentage of budget overrun in recently implemented projects MT with TA

2. Decision Making Process

How quickly can policy interventions be on the ground to provide the required stimulus?

1. Average (or specified mandatory) timeline of the decision-making process NO

2. How develop are channels for demand side of governance? MT with TA

3. Legal and Regulatory Framework

Regulatory Governance

Is the methodology for revenue determination and rate adjustments more similar to a rate of

return methodology or a price cap approach MT with TA

Pro-poor Regulation

1. Existence of safety-nets for infrastructure services (such as life-line tariffs) What are the

life-line consumption amounts? MT with TA

4. SOE Governance

Corporate Governance

1. Degree of corporatization MT with TA

Accounting, Disclosure and Performance Monitoring

1. Auditing of accounts MT with TA

5. PPP Contractual Framework

Is the sector able to manage re-negotiation?

1. Number of contracts gone for renegotiation and outcome of the process MT with TA

2 . Average length of renegotiation/ arbitration processes MT with TA

How vulnerable are contractual structures for PPP projects?

1 . Risk allocation (foreign exchange risk, fuel cost risk, demand risk, etc.). MT with TA

20

Table 6

Strategic projects: Investment needs, funding gap, and status of completion

Project Strategic value

(Growth,

employment)

Total Cost

[US$

Millions]

Status of

investment /

completion

Funding Needs

[US$ Millions]

Identified Funding Sources

[US$ Millions]

Expected

Funding

Shortfall [US$

Millions]/

Issues

2009 2010 2011 Debt Equity Govt. finance

1.

2.

3.

Total

3.3 IN-DEPTH INFRASTRUCTURE REVIEW

44. Finally, the in-depth level review, which encompasses the full set of variables comprised in the

SCR and IPAR, requires a significant investment of time and resources (including technical assistance for

the collection of some variables that would not be readily available in all countries or which need

particularly careful definition and processing). This investment would be justified, in full or by selected

modules, when policy makers are seeking answers to very specific policy questions. The full set of

variables for the SCR and IPAR are presented in Annex 1; guidance notes on Social Development Impact

and Greening Infrastructure complement this analysis, by spelling out the diagnostic method to assess

social and environmental benefits, costs, and institutions.

45. A number of uses of these diagnostic tools relate to the interest of donors in ensuring a better and

more expeditious allocation of international assistance. This include, particularly in the context of

INFRA:

Development of broad country typologies, and identification of critical country cases and policies

that apply to different country typologies, to guide and prioritize donor action. The limited set of

variables in the ―Rapid‖ country review lend themselves to this use, as illustrated in Annex II;

and

Access to INFRA concessional resources. INFRA is conceived as a donor platform, and

consistent criteria are necessary for vetting countries interested in getting access to INFRA

resources. A manageable set of variables such as the set in the ―Mid-Level‖ review could

become the commonly agreed standard of evaluation of candidates for INFRA resources.

46. More importantly, there are multiple uses of the diagnostic tools that can be of great interest to

developing countries (as well as donors). The diagnostic tools can be used by developing countries to

drive their fiscal stimulus measures,7 and they can also be used as ready guide for longer-term country

sector planning; cross-sector or cross-program prioritization; regulatory assessments and reform; and

decision on the sequencing of project investments. These uses may include:

7 Sections of the Country Assistance Review were pilot-tested in April 2009 in a mission to address assist the Government of

Peru in the design of its ―Plan for Sustaining Economic Growth, Employment, and Poverty Alleviation in a Global Crisis.‖

21

Benchmarking, country comparisons along specific variables: For instance, a group of ECA

countries will benefit from a AAA infrastructure benchmarking project, using sub-modules of the

Strategic Country Review;

Solid foundation for country diagnostics, strategy, and budget support (CEMs, PRSPs, CASs,

DPLs): Elements of the Infrastructure Portfolio Assessment Review have been pilot tested for

World Bank crisis response advice in EAP;

Impact evaluation, at the country, sector and subsector level;

Standardization and sharing of information across agencies and countries, to increase the value

added of the available information, facilitate rapid response, and improve consistency and

complementarity across donor agency interventions.

4. ROLL-OUT OF THE DIAGNOSTIC TOOLS

47. The concept of the Infrastructure Diagnostic Tools is being subject to pilot-testing in specific

country programs, and to internal World Bank Group sector specialist and management review. Base on

the outcome of the pilot, the tools will be fine-tuned. Management will undertake informal consultation

with key partners, including potential INFRA donors, to discuss the concept and benefit from shareholder

advice.

48. Once finalized, the Diagnostic Tools will be made available to all International Financial

Institutions, and particularly to those that would like to partner with the Bank in the INFRA platform.

The World Bank Group would stand ready to provide support to clients and to partner agencies in the

dissemination and implementation of the diagnostics guided by these tools. After undergoing vetting by

sector specialists, management and stakeholders, the Diagnostic Tools document will be revised,

enhanced to include more specific process, resources, and cost clarifications, and made publicly available.

49. As Annexes to this memorandum, the description of the full-fledged, in-depth Strategic Country

Review (Annex I) and the Infrastructure Portfolio Assessment Review (Annex II) follow below.

This paper is part of a broader SDN effort aimed at enhancing the analytical tools to provide rapid assessment of the

impact of the crisis on infrastructure and design diagnostic tools to support the INFRA platform. This task was led

by Maria Vagliasindi, under the guidance of Marisela Montoliu Muñoz. The team also included Daniel Benitez,

Federico Goñi, Atsushi Iimi, Karina Izaguirre, Yogita Mumssen, Tina Søreide and Natsuko Toba (all from FEU

Economics Team). We are very grateful to the INFRA Team, particularly Elio Codato and Patricia Veevers-Carter

(FEU), Jaehyang So, Marc Juhel and Fernando Navarro (ETW), Inger Andersen, Jose Luis Irigoyen, Vivien Foster

(AFTSN), an informal group of SDN economists led by Jordan Schwartz (LCR), Ranjit Lamech, Seema Manghee,

Wael Zakout (ECSSD), Sameer Akbar (ENV), Andrew Peter Norton, Cyprian F. Fisiy, Vara Vemuru, Elena Correa,

Carolyn Turk, Nilufar Ahmad (SDV) and PREM colleagues Louise Cord and Marijn Verhoeven for helpful

suggestions.

ANNEX 1: STRATEGIC COUNTRY REVIEW

Developing Countries and the Financial Crisis:

Infrastructure Diagnostic Tools

FEU ECONOMICS TEAM

Draft May 1, 2009

24

1. INTRODUCTION

1.1. This note describes the first component of the diagnostic tool package proposed under the

World Bank Group’s Infrastructure Recovery and Assets Platform (INFRA).8 INFRA would aim

to provide the foundation for rapid recovery and job creation and to promote long term growth by:

stabilizing existing infrastructure assets; helping to ensure delivery of projects that remain government

priority; supporting Public Private Partnerships (PPPs) in infrastructure; and assisting new infrastructure

project development and implementation. As one of the innovations with respect to the Bank‘s response

during previous financial crises, INFRA includes a package of quick-response diagnostic tools that can

help World Bank country teams and their clients to identify countries at risk, by assessing issues of fiscal

space, infrastructure gaps and institutional absorptive capacity which represents the first component of the

diagnostics tool package, namely the Strategic Country Reviews. The second component, namely the

Infrastructure Portfolio Assessment Reviews, identifies projects at risk, by assessing issues that could

affect projects under implementation (second component,). Both components will also identify priority

World Bank entry points target INFRA intervention to accelerate fundamental policy reforms and to

remove the most crucial infrastructure bottlenecks to growth and poverty reduction.

1.2. This note, therefore, focuses on providing country teams with an analytical approach and

concrete diagnostic tools for assessing the effectiveness of the use of infrastructure investment as a

fiscal stimulus. This first component of the INFRA diagnostic tool package, Strategic Country Reviews,

has two main objectives: (a) providing the elements for a taxonomy that can allow for a quick preliminary

assessment of the different ways in which the crisis impact different categories of countries, and (b) for

specific countries, identifying whether and to what extent infrastructure can be used as a fiscal stimulus.

The Strategic Country Reviews are divided in three key modules, addressing:

Economic and financial constraints to fiscal stimulus, that is, the country‘s ability to finance

the infrastructure fiscal stimulus program without unduly jeopardizing the sustainability of its

macroeconomic balances,

Infrastructure gaps, needs and spending, namely, the room for removing key infrastructure

bottlenecks to growth and to prioritize infrastructure projects based on their ability to generate

sources of local employment and income, and

Institutional capacity, namely, the country‘s ability to effectively scale up public expenditure

while protecting vulnerable groups.

1.3. Such tools provide step by step guidance in terms of diagnostic tables that can support policy

maker in:

Formulating of key policy questions and identification of transmission mechanisms through

which both macroeconomic and sector policy actions impact infrastructure allocation and

spending

Regularly tracking of selected indicators in crisis affected countries, that could be used for

measuring the impact of the crisis

8 See World Bank (2009a).

25

Using “checklists” to ensure that infrastructure allocations and lending will not be negatively

affected by the financial crisis

Identifying sector policy actions likely to have a positive effect on infrastructure allocation and

spending.

1.4. The paper is organized as follows. Chapter 2 provides a general backdrop on the relevant

transmission channels through which the crisis affects the infrastructure sectors. Chapters 3-5 present the

in-dept framework that can be used to analyze the effectiveness of infrastructure spending as a part of

stimulus packages, providing specific guidance to undertake the module by module assessment. Chapter

6, discusses how the political economy can affect the design and implementation of a stimulus package,

and proposes ways in which these key political economy insights can inform policy the focus and design

the stimulus package, to maximize its effectiveness. Finally, Chapter 7 presents the potential operational

response that could be tailored to suit the different countries and sectorial challenges, presenting also

entry points for infrastructure policy dialogue, drawing from the diagnostic analysis and the country

taxonomy.

2. THE TRANSMISSION CHANNELS

1.5. The crisis will operate through different transmission channels, whose overall impact on

infrastructure needs to be determined on a country-by-country basis. Different transmission

channels can counteract each other, and the direction of the final outcome cannot always be estimated ex-

ante. Moreover, the direction of the impact of the crisis on capital expenditures (capex) may differ from

that on operating expenditures (opex), with varying effects on infrastructure sector performance. This

section distinguishes between two transmission channels, macroeconomic and financial, and touches on

the impact on both capex and opex.

Macroeconomic transmission channels – Impact on capex. The economic slow down and the

fall of commodity prices is expected to reduce infrastructure investment needs. Fig. 1.1 illustrates

the transmission channels leading to a decrease in new capital investment needs. The economic

slow down is expected to affect the demand for infrastructure services, reducing investment

needs. Some infrastructure new investment may no longer be needed. The fall of commodity

prices, plus reduced global demand for construction services, could be expected to reverse recent

upward pressure on infrastructure unit costs, making the pipeline of projects relatively less

expensive than originally planned, and ultimately reducing the estimated need for additional new

investment funding.

Financing transmission channels – Impact on capex. On the other hand, deterioration in

revenue collection and reduced access to finance will reduce profitability and availability of funds

for infrastructure. Fig. 1.2 illustrates the financial transmission channels. Revenue collection

performance of utilities may deteriorate as consumers come under increasing financial pressure.

As a consequence, infrastructure companies may be in a weaker position to implement projects.

Financing will be more expensive and less available in the short-term. The most immediate

impact on infrastructure will be on the availability of finance from domestic and international

sources, for both State owned enterprises (SOEs) and government agencies that tap capital

markets as well as PPP projects and private companies. Private sector finance for new projects

(and those under implementation) could sharply drop, as it did in previous crises. Public

26

Revenue

Revenue collection

Access to finance:

Private Sector

ODA

Actual Infrastructure

Investment

Capex Opex

Infrastructure

Financial Shortfall

Demand for

infrastructure

Unit Cost for Infrastructure

GDP

Commodity

Price

Infrastructure

Investment Needs

Capex Opex

investment in infrastructure may also be subject to budgetary cutbacks. ODA may also be

reduced, due to budgetary pressures in donor countries.

1.6. The opex paradox: Financial crisis is not diminishing maintenance needs. Evidence from

past crises suggests that maintenance and operating expenditures (opex) are hit particularly hard in the

context of a crisis. Fiscal adjustments during past financial crises have exacerbated the bias against opex,

and the recovery has been slow. In the case of Indonesia, total public investment in infrastructure

dropped from about 7% of GDP in 1995-97 to 2% in 2000, whereas private investment plummeted from

2.5% of GDP to 0.09%. Infrastructure O&M spending, already at a very inadequate 0.048 % of GDP in

1996, dropped to 0.038% soon after the crisis. Since then, it recovered to 0.044 % of GDP in 2003, still

shy from its level in 1996. However, in spite of the expected decline in the demand for infrastructure

services in the context of a financial crisis, preliminary results from a simulation exercise show that

maintenance needs would continue to increase. Estimates for 2008 to 2015 suggest that, assuming that

new investment will occur though at a reduced pace, maintenance needs (in terms of GDP) in developing

countries would be on average 2% higher than they would have been in the absence of the crisis, despite

the fact that new investments needs would drop by about 12%. This result underscores the need to

safeguard maintenance resources to preserve the existing infrastructure stock as well as the new

investments (see SDN Policy Note, 2009).

Fig 1.1

Macroeconomic Transmission Channels

Fig 1.2

Financial Transmission Channels

27

3. ASSESSMENT OF ECONOMIC AND FINANCIAL CONSTRAINTS TO

FISCAL STIMULUS

3.1 OVERALL FISCAL AND FINANCIAL FRAMEWORK9

1.7. In order to assess the economic and financial constraints to the effectiveness of a

fiscal stimulus package it is essential to review the availability of budgetary room that

allows a government to provide resources for a desired purpose without jeopardizing the

sustainability of a government’s financial position. Fiscal sustainability namely the capacity of

a government to finance its desired expenditure programs to service any debt obligations and to

ensure its solvency.

1.8. The conventional rule to define fiscal sustainability entails ensuring that the

primary balance is greater than the debt service. If this rule is satisfied, then infrastructure

investment can be expanded without eroding debt sustainability and requiring sharp tax increases.

1.9. The primary balance is defined as the government net borrowing or net lending

excluding interest payments on consolidated government liabilities. It is fundamentally composed

of:

recurrent expenditure (excluding net interest payments) plus capital expenditure

minus tax and nontax revenues and grants.

capital losses caused by real exchange rate appreciation

seigniorage, namely, the amount paid by issuing new currency rather than collecting

taxes paid out of the existing money stock. Seigniorage has the effect of creating a de

facto tax that falls on those who hold the existing currency, as a result of its effective

devaluation through the introduction of additional money

domestic or foreign borrowing (with only a temporary effect)

Debt service is given by domestic and foreign real interest rate on domestic public debt.

1.10. It is worth noting that the conventional rule only looks at today’s deficit, ignoring

the assets created by investment. It may create a bias against investment, particularly in the

case of infrastructure projects, which are usually characterized by negative cash-flow in the short

term. Alternative fiscal rules beyond the targeted ―overall balance‖ combining simplicity and

rigor have been proposed by Buiter (2003).

The key questions below associated with this basic framework are:

Can infrastructure investment be expanded while fiscal sustainability is

maintained? Can infrastructure investment be expanded while avoiding an exploding

debt path, or a sharp increase in taxes, decrease in other expenditures, monetization or

debt repudiation?

How is fiscal space affected by the current financial crunch? Can government

borrow domestic or foreign resources? Can grants be increased or maintained?

9 The presentation on fiscal space in this section is based on analysis and collaborative work with the Poverty

Reduction and Economic Management network, and is included here as a backdrop for the remainder of the

diagnostic. For more details on vulnerabilities and fiscal policy option see World Bank (2009c).

28

Can real growth be sustained to support fiscal space? The basic reason is that

infrastructure could bring about a strong growth effect over the long run.

1.11. All these questions are closely interlinked, because ―infrastructure― is, in practice, often a

residual in the budget.

3.2 EXTENSION TO LOCAL GOVERNMENTS AND SOES

1.12. How is fiscal maneuvering room affected by the way infrastructure provision and

expenditures are budgeted and accounted for? Across countries, the organization of the

provision of infrastructure services, as well as expenditure channels can vary significantly. Most

importantly, these services and expenditures can be accounted for on-budget (e.g. directly in the

national public sector accounts, and within these, at different levels of government, from national

to local), or off-budget (e.g. in separate budgets of the State Owned Enterprises, SOEs, or Public-

Private Partnerships, PPPs). Some country studies have shown, for instance, that O&M

expenditures are substantially channeled via SOEs or local governments. Where this is the case,

it is important to know the flexibility and maneuvering room that the relevant entities have, as this

would affect the country‘s ability to expand the fiscal space for infrastructure expenditure. The

Africa Infrastructure Country Diagnostic (AICD) provides standardized cross country datasets of

fiscal indicators for infrastructure including extra-budgetary financing vehicles, such as SOEs and

PPPs, to the extent that the state or the operator still relies on support by the government (in the

form of implicit and explicit subsidies).10

Quasi fiscal deficits have been estimated in selected

regions, including ECA and SSA, according to the methodology developed by Ebinger (2006).

Key questions in this module include:

What is the hidden cost of SOEs?

Are local governments permitted to borrow domestically or abroad? If yes, what is the

stock of their (domestic and external) debt?

Are special funds permitted to borrow domestically or abroad? If yes, what is the stock of

their debt (domestic and external)?

Can SOE and local agencies mortgage assets? Can they borrow against them?

Can they issue unsecured debt? Local currency foreign exchange?

Can Treasury approve SOE borrowing? Can borrowing take place without the use of

guarantees? What is the level of fees and related risks of borrowing?

