Then, the initial and final year changes because of data availability. Only countries with at least two surveys since are considered. Despite significantly faster growth, electricity generation capacity in LIDCs—even in frontier markets—remains considerably lower than in emerging markets Furthermore, electricity supply is also less reliable see Table 1. Road density also lags behind 0. Mobile phone penetration made huge strides from near zero in to 72 per people in , but was still significantly lower than per people in EMs.
Survey-based measures about the quality of national infrastructure compiled by the World Economic Forum Schwab, show a noticeable improvement in perceived infrastructure quality in LIDCs in the second half of the , but no progress for the median LIDCs since , leaving a large gap with advanced and emerging market economies Figure 2. Figure 2. Perceptions of Infrastructure Quality Index, It is generally recognised, however, that the public sector provides the bulk of infrastructure in these countries.
In addition, as we show in Section 4. Thus, we start our analysis by examining trends in public investment. Median public investment in LIDCs rose significantly from 5. Following a temporary slowdown in , public investment picked up again and stood at 6. Moreover, a large gap still remains compared to emerging and advanced economies.
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In the pre-crisis period, the scaling-up of public investment was common to most countries, which benefited from a favourable global environment, rising commodity prices, and debt relief under the HIPC and MDRI initiatives, among other factors. In particular, commodity exporters expanded public investment more than other countries as they benefited from a large terms-of-trade improvement. These trends diverged in recent years, with public investment falling in commodity exporters as a decline in commodity prices led to fiscal pressures, while diversified exporters recorded a further small increase from the pre-GFC peak Figure 4.
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In every category, one can find examples of countries that achieved or maintained high public investment levels and examples of those that failed to do so. Public investment rose steadily in several commodity exporters, including Bolivia, Mongolia, Mozambique, Niger, and Tajikistan, until a drop in following a negative commodity price shock. However, in some other countries, the ratio of public investment to GDP has declined significantly over time, reflecting, for example, intensified fragility in Eritrea and Yemen, and fiscal pressures in Nigeria and Uzbekistan.
A few countries have not experienced a pronounced scaling-up, but have maintained fairly high levels of public investment throughout the past 15 years. On the other hand, in several countries, public investment has been quite low over the whole period e. Figure 6. Over the last decade and a half, there has been a clear correlation with correlation coefficient of 0. However, the former was greater than the latter in most countries, especially in most recent years. Median public saving declined sharply during the GFC, and, after a brief rebound, started slipping again, with the latest slide reflecting lower commodity prices.
As a result, median public saving has dropped 2. Figure 7. Fiscal vulnerabilities have increased recently, particularly among commodity exporters. Budget deficits have gone up, interest rates have risen, and local currency depreciation has increased the burden of external debt. For instance, in Ethiopia issued a USD one billion Eurobond to finance imports related to export-oriented projects such as investment in the power transmission infrastructure, sugar factories, and the development of industrial parks IMF, Thirty-two country teams were able to provide information on public investment in economic infrastructure over the last five years, typically in consultation with the authorities.
This information offers valuable insights, even though the results should be taken with a grain of salt as quality and comparability of data cannot be assured. Looking across country groupings, frontier market economies had somewhat higher levels of investment, facilitated by easier access to financing and stronger economic prospects. Investment levels in fragile states were typically lower than average, likely reflecting limited fiscal space and weak institutional capacity Collier and Cust, Figure 8. Water and sanitation account for 22 per cent, the energy sector for 19 per cent and ICT for the residual 6 per cent.
The relatively low share of energy is somewhat troubling, since access to electricity is frequently identified as a key constraint to development in LIDCs see Payne, , for a review of the literature, and Di Bella and Grigoli, , for an application to Haiti and Nicaragua. Fairly broad private provision of ICT services has allowed governments to spend relatively little in that area. Since , LIDCs accounted for 6. After a sharp acceleration in the early s, PPP flows have declined in the most recent years.
Across Africa there are several examples of regional infrastructure projects, especially in the energy and transport sectors UNCTAD, For instance, the Central Corridor is an integrated transport program across five countries Burundi, DR Congo, Rwanda, Tanzania, and Uganda with an investment of about USD 18 billion involving local and international actors from the public and private sectors WEF, Figure 9.
There is considerable variation in the size of PPP projects, and some of them are very large, such as a coal plant in Laos with an investment of USD 3. Nine projects started since are valued over USD 1 billion. More than a quarter of the projects in LIDCs involve MDB support in the form of direct loans, syndication, equity investment, partial credit guarantees, and political risk coverage.
The presence of MDBs is associated with a lower probability that a project comes under distress or is cancelled, even after controlling for a set of project-specific variables and for year and country fixed effects. Figure The bulk of the money went to public projects, with direct support to the private sector amounting to USD 0.
