Infrastructure: Achievements, Challenges, And Opportunities

Figure 1.2 Per capita availability of major infrastructure is closely related to income levels.Telephone main linesper thousand personsPercentage of householdswith wandaBangladeshBurundi0.5700 1,0003,000 5,000 8,000GDP per capita (PPP dollars)400Kilometers of paved roadsper million personsZimbabwe.Zambia2504007001,0003,000 5,000 8,000GDP per capita (PPP centage of populationwith access to safe water3,0001,000El SalvadorBoliviaIndonesiaCongoChad250Guatem. %exicoMozambique.Indonesia.Malawi'10Costa Rica VenccuelaPeru ,sHondurasMalawiCongoS5.SBolivia.IHondurasZambia .SNigeria.50Dominican RepublicPeruColombiaBoliviaS20Indonesia1 Sudan100ChadSBangladeshBurkina Faso2052504007001,0003,000 5,000 8,000GDP per capita (PPP dollars)Middle East and North AfricaLatin America and the CaribbeanEast Asia and Pacific2504005,000 8,000GDP per capita (PPP dollars)7001,0003,000Sub-Saharan AfricaSouth AsiaEurope and Central AsiaNote: Axes are logarithmic; infrastructure quantities and GDP are for 1990; purchasing power parity (PPP) dollars are valuedin Summers and Heston 1985 international prices.Source: WDI table 32; Summers and Heston 1991.ing appropriate levels, or sectoral allocations, for in-differences in the efficiency of investment acrossfrastructure investment. Other evidence confirmsthat investment in infrastructure alone does notcountries and over time. For example, a study of theeconomic returns to individual World Bank projectsguarantee growth. Many studies reveal muchsmaller returns for infrastructure than those suggested in Box 1 .1closer, in fact, to the return onshows that, when overall economic policy conditions are poor, the returns to infrastructure investment decline. Returns are lower by 50 percent orprivate investments. These disparities may be due tomore in countries with restrictive trade policies than16

in countries where conditions are more favorable.Infrastructure spending cannot, therefore, overcomeTable 1.2 Average economic rates of returnon World Banksupported projects, 1974-92a weak climate for economic activity. Nearly twenty-(percent)five years ago, the Brookings Transport ResearchProject evaluated the impact of transport projects inseveral developing countries and concluded similarly that, although the investments generally hadreasonable rates of return, success depended largelyon economic policy.Another approach to assessing the economic returns from infrastructure investment is to examinethe rates of return in a large sample of completedWorld Bank projects. The average economic returnon infrastructure projects, reestimated after loan disbursement (completion of project construction), hasbeen 16 percent over the past decadejust abovethe World Bank project average of 15 percent (Table1.2). Returns have been lowest (and declining) for ir-rigation and drainage, airports (for a very smallsample), railways, power, water supply, and sewerage. Why should this be so, given the expected benefits of such investments in developing countries?1974-821983-92Irrigation and 1781223968Infrastructure projects1816All Bank operations1715SectorUrban developmentWater and sanitationaWater supply aSewerageaNot available.a. Rates are financial, not economic, rates of return.Source: World Bank data.Some of the causes relate to implementationproblems (discussed below under "The record ofperformance") and others to project identificationand design. A common pattern discovered in proj-ments of other resources must be present as well.The growth impact of infrastructure investmentsalso depends on the timing and location of addi-ect completion reviews of water, railway, and powertions to capacity, and on the existing imbalance be-projects is the tendency at the time of appraisal tooverestimate the rate of growth in demand for newproduction capacity and, therefore, of revenues. Fortween supply and demand. Because much infra-the power projects in the sample, demand was overestimated by 20 percent on average over a ten-yearoperating period. In water projects, overestimationhigh returns. Box 1.2 illustrates the repercussions inof rates of new connections and per capita consumption also averaged about 20 percent. In thecase of railways, until recent years projects often as-sumed recovery in demand even where railwayswere continually losing traffic to roads offering bet-ter service. In twenty-nine of thirty-one cases,freight traffic failed to reach its projected level, andin one-third, traffic actually declined.One important explanation for the misjudgmentsduring appraisal is inadequate procedures for assessing demand (including the effects of tariff increases). Oversizing and inappropriate design of investments then occur, resulting in financial burdenson the project entities concerned. Although Bankprojects may not be entirely representative, they aresubject to more careful evaluation than many infrastructure investments in developing countries andso may have achieved better performance than average public investments in these sectors.Infrastructure is a necessary, although not suffi-cient, precondition for growthadequate comple-structure consists of networks, relieving bottlenecksat certain points of the system can produce veryChina's economy from critical constraints in thetransport of coal needed for power generation.Adequate quantity and reliability of infrastruc-ture are key factors in the ability of countries tocompete in international trade, even in traditionalcommodities. In part because of infrastructure problems, shipping costs from Africa to Europe are 30percent higher for plywood (and 70 percent higherfor tuna) than those from Asia to Europe. Thesecosts have to be borne by exporters.The competition for new export markets is espe-cially dependent on high-quality infrastructure.During the past two decades, increased globalization of world trade has arisen not only from the lib-eralization of trade policies in many countries butalso from major advances in communications, transport, and storage technologies. These advances center on the management of logistics (the combinationof purchasing, production, and marketing functions) to achieve cost savings in inventory andworking capital and to respond more rapidly to customer demand. About two-thirds of production andsales in the OECD countries are processed directly17