3.3 TAILORING THE BASIC FRAMEWORK TO INFRASTRUCTURE

1.13. When looking specifically at infrastructure, how large is the “current” fiscal room

and how vulnerable is it to the expected economic downturn? A leading indicator of the size

of the fiscal room for infrastructure is the government‘s capital spending (public investment) as a

share of GDP. The lower fiscal sustainability is the narrower space the governments have for

infrastructure spending. Public financing still accounts for approximately 80 percent of total

infrastructure investment in developing countries, despite some private financing (World Bank,

2005). And public investment is mostly in infrastructure. Hence, this is considered the level of

fiscal space that governments are currently allowed to use for infrastructure development. Under

the assumption that infrastructure demand is never met, low public investment rates mean that

fiscal space for infrastructure is already squeezed. The vulnerability of this infrastructure-specific

10 See Briceño-Garmendia et al (2009).

29

fiscal space can be gauged by looking at the share of government recurrent spending in the total

budget. The larger this share is, the higher the vulnerability. If the majority of public resources is

already devoted to recurrent spending, for political economy and other reasons, public

infrastructure expenditures would easily be marginalized, as experienced in Argentina and

Mexico in the late 1980s and 1990s (Calderón and Servén, 2004). As the depression deepens,

public revenues would likely be stagnant. However, recurrent spending cannot normally be cut at

the same pace.

1.14. Given the above, the following factors may be of particular importance from the

infrastructure point of view:

Public investment rate (government capital spending as a share of GDP): The variable

indicates the fiscal space that governments are currently allowed to devote for

infrastructure. Again, the lower this is, the narrower space the governments have for

infrastructure spending. When government revenues decline as the economy slows,

public infrastructure expenditures would easily be marginalized, as experienced in

Argentina and Mexico in the late 1980s and 1990s. The share of current expenditure in

government spending indicates the fiscal space that governments are currently allowed to

devote for infrastructure maintenance.

Infrastructure service prices relative to national income as a proxy of ―infrastructure

revenues‖: While it is true that many utility revenues are not directly reflected in the

budget, any infrastructure revenue from infrastructure users would eventually ease

economic and financial constraint either directly (e.g., vehicle or road tax) or through

reduced quasi-fiscal deficits of utilities. The higher prices, the larger fiscal space.

Aid for infrastructure: Many developing countries have high aid dependency for

infrastructure development. There will be a risk that those aid-dependent countries would

be faced with reduced aid flows, because donor countries are also experiencing a severe

economic depression. Since the 1990s, official infrastructure assistance has been much

less secured, while aid for social development has been firmly earmarked. External public

borrowing will also have an adverse effect on fiscal sustainability through debt, REER

and inflation, but these effects are expected to be marginal as long as the external public

borrowing is sufficiently concessional.

Economic growth associated with infrastructure investment (if possible): The

quantification of this dimension of the problem is still challenging. However, this can be

an infrastructure-specific variable to discuss fiscal space. Compared with the social

sector, infrastructure investment is affecting real growth in the relatively short term,

supporting the current fiscal space. Recent empirical work (Estache and Muñoz, 2007)

compares the growth-enhancing effect of public investment in infrastructure to those of

public investment in health and education. The model suggests, in the case of Uganda,

that a better way to finance infrastructure may be to improve existing capital stock by

allocating expenditures to O&M rather than to new investment. The model also shows

that spending on health and education raises output but is less efficient than infrastructure

investment. In Senegal, an alternative solution would be to spend a great deal more on

O&M, where the current level of spending is very low, or on health and education—all of

which have greater power than new infrastructure investment to stimulate growth in

output. No matter how spending is allocated, however, it worsens the ratio of debt to

GDP, reflecting the poor productivity of public spending in general. The better-connected

linkage between public investment and growth, the larger fiscal space.

30

1.15. Table 1.1 below summarizes the key issues analyzed above. Column 1 indicates

whether the data for the relevant variable or question are readily available for all countries, or

only for selected countries, via institutional documents, databases, or websites easily accessible to

Country Program teams. For those variables that are not already available to all countries,

Column 2 suggests the ease of collecting the missing data – whether they could be gathered by

Country Team members via well-known sources, or variables for which data collection would

require a major first-hand collection effort (e.g. through AAA/TA). Column 3 reports, for each

of the variables, the extent to which policy makers can modify the behavior of this variable. For

instance, Column 3 distinguishes between variables on which policy makers and other

stakeholders can influence/change the behavior in the short term; variables that can be influenced

in the short term, but at a higher cost (i.e. need IFIs technical assistance, ST with TA); and finally

variables that are completely outside the control of policy makers/Bank and other IFIs and should

be taken as constraints (at least in the short term).

31

Table 1.1

Template for Assessment of Economic and Financial Constraints to Fiscal Stimulus

Key Questions and Variables Extent of Data

Availability

Difficulty of Data

Collection, where

Missing

Policy’s Ability

to Modify

Behavior

1. The Basic Framework

Can governments borrow domestic resources?

1. Capital market trends (e.g., M4/GDP) Available na No

Can governments borrow more foreign resources?

1. Gov Debt/GDP Available na ST with TA

2. Ext Debt/GDP Available na No

Can grants be increased or maintained?

1. Grants/GDP (level and volatility) Available na No

2. ODA/GDP (level and volatility) Available na No

Can real growth be sustained to support fiscal space?

1. Projection of real growth rate for the next 2-3 years Available na No

1. Avg. real growth rate in the past 5-10 years Available na No

2. Min. real growth rate in the past 5-10 years Available na No

Can government print money?

1. M1/GDP Available na ST

2. Nominal interest rate Available na ST

2. Extending the Basic Framework to Local Government and SOEs

What is the hidden cost of SOE provision of services?

1. End-User Consumption Selected countries Low No

32

Key Questions and Variables Extent of Data

Availability

Difficulty of Data

Collection, where

Missing

Policy’s Ability

to Modify

Behavior

2. Average Cost Recovery Price (Cost Recovery Tariff) Selected countries Low MT with TA

3. Loss Rate (as a share of production)

Normative Loss Rate (as a share of Production)

Selected countries Low MT with TA

4. Average Actual Tariff (Real Tariff) Selected countries Low MT with TA

5. Collection Rate Selected countries Low MT with TA

Can local governments/SOEs support borrowing and fiscal expansion?

1. Domestic and external debt/GDP local governments/SOEs (if allowed to borrow) Selected countries Medium No

2. Fiscal decentralization (local gov revenue/total) Selected countries Medium No

3. Guarantees needed to borrow Selected countries Medium MT with TA

3. Tailoring the basic setting to infrastructure

What is the vulnerability of the fiscal space for infrastructure?

1. Infrastructure ODA/GDP (level and volatility) Selected countries Low No

2. Government Spending Selected countries Low No

3 Average Actual Tariff (Real Tariff) relative to national income Selected countries Medium No

33

4. ASSESSMENT OF INFRASTRUCTURE GAPS, ACTUAL SPENDING AND

DEFICITS

1.16. Can governments create fiscal space for infrastructure investment? And, if so, how? The first principle is that fiscal space can be created fundamentally by increasing public savings

through (i) expenditure reprioritization and/or (ii) revenue mobilization (IMF, 2005; Heller,

2005). In addition, (iii) PPP may also be able to create some fiscal space by crowding-in private

investment resources, improving efficiency and freeing public resources for other uses, though

the extent to and ease with which this happens is debatable

4.1 PRIORITIZATION OF INFRASTRUCTURE NEEDS AND SPENDING

1.17. Reallocation and better targeting of public spending could create additional fiscal

space. The IMF‘s publication Guidelines for Fiscal Adjustment has long acknowledged that

cutting productive public capital spending and essential operation and maintenance expenditures

will damage growth (IMF, 1995). Improving efficiency of current infrastructure entails

addressing the questions below:

New investment or operation and maintenance? And how much is needed for operation

and maintenance? Operation and maintenance spending for infrastructure should be top

priority (see SDN Policy Note, 2009).

Are expenditures in maintenance and rehabilitation at appropriate levels? The value of

this variable (gap in O&M expenditure or opex) across all sectors can be estimated by

subtracting an estimate of minimum maintenance requirements from the annual

maintenance budget. Other sector-specific proxy variables may include indicators such

as the percentage of roads in good condition, fair condition, and bad condition (an

indicator of maintenance needs) or system losses as a share of total water/electricity

supplied. To assess in relative terms the severity of the deficit, the values of these

variables for a specific country can be compared with those for countries in the same

income bracket, regional average, etc.

Which sector should be priority? Prioritization among infrastructure sectors has been a

key question for governments. In theory, it should be guided by rates of return on

invested projects. For instance, et al. (2002) and Estache and Liu (2003) offer a

methodology for prioritization of public investments.

What are the immediate investment needs in infrastructure sectors? Key sector-

specific variables include investment requirements to: (a) maintain reserve margins of

electricity systems within the recommended ranges: (b) prevent congestion in key

transport assets (airports, ports, roads, railway); and (c) meet the gap between actual

investments in the water sector vs. government objectives in network expansion (increase

in access) and service quality increase (including wastewater treatment).

What is the potential for Green Infrastructure? Existence of analytical information

providing estimate of GHG emission from the sector and the potential for reduction.

Similar information available for vulnerability of infrastructure and the potential for

ensuring adequate climate resilience.

Is the crisis likely to lead to a substantial decrease in the infrastructure investment

needs? Some rapid assessment can be done using elasticities with GDP growth,

additional available information and controlling for initial conditions or by estimates of

34

infrastructure demand-supply imbalances (based on pre-crisis data on infrastructure

stocks quality and needs).

Is the crisis likely to lead to a substantial decrease in the unit cost for infrastructure? Rapid assessments can be done by simulating the impact of changes in input prices on

unit costs.

Is the crisis likely to lead to a substantial decrease in collection rates? Affordability

analysis can be complemented by simulation on declines in collection rates.

4.2 REVENUE MOBILIZATION

1.18. Two main sources to mobilize government revenues for infrastructure are user fees and

foreign aid.

Who should be charged? Users or taxpayers? When the quasi-fiscal deficits cannot be

resolved immediately, governments can always choose to charge taxpayers for such

deficits implicitly. Political economy factors (to be discussed later in this note) may

determine the feasible choice.

How secured is aid for infrastructure? Many developing countries have high aid

dependency for infrastructure development. There will be a risk that those aid-dependent

countries would be faced with reduced aid flows because donor countries are also

experiencing the financial crunch and deep economic downturn. Notably, in the past,

infrastructure assistance has been much less secured, while aid for social development

has been firmly earmarked since the 1990s.

Would additional infrastructure assets be able to maintain or improve the financial

viability of the sector? Indicators that could be used to address such a question include

the gap between the average tariff and average cost of service in the sector and the share

of the tariff deficit covered by government subsidies.

To what extent can quasi-fiscal deficits be reduced? At the sector level, financial

viability/sustainability is well represented by quasi-fiscal deficits, which can be

composed by underpricing, technical losses and nonpayment (insufficient metering and

arrears). Additional fiscal space can be created by reducing some of these quasi deficits.

What is the distortionary effect of leaving quasi-fiscal deficits on the economy? Effects

on demand for infrastructure, private investment, savings, and other markets, such as

labor market.

4.3 PRIVATE SECTOR PARTICIPATION IN INFRASTRUCTURE

1.19. Key questions in this sub-module would relate to the likelihood for increased private

sector participation and, if such an increase does take place, the prospects for it to enhance fiscal

space for infrastructure:

Increasing reliance on the private sector for infrastructure financing. The scope for

this can be assessed by benchmarking the country‘s performance in attracting private

investment in infrastructure against global comparators, and thereby evaluating whether

enough efforts have been made in those sectors where private investment is most likely to

be forthcoming.

35

Could the private sector take a larger role in providing infrastructure services? Is there

still investor interest in projects in tenders? Are awarded projects or projects to be

awarded facing problems on securing financing? The World Bank/PPIAF ―impact of the

financial crisis on PPI‖ database has shown that for low and middle-income countries as a

whole private infrastructure projects continued to reach financial closure over the period

August-January 2009, but at levels around 40% of those from the corresponding period in

2007. Projects are facing higher cost of financing, but the major impact to date is in

terms of projects being delayed or cancelled.11

Does PPI create fiscal space? Fundamentally, fiscal space can be created if economic

efficiency is improved through private sector involvement. Financial gains may or may

not be realized to finance capital expenditure. Some cautionary notes need to be made, as

for many developing countries PPPs have implied ―hidden‖ off budget expenditure,

contingent liabilities with non-negligible fiscal implications. The lack of globally

accepted accounting standards further complicates the issues.

Is the net present value of infrastructure assets positive or negative?

If NPV is positive, selling infrastructure assets may bring about a lump-sum gain to the

government

How vulnerable are the infrastructure capital and operational expenditures to the

foreign exchange rates and interest rates?

4.4 INFRASTRUCTURE AND JOB CREATION

1.20. Well targeted labor-intensive public works programs can further maximize employment

generation in the short term, while constructing or rehabilitating much needed public

infrastructure for the longer term. In addition, public works programs serve as an important

safety net, providing both income transfer and consumption-smoothing benefits to households

hurt by crisis.

Which sector investment programs are able to generate highest local employment and

income? To answer such a question several indicators may be collected, including the

share of capital expenditure to be spent on labor and local materials, as well as the

expenditure on labor and estimate of job creation for different types of projects (if

possible, including consideration of benefits to vulnerable group, such as by age, gender,

geography)12

. Job creation includes those within infrastructure sectors but also those in

other industries for which the proposed infrastructure investment would eliminate a

bottleneck.

Which sector has the highest multiplier? Infrastructure investment has a higher

multiplier than tax reduction. But public infrastructure investment can crowd-out the

private sector in the long run.

1.21. Table 1.2 summarizes, for this module, the key issues analyzed above. Column 1

indicates whether the data for the relevant variable or question are readily available for all

countries, or only for selected countries, via institutional documents, databases, or websites easily

11 For more details, see Izaguirre (2009). The crisis impact database includes 173 infrastructure projects with private

participation in developing countries which were trying to raise financing on project finance basis or were in

advanced tender stage between August and January 2009.). Those projects represented over 50% of total investment

commitments in 2004-07 as reported by the PPI project database. 12

The Social Development Impact Guidance Note provides methodological guidance on this subject.

36

accessible to Country Program teams. For those variables that are not already available to all

countries, Column 2 suggests the ease of collecting the missing data – whether they could be

gathered by Country Team members via well-known sources, or variables for which data

collection would require a major first-hand collection effort (e.g. through AAA/TA). Column 3

reports, for each of the variables, the extent to which policy makers can modify the behavior of

this variable. For instance, Column 3 distinguishes between variables on which policy makers

and other stakeholders can influence/change the behavior in the short term; variables that can be

influenced in the short term, but at a higher cost (i.e. need IFIs technical assistance, ST with TA);

and finally variables that are completely outside the control of policy makers/Bank and other IFIs

and should be taken as constraints (at least in the short term).

37

Table 1.2

Template for Assessment of Infrastructure Gaps, Needs and Spending

Key questions and variables Extent of Data

Availability

Difficulty of Data

Collection, where

Missing

Policy’s Ability to

Modify Behavior

1. Prioritization of infrastructure needs

Can expenditures be reprioritized to create fiscal space?

1. Total spending/GDP Available na ST

2. Recurrent expenditure/GDP Available na ST with TA

3. (Wage + Interest)/GDP Available na No

New investment or operation and maintenance? And how much is needed for operation and

maintenance?

Are expenditures in maintenance and rehabilitation at appropriate levels?

1. Gap between annual maintenance budget and minimum maintenance requirements Selected countries Medium ST

2. Percentage of roads in good condition, fair condition, and bad condition Selected countries Medium ST with TA

3. System losses as a share of total water/electricity supplied. Selected countries Medium ST with TA

Which sector should be a priority?

What are the immediate investment needs in infrastructure sectors?

1. Investment requirements to maintain reserve margins of electricity systems within the

recommended ranges, including projected demand growth for next three years Selected countries Medium ST with TA

2. Investment requirements to prevent congestion in key transport assets (airports, ports,

roads, railway) in the next three years Selected countries Medium ST with TA

3. Gap between actual investments in the water sector vs. those required to achieve

government objectives in network expansion (increase in access) and service quality

increase (including wastewater treatment)

Selected countries Medium ST with TA

What is the potential for Green Infrastructure?

1. Existence of analytical information providing estimate of GHG emissions from sectors

and the potential for reduction.

Selected countries Medium MT with TA

38

Key questions and variables Extent of Data

Availability

Difficulty of Data

Collection, where

Missing

Policy’s Ability to

Modify Behavior

2. Similar information available for vulnerability of infrastructure and the potential for

ensuring adequate climate resilience.

Selected countries Medium MT with TA

Is the crisis likely to lead to a substantial decrease in the infrastructure investment needs?

1. Assessment using elasticities with GDP growth, additional available information and

controlling for initial conditions

Selected countries Medium No

2. Estimates of infrastructure demand-supply imbalances (based on pre-crisis data on

infrastructure stocks quality and needs)

Selected countries Medium No

Is the crisis likely to lead to a substantial decrease in the unit cost for infrastructure?

1. Assessment using changes in input prices and its impact of unit costs

Selected countries Medium No

Is the crisis likely to lead to a substantial decrease in collection rates?

1. Assessment using changes in affordability

Selected countries Medium No

2. Revenue mobilization

Will additional infrastructure assets be able to maintain or improve financial viability of the

infrastructure sector?

1. Gap between the average tariff and average cost of service unit in the sector (KWh,

cubic meter of water, etc).

