Rita Nangia Director Asian Development Bank Manila, The Philippines

1. Ensuring Accountability in Infrastructure Investments 28 February 2006Kuala Lumpur Rita Nangia Director Asian Development Bank Manila, The Philippines

2. Agenda • Asian Infrastructure • Status • Challenges • New Framework • Inclusive Development • Coordination • Accountability and Risk Management • Way Forward

3. Major Trends • Asia is growing rapidly Source: World Development Indicators 2005

4. Major Trends • Poverty is declining in Asia • ($ 1-day poverty as % of total population 2003) • % Source: Asian Development Bank

5. Asia’s Challenges ……. • Asia is urbanizing rapidly • (urban population as % of total population 2000) Source: Connecting East Asia: A New Framework for Infrastructure

6. Asia’s Challenges ……. • Environmental costs are growing • 2000 CO2 emissions (metric tons per capita) Source: World Development Indicators 2005

7. Asia’s Challenges ……. • Environmental costs • 2000 CO2 emissions (kg per US$ of GDP) Source: World Development Indicators 2005

8. Asia’s Challenges ……. • Access to Infrastructure varies... • ...Electricity Source: World Development Indicators 2004 & World Energy Outlook 2002

9. Challenges and Opportunities • Access to Infrastructure varies... • kwh ...Electricity use per capita Source: Key Energy Statistics, 2005, International Energy Agency & World Development Indicators Online

10. Challenges and Opportunities • Access to Infrastructure varies... • ...Telephone Source: World Development Indicators 2004 & Connecting East Asia, 2005

11. Quality of Infrastructure varies… Overall Infrastructure Source: The Global Competitiveness Report 2004-2005

12. Overall Quality of Infrastructure varies… Air Transport Source: The Global Competitiveness Report 2004-2005

13. Overall Quality of Infrastructure varies… Ports Source: The Global Competitiveness Report 2004-2005

14. Overall Quality of Infrastructure varies… Railroads Source: The Global Competitiveness Report 2004-2005

15. Overall Quality of Infrastructure varies… Electricity Source: The Global Competitiveness Report 2004-2005

16. Overall Quality of Infrastructure varies… Telephones Source: The Global Competitiveness Report 2004-2005

17. Average savings and investment (% of GDP 1990-2004) Source: World Development indicators 2005

18. Average savings and investment (% of GDP 1990-2004) Source: World Development indicators 2005

19. Infrastructure requires funding globally Source: World Bank

20. East Asia alone requires more than US$200 billion per annum for infrastructure

21. Attitudes towards infrastructure investment levels The private sector bubble has burst… …but sentiment is positive Investment in Projects with Private Participation Source: Connecting East Asia: A New Framework for Infrastructure

22. Water and SAR Sanitation MNA Transport LCR ECA Telecoms EAP Energy AFR 0 100 200 300 400 500 0 100 200 300 400 500 $ billion $ billion Private finance is selective Sectors Regions Infrastructure Projects with Private Sector Commitments: 1990-2003Source: PPI Database

23. Role of official financing varies by country Aid dependency in selected countries, East Asia, 2003 Source: Connecting East Asia: A New Framework for Infrastructure

24. Who pays for infrastructure?

25. Infrastructure USERS growth Who pays for infrastructure? In the first instance, users: In a virtuous cycle, of growth and infrastructure funds itself

26. SUBSIDIES Infrastructure TAX PAYERS USERS growth Who pays for infrastructure? In the second instance, users are subsidized by tax payers…

27. All government expenditure is a claim on tax payments – now, or in the future Infrastructure STATE BUDGET TAX PAYERS USERS PROVIDERS growth Infrastructure TAX PAYERS USERS growth Who pays for infrastructure? Two institutional mechanisms channel the flows - the state budget, and service providers Services may be provided by the government, a state entity, or the private sector

28. FINANCIERS STATE BUDGET PROVIDERS Infrastructure TAX PAYERS USERS growth Who pays for infrastructure? Financiers have a key facilitating role… Financing makes it possible to mobilize the current value of future tax payments… … and flattens the cost profile for users over time

29. FINANCIERS STATE BUDGET PROVIDERS Infrastructure FOREIGN TAX PAYERS TAX PAYERS USERS growth Who pays for infrastructure? Financiers have a key facilitating role… This is the case when finance is concessional, or takes the form of grants

30. Who pays for infrastructure? The public and private sectors are complementary

31. Coordination Inclusive Development Accountability and Risk Management New Framework • Three Broad Approaches to Poverty • Income or expenditure • MDG • Human Capabilities Inclusive development is about improving the incomes and lives of all members of the society, especially poor

32. Inclusive Infrastructure

33. Coordination challenges for developing countries • 1. Getting infrastructure spending right • Coordinating investment and financing functions • Coordinating fiscal space • 2. Coordinating through decentralized agencies • Horizontal coordination • Vertical coordination • Developing the missing middle • 3. The special challenge of urban management

34. Accountability and risk management …and how they’re related • Accountability • rewarding organizations that consistently perform well for their stakeholders (and penalizing those that perform badly) • Risk management • making risks and rewards commensurate with each other, in order to drive good performance

35. Mechanisms to strengthen accountability • Community participation • From project selection to ongoing operations • But likely to be limited to the last mile • Competition • Most effective way of bringing accountability • But East Asia not in the forefront, for a number of reasons • Regulation • The problem of holding regulators accountable • Independence is evolutionary

36. Does ownership matter for accountability? • A poorly-regulated private monopoly performs as badly as a poorly-regulated public monopoly • But the private sector responds better than the public sector to good regulation or competition

37. THE WAY FORWARD • Study provides a way of thinking about infrastructure issues in different situations • Not a blueprint or toolkit • Policy messages reflect concerns raised during our consultations • To improve infrastructure development and service delivery

38. Policy Messages • The center matters – infrastructure demands strong planning and coordination functions • Decentralization is important – but raises host of coordination challenges • Subsidy is not a dirty word – subsidies can be important, but are always risky, and should be handled with care • Competition is hard to achieve in infrastructure – but it’s the best way to bring accountability • Regulatory independence matters more in the long run than the short run • Civil society has a key role to play in ensuring accountability in service provision • Infrastructure has to clean up its act – addressing corruption is a priority

39. Funding Messages • Fiscal space for infrastructure is critical • The private sector will come back – if the right policies are in place • Public sector reform matters – but be realistic • Local capital markets matter – but are not a panacea • Infrastructure needs reliable and responsive development partners

40. Service commissions • Regulators • Supreme audit body • Judiciary • Ombudsman • Legislature Final Investment Choices Process Holding Executive Accountable ……. Electorates • Interest Groups • Civil Society Organizations • Think tanks • Political Parties • Media • External Groups • Donors • CPA