Connecting East Asia: A New Framework for Infrastructure Tokyo Launch March 16, 2005

What we’ll cover The Infrastructure Challenge –With a focus on the funding story The New Framework –Inclusive development –Coordination –Accountability and risk management The Way Forward –12 key policy messages

The Infrastructure Challenge Five stories Economic Spatial and demographic Environmental Political Funding –The focus of today’s presentation

East Asia to require more than US$200 billion per annum for infrastructure

Who pays for infrastructure?

… but sentiment is positive The private sector bubble has burst… Investment in Projects with Private Participation Attitudes towards infrastructure investment levels

Many governments face budget constraints, post- stabilization… The case of Indonesia: Total nominal infrastructure expenditureCentral government development spending

Role of official financing varies by country

Chapter 2: Inclusive Development Accountability and Risk Management Coordination Inclusive Development

Income and equality dimension –Substantial decline in income poverty Quality of life –Progress on MDGs Capabilities and Participation The impact of infrastructure on poverty Three dimensions of poverty

How does infrastructure promote inclusive development?

But the impacts of infrastructure vary… by kind of infrastructure depending on other policies depending on the nature of poverty … and balances must be struck between growth inducing and poverty reducing infrastructure between poor and non-poor

Inclusive development on the national scale Infrastructure and regional integration Regional coordination – the case of Laos Infrastructure and logistics Inclusive development on the regional scale The case of Vietnam –Large scale – Hanoi-Hai Phong corridor –Small scale

Chapter 3: Coordination Accountability and Risk Management Coordination Inclusive Development

Chapter 3: Coordination The “big picture”: The state ’ s ability to generate strategic vision and turn that vision into reality

The “flying geese” theory of infrastructure The advanced economy model of coordination: The “ high-flying ” geese – Japan, Hong Kong (China), Taiwan (China), Singapore, South Korea, Malaysia Senior policy makers, politicians and strategic vision Infrastructure driven by strong planning agencies High growth helped maintain policy consensus Investment anticipated demand; when following demand, responses were rapid and strategic Much of the inner-workings hidden from public view But under increasing stress from the 1980s

Coordination challenges for the “geese trying to catch up” 1. Getting the infrastructure expenditure allocation right Coordinating investment and financing functions Coordinating fiscal space 2. Coordination through decentralized agencies Horizontal coordination: Managing spillovers, Excessive fragmentation, and “Destructive Competition” Vertical coordination Developing the missing middle 3. The special challenge of urban management

State of play in four East Asian developing countries The Philippines Long term vision undermined in a fluid and fragmented political system Indonesia An incomplete progression from autocratic technocracy to greater participation and decentralization

State of play in four East Asian developing countries China Decentralization + centralized strategic planning and long term vision Thailand Shifts in relative power in the definition of strategic direction, but direction nonetheless

Chapter 4: Accountability and Risk Management Accountability and Risk Management Coordination Inclusive Development

Chapter 4: Accountability and Risk Management Accountability a set of institutional tools which reward organizations that consistently perform well for their stakeholders (and penalize those that perform badly) Risk Management a set of institutional tools which endeavor to make risks and rewards commensurate with each other, in order to drive good performance …and how they’re related

When accountability and risk management fail: Poor performance Financial crisis Corruption

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

Managing fiscal support Subsidies – Important for a number of reasons – But blur accountability and bring risk – Accountability is a challenge Contingent liabilities – Who bears risk is not always easy to tell

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

The Way Forward Study provides a way of thinking about infrastructure issues in different situations –Not a blueprint or toolkit Policy messages reflect concerns raised during our consultations –To promote the role of infrastructure in underpinning growth and poverty reduction

Messages on Coordination 1.The center matters – infrastructure demands strong planning and coordination functions 2.Decentralization is important – but raises host of coordination challenges 3.Fiscal space for infrastructure is critical

Messages on Accountability and Risk Management 4.Subsidy is not a dirty word – subsidies can be important, but are always risky, and should be handled with care 5.Competition is hard to achieve in infrastructure – but it’s the best way to bring accountability 6.Regulatory independence matters more in the long run than the short run

Messages on Accountability and Risk Management (2) 7.Civil society has a key role to play in ensuring accountability in service provision 8.Infrastructure has to clean up its act – addressing corruption is a priority

Funding Messages 9.The private sector will come back – if the right policies are in place 10.Public sector reform matters – but be realistic

Funding Messages (2) 11. Local capital markets matter – but are not a panacea 12. Infrastructure needs reliable and responsive development partners