Selected countries Medium ST with TA

2. Share of the tariff deficit covered by government subsidies and total cost of subsidy as a

percentage of GDP

Selected countries Medium ST with TA

How secured is donor funding for infrastructure? And could additional donor funding be

raised for infrastructure?

1. Committed donor funding for infrastructure sectors Selected countries Medium ST

2. Possible new donor funding for infrastructure projects Selected countries Medium ST

To what extent can quasi-fiscal deficits be reduced?

1. Sector quasi-fiscal deficits (including under pricing, technical losses and nonpayment) Selected countries Medium ST with TA

2. Additional fiscal space can be created by reducing some of these quasi deficits Selected countries High ST with TA

39

Key questions and variables Extent of Data

Availability

Difficulty of Data

Collection, where

Missing

Policy’s Ability to

Modify Behavior

What is the distortionary effect of leaving quasi-fiscal deficits on the economy?

1. Effects on demand for infrastructure, private investment, savings, and other markets,

such as labor market.

Selected countries High No

3. Private sector participation in infrastructure

Will the private sector continue to play a major role in providing infrastructure services?

1. Is there still investor interest in projects in tenders? Selected countries Medium MT with TA

2. Are awarded projects (or projects) to be awarded facing problems on securing financing? Selected countries Medium MT with TA

Does PPI create fiscal space?

1. Value of economic efficiencies expected from the PPI projects (improvements in

technical and commercial losses and reduced project cost)

Selected countries High MT with TA

Is the net present value of infrastructure assets positive or negative?

1. PPI projects and associated investments which will not require government support

(subsidies, government payments, financing, etc)

Selected countries Medium No

2. PPI projects and associated investments which will require government support

(subsidies, government payments, financing, etc)

Selected countries Medium No

How vulnerable are PPI projects to the foreign exchange rate risk/devaluations?

1. Share of capital and operational expenditure foreign denominated currency Selected countries Medium No

2. Share of debt in foreign denominated currency Selected countries Medium No

3. Exchange rate volatility Selected countries Medium No

4. Gearing ratio Selected countries Medium No

4. Infrastructure and Job Creation

Which sector investment programs are able to generate highest local employment and income?

1. Share of capital expenditure to be spent on labor and local materials at sector Selected countries Medium No

2. Number of jobs created by unit of capital cost Selected countries Medium No

3. Performance of construction industry in terms of rate of completion, timeliness, etc Selected countries Medium No

40

5. ASSESSMENT OF QUALITY OF INSTITUTIONS

5.1 BUDGET EXECUTION CAPACITY AND INSTITUTIONAL EFFICIENCY

1.22. The concept of institutional efficiency relates to the degree to which administrative

and procedural mechanisms are in place to enable successful policy implementation and

project execution. At the more general level, the planning capacity of developing countries will

be judged upon the criteria used to allocate resources among different economic sectors (e.g.

education vs. infrastructure, education vs. health, etc.) and the legal framework guiding the

allocations for infrastructure sectors (both in terms of new capital investment or maintenance

expenditures). More specifically, a number of dimensions are relevant to assess the institutional

efficiency as it affects investment in infrastructure. One dimension of institutional efficiency is

the process of selection of investment projects. Unless the selection of investment projects

results from a rigorous technical screening process, it is possible that ―white elephants‖ (projects

with a negative Net Present Value) may be implemented. Another dimension is the

implementation of the investment project. If investment projects are starved or funds and/or

implementation capacity is weak, a project with a positive rate of return may never be completed.

As a result, a country may incur public investment without securing a productive asset at the end

of the process. Infrastructure projects often incur significant cost overruns and delays (Flyvbjerg,

2005), leaving certain ambiguity in ex ante project assessment and prioritization based on it. The

third dimension of efficiency is the unit cost of operating the completed project, which should be

close to an efficiency benchmark. This can be measured through normalized maintenance

expenditures. In the case of budget spending, unit maintenance levels can be calculated. In the

case of SOEs, it is also possible to normalize against the overall asset value.

1.23. Indicators that could be used to capture execution capacity include:

Percentage of executed annual capital and maintenance spending;

Average time needed to bring projects to completion;

Average delay in project implementation;

Average percentage of cost over-run;

Percentage of investment projects that are dropped / stalled prior to completion; and

Unit cost of investment projects.

1.24. Other observations that can yield a good sense of the country‘s institutional efficiency as

it pertains to infrastructure investment include:

What information and from whom (congress, finance, public sector, planning, audit

committees, etc) is taken into account in allocating public investment?

Do SOEs provide a ‗business plan‘? What are the underlying principles for forecasting

needs? Does any ‗central‘ agency provide guidance?

Is Cost-Benefit analysis done regularly/systematically? By whom?

Who monitors the quality of the investment portfolio? How are public investment

projects appraised and selected?

41

5.2 DECISION-MAKING PROCESS FOR INFRASTRUCTURE SPENDING

1.25. In principle, the more levels of controls involved in government spending, the more

informed are the decisions and the more checks and balances are usually in place. Access to

information for the public and a free press strengthens that relationship. At the same time, more

procedures hamper a quick response to a crisis situation. The ―emergency‖ situation may increase

the risk for biased decisions due to private agendas or pork barrel13 in the allocation of projects.

1.26. A number of key questions may be posed to assess how transparent and accountable

the decision making processes are. For instance: Is the decision-making process transparent:

e.g. are decisions discussed openly in parliament? Are decisions and budgets disclosed to the

public? What is the level of detail required for infrastructure interventions? How are the

budgetary decisions regarding infrastructure interventions related to asset ownership and

implementation? For example – the budget may be centralized while implementation is

decentralized. What is the normal timeline of the government decision-making process? Will

there be enough time or political willingness to conduct sufficient investment analysis before

implementing the project?

1.27. A selection of useful indicators includes:

Number of procedures behind government spending;

Access to information and freedom of the press;

Quality of monitoring mechanisms (audit general, parliamentary control on the executive,

independence); and

Country ranking in the Open Budget Index (indicates opportunities to control political

allocation). A potential red flag can arise due to the combination of a weak ranking in the

OBI index together with low level of detail in the investment scheme as approved by

parliament (which in turns opens opportunities for executive discretion), and indicators of

strength of lobby groups and/or the election of presidential and parliament members

directly elected by constituencies (which, in turn, indicate higher risk of pork barrel).

5.3 LEGAL AND REGULATORY FRAMEWORK

1.28. The questions below relate to how legal and regulatory systems are structured to

ensure the greatest effectiveness of the fiscal stimulus in the infrastructure sectors, while

protecting all stakeholders, including consumers and operators. Often, in the context of a crisis,

investment/fiscal interventions may be made without sufficient regard to medium and long-term

consequences. Policy analysts need to observe which legal and regulatory systems/frameworks

are in place to safeguard stakeholders, particularly the most vulnerable, and to ensure long-term

sustainability of the intervention. In the case of PPPs and private providers, it is crucial to check

whether the existing framework mitigates political risk, including renationalization.

1.29. The criteria according to which infrastructure regulatory governance is assessed

include autonomy, transparency, accountability, and tools. Several regions have been

benchmarked according to such criteria, including LAC (see Andres et al, 2008), ECA (Fay and

Vagliasindi, 2009) and SSA (Vagliasindi and Nellis, 2009).

13 The term pork barrel refers to spending that is intended to benefit constituents of a politician in return for their

political support, either in the form of campaign contributions or votes.

42

Autonomy can help to mitigate risks for investors in period of crisis. Key questions to

guide he assessment of the degree of autonomy are: is the agency free to hire/fire

commissioners? Has the agency guarantee financial autonomy? Can regulatory decision

be overturned by the government?

Transparency in a crisis context is of upmost relevance: Transparency can be

measured by the degree of publicity of key decisions through the agency‘s annual report,

its web-site and public hearings.

Accountability must counterbalance the degree of autonomy and allow investors

and consumers to appeal decisions in case of conflicts. It also guarantees an adequate

level of control of the agency‘s budget and performance by political authorities, namely

the Parliament

Finally, in a crisis context, rate of return regulation may be more suited than price

cap regulation to protect investors. Regulatory tools include tariff methodology and

quality monitoring. In a crisis context government may discover that tariffs are too high

and freeze tariff revision or limit pass-through of input costs. Some countries, like

Argentina during the financial crises, enacted a ―Law of National Economic Emergency‖

through which they froze infrastructure prices for several years, and extended it beyond

the end of the crisis. This points to the need of being cautious with the definition of a

crisis and what it triggers such a mechanism (see also section 6.3).

1.30. Specific questions related to environmental and pro-poor regulation are worth being

examined separately to ensure environmental sustainable outcomes and protection of the

poor.14

Some key principles are outlined below.

Environmental Regulation

Is the financial crisis affecting the promotion of green infrastructure? Is the

availability of grants and soft loans promoting clean infrastructure technologies to

ensure the financial viability of environmental friendly project being adversely

affected?

Is there an existing overall policy framework for addressing climate change?

Existence of overall or sectoral targets to reduce GHG emission? Are there

supporting policy/ regulatory/ fiscal incentive measure in place for facilitating

Greening of Infrastructure?

Pro Poor Regulation

Can access for the poor be ensured? What types of subsidies are used? Are there

only subsidies for consumption (through the tariff) or are access subsidies available?

Are there any life-line mechanisms for infrastructure services? What are the life-line

consumption amounts? What is the percent of average household income for the

lower quintiles spent on the specified service? What targeting mechanism is used for

life-line or other safety net mechanisms? Are there other welfare targeting

mechanisms (e.g. for health, education) that infrastructure services can piggy-back

on?

14 Separate guidance notes on Social Development Impact and Greening Infrastructure provide further detailed

methodological guidance on this subject.

43

Can improved access be promoted through Output Based Aid? Has an OBA

approach been applied/piloted in any context? How easily can geographic or self-

selection targeting mechanisms be used, for the given intervention?

1.31. The risk of insufficient focus on low income groups is difficult to estimate, yet we

want to know the extent to which a government is likely reduce the burden on the poor. A

combination of ranking in the Country Policy and Institutional Assessment (questions related to

the quality of social protection policies and the equity of public resource use) together with

poverty indicators (based on household survey) may be used to assess the effectiveness of pro-

poor regulation.

5.4 SOE GOVERNANCE FRAMEWORK

1.32. The SOE governance framework is particularly relevant for understanding the

likely success of crisis-control if the investment interventions will be channelled through

SOEs. State Owned Enterprises (SOEs) are likely to be operating under tight budgets and under

business plans and mechanisms vulnerable to short-run fiscal adjustments, which makes them

more vulnerable to the financial crisis.

1.33. SOE governance entails the implementation of a series of measures inside the

enterprise -- such as strengthening of the quality of shareholder voice and supervision, board and

management autonomy and mechanisms of accounting and disclosure measures aimed at

improving the external environment in which the enterprise operates, including outsourcing

to the private sector and the introduction of discipline coming from a competitive labor and

capital market (see Vagliasindi, 2008 and 2009).

1.34. In most of the regions, SOE governance assessments have been implemented, including

SSA (see Vagliasindi and Nellis, 2009) and LAC (Andres et al, 2009).

Key Questions on Internal governance

What is the degree of corporatization? Are SOEs allowed to earn a rate of return? Are

they issuing dividends?

What is the degree of managerial autonomy in decision making?

What is the degree of autonomy of the Board (as measured for instance by the presence

of independence directors)?

Key Questions on External governance

How do labor market conditions compared to the private sector (wages and benefit,

restrictions to dismiss employees)?

Are SOEs subject to capital market discipline (through public listing, bond issuance or

graduation from grants)? What are the legal and commercial constraints to (sub-

sovereign) borrowing?

Has there been any outsourcing to the private sector (metering, IT, HR functions)?

5.5 PPP CONTRACTUAL FRAMEWORK

1.35. In a crisis context, it will be critical to understand the existing framework for

renegotiation. During crisis, the incidence of re-negotiation and even renationalization of forms

of private sector participation emerge as a crucial risk. Guasch (2004) represents the most

44

comprehensive study analyzing a sample of more than 1,000 concessions granted in LAC during

1985–2000. The incidence of renegotiation is very high, amounting respectively to 30% and

more than 40% of the sampled concessions (excluding the telecommunications sector). There are

several policy implications that can be drawn from this study. First, most renegotiated

concessions underwent renegotiation soon after their award, with an average of 2.2 years between

concession awards and renegotiations (1.6 years after concession award in the water sector) --

whereas the average time lapsing between financial closure and project cancellation is about 5.3

years. Second, the vulnerability of concession to renegotiation was lower in the presence of a

regulatory agency and when a rate of return type of regulation was used. Key questions include:

Is there a history of arbitration/renegotiation? Is there a depth of experience of PPP

contracts in the sector? What is the normal timeline of arbitration/renegotiation

experienced? What level of arbitration?

How vulnerable are the contractual structures of the infrastructure projects? The

vulnerability of PPIs need to be assessed based on the types of contracts, e.g., PPAs, risk

allocations (construction risk, commercial risk, market risk, fuel supply risk, location

risks, and foreign exchange risks, with the existence of government performance

undertaking on behalf of the public utilities or guaranteed commercial obligations of the

public utilities and off-take through take or pay provision, etc.

Do contracts include adjustment mechanisms? For which types of risks? How is foreign

exchange risk addressed? Other costs? How comprehensive is the adjustment

mechanism? How often used in practice?

1.36. Table 1.3 summarizes the key issues analyzed above. Column 1 indicates whether the

data for the relevant variable or question are readily available for all countries, or only for

selected countries, via institutional documents, databases, or websites easily accessible to Country

Program teams. For those variables that are not already available to all countries, Column 2

suggests the ease of collecting the missing data – whether they could be gathered by Country

Team members via well-known sources, or variables for which data collection would require a

major first-hand collection effort (e.g. through AAA/TA). Column 3 reports, for each of the

variables, the extent to which policy makers can modify the behavior of this variable. For

instance, Column 3 distinguishes between variables on which policy makers and other

stakeholders can influence/change the behavior in the short term; variables that can be influenced

in the short term, but at a higher cost (i.e. need IFIs technical assistance, ST with TA); and finally

variables that are completely outside the control of policy makers/Bank and other IFIs and should

be taken as constraints (at least in the short term).

45

Table 1.3

Template for Assessment of Quality of Institutional Capacity

Key questions and variables Extent of Data

Availability

Difficulty of Data

Collection, where

Missing

Policy’s Ability to

Modify Behavior

1. Budget Execution Capacity

Do government agencies have good execution capacity on general expenditure?

1. % of executed annual capital expenditure budget Selected countries Low MT with TA

2 . % of executed annual budget for maintenance Selected countries Low MT with TA

3. Percentage of budget overrun in recently implemented projects Selected countries Low MT with TA

Do government agencies have good execution capacity on infrastructure expenditure?

1. % of executed annual capital infrastructure expenditure budget Selected countries Medium MT with TA

2 . % of executed annual budget for maintenance Selected countries Medium MT with TA

3. Percentage of budget overrun in recently implemented projects Selected countries Medium MT with TA

2. Decision Making Process

How transparent and accountable is government decision making?

Are decisions and budgets disclosed to parliament and/or public?

1. Open Budget Index ranking Available na MT with TA

2 . Financial Accountability PFM Performance Measurement Framework (PI: 5 & PI: 10) Available na MT with TA

Is there a requirement to disclose use and monitor progress/implementation? Are audit reports

provided? Is there a supreme audit institution in the country?

1. Performance on PFM Measurement Framework (PI: 26-28). Available na MT with TA

How quickly can policy interventions be on the ground to provide the required stimulus?

1. Average (or specified mandatory) timeline of the decision-making process Selected countries High NO

2 . Implementation challenges related to budgetary decisions regarding infrastructure

interventions related to asset ownership and implementation (e.g. budget centralized while

implementation decentralized)

Selected countries High NO

46

Key questions and variables Extent of Data

Availability

Difficulty of Data

Collection, where

Missing

Policy’s Ability to

Modify Behavior

3. Legal and Regulatory Framework

Regulatory Governance

Is the regulatory framework fulfilling some basic criteria of autonomy, transparency and

accountability and tools?

1. Autonomy (legal, managerial and financial) Selected countries Medium MT with TA

2. Transparency i) Are regulatory decisions clearly published, with access provided to the

public?

Selected countries Medium MT with TA

3. Accountability: i) existence of appeal procedure (through local courts or arbitration) ii)

independence of appeals

Selected countries Medium MT with TA

4. Tools (Pricing methodology and Quality monitoring)

i) Is the methodology for revenue determination and rate adjustments more similar to a rate

of return methodology or a price cap approach

ii) What is the time-frame for tariff adjustments – in policy and in practice?

Selected countries Medium MT with TA

Environmental Regulation

Incentives to promote green infrastructure

1. Grant and soft loan promoting clean infrastructure technologies Selected countries Medium MT with TA

2. Feed in tariff and other mechanisms Selected countries Medium MT with TA

Pro-poor Regulation

Can access for the poor at minimum required levels be ensured?

1. Existence of safety-nets for infrastructure services (such as life-line tariffs) What are the

life-line consumption amounts?

Selected countries Medium MT with TA

2. Percent of average household income for the lower quintiles spent on the specified

service

Selected countries Medium MT with TA

3. Other safety net mechanisms (for the social or other sectors) Selected countries Medium MT with TA

Medium

Can improved access for the poor be promoted through Output Based Aid? Medium

1. OBA scheme been piloted in country Selected countries Medium MT with TA

2. Existence of clearly identifiable target groups through either geographic targeting or self-

selection targeting, or through (usually for MICs) existing social welfare systems which can

provide a (usually means-tested) targeting platform

Selected countries Medium MT with TA

47

Key questions and variables Extent of Data

Availability

Difficulty of Data

Collection, where

Missing

Policy’s Ability to

Modify Behavior

4. SOE Governance

Corporate Governance

1. Degree of corporatization Selected countries Medium MT with TA

2. Degree of managerial and board autonomy Selected countries Medium MT with TA

Accounting, Disclosure and Performance Monitoring

1. Auditing of accounts Selected countries Medium MT with TA

2. Existence of performance contracts monitored by a third party Selected countries Medium MT with TA

5. PPP Contractual Framework

Is the sector able to manage re-negotiation?