Box 1.2 The importance of infrastructure to economic development: an examplefrom ChinaThe fact that infrastructure provides critical support tothe growth of an economy can be clearly seen when bottlenecks arise. One of the most striking examples is thatof China's intercity transport system, with its links to thesupply of raw materials, coal, and electricity.The coverage of China's intercity transport networksis one of the thinnest in the world: the total route lengthture, as manifested by the growth of bottlenecks in therailway network, the severe rationing of transport capacity on railway lines, and the poor quality of service experienced by shippers and passengers.Transport shortages have adversely affected the sup-China's transport investments amounted to only 1.3 percent of GNP annually during 1981-90, a period of rapidgrowth in transport demand.Since the onset of China's open door policy in 1979,economic growth averaging 9 percent a year has resultedin an unprecedented expansion in intercity trafficwithgrowth averaging 8 percent a year for freight and 12 percent a year for passengers. This traffic growth has im-ply of coal in particular. Coal is the source of some 73percent of China's commercial energy and representsabout 43 percent of the total tonnage of freight handledby the railways. The shortage of coal has in turn adversely affected supplies of electricity, about 76 percentof which is generated by thermal plants. In 1989, Chinawas experiencing a shortfall in available power of about20 percent of industrial electricity requirements. Centraland local authorities established quotas for allocatingelectricity and rationed new connections, but power cutshave nevertheless been frequent.A conservative estimate is that the annual economiccosts of not having adequate transport infrastructure inChina during the past several years amount to about 1posed tremendous strains on the transport infrastruc-percent of China's GNP.per capita or per unit of arable landfor highways orrailwaysis similar to, or lower than, that in Brazil,India, and Russia. This has resulted mainly from chronicunderinvestment in China's transport infrastructure.to order, and "just-in-time" delivery of products hasbecome the norm in many sectors. Because about 60percent of their exports are directed to OECD mar-kets, developing countries must meet these standards. Virtually all the improved practices designedto reduce logistics costs, including those in transport, have been based on information technologiesusing telecommunications infrastructure. Cost reductions and the increased speed of freight movements over the past few decades have also been increasingly based on multimodal transport involvingcontainerization, which requires intensive coordina-tion by shippers across rail, port, air, and roadfreight modes.For developing countries wishing to compete inglobal markets, or to participate in "global sourcing" (the linking of businesses in several countriesproducing different components for a final product), not just any kind of transport and telecommunications infrastructure will do. Manufacturing as-adapt to containerization and are subject to regulatory delays, freight transport to the United States isone-third more expensive from Indian ports thanfrom Bangkok or Singapore.The availability of infrastructure services valuedby users is also critical for the modernization anddiversification of production. The growth of elec-tronic data exchange involving telecommunicationsinformatics--is central to efficient operations in manufacturing, services, the financial sector,arid government. Availability of power allows substantial improvements in workers' productivity (forexample, in the transition from foot-powered toelectrically powered sewing), while internationaltelecommunications, facsimile services, and rapidexports from Kenya are examples of the diversifica-transport of goods permit the artisan to produce toorder for a computerized global market. A higherquality of water and sanitation is required to shiftfrom production of raw agricultural commodities toprocessed foods. Surveys of prospective foreigninvestors over a wide range of countries show thatthe quality of infrastructure is an important factortion of trade permitted by appropriate logisticalin ranking potential sites for location of directsupport and multimodal facilities. During the 1980s,investment.The nature of an economy's infrastructure is cen-sembly operations in Mexico and horticulturalthe proportion of garments, shoes, and handicraftexports shipped by air from northern India quintu-pled because land and ocean transport systemswere no longer able to meet demanding delivery requirements. Because India's ports have been slow to18tral to its ability to respond to changes in demandand prices or to take advantage of other resources.The formerly socialist countries (particularly thosein Central and Eastern Europe and the former So-

