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

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

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

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

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

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

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

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

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

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

22. Private finance is selective 0100200300400500 Energy Telecoms Transport Water and Sanitation $ billion 0100200300400500 AFR EAP ECA LCR MNA SAR $ billion Infrastructure Projects with Private Sector Commitments: 1990-2003 Source: PPI Database SectorsRegions

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. In the first instance, users: Infrastructure growth USERS In a virtuous cycle, of growth and infrastructure funds itself

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

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

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

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

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

31. New Framework Accountability and Risk Management Coordination Inclusive Development 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 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 …and how they’re related

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 Interest Groups Civil Society Organizations Think tanks Political Parties Media External Groups Donors CPA Holding Executive Accountable ……. Electorates