These countries direct a considerable share of their development financing to infrastructure. According to the data on Chinese official development assistance published by AidData, between and infrastructure projects accounted for about 70 per cent of total Chinese financing.
There is considerable dispersion across countries in the amounts of ODF received.
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As expected, grants accounted for the bulk of financing in fragile states, while frontier markets and commodity exporters received less ODF relative to their GDP than other country groups as they have a higher domestic revenue base and greater access to commercial borrowing. Total cross-border bank lending rose steadily in the late s, peaking in —when it amounted to about USD 40 billion—before falling significantly alongside the drop in commodity prices in — A significant share of these flows is financing infrastructure projects, especially since , when almost 30 per cent of cross border bank lending in LIDC financed infrastructure projects, while the share in EMs is about 22 per cent Figure 12; see also Gurara et al.
This allocation points to complementarity between commercial cross-border lending and ODF, with the latter focused more on the transportation sector.
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Various other analyses e. Thus, despite the broad increase in infrastructure investment documented in the previous section, a strong case exists for further expansion in light of potentially high social and economic returns, even though policy makers should keep in mind the lessons from past experiences and the possible heterogeneous effects of infrastructure investment see Section 2. Over recent years, public debt levels have risen, external financing conditions have tightened, and growth prospects have weakened for the LIDCs. These trends create a challenging environment for infrastructure investment.
Countries with fiscal space should seek financing on the most concessional terms possible, with the support from the international community. Especially for countries where fiscal space is limited but also for the others there is a need to increase the efficiency of public investment—and considerable scope for it exists. The link between the amount of public investment the input and the quantity and quality of infrastructure in a country the outputs and the outcomes is not very tight and, although many factors may contribute to this variance, differences in investment efficiency are likely one of them.
Several studies Dabla-Norris et al.
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Strategic guidance and preliminary screening: strategy documents should be specific enough, and have sufficient coherence and authority to guide public investment. Sector strategies should be fully costed, and closely integrated and consistent with medium term budgets. Appraisal: projects should be appraised using the full range of techniques as appropriate.
There should be a comprehensive central guideline on project appraisal, including specific detailed guidance on the appraisal of PPPs. Independent review of appraisal: projects should be subjected to independent review.
Project selection and budgeting: only projects that have been subject to thorough appraisal, and have been independently reviewed, should be selected for funding in the budget. Project implementation: there should be a strong focus on managing the total project costs over the life of each project with regular reporting on financial and non-financial progress.
Facility operation: comprehensive and reliable asset registers should be maintained and are subject to external audit. Project evaluation: ex post evaluation framework should be in place. Every public-investment project is subject to the same cost-benefit analysis, under a set of clearly specified methodologies published by the MoP. The law mandates that the capital budget sent by the Ministry of Finance to Congress can only include projects within the SNI. MoP oversees the ex-ante and ex-post appraisal of investment initiatives within the SNI. In a seminal paper, Isham and Kaufmann show that once the ratio between public investment over GDP is too high above 10 per cent , the increase in public investment is associated with a declining productivity of investment projects.
More recently, Presbitero uses a large dataset of investment projects financed by the World Bank since the s in developing countries and shows that infrastructure projects undertaken in periods when public investment accelerates compared to its historical patterns are less likely to be successful, indicating the presence of absorptive capacity constraints. This suggests that it might be advantageous to scale up infrastructure investment gradually, while building capacity and strengthening institutions.
Scores ranges from in decreasing order of importance. Based on 46 responses. Sharper results were obtained for subgroups, with fragile state desks emphasising availability of external finance and administrative capacity as key challenges, while availability of domestic resources and limits on debt accumulation were most important for frontier economies. While over the longer run purely private provision can be expected to spread more widely beyond the telecom sector, in the near future private participation is likely to occur primarily through PPPs.
Macro-fiscal implications of PPP projects could be large and expose countries to fiscal risks.
Thus, a strong regulatory environment and a robust institutional framework 26 are essential to implement PPP infrastructure projects in a sustainable and efficient way, especially in developing countries, where public sector capacity constraints may be more severe Romero, PPP use is correlated with domestic institutions, such as the rule of law and levels of corruption Moszoro et al. The average Infrascope index for LIDCs is significantly lower than the one of EMs, and the gap is particularly strong for the legal regulatory framework and for the presence of financial facilities.
In that perspective, there is scope to improve the collaboration between local governments and MDBs in the preparation, structuring and financing of infrastructure projects, to facilitate the participation of private long-term investors—the World Bank Global Infrastructure Facility and the EBRD Equity Participation Fund are infrastructure platforms that go in that direction Arezki et al.