Infrastructure Reforms in ECA and Economic Performance Antonio Estache October, 2005

Overview Background What’s the efficiency effect of reforms in ECA? Some basic figures on the sector in ECA How important is the sector for economic productivity? How widespread were reforms in the region? What’s the efficiency effect of reforms in ECA? Some new econometric results …don’t ignore the short to medium term trade-offs Concluding comments

Some numbers on infrastructure in ECA 1. How much is needed to run INF? (% of GDP) 2005 2010 Investment 3% 2.6% O&M 4% 3.8% Total 7% 6.4% Bulk Electricity (50%), Telecoms (20-25%), Roads (25-20%) 2. Employment and value added in ECA’s utilities? In 2000: Employment: 1.5 - 3% of total Value Added: 3-5% of total

How important is the sector for growth convergence and productivity? Strong evidence around the world of role of infrastructure Output elasticity to infrastructure investment is much higher for LDCs than developed countries Canning (1999) shows that roads+rail and electiricity generation Have roughly the same marginal productivity as total physical capital, but telecoms and transport routes in higher income countries have a higher mpK Rates of return on Bank projects are in 15-30% range (except in water, where they are lower…) Very few quantitative assessments in ECA Education and health tend to be the focus… A few studies highlight the role of transport as an integrator and catalyzer of growth in peripheral regions… (Brown (2001), Cappelen et al. 2003, Boldrin and Canava (2003)

How much reform in ECA? It depends on the sector… It depends on the reform… It depends on what we measure in some sectors (water and transport) we can’t say much simply because things are not being measured…

Countries with an independent regulator (% of sample in 2004) Electricity Water ICT AFR 34% 12% 77% EAP 36% 25% 27% ECA 78% 20% 57% LAC 73% 50% 85% MNA 7% 0% SAR 100% Developed countries 92% 56%

Countries with Private Participation (% of sample in 2004) Elec. Gen. Elec. Dist. Water ICT AFR 39% 28% 20% 51% EAP 67% 64% 61% ECA 41% 48% 62% 70% LAC 68% 74% MNA 7% 6% 18% 33% SAR 38% 13% 50% Developed countries 43% 80% 84%

How much do reforms matter to the sector performance? NOTE: Don’t trust simple statistical correlations… look at some econometric results Efficiency (measured by TFP or other economic concepts): Very little work on ECA (1 paper on Ukraine water…) Strong evidence of efficiency gains in energy and transport, less obvious in water (range vary across regions and sectors) Other measures available Access Affordability Average prices Price structures Quality

Summing up research 2 main reforms: PPI and IRA Somewhat unexpectedly, both seem to have tended to reduce access & increase prices Neither had a significant effect on quality Reforms are effective in offsetting impact of corruption Technological progress mattered more than these 2 reforms Probably other reforms (commercialization, restructuring, regulatory design, …) mattered more

Concluding comments When should think about this? Overall When you conduct the Cost/Benefit Analysis of reform options Trade-offs matter!!!! …but also when When you assess regional policies and try to get a sense of the relative importance of sectors and their reform needs Overall Efficiency payoffs of more and better infrastructure are relatively obvious…but Strong impression that there is a lot we still need to look into