At the Global Infrastructure Facility (GIF) Advisory Council Meeting in March, we talked about construction risk and the way it shapes the delivery environment early in a project’s investment life. As a practicing engineer accustomed to attacking construction risk at the granular level, I enjoyed the broader discussion, particularly from the banking and credit perspective (meeting outcomes).
Unfortunately, construction risk realization will continue to be the norm. Perhaps we need to consider taking the longer view to reach potential investors by aligning the risk environment with risk tolerance.
Here are three ways to do this:
A significant percentage of government spending in India goes towards the creation of new infrastructure like the construction of roads, ports, railways and power plants. Construction contracts, however, often have a reputation for disputes and conflicts between contractors and governments. Such disputes ultimately delay implementation of the contracts and increase total costs, adversely impacting development outcomes of the projects.
Many countries have found that Dispute Boards offer an effective mechanism for resolving these issues in a timely and cost-effective manner. These boards, composed of one to three members, are set up upon commencement of a contract and help the involved parties avoid or overcome disagreements or disputes that arise during the contract’s implementation. The boards are less legalistic, less adversarial, less time consuming and less costly than options for resolving disputes within the legal system, including arbitration and litigation.
A 2004 study (PDF) shows that with an almost 99% success rate. The savings in using these boards are enormous: another study indicates that in almost 10% of projects, between 8% and 10% of the total project cost was legal cost.
Facilitating investments into Fragile and Conflict-Affected States (FCS) is one of the most important strategic pillars in MIGA’s Strategy. In an effort to further expand MIGA’s support in FCS countries, I recently visited Burundi, South Sudan, and Afghanistan and met with investors, government agencies, and donors. Although the investment climate varies in these FCS countries, I observed the following four common threads during my visit.
First, despite the deteriorating security situations, there are still investors seeking business opportunities in FCS countries, as long as the expected return on investment is sufficiently high to cover a required level of return plus risk premium. When it comes to the investors actively operating in FCS countries, their concerns appeared to be more focused on unexpected and arbitrary changes in government policies against their investments, rather than the security issue itself. Most aspects of the government-related procedures are risks beyond the control of investors, for example, renewal of licenses and permits, taxation, and various contracts signed with the government. Investors usually go through several political cycles during their investment horizon. An approval from the current government does not guarantee the same approval would be obtained from the succeeding government. A foreign investor I met in Afghanistan cemented this notion by telling me that “when we made a decision to invest in Afghanistan, we were already well-aware of the security issue in the country. For us, the security was a foreseeable risk that could be mitigated to some extent, if not entirely avoidable. We can take care of security risks as well as commercial risks; but what concerned us the most was the risks related to uncertainties in the government’s regulation and policy.”
- fragile and conflict affected states
- business opportunities
- Law and Regulation
- diaspora investments
- new business
- operational efficiencies
- new technology
- Political Risk Insurance
- transfer restriction
- war and civil disturbance
- capital flight
- investment assets
- high rate of return
- service sectors
The emergence of local capacity in the construction sector has long been regarded as critical for economic development. Indeed, since the early 1970s, the World Bank has provided a “civil works preference” for low income countries in Bank-financed projects in order to foster the expansion of domestic construction industries. In most regions of the world, the emergence of domestic capacity in civil works goes hand-in-hand with regional development trajectories. Large construction companies bid for, and win, contracts in their own and neighboring countries.
In community-driven development (CDD) projects, communities that have been given control over planning decisions and investment resources for development often decide to undertake small-scale infrastructure projects, such as rural roads, small bridges or schools. A project in Benin has demonstrated that schools built by communities can be built faster at lower cost than those built by outside contractors.
An assumption behind CDD is that communities with local knowledge of resources and environment are better positioned to figure out the best way to build their own public infrastructure in their interest. Indeed, there is some evidence that community-built infrastructure can be cheaper when compared to infrastructure built by government or outside contractors (for example, Wong (2012) introduces several cases of “CDD’s cost effectiveness as compared to equivalent works built through other government service delivery mechanisms”).
However, much of the available evidence comes from a comparison between “community-built infrastructure” and “other-entity built similar infrastructure” constructed at a different time. It is difficult to find, or to set up, an experiment where a set of identical infrastructure projects are built by both communities and others at the same time under similar conditions, and in numbers large enough to allow for comparison between outcomes.
In this regard, the recently completed National Community Driven Development Project (“PNDCC” in French) and the Fast Track Initiative (FTI) Education project in Benin present just this type of “natural experiment.”
Over time I have developed certain ‘home truths’. Among them is that the size of the country is inversely proportional to the length of the immigration and customs form, and the aggressiveness of dogs encountered when running is a reflection of their owners. In both cases this was proved true during my first mission to Kiribati. A tiny country in the Pacific ocean some half-way between Sydney and Honolulu, it has the largest immigration and customs form imaginable.
|Quality Control Inspector Jiang Peng walks on scaffolding along the foundation of the water treatment facility.|
While traveling through China recently, I had an opportunity to visit the Shanghai Urban Environment project in the emergent suburban district of Qingpu and spoke to a number of workers responsible for the implementation and completion of the project.
As with many infrastructure and urban development projects in China, the speed and magnitude can be astonishing, with hundreds of employees working around the clock to ensure timely completion. Work on the facility runs 24 hours a day, 7 days a week with construction workers from all over China contracted to work and live onsite until its completion in 2011. Once finished, it will improve water service, coverage, and waste water management in the region which will be essential for sustaining the increasing population and living standards.
|Rows of solar collectors line the roofs of many buildings in China.|
Driving through Jiangsu and Anhui provinces adjacent to Shanghai, China, last month, I was struck. Not by the sheer number of people and vehicles, or by the seemingly endless number of new buildings under construction with their distinct bamboo scaffolding, but by what was on top of those roofs: continuous rows of solar collectors.
China’s increasing emphasis on renewable energy on a large-scale level can be seen by wind farms in Inner Mongolia and several other green World Bank projects in the country. However, the most pervasive example for the public and individuals has been the explosion of the use of solar water heaters.
|Children breathe thick, toxic smog from thousands of stoves in Ulaanbaatar's ger districts, which are home to 60 percent of the city's population.|
Worst of all, imagine you and your children breathing the thick, toxic smog from thousands of stoves 24 hours a day, seven days a week. Unfortunately, this is not imagination, this is the real situation for over a half million people living in the ger districts of the capital. Not a pretty picture.
|Children perform during "Call for Green China" – a unique cultural tour to raise awareness about pressing environmental issues in China and possible solutions.|
Other factors are more long term – the sandstorms common when I lived here in 1986 are largely gone, owing to successful re-greening efforts west of here. There was a frenzied pace of construction as modern Beijing was being built, which has naturally slowed down – construction dust was a key part of air pollution here.
There is more room for improvement, but the progress was notable during a lovely April. One key issue going forward will be to continue to control private vehicle use.