1. Number of contracts gone for renegotiation and outcome of the process Selected countries Medium MT with TA

2 . Average length of renegotiation/ arbitration processes Selected countries Medium MT with TA

3. Capacity of institution who undertakes the arbitration/ renegotiation process? Selected countries Medium MT with TA

4. Availability of alternative adjudicatory institutions, such as special tribunals or formal

advisory panels

Selected countries Medium MT with TA

How vulnerable are contractual structures for PPP projects?

1. Types of contracts (management contracts, BOT, DBO, concession, etc) and average

length of contract

Available Low MT with TA

2 . Risk allocation (foreign exchange risk, fuel cost risk, demand risk, etc.). Selected countries Medium MT with TA

3. Types of adjustment mechanisms included in contracts Selected countries Medium MT with TA

4. Type of Regulation (rate of return vis a vis price cap regulation) Selected countries Medium MT with TA

48

6. POLITICAL ECONOMY ISSUES

1.37. This section lists some political constraints that might be relevant to understand

shortcomings in initiatives to reduce the consequences of the financial crisis. The questions

and variables described look at issues of political economy and how they can shape and determine

the potential effectiveness of fiscal interventions in the infrastructure sectors – in general and

more specifically during the financial crisis. The key political economy relevant sub-issues are

explained below.

A. Bank-country relationship

What is the existing framework for Bank intervention in the sector? Is the sector mainly

supported through budget support, DPLs or SIL’s? The form of intervention for crisis

support should take into account the existing modus operandi for the Bank in that

country/sector and understand the steps required if another modus operandi is chosen.

What is the level of donor co-ordination required for the sector’s interventions? Key

indicators to be considered include steps required; average timeframe; history of

―emergency‖ decision making. The relevance of this question is that in the Bank is part of

a partnership framework with clear rules.

B. Winners and Losers Analysis

Political decisions will often be shaped by losers from change. Obviously, there are

many losers from the financial crisis, yet difficult to identify groups which are harmed by

intervention and at the same time influential and organized enough to block infrastructure

investment. There are, however, those who lose out because infrastructure is prioritized to

other social goals and the packages will also imply bigger future tax burden. These

concerns may cause hesitation among politicians and thus prevent majority for welfare-

enhancing decisions. There will also be winners from interventions. The influence of

private sector interests and lobby groups is difficult to estimate. General uncertainty

about effective solutions can be exploited to redirect resources to specific industries.

C. Risk of inaction and ignorance

There are several reasons for political inaction (that is failure to act on the crisis,

which is likely despite agreement that action is needed) and some are very relevant in the

discussion about financial crisis initiatives. One main challenge is asymmetric

information between voters and politicians - where politicians are convinced about the

benefits of action while voters are not.

Politicians want to be seen as accountable. If unable to convince the public

about the benefits of a certain decision, their concerns about re-election or party

popularity may prevent them from doing what they think is to the benefit for the

society at large.

Another reason for inaction is the challenge of compensating losers. This

may cause hesitation to act for welfare-enhancing solutions because the

―accountable politician‖ prefers a decision that will please as many groups as

possible. A third reason for inaction is the lack of knowledge and experience.

Failure to act is not surprising when policymakers do not know what to do. In a

lack of knowledge different parties may have different suggestions and then it

49

becomes difficult to achieve majority for action – even if all are convinced that

action is needed.

D. The importance of communicating the rationale behind intervention

The ability to convince the public about the strategy depends on the extent to which the

suggested efforts are in accordance with party politics. If strongly in accordance with

the party program, infrastructure investment may be seen as an attempt of exploiting an

emergency situation to promote party politics - and may not get needed support.

Are there possibilities to communicate advantages of reform and the need to involve

minority leaders? What are the possibilities for the use of media? What is the extent of

consensus building that has been used/seems feasible regarding potential interventions?

E. Crisis and cross-border collaboration

The financial crisis may reduce the propensity to initiate cross-border collaboration - even if two countries agree that a joint venture project would be the best solution for

both countries. The lack of trust in the other country‘s solutions is one issue. Another

issue is the difference across countries in their exposure to the crisis. If two countries are

harmed very differently they may not be able to initiate cross border projects. One will

decline because of the risk/investment ratio; the other may decline because of own

uncertain financial situation. The key question to be addressed is how collaboration

across countries can be promoted despite the crisis.

F. Focus on vulnerable groups

A final section of the political economy analysis can focus on the specific benefit and

impact on vulnerable groups, and on the risk diversion of capture of investment resources

by other groups. (This aspect will be considered in more detail in the Social Development

Impact Guidance Note)

7. KEY OPERATIONAL RESPONSE: AAA AND TA INSTRUMENTS

1.38. The INFRA initiative represents an innovative approach to Bank response to the

financial crisis, which includes diagnostic tools and associated follow-up in terms of AAA

that can improve countries response to future financial crises. As part of the World Bank

Group‘s broader Vulnerability Financing Facility, the INFRA initiative includes enhanced Bank

support in three areas: (a) direct financing; (b) parallel financing; and (c) concessional financing.

The second component of the INFRA diagnostic tools package, described in a separate document,

focuses on assisting country teams in the identification of projects appropriate for INFRA

support. This first component of the INFRA diagnostic tools focuses, in a complementary way,

on broader economic and sector performance factors. The preceding chapters have proposed a

broad framework for the assessment of the fiscal space for infrastructure, and the opportunities

and constraints, in a country-specific context, for enhancing this fiscal space and using

infrastructure investment effectively as a fiscal stimulus in the context of the current crisis. They

have also presented a quick assessment and taxonomy, based on existing data relating to a limited

set of variables, that allow to start thinking of country cases at most risk and possible areas for

action.

1.39. In addition to enhanced financing, INFRA innovations would include a more balanced

approach between investment lending enhanced financing and Development Policy Operations

(DPOs). The latter are becoming more prevalent in a period of crisis because of their faster

50

deployment. SDN will work with OPCS in preparing a guidance note on the use of DPOs for

infrastructure. DPOs can also be an effective conduit for policy dialogue and reform to

strengthen infrastructure-sector and economic resilience in the face of financial crises.

1.40. The Bank is well placed to provide governments with policy advice that can also be

included the inclusion of infrastructure-related reforms in enhance the governments’ capacity,

in the medium term, to manage financial crises like the one we are facing today. This advice

may address, for instance, issues related to identification / prioritization of projects (i.e. cost-

benefit analysis), strategic planning (i.e. through better coordination between different

infrastructure sectors, or through different modes of infrastructure provision), and strengthening

legal and regulatory frameworks, governance and financial management

1.41. A few selected policy recommendations that need to be tailored to the country and sector

context include:

Monitoring expenditure against identified needs and priority & reallocate spending across

sectors if needed, ensuring that limited resources are devoted to address critical

bottlenecks. This can take place through Public Expenditure Reviews (PERs) and Public

Expenditure Tracking Surveys (PETS) so as to avoid repeating the phenomenon of the

―lost decade‖ of growth.

Improving budget execution, by removing the institutional bottlenecks (better planning of

projects, earlier completion of feasibility studies, more efficient procurement and move to

medium term multi-year budgeting). Government ability to implement multi-year

projects should also be strengthened through Medium Term Expenditure Framework

(MTEF) to protect multi-year investments and avoid unexpected cost overruns through

inadequate planning.

Using advisory services to help improve SOE governance and financial management and

to reduce the risk of misallocation of resources and avoid use of emergency situation to

allow undue deviations from control mechanisms.

Simple tools that may prove important in a situation when other procedures are simplified

are to demand parliamentary control on funding allocated during this period. Line

ministries should be asked to write up all spending and defend their spending to the

parliament. Documents reporting the spending for the parliament should as far as possible

made available to the public.

Strengthening legal/regulatory/contracting frameworks, using the financial crisis to

leverage needed reform in the sector better tackle needed economic and financial

restructuring/renegotiation of PPP projects (e.g. developing automatic adjustment

mechanisms for fuel and foreign exchange costs, regulating the equity/debt ratio to limit

the cost of capital or limiting the exposure of companies to demand or input price

fluctuations).

Reviewing the investment plan, during crises, if users cannot afford the cost of new

investments (capex in tariff), and assuming that the government won‘t (or cannot)

contribute to it, the tariff structure can be reviewed and investments postponed.

1.42. Finally, several implementation challenges to the use of infrastructure as a part of a

fiscal stimulus package must be taken into account. Analytical components addressing these

issues could be incorporated more systematically in the future as part of Country Economic

Memoranda or infrastructure AAA, and TA instruments could also be applied to address these

issues.

51

Implementation and absorption capacities are important in actually spending funds that

are allocated for fiscal stimulus.

New infrastructure spending can have long lags before making an impact on the

economy, unless the authorities are accelerating projects already under implementation.

This concern is particularly strong for large public sector projects that require additional

due diligence and planning. It is also true for PPPs where additional time may be needed

to design a ―bankable‖ project.

Crowding-out of private sector borrowing may become a key concern in the medium-

term.

Projects characterized by a large proportion of expenditure on imported equipment or

inputs might also be less effective as a fiscal stimulus. On the other hand, labor-intensive

infrastructure works that can be implemented quickly and provide employment

opportunities might be more effective. Such activities could also serve the dual purpose

of protecting the poor from the worst effects of the crisis. Increase pro-cyclical fiscal

transfers to sub-national governments/entities may also be more effective.

52

8. REFERENCES

Andres, L., Guasch, J. L. and S. Lopez Azumendi (2008) ―Regulatory Governance and Sector

Performance: Methodology and Evaluation for Electricity Distribution in Latin America‖,

Policy Research Working Paper 4494. The World Bank, Washington, DC.

Blanchard, O. (1990), Suggestions for a New Set of Fiscal Indicators, Working Papers No. 79,

OECD Economics Department

Braga, Carlos (2008) ―Do countries have space for a fiscal stimulus program?‖, PRMED Policy

Note.

Briceño-Garmendia, C.; Smith, K. And V. Foster (2009) ―Financing Public Infrastructure in Sub-

Saharan Africa: Patterns and Emerging Issues‖, AICD, forthcoming.

Buiter, W. (2003) ―Ten Commandments for a Fiscal Rule‖, Oxford Review of Economic Policy

2003; 19: 84-99

Calderón, C., and L. Servén. 2004. The Effects of Infrastructure Development on Growth and

Income Distribution. Policy Research Working Paper 3400. The World Bank,

Washington, DC.

Celasun, O., X. Debrun, and J.D. Ostry (2006), Primary Surplus Behavior and Risks to Fiscal

Sustainability in Emerging Market Countries: A ―Fan-Chart‖ Approach, IMF Working

Paper WP/06/67

Drazen, Allan (2000) Political Economy in Macroeconomics, Princeton University Press,

Princeton

Ebinger, J. (2006) Measuring Financial Performance in Infrastructure, Working Paper Series,

World Bank, Washington DC

Estache, A. and R. Muñoz (2007), ―IMF Financial Programming vs the Growth Enhancing Power

of Education, Health and Infrastructure Investment: Lessons from Senegal and Uganda‖,

World Bank, mimeo

Estache, A. and R. Liu (2003), ―Social rates of return on World Bank Infrastructure projects: a

review of a 40 years experiment‖, World Bank, mimeo

Fan, Shenggen, Linxiu Zhang and Xiaobo Zhang (2002) ―Growth, inequality, and poverty in rural

China: the role of public investment‖ Research Report 125, International Food Policy

Research Institute, Washington D.C.

Fay, M. and M. Vagliasindi (2008), ―Regulatory Governance Benchmarking: the case of Eastern

Europe and Central Asia‖, World Bank, mimeo

Fay, M. and T. Yepes (2003), ―Investing In Infrastructure: What Is Needed From 2000 to 2010?‖,

World Bank Policy Research Working Paper 3102, July 2003

53

Flyvbjerg, Bent (2005) ―Policy and planning for large infrastructure projects: problems, causes,

cures‖ World Bank Policy Research Working Paper No. 3781, The World Bank.

Hauner, D., D. Leigh, and M. Skaarup (2007), Ensuring Fiscal Sustainability in G-7 Countries,

IMF Working Paper WP/07/187

Heller, P. (2005), Understanding Fiscal Space, IMF Policy Discussion Paper PDP/05/4

Izaguirre, Karina (2009) ―Assessment of the Impact of the Crisis on New PPI Projects‖, World

Bank and PPIAF

Ley, E. (2006), Fiscal (and External) Sustainability, World Bank, mimeo

SDN (2009) ―The Impact of the Global Economic Crisis on Core Expenditures: Infrastructure

Maintenance‖, SDN Briefing Note.

Vagliasindi, Maria (2008) ――Governance Arrangements for State Owned Enterprises‖, World

Bank Policy Research working paper 4542, World Bank.

Vagliasindi, Maria (2009) ―How to Improve the Performance of State-Owned Enterprises‖,

World Bank and PPIAF, forthcoming

Vagliasindi, M. and J. Nellis (2009) ―Building Infrastructure Institutions‖, forthcoming in AICD

Flagship Report

World Bank (2005) ―Infrastructure and the World Bank: A Progress Report‖ World Bank,

Washington DC.

World Bank (2008) ―Swimming against the tide: how developing countries are coping with the

global crisis‖ PREM Policy Note

World Bank (2008) ―Emerging Impacts of the Financial Crisis on Low-Income Countries –

Preliminary Findings‖, PREM Policy Note

World Bank (2008) Fiscal Policy for Growth, PRMED Brief

World Bank (2009a) Infrastructure Recovery and Assets (INFRA) Platform- A WBG response to

support infrastructure during the crisis, Concept Note, World Bank, Washington DC

World Bank (2009a) ―The Global Economic Crisis: Assessing Vulnerability with a Poverty

Lens‖, PREM Policy Note

World Bank (2009b) ―Developing Countries and the Financial Crisis: Vulnerability and Fiscal

Policy Option‖, PREM Policy Note

Yepes, T. (2008) ―Investment Needs for Infrastructure in Developing Countries 2008–15‖,

mimeo, The World Bank.

This paper is part of a broader SDN effort aimed at enhancing the analytical tools to provide rapid assessment of the impact

of the crisis on infrastructure and design diagnostic tools to support the INFRA platform. This task was led by Fernando

Navarro (ETW). The team included Lucio Monari, Pedro Antmann and Jessica Lin (ETWEN); Abel Mejia, Daryl Fields, and

Martha Jarosewich-Holder (ETWWA); Marc Juhel, Peter O'Neill, and Andreas Dietrich-Kopp (ETWTR); Abha Joshi-Ghani

and Judy Baker (FEU-Urban); Nitin Jain (WSP); and Doyle Gallegos and Arturo Muente Kunigami (CITPO). We are very

grateful to the members of the FEU Economics Team, Marisela Montoliu Munoz and Maria Vagliasindi; to the members of

the INFRA Team, particularly Jaehyang So (ETW) and Elio Codato and Patricia Veevers-Carter (FEU); Ranjit Lamech,

Seema Manghee, Wael Zakout (ECSSD); Sameer Akbar (ENV) for helpful suggestions.

ANNEX 2: INFRASTRUCTURE PORTFOLIO ASSESSMENT

Developing Countries and the Financial Crisis

Infrastructure Diagnostic Tool

ETW INFRA TEAM

With contributions from CITPO and FEU

Draft May 1, 2009

56

1. INTRODUCTION

2.1. This note describes the second component of the diagnostic tool package proposed under

the World Bank Group‘s Infrastructure Recovery and Assets Platform (INFRA). INFRA would

aim to provide the foundation for rapid recovery and job creation and to promote long term

growth by: stabilizing existing infrastructure assets; helping to ensure delivery of projects that

remain government priority; supporting Public Private Partnerships (PPPs) in infrastructure; and

assisting new infrastructure project development and implementation. As one of the innovations

with respect to the Bank‘s response during previous financial crises, INFRA includes a package

of quick-response diagnostic tools that can help World Bank country teams and their clients to

identify countries at risk, by assessing issues of fiscal space, infrastructure gaps and institutional

absorptive capacity which represents the first component of the diagnostics tool package, namely

the Strategic Country Reviews. This second component, namely the Infrastructure Portfolio

Assessment Review, provides the elements for an in-depth assessment of infrastructure sub-

sectors and identification of projects at risk. Both components will also identify priority World

Bank entry points target INFRA interventions to accelerate fundamental policy reforms and to

remove the most crucial infrastructure bottlenecks to growth and poverty reduction.

1.1 BACKGROUND AND OBJECTIVE OF THE INFRASTRUCTURE PORTFOLIO ASSESSMENT REVIEW

2.2. The recent downturn in global credit markets has created uncertainty regarding the

availability and cost of medium to long term funding for meeting infrastructure sectors

investment targets. Some projects have witnessed a withdrawal of potential financiers while

others have seen an increase in funding costs to prohibitively high levels. Still others are finding

more stringent project approval thresholds as required by potential lenders in a credit-constrained

environment. Sponsors are seeing a withdrawal of commercial lenders from major potential

infrastructure projects loan syndications due to capital constraints while others are preserving

their capital base to remain sufficiently liquid and meet reserve requirements.