viet Union) provide a clear illustration of how thepatterns of supply and demand imposed by centralplanning affect infrastructure development. Thesecountries showed an extremely high transport andenergy intensity (owing to noneconomic decisionson location of production units, underpricing andinefficient use of energy, and an emphasis on heavyindustry and raw materials production). They alsoshowed a greater reliance on rail than on road transport than did countries with similar conditions, andon long- over short-haul public transport facilities.With market reforms, the location and compositionof demand will alter, giving a greater role in theseThrowing infrastructureoverboardBox 1.3When times are hard, capital spending on infrastructure is the first item to go, and operations andmaintenance are often close behind. Despite thelong-term economic costs of slashing infrastructurespending, governments find it less politically costlythan reducing public employment or wages. Studies of fiscal adjustment and expenditure reductionIspending often taking the biggest reduction. Moreover, within current expenditures, nonwage expen-economies to light industry, to services such asdomestic distribution, and to the diversification ofexternal trade. Small enterprises and consumerswill become a more important source of demand.These trends require corresponding modificationsin infrastructure, with greater attention to the quality and variety of services.Public spending on infrastructure constructionand maintenance can be a valuable policy tool toprovide economic stimulus during recessions. Aslong as quality and cost-effectiveness are not compromised, labor-based approaches to infrastructuredevelopment can also be an important instrumentfor employment-intensive economic growth. In deciding on public spending for infrastructure, policy-find that capital expenditures are cut more thancurrent expenditures, with infrastructure capitalditures (which include operations and mainte-Inance) are cut by more than the wage bill.The decline in investment, at least in the initialphases, is not altogether undesirable as it often induces a rationalization and strengthening of countries' project portfolios. Cutbacks in operations andmaintenance expenditure, however, are worrisome.A World Bank review of countries' adjustment experience found that reductions in nonwage operations and maintenance and a marked deteriorationin infrastructure services were common. For instance, in Costa Rica during the 1980s current non-wage expenditures (principally operations andmaintenance) fell from 1.6 percent of GDP to a mere0.3 percent, and the share of the national and cantonal road network in poor to very poor conditionrose to 70 percent.makers have frequently not looked sufficientlybeyond the near-term impacts, and many governments have been attracted to the political benefits ofthe highly visible structures created. When publicspending on infrastructure is not wisely deployed, itcan crowd out more productive investment in othersectors. At the same time, short-term fiscal constraints have often led to disproportionate cutbacksin infrastructure, thereby sacrificing an importantimpetus to renewed growth following adjustment(Box 1.3).Sometimes the least-cost approach to improvingthe supply of infrastructure services would requireinterregional (cross-country) integration of infrastructure networks, for example, power grids. Suchan agreement would call for not only coordinationof investments but, equally important, cooperationto maintain efficient policies governing the trade inservices. Most countries, however, resist dependingon others for a supply of services deemed to be ofstrategic importance; therefore, importing power tomeet the base load demand is less acceptable thanacquiring only peak load from abroad. Internationalagreements have been more common for cross-bor-der transport, which is a particularly importantissue for landlocked countries. Often, the quality oftransport infrastructure on an international corridoris less of a problem than are institutional constraints. For example, one-third of the time requiredto ship freight between landlocked Mali and neigh-boring ports in Lomé (Togo) and Abidjan (Côted'Ivoire) is due to delays in customs clearance. Removing inefficient regulation of road transport andprivatizing transport operations, and deregulatingpower generation and distribution (as discussed inlater chapters), may facilitate some international exchange of services in these sectors.To summarize, infrastructure investment is notsufficient on its own to generate sustained increasesin economic growth. The demand for infrastructureservices is itself sensitive to economic growth,which is notoriously difficult to predict. The economic impact of infrastructure investment variesnot only by sector but also by its design, location,and timeliness. The effectiveness of infrastructureinvestmentwhether it provides the kind of services valued by users (responding to "effective demand")depends on characteristics such as quality19

and reliability, as well as on quantity. Matching supply to what is demanded is essential. Finally, the efficiency with which infrastructure services are provided is also a key to realizing potential returns.Links to povertyboth an increase in the incomes of rural workers anda reduction in food prices for the urban poor can beachieved. The green revolution (with irrigationplaying a central role) demonstrated that the wagesof, and demand for, low-skilled agricultural laborersrise in step with more intensive cultivation and increased yields. Over twenty years, one closely ob-Infrastructure is important for ensuring thatgrowth is consistent with poverty reduction, a topiccovered extensively in World Development Report1990: Poverty. Access to at least minimal infrastructure services is one of the essential criteria for defining welfare. To a great extent, the poor can be identified as those who are unable to consume a basicquantity of clean water and who are subject to unsanitary surroundings, with extremely limited mobility or communications beyond their immediatesettlement. As a result they have more health prob-served Indian village saw yields increase almostlems and fewer employment opportunities. Theburgeoning squatter communities surroundingmost cities in developing countries typically lackservices, especially in cities. Where the poor are con-formal infrastructure facilities, a condition arisingfrom their nonpermanence of tenure. In India theproportion of the urban population living in slumareas grew during 1981-91, while the share of thepopulation living in poverty (estimated using traditional poverty measures based on income and foodconsumption) declined. The lack of access to infrastructure is a real welfare issue.Different infrastructure sectors have different effects on improving the quality of life and reducingpovert

Infrastructure: achievements, challenges, and opportunities Infrastructure servicesincluding power, trans-port, telecommunications, provision of water and sanitation, and safe disposal of wastesare central to the activities of households and to eco