2.3. The inability of client countries to meet their infrastructure investment targets will have

an adverse impact on economic growth, employment, and access to essential infrastructure

services by the poor, while also delaying the achievement development goals. Governments

would need to make a careful reassessment and prioritization of using public resources to fund the

infrastructure investments while also seeking alternate funding to meet investment needs. The

objective of this second component of the Diagnostic Tool – the Infrastructure Portfolio

Assessment Review – is to (i) identify the short-to-medium term impact of the credit constraints

and global economic slowdown on the on-going and future capital investment plans and programs

in the infrastructure sectors of the World Bank Group‘s client countries, and (ii) prioritize

stimulus responses under the World Bank Group‘s Infrastructure Recovery and Assets Platform

(INFRA).

1.2 METHODOLOGY

Structure

2.4. This component of the Diagnostic Tool first considers the sectoral and sub-sectoral

implications of the financial downturn‘s through a demand-supply analysis; it then proposed a

specific financial asset analysis of the sector portfolio, identifying priority investments shortfalls;

subsequently, the policy and institutional dimensions are considered; and, finally, and these

57

investments undergo a benefits risk screening. Specifically, the infrastructure Portfolio

Assessment Review includes the following components and processes:

2.5. Demand analysis: Broadly describes the current and post financial crisis infrastructure

conditions of the respective infrastructure sector in a client country, including changes in present

and future demand for particular sub-sectors.

2.6. Supply analysis: The diagnostic considers the current changes in the sector‘s situation

and its project portfolio, with an aim to assist client countries overcome the challenges of the

crisis and sustain development. The supply analysis is not limited to short-term activities aimed at

employment generation but also considers longer-term country objectives and priorities, and

medium-term projects aimed at facilitating economic activity, including in an upturn scenario.

The portfolio situation and status, inclusive of the financial constraints faced by ongoing and

planned projects, is defined as an aggregate of the status of development of individual projects.

Projects could either be currently operational, under construction, or under preparation. The

assessment review would flag projects that are more advanced in terms of completion and

delivery of services:

For projects that are operational, focus should be on reducing costs and increasing

efficiency, including sustaining priority maintenance, and supporting capital expansions

and enhancement. In these cases, the cost and efficiency ratio would be measured against

reduced costs. In the case of projects under construction, the recommended course of

action could be financing to stabilize investments, acceleration of project schedules or

design modifications.

Projects under preparation should be prioritized and possibly modified, aiming to

stabilize their financial situation, and accelerated where projects risks are manageable

(discussed below). Indicators to prioritize projects on status include: are not just the

funding needs, sources and costs, but a relative parameter, the percent of budget already

disbursed and expected disbursements over the next three years, help filter and rank these

projects.

For projects under construction, the cost of termination (e.g. contractual penalties, etc.)

should be taken into account.

2.7. However, this hierarchy should not be the only factor dictating project prioritization, as

project that may yield high benefits may be in earlier stages of development. The type of project

should also be factored; newly constructed projects have different cost and scheduling risks and

social benefit implications than rehabilitation projects. At the same time, projects that are only

subjected to operations and maintenance have operational implications from longer-term

investment costs and efficiency benefits.

2.8. Institutional and policy analysis. Institutional capacity is a critical element in

infrastructure development. In many areas, policy and institutional capacity remain weak,

compromising the ability to manage water resources and deliver water services on a cost-recovery

basis. Similarly, policy responses during the crisis period can aid in infrastructure maintenance

and resumption of infrastructure financing as the crisis attenuates. The institutional and policy

parameters have a sometimes only subtle impact on the effectiveness decision making and

performance of infrastructure services, but they should be valued equally to infrastructure

investments, as INFRA will also fund technical assistance for policy development and

institutional strengthen.

2.9. Benefits and risk screening. The portfolio and financial analysis would be combined with

the institutional and policy analysis of the project portfolio, in an iterative process, to identify

―quick response‖ opportunities. The tabular form that would be used to represent this evaluation

58

is presented at the end of this document: (i) projects could be ranked strategically according to

their economic and social benefits, on the one hand, and to the ease of implementation, on the

other; and (ii) institutions and policies could also be ranked according to their potential mid-term

impact and their ease of execution as well. The analysis of benefits and risks may include

specific social variables (age, gender, income level, geographic, etc.) to maximize the benefit to

vulnerable groups Not all projects would have similar risk profiles, and these risk profiles may

shift unequally in times of economic downturn, whether as a consequence of the economic

downturn/crisis (e.g., at the national level, the drain of on foreign exchange reserves, equipment

delivery) or as a result of inherent risk of the project (e.g., inability to strengthen institutional

capacity or foster appropriate policy mechanisms). Risk tolerance may also shift to favor projects

that are likely to disburse quickly and/or be resilient to bottlenecks.

2. TRANSPORT SECTOR

2.1 INTRODUCTION AND DEFINING SUBSECTORS

2.10. The proposed approach to diagnosing the impacts of the global economic slowdown on

the transport sector and developing a response program includes two main components, 1) a

situation analysis assessing what is happening to the portfolio of urban projects in the context of

the crisis; and 2) identifying priorities for urban infrastructure spending under the crisis. Tools for

assessing the fiscal space and financing in a given country are covered in other companion tools.

2.2 DEMAND ANALYSIS

2.11. The risks to economic growth are great, in a time of diminishing government revenues,

uncertainty around demand and cost/benefit of intervention. Transport projects create

employment opportunities, generate economic activity, and access to opportunity.

2.12. Without continuation of current levels of investment in growth enabling programs from

the transport sector client countries run the risk of further deceleration of support to economic

growth. The best of these programs, focused, impacting, and value-for-money offer many benefits

in a time of economic downturn particularly in the areas of promotion and planning for

restoration of economic activity alongside the opportunity of employment and need to protect

existing asset value.

2.13. One of the distinguishing features of investments in the transport sector is the fact that

they are generally longer term than other infrastructure sectors and require a long-term forecast of

demand. Therefore, there is a risk that a finite decrease in spend today could have a

multiplicatively detrimental effect in the future. More precisely, depending upon the sub-sector

involved transport has varying characteristics of demand. For instance, the demand for extension,

rehabilitation and maintenance in the rural roads sector is constant and in many countries of

enormous scale. 30% of agricultural productivity is lost due to lack of access to an all-season

route to market. Significant rural communities are severely burdened due to lack of access to

health, education, markets, and opportunity. This demand is not affected to any significant degree

by economic downturn. Highways and inter-regional roads have a different demand characteristic

that is affected by economic downturn.

2.14. In the port and shipping sector demand is related to current and forecasted activity.

Demand has dropped significantly due to a slowdown in shipping. The temptation here is to stall

planning, but the time lost in stopping the planning process can not be recovered.

59

2.15. In the railway and mass transit sector demand is more buoyant for intended projects, but

again there is a temptation to postpone. Of high priority is appropriate and timely maintenance to

protect the value of existing assets.

2.16. It is therefore recommended that demand should be evaluated in the three priority

subsectors of the transport sector: Ports, Road Transport, and People and Freight Transit as

follows:

Ports

2.17. Ports and their services may have been particularly affected by a reduction in freight

traffic and current demand. The actual demand upon upturn remains the objective to fulfill in the

medium term strategy for facilitating economic activity. Long lead-in times could indicate that

time-disruptions to the process may not be recovered. Flexibility is low to recover interruptions to

the design and implementation process

2.18. The main factors for analysis are: the temporary and recent decline in trade (% tonnage),

with effect on staffing and supply chains. Data would be collected on projects that have halted,

slowed and been postponed. Data would also be collected on the direct causal effect of lower

freight throughput temporarily stunting the demand for expansion of infrastructure and services.

We would also evaluate whether the demand identified by shippers and Government planning for

ports been reprioritized.

2.19. The team would consider the before crisis planning for port and port services demand and

current Governments‘ and Port Authority‘s views on pipeline projects, shippers forecasts in

addition to the current projections of future traffic.

Road transport

2.20. The demand for road transport is fairly robust, especially in the rural areas. There may be

a slight reduction of demand on regional highways due to lesser freight use. The upturn will

require the infrastructure in place to facilitate trade and for larger capital projects flexibility is

low. For rural and smaller investments there is greater flexibility.

2.21. The main sub-sectors that we would consider include the following: arterial, urban, and

rural. For each subsector, the team would identify the transport benefits as well as the future risks

associated with delaying investments. Further analysis is recommended on the year on year

reduction of Kms constructed, rehabilitated, maintained. The readiness to participate in economic

activity is also dependent upon the infrastructure asset preparedness. For instance all-season

access conversion (% surfaced) and within two miles of settlements (existing data). The demand

reduction may be seen in Government and agency pre-crisis plans and current values of spending

on maintenance as a percentage of estimated needs that would maintain the asset value.

People and Freight Transit

2.22. Here there is little flexibility in the project cycle. The key factors for analysis include the

demand reduction for projects in consideration and analysis of options. Completing commenced

projects and maintenance would remain the priority. A survey of how railways, in particularly

affected regions, have cut back their maintenance and investment programs and by how much. A

review of the Strategic development plans compared to current Government and parastatal views

on future requirements in view of the economic downturn.

2.3 SUPPLY ANALYSIS

2.23. The situation analysis will look at the transport sector and sub-sectors in client countries

including an inventory of commitments on capital and operations of transport projects, the

60

content of labor and local resources, and how the crisis has affected the demand or relevance for

those projects. The assessment would also look at which programs are being delayed or having

problems, why, and whether help is needed, and classify those projects in terms of long-term

objective or short-term stimulus or safety-net support. Rural roads projects primarily and

port/highway infrastructure projects would be the best candidates for a detailed analysis of their

impacts in the short term as economic stimulus and as long-term investment in infrastructure.

Table 2.1: Situation Analysis for the Transport Sector

Evaluation Questions

for Sub-sector

Information/analysis

Situation analysis assets and service programs and projects in transport sector

a) What is the situation in the public

expenditure program, transport?

What are the existing country investment commitments on capital,

rehabilitation and maintenance accounts in transport that are progressing?

Existing country and local commitments on capital operation and

maintenance in urban projects that are being executed

Cost and scope of these programs

Content of labor spent and use of local resources

How small and medium firms are being used and opportunities to

increase their participation

b) What are recent developments

since fiscal crisis began?

Has/will the crisis lead to significant slowdowns in demand for certain

transport infrastructure services?

shortfalls as a consequence of tighter credit restrictions

shortfalls as a consequence of higher financing costs, due to a higher risk

averseness and new market regulations.

Shortfalls in public finance:

shortfalls in tax revenues,

shortfalls in terms of political commitments and structural budget

reallocations

Existing estimates of transport demand-supply imbalances (pre-crisis

data on infrastructure stocks and needs) data on spend (former and

existing/projected)

Investment commitments on projects that have already spent e.g. 30% or

more of allocations

What is happening with disbursements

Are there significant backlogs in maintenance and rehabilitation?

Spending on maintenance as a percentage of estimated needs that would

maintain the asset value.

Allocation of transport budget on capital and maintenance by main

sectors

Investment commitments to existing projects?

c) What is the status of the

implementation of the Government

program?

Areas of programs not progressing and why

Identification of projects that are being postponed and attributable cause.

% of overall program

Identification of progress and stage of these postponed projects?

What facilitation is needed to complete these projects?

d) What are the trade-offs between

projects that are long term priorities

and those that are more effective to

cope with the crisis?

Identify/reaffirm priority investment projects (including for broad policy

objectives, including climate change)

Identification of operational and maintenance shortfalls. Identify/reaffirm

priority investment projects including:

-Long term policy objectives

-Immediate impact on job creation and the local economy

Portfolio Status and Financial Analysis

2.24. Tables in Annex 2 are templates for identifying specific ―quick-response‖ projects,

differentiated for transport subsectors and separated by the state of status of their completion i.e.

projects which are being implemented, projects under construction and projects in preparation

61

together with new projects. The portfolio information from these tables will be evaluated and

filtered through a benefit and risk screening process to define priority investments.

Benefits analysis for infrastructure

2.25. If INFRA supports new infrastructure project development and implementation other

demand considerations might play a role. Given the long life cycle of infrastructure and given the

heterogeneity of countries needing the INFRA support, restrictions on the modal structure of

investments seem to be difficult to justify. At least in part the infrastructure investment is meant

to generate demand not to respond to it.

2.26. As a first step demand analysis could focus on the identification of repressed demand for

infrastructure service, i.e. the identification by analyzing current congestion patterns, across

traffic modes.

2.27. Within the context of INFRA‘s strategic priorities, Table 2.8 is a platform for a benefits

analysis for refining priorities for spending in the transport sector under the crisis would require

analysis of the role of each type of transport sector and their projects in achieving economic and

social benefits aligned with country strategic priorities. The funding should be allocated to

minimize the opportunity costs of the ongoing projects.

Table 2.2. Transport sector - Benefits - INFRA specific priorities for portfolio analysis

Evaluation Questions

For Sub-sector

Information/analysis

2. Priorities for infrastructure investment in the transport sector

a) Strategic importance criteria Determining ranking of economic and social benefits and their

strategic importance

Correct for past biases in infrastructure policies

Increase the share of resources allocated to maintenance.

Returns from maintenance are often higher than from new

investment and have a higher employment effect.

Invest in responses to major changes in development patterns

- Rapid urbanization

- Changing climate: adaptation

1. Take account of external benefits and costs of transport

Take account of the wider benefits of transport, beyond travel

time savings

- Gains from trade, internationally like mentioned in the diagnostic

but also regionally and between cities.

- Improvement of functioning of urban labor and goods markets by

improved accessibility at the city level

- Help to provide public services (health, education, extension

services, marketing facilities) by increasing catchment areas of

service provision

- Give particular attention to direct and indirect employment effects

Take account of environmental effects of transport and the

resulting modal consequences in the future

- Reduction of local air pollution

Increasing transport safety

Contribution to a climate change agenda

Take account of the coordinating function of large scale transport

investment, in the perspective of changing expectations of

private investors

62

Evaluation Questions

For Sub-sector

Information/analysis

- access/MDG Contribution to MDGs

Access to road networks

- job creation/employment Evaluate the opportunity of local labor intensive infrastructure

projects.

Availability of labor/seasonal labor

Local resource opportunity

Impact of spending on different types of transport projects:

For typical projects expenditure resource spending of various

methods of construction. Main headings (machinery, labor,

materials), split out by imported/domestic. Sectors: highways,

rural roads, ports.

Expenditure on labor and estimate of jobs provided/people hired

per $1mn for different types of projects

- impact on growth/development Analysis of where investment is most effective

Evaluation of the various sectors of transport intervention and

possible growth outcomes

Evaluation of major infrastructure investments and trends

Assessment of growth potential from transport infrastructure

investments

- impact on poverty mitigation Analysis on major contribution of types of transport intervention on

facilitation access of poor communities to health, education, markets,

employment, social needs, opportunity

Impact on poor people of particular type of project

b) Country priorities Country infrastructure priorities

Risk analysis and ease implementation

2.28. As part of a benefit – risk analysis to screen through priority projects, a risks analysis

through a series of parameters (see Table 2.3) would provides for understand the implementation

record of transport projects looking at the capacity of the government (s), project quality, and

adaptability to redesign or scaling up under the crisis. With this information, it would be possible

to identify a list of priorities for spending in the transport sector with a clear rationale.

2.29. The diagnostic should identify the consequences in terms of benefits forgone (opportunity

costs of projects) by dropping or delaying ongoing projects. The diagnostic should give an

estimate of the financing needs according to a priority ranking of the projects. In particular, it

should inform on shortfalls in private finance:

Table 2.3. Transport sector - Risks and ease of implementation

Ease of implementation/risks Determining implementation issues, time lag of impact, stage of

completion, easiness to redesign

- Government‘s capacity to execute

projects within 3-year time frame Past Government performance on spending vs. allocations

In-country capacity to design and implement high quality

projects

Local government capacity for implementation

- Construction sector and suppliers

capacity to support implementation Local private sector capacity (industry and consultants) and

performance

-completion rates,

-timeliness

-extent of local/national competition

- Project quality and adaptability What stage is the project at in terms of implementation or

completion

What is the time lag of impact

What are issues / risks for redesign

63

Ease of implementation/risks Determining implementation issues, time lag of impact, stage of

completion, easiness to redesign

Project relevance to national strategy (if exists)

Maintenance of infrastructure assets

Likely to quickly achieve major benefits - economic and social.

Under or near to construction

Option to modify easily

Little alternative to complete project

Risk of failure to complete

- What are the options and/or

implications to modify project design Postpone

Scale down

Re-structure / re-sequence

Redesign

Accelerate

Front-end

- What are the optimal financial

instruments for easing implementation Investment Lending (IL)

Development Policy Lending (DPL)

Additional Financing

Parallel Financing

Donor support

Private Sector

Other multilaterals

Other innovative financing

What are the main indicators for project

quality?

Ensuring that projects are optimal and focused to deliver intended outputs and outcomes

Primary

National and regional transport strategy plan adherence

Generation of new activities, or changes in the way that current

activities are undertaken that have calculated benefit and

produce sustainable economic growth

Generation and reduction in the cost and barriers to Trade and

transportation of people

Government Priority

Enables compliance with regulation and certification

Demand and likelihood of client acceptance

Secondary

Reduction in vehicle, aircraft/ship operating costs and

subsequent freight charges

Time savings

Reduction in traffic casualties

Promotion of transport services

Transportation projects often produce public goods that cannot

necessarily be charged directly to the beneficiaries.

What sectoral areas should have priority

Ports

Analysis of trade decline (%tonnage), with effect on staffing

and supply chains. Attributable areas

View on trade inefficiency, the market, time savings achievable

and where.

Data on Projects halted, slowed and postponed

64

Ease of implementation/risks Determining implementation issues, time lag of impact, stage of

completion, easiness to redesign

View on Investment in port infrastructure, governance or

service to prepare for trade upsurge

Confirmation of government prioritization for completion of

nearing completion projects (over 75%)

Identification of new projects

Road transport

Analysis of sector contribution, arterial, urban, rural. Indicators

of transport benefits.

Analysis of year on year reduction of Kms constructed,

rehabilitated, maintained. Value of all-season access conversion.

(% unsurfaced) within two miles of settlements (existing data)

View on barriers of lack of infrastructure to economic

growth/social deprivation

View on Investment in arterial, urban, road, to maximize

objectives, benefit analysis.

Confirmation of Government prioritization for completion of

nearing completion projects (over 75%)

Identification of new projects that conform to agreed eligibility

criteria.

Mass and Freight Transit

Projects in consideration and analysis of options. A survey of

how much railways in particularly affected regions have cut

back their maintenance and investment programs, and what they

would need to scale them back up.

Support maintenance work with implementation programs to

shorten the backlog of maintenance for infrastructure and

rollingstock that is needed to serve expected future demand.

To support productive investment expenditures to serve future

traffic. Track investments (rehabilitation, double tracking) that

are labor intensive.

2.4 INSTITUTIONAL ANALYSIS

2.30. The institutional analysis is indirectly captured in the sections above.

3. ENERGY SECTOR

3.1 INTRODUCTION AND DEFINING SUB-SECTORS

2.31. Adjusted versions of the investment programs must take into consideration new demand

forecasts, financial conditions, and the physical degree of completion of the different assets at the

moment the crisis erupted. Although this condition is specific to each project, it is possible to

define some general guidelines for the evaluation of the energy subsectors:

Generation projects imply in general big investments concentrated in 3 to 5 year

construction periods. Flexibility to reschedule them within the construction period is

generally low. In addition, paralyzing advanced construction works leads to high

65

financial and operational costs and should be avoided. It might also imply significant

contractual penalties to the sponsor due to unilateral holdbacks.

Transmission projects are mixed: there may be some big investments related to

reinforcement of the backbone connecting generation plants and consumption centers,

which show similarities with generation projects. But there is also a set of relatively small

or medium size projects aimed at attending growth of existing demand and renovation

and replacement of equipment used for that purpose.

Individual distribution projects, either to connect new electricity consumers or attend

growth of demand and service quality requirements of existing users, imply relatively

small investments. In general it is possible to adjust their time schedule to match it with a

new demand scenario.

2.32. Projects in the investment programs previously classified as described in above should

also be evaluated according to their situation in terms of progress in physical execution. As a

general rule, construction works close to termination should be completed, as the financial,

operational costs and contractual penalties of interruption could be even higher than remaining

investments. Although this is valid for all kind of works, the quantitative impacts are particularly

relevant in generation and large transmission projects.

3.2 DEMAND ANALYSIS

2.33. Growth of electricity demand is perhaps the main determinant of investment needs in the

power sector of developing countries. As the cooling of the economy is already visible in most

countries, the pre-crisis investment needs must be reassessed, based on updated forecasts of

demand evolution. This is likely to lead to adjusted time schedules of the existing investment

programs, which will also be related to the duration of the economic slowdown. Eventual changes

in scope of those programs will depend on the evaluation of the scenario defined by new prices of

energy resources and equipment resulting from the crisis.

2.34. Three important caveats need to be made at this point stressing the dynamic and

diachronic nature of the assessment we will be carrying out:

Demand-driven adjustment of investment programs may imply postponements in

implementation of some components but is unlikely to change the need of high financial

support to develop them.

Adjustment of generation and transmission plans must contemplate in particular, impacts

on transmission investments of the new sequencing of generation projects.

If economic recovery is faster than projected, there is risk of potential mismatching

between demand and supply.

These three aspects also need to be evaluated.

3.3 SUPPLY ANALYSIS

2.35. Projects in investment programs affected by the credit crunch can be classified in the

following categories:

Large generation and transmission projects with construction works close to termination

(80 percent progress or more): provision of financial support allowing effective

completion appears as the best option.

66

Large generation and transmission projects in early stages of development: they need to

be reassessed, based on the conclusions of the demand-driven analysis of the pre-crisis

investment programs. This will lead to identify the projects having high priority and the

financial gap faced by each of them as a consequence of the credit crunch.

Medium and small transmission and distribution projects: although the general concepts

are equally applicable, the size of each individual project makes in general possible to

complete those close to termination without significant financial effort, as well to

reschedule others in early stages to match adjusted demand.

High-priority projects focused on energy efficiency (both demand and supply side) and

access of the poor to electricity services through grid extension, mini-grids and individual

systems using renewable energy resources: they will be identified and evaluated

separately, taking into consideration specific options for financing.

Portfolio Status and Financial Analysis

2.36. The financial downturn might have affected investment projects in different stages of

development, from early planning to advanced execution (there is clear evidence that this actually

happened in several client countries). Within a broader sector assessment, a country‘s energy

investment portfolio assets need to be analyzed on a case-by-case basis, actions to be taken

depend on status of implementation. The tables in Annex 2 are templates for identifying specific

projects, differentiated by subsectors (generation, transmission and distribution). Separate tables

are considered to contemplate differences in status of completion i.e. projects which are being

implemented, projects under construction and projects in preparation together with new projects.

2.37. The energy sector is capital intensive; energy infrastructure requires significant up-front

capital allocations to be amortized over long time periods. The current financial crisis has

severely curtailed the provision of debt and equity for ongoing projects. The lack of completion

of energy projects could have a significant negative impact in both the level of provision of

services and profitability of public and private utilities. Therefore, priority is given to projects

under construction over those at earlier stages of development.

Benefits analysis for infrastructure

2.38. The benefits related to each specific energy project are evaluated through the INFRA

priority criteria. Each practitioner would be able to value the strategic importance of any given

project. A relative ranking for the energy sector would be attached to those criteria. Table 2.4

includes INFRA Initiative but other criteria might be specifically identified as well on a country

basis. The benefits analysis would aim to determine the overall value of the benefits that the

execution of any given project might generate; and a relative ranking of the energy projects for

any given country.

Table 2.4. Energy sector - Benefits - INFRA specific priorities for portfolio analysis

Evaluation

Questions

For Sub-sector

Information/analysis

Priorities for energy infrastructure investments

a) Strategic

importance criteria

Determine ranking of economic and social benefits and their strategic importance

- Access/MDG

Contribution to access to electricity

-Job creation /

employment

Evaluate the opportunity of local labor-intensive energy infrastructure projects.

Availability of labor/seasonal labor

Local resource opportunity

67

Evaluation

Questions

For Sub-sector

Information/analysis

Impact of spending on different types of energy projects:

For typical projects expenditure resource spending of various methods of energy

infrastructure construction. Main headings (machinery, labor, materials), split out by

imported/domestic for the following sub-sectors: generation, transmission, and distribution

Expenditure on labor and estimate of jobs provided/people hired for different types of

projects

- Impact on growth

/ development

Analysis of where investment is most effective

Evaluate various sectors of power/energy intervention and possible growth outcomes

Evaluate major energy infrastructure investments and trends

Assess growth potential from energy infrastructure investments

- Impact on

poverty mitigation

Analysis on major contribution of types of energy intervention on facilitating access for poor

communities lighting, health, education, markets, employment, social needs,

Impact on poor people of particular type of project

b) Country

priorities

Country infrastructure priorities

Risk analysis and ease implementation

2.39. Risks involved in the implementation and the likelihood of execution of any of the energy

projects under consideration need to be considered. . Table 2.5 below outline the basic parameters

to screen the project portfolio for investments; however they likely will need to be tailored for a

specific country.

Table 2.5. Energy sector - Risks and ease of implementation

Ease of implementation/risks Determining implementation issues, time lag of impact, stage of

completion, easiness to redesign

- Government‘s institutional capacity to

execute projects within 3-year time frame Past Government performance on spending vs. allocations

In-country capacity to design and implement high quality

projects

Local government capacity for implementation

- Construction sector and suppliers capacity

to support implementation Local private sector capacity (industry and consultants) and

performance

-Completion rates,

-Timeliness

-Extent of local/national competition

-Project quality and adaptability What stage is the project at in terms of implementation or

completion

- What is the time lag of impact

- What are issues / risks for redesign

Project relevance to national strategy (if exists)

Maintenance of infrastructure assets

Likely to quickly achieve major benefits - economic and social.

Under or near to construction

Option to modify easily

Little alternative to complete project

Risk of failure to complete

- What are the options and/or implications to

modify project design Postpone

Scale down

Re-structure / re-sequence

Redesign

Accelerate

Front-end

- What are the optimal financial instruments Investment Lending (IL)

68

Ease of implementation/risks Determining implementation issues, time lag of impact, stage of

completion, easiness to redesign

for easing implementation Development Policy Lending (DPL)

Additional Financing

Parallel Financing

Donor support

Private Sector

Other multilaterals

Other innovative financing

3.4 INSTITUTIONAL ANALYSIS

2.40. Considering the long construction period of large generation and transmission projects,

there is a risk of potential mismatching between demand and supply if economic recovery is

faster than projected. Some policy issues with potential high impact on the matter include:

A mechanism to address this is to maximize the scope and depth of permanent actions for

energy efficiency. Documentation is available which indicates countries that gave high

priority to this issue experienced sustained reduction of electricity demand. A set of tools

are available to achieve these results, for which the most important of them is an

operational and valid tariff system with rates reflecting actual costs of efficient supply. It

is unrealistic to implement energy efficiency if prices of energy products and services do

not provide users with the right signals on actual costs of supply; this is an absolutely

necessary condition to promote the optimization of consumption. Application of subsidies

provides disincentives to save energy.15

On the other hand, ample evidence worldwide

shows that higher energy prices induce substantially lower demand.

Energy subsidies are often justified as protecting poor people, but the bulk usually goes

to the better-off consumers. This is the case in most developing countries, even the

poorest in Sub-Saharan Africa, where rates of access to basic energy services are very

low. This creates an extremely unfair and socially regressive situation: amounts allocated

to subsidize existing consumers who can afford to pay cost reflective prices could be

better used to favor the poorest (those currently without access to energy services).

The sharp reduction of prices of oil and other primary energy resources is actually a

positive side effect of the economic downturn and credit crisis. Cost-reflective rates can

be applied for currently subsidized users able to pay for them, together with the

implementation of social nets aimed at protecting poor and low-income consumers.

Differently from previous times, when this implied significant tariff increases, in many

countries this could be done now by not fully transferring into existing rates the effects of

lower prices of oil and other primary energy resources. The difference between both

situations, in terms of political feasibility and social acceptability, seems to be enormous.

The opportunity should not be lost. Willingness of the WBG to provide support to client

countries through DPL and other tools provides the opportunity to move forward in such

a critical issue.

15 Current amount of global energy subsidies is around $300 billion a year (around 0.7 percent of world GDP), and

$220 billion of that amount corresponds to developing countries. This is completely inconsistent with any serious

attempt to induce global energy efficiency.

69

4. WATER INFRASTRUCTURE SECTOR

4.1 INTRODUCTION AND DEFINING SUB-SECTORS

2.41. At times of economic uncertainty, investment responses need to be guided by a set of

rigorous long-term principles yet be flexible to adapt to the current circumstances. For example,

The World Bank Group operates on a set of guiding principles tailoring its global, regional or

country-level approach to the specific circumstances through key water sector strategies.16

The

strategies are designed to provide effective, tailored assistance to client to support access,

efficiency and optimal resource use for sustainable development and poverty alleviation.

2.42. However, longer-term infrastructure development plans are at risk during the economic

downturn, through changes in revenue and financing constraints, including diverting government

funds to social programs. The INFRA diagnostic tool concentrates on immediate actions to

maintain or support momentum in infrastructure development, consistent with longer-term

principles and strategies.

2.43. The water sector consists of a range of investments, which can be categorized into three

main sub-sectors:

Water supply and sanitation (WSS). Access to water supply and sanitation is a critical

indicator within the Millennium Development Goals (MDGs). The costs of inadequate

WSS are high, but challenges and opportunities in water supply differ from those in

sanitation, and these in turn differ in rural and urban contexts. This is reflected not only

costs and economies of scale, but also differences in poverty and institutional capacity for

investment and management. The greatest challenge lies in building competent, efficient,

business-like, and service-oriented institutions, public and private support is affected

during economic and financial downturns; and sustainable service provision is only

possible where customers themselves cover the costs of operation and maintenance;

capital cost recovery is not always possible, but often requires predictable public

subsidies. Both in the rural and urban setting, within the context of INFRA priorities,

WSS rehabilitation projects are low cost yet labor intensive; while water infrastructure

projects such as hydropower investments, necessitates specialized employments and has

longer-term implications maybe crucial to priority investments in the power sector.

Irrigated agriculture and drainage. Investments in irrigated agriculture and drainage

have driven rural growth in many developing countries, creating jobs and reducing

poverty; yet the productivity of agriculture will have to continue to increase to meet the

ever-rising demand for food, now more than every before with the world is facing an

unprecedented food crisis. Water use in agriculture consumes more than 75 percent of

water in the developing world. Increased demand for water will have to be balanced with

the competing demands of other sectors. Water productivity will have to be raised. Water

use in agriculture consumes more than 75 percent of water in the developing world,

however in with the economic downturn there will be decreased funding to support

16 The World Bank Water Resources Sector Strategy – Strategic Directions for World Bank Engagement (World Bank,

2004) has a pragmatic but principled approach to water resources management was designed to provide effective,

tailored assistance to client to improve water resources management – with a mission to reengage with high reward

infrastructure ranging from energy infrastructure to flood management. Water for people addressed through The

World Bank Group‘s Program for Water Supply and Sanitation (World Bank, 2004) recognizes improving water

supply and sanitation services is key to achieving broader poverty reduction goals, through sound policies and

institutions and building capacity at the local level and secure necessary financing to rebuild infrastructure and

expand service coverage and quality. Reaching the Rural Poor A Renewed Strategy for Rural Development (World

Bank, 2003) highlights scaling up innovations and successful investment for water for food by increasing

productivity of water use.

70

increased demand for water will have to be balanced with the competing demands of

other sectors, investments will be needed to create effective and sustainable institutional

arrangements, including by establishing and strengthening water users‘ associations,

promoting the involvement of the private sector, and ensuring that irrigation systems are

financially viable.

Water resources management (WRM). Water resources management integrates a number

of water sub-sectors agriculture, flood protection, power generation, natural resource

management and resource development. The use of an integrated water resources

perspective ensures that social, economic, environmental, and technical dimensions are

taken into account in the management and development of surface waters inclusive of

water for the environment for flood management and multi-purpose basin projects,

which require perhaps a longer gestation period, with lower employment implications but

these broader water resource management investments and programs should remain

equal players as part of a country‘s priority assets portfolio, for technical assistance for

policy and institutional capacity building in the immediate-term for longer-term benefits.

2.44. While each sub-sector has its own set of risks, benefits and financial architecture;

however, the diagnostic tool is generalized across the sector for ease of application.

4.2 DEMAND ANALYSIS

2.45. The demand for water infrastructure is largely driven by non-market, social or

environmental pressures. Some of these are captured by the Millennium Development Goals (e.g.,

water supply and sanitation); while others have less well-defined definitions of demand/need

(e.g., water infrastructure for flood management or environmental quality). A corollary is that the

demand for these services is relatively insensitive to changes in economic conditions, linked more

directly to population growth, urbanization, and public development priorities. However, some

water services (e.g., water supply, irrigation) may be delivered through varying degrees of market

mechanisms. In these sub-sectors, the economic downturn may manifest in lower demand or,

more likely, reduced payments and collections.

Three important implications from the demand side, therefore, are:

Demand for water infrastructure and water services are relatively insensitive to general

economic activity, so there will be little offsetting reduction in demand (or demand

growth) over the crisis period

Demand may be more appropriately measured by development objectives (e.g.,

Millennium Development goals), necessitating articulation of priorities based on policy

and/or political judgment informed by national investment plans (where available) rather

than measures of economic (market) value

Downturn in collections and revenues may compromise perceptions of long-term

risk/reward as well as short-term sustainability (maintenance) of existing infrastructure.

4.3 SUPPLY ANALYSIS

2.46. The list of potential investment projects should be assembled based on existing

national/sectoral plans, critical or backbone operations and risk of financial stress.

Portfolio status

2.47. The supply analysis includes an assessment of the status of development: projects are

either currently operational, under construction or under preparation (see Table A Portfolio Status

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Review). Generally, priority should be given to more advanced projects in terms of completion

and delivery of services. For projects that are operational, focus should be on reducing costs and

increasing efficiency, including sustaining priority maintenance; in these cases, the cost and

efficiency ratio would be measured against reduced costs. Responses to projects under

construction could be financing to stabilize investments, acceleration of project schedules or

designs modified. Projects under preparation should be prioritized and possibly modified afforded

stabilizing finances and possibly accelerated where projects risks (see Table 2.8 below) are

manageable. Indicators to prioritize projects on status include: percent of budget already

disbursed and expected disbursements over the next three years. For projects under construction,

the cost of termination (e.g. contractual penalties, et.) should be taken into account. However, the

proposed hierarchy should not dictate project prioritization as some very important projects (vis a

vis benefits) may be in earlier stages of development.

Table 2.6. Water Infrastructure sector - Portfolio Status Review

Evaluation Questions

for Sub-sector

Information/analysis

Situation analysis assets and service programs and projects in water

a) What is the situation in the public

expenditure program, urban? Existing country and local commitments on capital operation

and maintenance in water projects that are being executed

Cost and scope of these programs

b) What are recent developments since fiscal

crisis began? What is happening with disbursements?

Investment commitments to existing projects?

c) What is the status of the implementation

of the Government program? Areas where water programs are facing problems

Water projects that are being postponed due to crisis

Identification of stage and progress of these projects

What facilitation is needed to complete these projects

Benefits analysis

Table 2.7. Water Infrastructure sector - Benefits - INFRA specific priorities for sub sector analysis

Evaluation Questions

For Sub-sector

Information/analysis

Benefits analysis: Priorities for infrastructure investment in the water infrastructure sector

a) Strategic importance

criteria

Determining ranking of economic and social benefits and their strategic

importance for country and water sector

- access/MDG Extent to which spending will contribute to MDG 7, development objectivess

- job creation/employment Expenditure on labor and estimate of Jobs provided / people hired for different

types of projects

Assessment of opportunities for local labor

Use of labor intensive approaches

- impact on

growth/development

Assessment of growth potential from (direct and indirect) water infrastructure

investments

- impact on poverty

mitigation

Assessment if investments are targeted to the poor (e.g. rural water supply

irrigated agriculture))

b) Country priorities Country infrastructure priorities

2.48. The specific indicators of benefits/importance are contingent on an individual country‘s

specific needs and can be informed by the Country Strategic Review. However, priority

investments are likely to be those that target economic growth, employment, and access to

infrastructure services by the poor.

Risks and ease of Implementation

2.49. Not all projects have similar risk profiles, and these risk profiles may shift unequally in

times of economic downturn whether as the consequences of the economic downturn/crisis (e.g.,

72

at the national level, the drain of on foreign exchange reserves, equipment delivery) or as an

inherent risk of the project (e.g., inability to strengthen institutional capacity or foster appropriate

policy mechanisms). Risk tolerance may also shift to favor projects that are likely to disburse

quickly and/or be resilient to bottlenecks.

Table 2.8. Water Infrastructure sector - Risks and ease of implementation

Evaluation Questions

For Sub-sector

Information/analysis

Risks and Ease of Implementation: Priorities for infrastructure investment in the water

infrastructure sector

- Government‘s capacity to execute

projects within 3-year time frame

Past Government performance on spending vs.

allocations

Determining implementation issues, time lag of impact,

stage of completion, easiness to redesign

In-country capacity to design and implement high quality

projects

Local government capacity for implementation

- Construction sector and suppliers

capacity to support implementation

Local private sector capacity (industry and consultants)

and performance

-completion rates,

-timeliness

-extent of local/national competition

- Equipment supply risks Are suppliers dependable in new economic conditions?

Is bridging foreign exchange manageable?

- Institutional risks Are investments institutionally complex?

Will management‘s attention remain in project

implementation?

Are PPP commitments at risk (e.g. risk sharing, financial

resources, performance)?

- Project quality and adaptability What stage is the project at in terms of implementation

or completion

What is the time lag of impact

What are issues / risks for redesign

Project relevance to national urban strategy (if exists)

Maintenance of urban infrastructure assets

4.4 INSTITUTIONAL ANALYSIS

2.50. Institutional capacity is a critical element in water infrastructure development. In many

areas, policy and institutional capacity remain weak, compromising the ability to manage water

resources and deliver water services on a cost-recovery basis. Policy responses during the crisis

period can aid in infrastructure maintenance and resumption of infrastructure financing as the

crisis attenuates. Two areas of concern in the crisis period are planning and policy development:

Planning: Large water resources infrastructure projects (especially for flood

management and multi-purpose water allocation) have long gestation periods, from

identification to feasibility to construction and implementation. Further, the pipeline or

stock of well-identified projects is limited in most countries, the result of the past decades

of lack of planning. There is now a recognized need for public sector initial planning to

identify priorities and reduce risk in future investments, and so accelerate financing once

the crisis attenuates.

Policy development: Policies may help offset risks to existing service providers while

improving the investment climate for resumption of investment. Some policy issues have

73

also long gestation periods and may be difficult to re-start if abandoned. Examples

include tariff policy, water policy, and environmental and social policies (e.g.,

resettlement and rehabilitation).

2.51. Prioritization of policy and planning initiatives will be country and sub-sector-specific.

However, the basic criteria identified for investments can be applied to institutional initiatives,

namely: status of reforms/planning; benefits/importance; and risks to complete. However,

priority should be given to policy and planning initiatives that: (i) are currently underway or

mobilized; (ii) have a direct impact on attracting financial resources as the crisis attenuates; and

(iii) stabilize current service providers and existing infrastructure.

5. URBAN SECTOR

5.1 INTRODUCTION AND DEFINING SUBSECTORS

2.52. The ongoing financial crisis and associated economic slow down are expected to have a

major impact on the urban sector in several ways. First, the decline in economic activity will lead

to a shortfall of fiscal resources, reducing the capacity to fund service provision and long-term

infrastructure. Second, increased levels of poverty and shrinking disposable incomes will

augment the dependence of the population on public provision of basic services and income

support. Third, local and national government will be forced to re-assess priorities, balancing the

urgent needs of the short-term with the need to keep and maintain infrastructure assets.

2.53. The crisis may provide a unique opportunity for the government (central and local) to

address institutional constraints that have affected the provision of services. For example in the

case of housing for the poor, as we expect a shift in the demand for low-income housing,

developers may take an increased interest in this market, developing affordable and progressive

units with the aid of micro-credit schemes and local participation. Local governments may take an

interest in citywide slum upgrading programs as the pressures from their constituencies will

increase. Governments may even use this crisis to get rid of dated land regulations and controls

that have pushed households into informality.

2.54. The urban sector is defined as the envelope of activities that ensures the economic

functioning of a city and the well being of its inhabitants. This includes housing and shelter for

the urban poor, urban infrastructure (roads, drainage, solid waste, water and sanitation), land

markets, municipal finance, urban planning and management, urban environment and climate

change, and governance.

5.2 DEMAND ANALYSIS

2.55. The demand for investment in the urban sector is closely linked to growth, as well as

social and equity concerns. Cities are an important driver of growth and job creation. This

message is reinforced by the recent WDR, Reshaping Economic Geography.17

2.56. Job losses. The crisis is anticipated to impact on labor markets through reductions in

wages and labor demand. Urban areas are expected to be hardest hit, particularly in the financial,

manufacturing and construction sectors. Evidence from past crises also shows evidence of labor

reallocation; during the 1997 Asian Crisis, some 30-40 percent of displaced urban workers moved

back to agricultural. Workers, which are likely to be most vulnerable (as in past crises), are the

17 World Development Report, 2009 ―Reshaping Economic Geography‖ World Bank, Washington DC. 2008

74

unskilled, women, youth, migrants, and older workers who may face greater obstacles in re-

entering the labor market later.

2.57. Urban poverty. The job losses and wage reductions in urban areas are anticipated to push

some into poverty, and those that are already poor are anticipated to fall into extreme poverty. A

decline in remittances will also have negative impacts on urban households. The financial crises

in East Asia and Mexico showed that urban households felt the impacts disproportionately. In

Mexico‘s 1994/5 ―peso crisis‖, urban households with workers in financial services and

construction suffered the greatest income declines (48% and 35% respectively). The lack of

agricultural production as a safety net for households to fall back on also makes urban households

more vulnerable.

2.58. Decreasing incomes means more difficulty in satisfying the basic needs of households,

including nutrition and education, and more urgency to extend safety nets. Cost recovery schemes

used to finance urban infrastructure – especially water and sanitation utilities – may not be

sustainable as initially designed. Poor households may have reduced access to basic services for

lack of affordability. Utilities that depended on a steady stream of revenues may be unable to

operate without financial help from the government.

2.59. Social problems. Cities are prone to problems of crime and violence, and social unrest

due to stark inequalities. These problems can become more pronounced during times of rising

unemployment and economic hardship leading to widespread protests, riots, and social unrest.

Some recent examples include cities in Russia, Lithuania, France, Greece, and Iceland, with deep

concerns elsewhere such as in China. These problems create demand for investments which

contribute to job creation as well as improving equity through the provision of basic urban

services and slum upgrading in low income areas.

5.3 SUPPLY ANALYSIS

Local Governments face declining resources.

2.60. The crisis is impacting local government resources through falling tax revenues, a credit

crunch, and uncertain (and decreasing) intergovernmental transfers. This will translate into cuts

for current expenditures as well as capital and infrastructure investments. The two largest banks

which specialize in local government lending, Dexia and DEPFA, are facing major solvency

issues and have received assistance through bailout packages.

2.61. On the expenditure side, local governments will likely face increased demand for social

safety net expenditures, requests from utilities for subsidies and grants, and renegotiation of

contracts with suppliers. Some projects based on private sector participation or financed partly by

cost recovery mechanisms may find themselves without sufficient financial return to remain in

the public expenditure program. Local capacity will be seriously stressed

2.62. During times of economic crisis, a critical response to preserving jobs, creating new ones,

and building lasting assets for economic and social development is investing in infrastructure in

cities. This includes maintaining existing spending, and where possible, ramping up spending.

There is much demand for public investments in urban infrastructure, slum upgrading, and for

rehabilitation, operations, and maintenance of existing infrastructure. Affordable housing could

also have much potential in assisting client countries to overcome the challenges of the crisis.

The following instruments should be considered from the broader spectrum of urban investments:

Urban Infrastructure Funds, also known as Municipal Development Funds are a

financing instrument that lends to local governments, local utilities, or communities for a

range of infrastructure investments. Perhaps the most important distinctive feature is that

these projects use local institutions to do the work of identifying, appraising, and

75

channeling finance to sub-national entities on behalf of International Finance Institutions

or national governments. This way, resources can reach a large number of municipalities

(including smaller cities and towns). Some have been designed for financial

intermediation aimed at strengthening municipal finance to build infrastructure systems

and sustainable credit market. Others are poverty oriented grant funds, which work with

communities for basic services and community infrastructure and can be designed to

promote labor-intensive approaches for some investments. A recent World Bank review

of Urban Investment Funds shows that they have performed well.18

Slum Upgrading. With estimates of approximately one billion slum dwellers globally, the

infrastructure needs in slums are immense. Living in slums poses major risks due to the

overcrowded living conditions and resulting health impacts, vulnerability to disasters and

climate change as a result of living in precarious areas, and in some places social

problems of crime and violence. Investments in water and sanitation, electricity, and

roads, as well as social and community infrastructure in slums have demonstrated long-

term benefits for the urban poor. Slum upgrading programs rely very much on local

participation and during times of crisis can be effective at local job creation in the short

term and longer-term investments in community infrastructure. In some cases, upgrading

may not be viable and relocation may be a more effective strategy and can be addressed

with investments as discussed below.

Affordable housing projects will be critical as many of the conventional subsidized

housing loans may face difficulties due to the reduced government capacity. In addition

to helping governments in restructuring those loans, instruments such as micro-finance

for incremental housing could spur investments at the household level and create

additional supply for the rental market in the form of rooms to rent, etc.

The rehabilitation, maintenance, and operations of existing urban infrastructure will also

create jobs while ensuring that infrastructure does not fall into disrepair. Evidence from

previous crises shows that such spending is often neglected with spending cuts. Yet

spending on the repair of roads, maintaining water systems, drainage systems and

community facilities is important in both the short run and long run as lack of

maintenance can shorten the productive value of these assets, ultimately resulting in

higher long term costs.

2.63. Other investments such as slum prevention and land subdivision projects also are

important but would potentially be secondary priorities in times of crisis. With the rapid

urbanization in many developing countries, investing in sites and services can help to mitigate the

proliferation of new slums, and spur private investments in housing. In such programs

investments in basic services are made on empty lands typically in peri-urban areas around fast

growing cities, which are then opened up for affordable purchase by low-income residents. With

links to low income housing finance schemes and to transport networks, such programs can

provide viable alternatives to slums, are ultimately more cost effective than retrofitting, and can

create jobs in the short term. Such efforts can also help to ensure more environmentally

sustainable efforts to urbanization and minimize the poor‘s vulnerability to natural disasters

particularly given the known threats of climate change. Land subdivision projects will help

reduce supply constraints and can provide tax revenues to local authorities in case land lease or

sale is auctioned. This may be a great opportunity to have the private sector interested in

developing some projects with serviced land included.

18 Annez, Huet, Peterson, 2008. ―Lessons for the Urban Century‖, Decentralized Infrastructure Finance in the World

Bank.

76

2.64. All of these investments can be designed to maximize employment generation through

including labor-intensive approaches where appropriate. This can serve as an important safety net

for some by providing both income transfer and consumption-smoothing benefits to households

hurt by crisis. By setting wage rates low, programs attract only the poor in need through self-

targeting, promoting poverty alleviation.

Portfolio status

2.65. The analysis will look at the urban portfolio in client countries including an inventory of

commitments on capital and operations of urban projects, the content of labor and local resources,

and how the crisis has affected the demand or relevance for those projects. The assessment would

also look at which programs are being delayed or having problems, why, and whether help is

needed, and classify those projects in terms of long-term objective or short-term stimulus or

safety-net support.

Table 2.9. Urban sector - Situation analysis assets and service for urban programs and projects

Evaluation Questions

for Sub-sector

Information/analysis

Situation analysis assets and service programs and projects in Urban

a) What is the situation in the public

expenditure program, urban? Existing country and local commitments on capital

operation and maintenance in urban projects that are being

executed

Cost and scope of these programs

Content of labor spent and use of local resources

How small and medium firms are being used and

opportunities to increase their participation

b) What are recent developments since fiscal

crisis began? Has/will the crisis lead to significant increase or slowdown

in the demand for urban projects (by type of project).

What is happening with disbursements?

How has/will the crisis affect:

-The demographic flows within and outside the city

-Projected income for the urban poor

-Unemployment

-Affordability of basic services

-Housing and informality – will there be a shift of more

people to informal settlements?

Investment commitments to existing projects?

c) What is the status of the implementation

of the Government program? Areas where urban programs are facing problems

Urban projects that are being postponed due to crisis

Identification of stage and progress of these projects

What facilitation is needed to complete these projects

d) What are the trade-offs between projects

that are long-term priorities and those that

are more effective to cope with the crisis?

Identify/reaffirm priority investment projects including:

-Long term policy objectives

-Immediate impact on job creation and the local economy

2.66. Defining priorities for spending in the urban sector under the crisis would require analysis

of the role of each type of urban project in achieving economic and social benefits aligned with

country strategic priorities. These generally include impacts on access to basic services and

meeting the MDG target of improving the living conditions of 100 million slum dwellers,

employment creation, economic growth, and impacts on poverty. Analysis would also be carried

out to understand the implementation record of urban projects looking at the capacity of the

government (s), project quality, and adaptability to redesign or scaling up under the crisis. With

this information, it would be possible to identify a list of priorities for spending in the urban

sector.

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Benefits analysis

Table 2.10. Urban sector - Benefits - INFRA specific priorities for sub sector analysis

Evaluation Questions

For Sub-sector

Information/analysis

Priorities for infrastructure investment in the Urban Sector

a) Strategic importance criteria Determining ranking of economic and social benefits and

their strategic importance for country and urban sector

- access/MDG Extent to which spending will contribute to MDG 7, Target

4 and other MDGs

- job creation/employment Expenditure on labor and estimate of Jobs provided /

people hired for different types of projects

Assessment of opportunities for local labor

Use of labor intensive approaches

-impact on growth/development Assessment of growth potential from urban infrastructure

investments

- impact on poverty mitigation Assessment if investments are targeted to the poor (slum

upgrading, affordable housing, urban infrastructure)

b) Country priorities Country infrastructure priorities

Risks and Ease of Implementation

Table 2.11. Urban sector - Risks and Ease of Implementation

Evaluation Questions

For Sub-sector

Information/analysis

Priorities for infrastructure investment in the Urban Sector

Ease of implementation/risks Determining implementation issues, time lag of impact,

stage of completion, easiness to redesign

- government‘s capacity to execute

projects within 3-year time frame Past Government performance on spending vs. allocations

In-country capacity to design and implement high quality

projects

Local government capacity for implementation

- construction sector and suppliers

capacity to support implementation Local private sector capacity (industry and consultants) and

performance

-completion rates,

-timeliness

-extent of local/national competition

-project quality and adaptability What stage is the project at in terms of implementation or

completion

What is the time lag of impact

What are issues / risks for redesign

Project relevance to national urban strategy (if exists)

Maintenance of urban infrastructure assets

5.4 INSTITUTIONAL ANALYSIS

2.67. Institutional capacity at both the national and local level for planning and implementation

of urban projects is critical. This capacity varies greatly from country to country, but at the local

level, can be quite weak. Many local governments do not have adequate staffing, technical skills,

or financial capital to tackle existing problems let alone taking on new challenges. This is an area

of concern which can be addressed in the context of project preparation and design through the

provision of technical assistance and training in promoting technical, administrative and financial

capacity.

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6. TELECOMMUNICATIONS SECTOR

6.1 INTRODUCTION

2.68. Information and Communications Technologies (ICT) may be considered a general

purpose technology; an enabler that acts as a platform for innovation and growth in other sectors.

Recent research19

attempts to quantify the positive boost that ICTs can provide to general

economic growth. For instance, in developing countries, a 10 per cent increase in mobile

telephony penetration could increase economic growth by 0.81 per cent; while for broadband

penetration the boost could be as high as 1.438 per cent.

6.2 DEMAND ANALYSIS

2.69. Even though the global financial crisis may have a negative impact on demand, its

magnitude could be relatively smaller in telecommunications than in other sectors. Although

growth in end-user demand may slow-down due to the financial crisis, research suggests20 that

access to ICT services is relatively income-inelastic (i.e. a change in income does not alter in the

same magnitude the demand for access to ICT services). Indeed, cost reductions in other

economic activities, such as travel or business conferences, may actually boost demand for ICT

services, through substitution. Industry projections show slower growth, but no decline in demand

for ICT services in developing countries.

2.70. The bigger risk is that reduced investment could contribute to higher pressure on supply.

Recent studies21

suggest that global demand for broadband could exceed total capacity at the

access layer by 2012. There might already be a gap between the investment required to meet this

demand and the actual investment from the industry. If anything, this gap will increase as demand

remains almost constant and supply faces financing constraints. As a result, some developed

country governments, such as Italy, Greece, or Australia, have announced active intervention in

national broadband strategies to avoid next-generation network (NGN) deployment being

delayed.

2.71. With a possibility of a slight drop in global demand‘s growth, specific country

assessments need to be carried out. In general, existing services may see a relatively small drop in

demand‘s growth, while new services and network expansion plans will probably be slowed

down or stalled due to constraints on the supply side. However, we recommend each specific

country to closely monitor their own telecommunications sector through sector statistics

(especially traffic statistics as this is a leading indicator of general economic activity) and close

interaction with regulatory agencies and operators.

6.3 SUPPLY ANALYSIS

2.72. The primary sets of assets exposed to the effects of the financial crisis are those in the

midst of deployment or about to be deployed. The financial crisis has hit telecommunications

operators by increasing the cost and availability of credit (financing in general), and this in turn

has affected planned investments and network expansion. In markets highly competitive markets,

competitive pressure from competing networks and operators might prove to be a strong reason

not to postpone investments. Overall, these assets can be classified in four different categories,

depending on the services provided and/or objective market segment:

19 See World Bank, ―Information and Communication for Development 2009: Extending Reach and Increasing

Impact‖, especially analysis in Chapter 3. 20 See ITU, ―Confronting the Crisis: Its Impact on the ICT Industry‖, February 2009. 21 See ITU, Op.Cit.

79

International connectivity (submarine or terrestrial fiber optic cables, satellite)

Domestic transmission (backbone)

Local access networks in rural areas

Local access networks in urban areas

2.73. In countries with open and competitive markets, local access networks in urban areas are

highly competitive, while all other segments may be less competitive. It is therefore expected that

investment plans in the first three categories might be halted or stalled, even in competitive

environments.

2.74. In general, public-private partnerships (PPP) are at risk. Many projects that have strong

social components and long-term benefits for operators have been designed under some form of

PPP approach. These projects, when analyzed in isolation, are sometimes not attractive for private

operators to undertake on their own, and so a PPP scheme is designed to make the project

attractive for commercial investors. As many of them are tendered to maximize efficiency,

winning operators tend to bid for the minimum required public participation that would make the

project worthwhile. It is under these circumstances where a steep increase in financing costs

could jeopardize project execution.

2.75. For example, projects funded by universal service funds might be affected. Universal

service funds have been set-up by many developing countries to increase access to

telecommunications services in rural and low-income areas. These funds often bid out projects,

for instance under reverse auctions, asking for operators to bid for the lowest subsidy that would

allow them to provide pre-specified services in pre-defined locations. For ongoing tenders,

projects that have recently been awarded, or projects that are starting their deployment, the

increase in the cost of financing (or lack of it) introduced by the global crisis could have deep

repercussions: it could increase the requested subsidy beyond expected levels in the case of

ongoing tenders; or it could impact delivery timelines and profitability in those cases where an

operator has already been awarded. Universal service funds in developing countries are typically

under spent, due to bureaucratic management practices, but may become more important during a

credit crunch because of the lack of availability of commercial funding sources.

2.76. In addition, projects that were previously viable without any intervention from the

Government might now require a PPP approach. Big, investment-intensive telecommunications

infrastructure projects with long-term returns might also be affected by the current crisis. For

example, a company about to install a regional submarine cable that was to connect several

countries has now announced that it will have to cut the scope of the project and exclude at least

one country from the initial plans due to the increase in financing costs. The additional overall

costs of including this country sometime in the future, after the main project is concluded, plus

the opportunity cost of having the country connected to this cable (in terms of consumer welfare

and indirect economic growth) make it worthwhile to consider a PPP scheme with the operator to

bring these countries back in the project.

A Diagnostic Approach for the Telecommunications Sector

2.77. Available indicators for the telecommunications industry might not capture the effects of

the crisis. There is a wealth of indicators that are available for the telecommunications industry in

general. However, because of their global nature, many existing databases update relatively late.

For instance, statistics from the International Telecommunications Union (ITU) for year-end 2008

will not be available until September 2009. These indicators might not capture the latest effects of

the financial crisis on individual countries.

80

2.78. A reliable diagnostic approach requires surveys and up-to-date statistical information. It

is recommended that the Assessment Team carry out an in-situ review in order to get a better

understanding of the impact of the crisis on the telecommunications sector as impacted by the

crisis. In general, it is recommended that household surveys and/or focus groups be organized to

better understand the extent of the impact of the crisis on the demand for telecommunications

services. Additionally, in-depth interviews with the following stakeholders are strongly

recommended to collect up-to-date information:

Regulatory Agency and / or sector Ministry

Universal Service Fund Administrator, if available

Main operators

Investment promotion agencies, if available

Regional organizations / sponsors (in case of international fiber optic transmission

projects)

Bankers and financiers

2.79. The Diagnostic approach has been divided in two parts: (i) a situation analysis that will

allow a better understanding of the current situation of existing projects and the effect of the

crisis; and (ii) a prioritization analysis that will allow policy makers channel available resources

among existing projects. The following table provides a quick reference on the main issues and

information required for a rapid assessment of the telecommunications sector.

Table 2.12. Telecommunication sector - Situation Analysis for the Telecommunications Sector

Evaluation Questions

For Sub-sector

Information/analysis

Situation analysis assets and service programs and projects in telecommunications

a) What is the situation in the

telecommunications public expenditure

program?

Existing commitments on telecommunications

projects that are being executed

Cost and scope of these projects, identification of

private and public portions in case of PPPs

Identification of job creation components in case of

labor intensive works

b) What are recent developments since

fiscal crisis began? Have operators / regulatory agencies observed a

decline in demand in terms of:

(i) shipments,

(ii) new installations,

(iii) churn,

(iv) traffic, and

(v) average revenue per user – ARPU?

What is the situation of private sector investment

commitments to existing projects, especially those in

rural and urban areas sponsored and partially

financed by the Government?

c) What is the status of the

implementation of programs with

Government participation?

What are the areas where telecommunications

projects may face / are facing problems?

Which are the main telecommunications projects

financed by the Government that are being postponed

due to the crisis?

Will projects that previously did not require public

financing stall or stop because of the financial crisis?

Is it worth to consider public financing?

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Evaluation Questions

For Sub-sector

Information/analysis

Identification of stage and progress of these projects

Assessment of resources required to complete these

projects

d) What are the trade-offs between

projects that are long-term priorities and

those that are more effective to cope

with the crisis?

Identify / reaffirm priority investment projects

including:

o Long term policy objectives

o Immediate impact on job creation and the local

economy

Benefit analysis

2.80. Telecommunications projects are an engine of growth. In general, ICT network

infrastructure investments (especially nationwide broadband backbone and access projects) could

be included as part of economic stimulus action plans due to several reasons, mainly:

(i) many of these projects can be initiated quickly and require a significant amount of labor

with strong multiplier effects; and

(ii) nation wide broadband investments may create a platform for overall economic growth in

the medium to long term.

2.81. Given the characteristics of the demand for ICT services described above, these projects

represent a long-term growth investment that addresses many of the short-term issues posed by

the global crisis.

2.82. Many OECD countries have already included broadband infrastructure rollout in their

stimulus plans. The organization has recently released a draft report ―The Role of communication

Infrastructure Investment in Economic Recovery‖, which provides a rationale for this kind of

investments as part of recovery plans. Moreover, at least thirteen OECD countries have already

included specific broadband initiatives as part of their economic growth strategies and / or

stimulus packages, with an estimated $140 billion investment from public and private. For

instance, the US government has included more than US$7 billion for rural broadband in the

economic stimulus package while the Australian government recently announced that it would

build a national broadband network, aiming a universal converge by the year 2012, at an

estimated cost of A$43 billion.

Table 2.13. Telecommunication sector - Benefits - INFRA specific priorities for sub-sector analysis

Priorities for infrastructure investment in the Telecommunications Sector

a) Strategic importance criteria Determining ranking of economic and social benefits

and their strategic importance for country and

telecommunications sector

- access/MDG Extent to which project completion will contribute to

relevant MDGs and / or National

Telecommunications Strategy

- job creation/employment Expenditure on labor and estimate of Jobs provided /

people hired for different types of projects

Assessment of opportunities for local labor

-impact on growth/development Assessment of growth potential from

telecommunications infrastructure investments

- impact on poverty mitigation Prioritization of telecommunications projects aimed

at rural and low income areas

Social welfare created by access to

telecommunications in rural and low income areas

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Priorities for infrastructure investment in the Telecommunications Sector b) Country priorities Country infrastructure priorities

Risks and ease of implementation

Table 2.14. Risks and ease of implementation

Ease of implementation/risks Determining implementation issues, time lag of impact,

stage of completion, easiness to redesign

- government‘s capacity to execute

projects within 3-year time frame Assessment of current mechanisms for government

spending (i.e. are Universal Service Funds in place?)

and institutional arrangements

Past Government performance on telecommunications

projects similar to those identified as at-risk

Local government capacity for implementation

- construction sector and suppliers

capacity to support implementation Local private sector capacity (industry and consultants)

and performance

Potential job creation opportunities based on previous

projects

-project quality and adaptability What stage are the projects at in terms of preparation,

implementation, or completion?

In the case of projects in preparation, what is the

timeline for execution and completion?

What are issues / risks for redesign in the case of

projects in preparation or implementation?

Project relevance to national telecommunications

strategy (if available)

6.4 INSTITUTIONAL ANALYSIS

2.83. There are two different reasons why public authorities should consider allocating

emergency resources to the telecommunications sector: (i) to rescue projects that might be at risk

due to the impact of the global financial crisis on their financing structure; and (ii) to provide their

countries with a long-term investment that will also mitigate the short-term effects of the financial

crisis.

Capacity

2.84. A specific solution for a country will depend on the relevant demand and supply

characteristics, and the strength of the governing body and policies. The process will also allow

the team to pinpoint specific institutional or capacity building bottlenecks that could hinder any

attempted solution. Different options have to be considered for viable and timely solutions. There

are many alternatives that government authorities could considered to mitigate the impact of the

financial crisis on the telecommunications sector in their country. Some of them are:

bridging the gap in financing (in terms of rates spread and / or availability of resources)

with respect to pre-crisis situations and gradually converge with market conditions;

consider the inclusion of financial guarantees and / or demand guarantees (in the form,

for instance, of capacity purchases)

technical assistance to re-evaluate projects and redefine their scope and timeline for

deployment;

redefine projects at risk to turn them into national connectivity projects;

83

consider direct public participation in investment projects that have been seriously

affected; among others

2.85. Strengthen capacity to undertake monitoring and evaluation: if an intervention is agreed,

a monitoring and evaluation framework has to be rapidly implemented. The key is to include

relevant yet readily available indicators, in order to measure the result and impact of any

intervention carried out by local authorities. These usually include:

List of areas benefited

Users / subscribers and pricing and traffic information

Overall investment, divided public and private

Jobs created or sustained

2.86. Baseline studies are recommended also to measure the overall impact of the project. It is

important to note that due to the nature of telecommunications projects, baseline studies can be

carried out simultaneously with project rollout (unless they are required to support the economic

benefits and hence be part of the evaluation of the project).

Financing

2.87. Developing countries might also consider adapting intervention mechanisms being used

by several OECD countries. While there are many variations and details still missing from the

actual approach to be followed by these countries, the main principles behind their strategies are:

Ambitious goals in terms of coverage (many of them aiming at near-national coverage of

broadband networks) and timing

Government to provide partial or total financing (including loans and guarantees)

Private sector participation considered key, as investor and as operator of the infrastructure

Market-based competitive selection of private party to provide the infrastructure

2.88. Leverage existing mechanisms for fast track financing. Finally, design of the actual

solution will have to consider existing mechanisms that can provide an easy and fast way to

channel the required resources. After the economic evaluation proves the intervention to be

socially desirable, a fast implementation arrangement has to be designed. It is recommended that

it is build over existing institutional arrangements as they would require fewer resources for

implementation and would be readily available for rapid execution.

Economic evaluation

2.89. An economic evaluation of the intervention is worth carrying out. All interventions to be

considered should undergo an economic analysis to determine whether it is worth doing or not.

This analysis should be forward-looking and consider the costs of re-activating / continuing a

project against the potential benefits of the project, without including previously committed

resources (―sunk-costs‖), but including the opportunity cost of delaying or postponing the project.

As thorough as this analysis ought to be, time will be of the essence and a rapid methodology may

have to be developed to streamline this kind of evaluations.

84

7. SYNTHESIS: RANKING COUNTRY INFRASTRUCTURE PRIORITIES

2.90. Through the Second component assessment process a country‘s infrastructure, investment

opportunities and technical assistance needs for priority investments are ranked: first, a strategic

ranking of priority investment opportunities according to its Benefits and Ease of Implementation

analysis; and secondly, an institutional and policy ranking reflects its potential mid-term impact

and Ease of Execution as well.

7.1 RANKING THE PRIORITY INVESTMENT OPPORTUNITIES

2.91. Identifying the priority investment opportunities in the context of INFRA is only one step

in the process. Projects should be prioritized by considerations related to financial resources and

also by the focus needed in an emergency situation where the readiness to respond is not

constrained by limitations related to human resources and institutional capacity. With the INFRA

Diagnostic Tools practitioners are asked to identify the Benefits associated with any given set of

projects, in the context of INFRA Initiative‘s criteria but the tool remains open to accommodate

other country specific criteria.

2.92. In a double-entry evaluation matrix (see Table 2.15 below) the Benefits associated with

any given project should help define its strategic importance, or one of the ways to position the

project under consideration (horizontal axis). The other measurement criteria are defined under

Implementation Ease (vertical axis), or a weighting of the risks and key considerations affecting

the potential implementation any given project. As identified in the sector discussion above ,

some of the parameters to ease implementation or provide constraints could include but not

limited to the institutional execution capacity that might be constrained by the crisis; policy

bottlenecks; input risks such as limitations affecting suppliers or volatility in a wide sense; the

degree of flexibility in project design that might ease changes in course of action as we go; degree

of advancement of the project as active within the portfolio of any IFI or major donor, etc.

7.2 RANKING OF PRIORITY INSTITUTIONAL AND POLICY OPPORTUNITIES

2.93. The current crisis might pose opportunities for institutional and policy reform dimensions

that should be also taken into consideration in line with INFRA‘s technical assistance support.

Defining institutional and policy opportunities through the assessment process might allow some

client countries to reform essential aspects that could boost economic recovery and/or turn such

growth into more sustainable once the economy determines a steadier pace. Consequently,

priority projects should be ranked as well to help us understand their economic potential and

implementability.

2.94. The Assessment process maps out a country‘s priority infrastructure projects. The

ranking to be executed in the Strategic Country Review module will have introduced by the

Assessment signaling the fiscal space status of any given country and the importance of

infrastructure needs, providing a relative positioning compared with peer countries. As illustrated

in Table B below, the two rankings to be executed at the end of the Infrastructure Portfolio

Assessment Review should allow us to prioritize projects according to its strategic importance

that can be measured and implemented within a 3-5 year timeframe: weighing the likelihood of a

successful execution and its potential benefits; and understanding the potential impact from a

policy perspective.

85

Table 2.15. First Ranking -- Country:

Strategic ranking of all infrastructure

priority projects

Strategic Importance /

Benefits

Low

Mediu

m High

Imp

lem

enta

tio

n

Ea

se

(Wei

gh

tin

g o

f th

e ri

sks

and e

ase

of

imp

lem

enta

tio

n)

Lo

w

Mo

der

ate

Hig

h

Table 2.16. Second Ranking -- Country:

Ranking of policy opportunities

Benefits

(Time span should be limited to 3-5

years)

Low Medium High

Ex

ecu

tio

n E

ase

(Wei

gh

tin

g o

f th

e ri

sks

and e

ase

of

imp

lem

enta

tio

n)

Lo

w

Mo

der

ate

Hig

h

86

Annex 2.1 Templates for Financial Analysis of Project Portfolio

Table 2.1.1. Projects Under Operations: Investment needs and expected funding shortfall

Projects Under

Operation

/Project Type

Total Cost

[US$

Millions]

Funding Needs

[US$ Millions]

Identified Funding Sources

[US$ Millions]

Expected Funding Shortfall

[US$ Millions]/Issues

Status of Investment

(if expansion or additions required)

2009 2010 2011 Debt Equity Govt.

finance

% budget (works)

disbursed

funds to be disbursed

within 3-years

approx. cost of

termination

1.

2.

3.

Total

Table 2.1.2. Projects under Construction: Investment needs and expected funding shortfall

Projects Under

Construction

/Project Type

Total Cost

[US$

Millions]

Expected

Completion Date

Funding Needs

[US$ Millions]

Identified Funding Sources

[US$ Millions]

Expected Funding

Shortfall [US$ Millions]/Issues

Status of Investment

2009 2010 2011 Debt Equity Govt.

finance

% budget

(works)

disbursed

funds to be

disbursed within

3-years

approx. cost of

termination

1.

2.

3.

Total

Table 2.1.3. Projects under Preparation & New Projects: Investment needs and expected funding shortfall

New Projects/Project

Type Total Cost

[US$

Millions]

Expected Completion

Date

Funding Needs

[US$ Millions]

Identified Funding Sources

[US$ Millions]

Expected Funding Shortfall [US$

Millions]/Issues

2009 2010 2011 Debt Equity Govt. finance

1.

2.

3.

Total