The Buzz on the Street: Can institutional investors really close the infrastructure gap?
Once again, infrastructure is a hot topic. Not since the first waves of energy, water and transport privatizations in the early 1990s has infrastructure been a central topic in the daily discourse of the media, of the development community, of economists and financiers. Now, governments are crying for more of it, new development institutions are being built around it and even the IMF is asserting its central role in economic growth.
Not only has infrastructure re-emerged as a popular, nearly consensus solution to the economic and societal woes of developing countries and industrialized nations alike, but the font of the resources needed to fill the infrastructure financing gap has also been identified. Suddenly, it is impossible to walk through London, Washington, Paris or Singapore without bumping into a conference on institutional investors in infrastructure. The G20 has discovered the link along with their business counterparts at the B20. So too has the World Economic Forum, the OECD, the UN and the international financial institutions. Match the long-term liabilities of pensions and insurance plans with long-term assets, the mantra goes, and the infamous infrastructure gap will close. Win-win.
If only life were so easy.
The Buzz on the Street: Can institutional investors really close the infrastructure gap?
The world economy today presents itself as a diverse canvas full of challenges and opportunities. Advanced economies continue to struggle towards recovery, with the US on its way to tighten monetary policy as the economy picks up while a still weak Eurozone awaits quantitative easing to kick in. At the same time, plunging oil prices have set in motion significant real income shifts from exporters to importers of oil. Astonishingly, amidst all this turmoil, South Asia has emerged as the fastest growing region in the world over the second half of 2014. Led by a strong India, South Asia is set to further accelerate from 7 percent real growth in 2015 to 7.6 percent by 2017, leaving behind a slowing East Asia gradually landed in second spot by China.
While bolstered by record low inflation and strong external positions across the region, the biggest question yet to be addressed by policy makers in South Asia will be how to make the most of cheap oil.
All countries are net oil importers as well as large providers of fuel and related food subsidies, therefore bound to benefit from low oil prices. However, the biggest oil price dividend to be cashed in by South Asia is one yet to be earned, and not one that will automatically transit through government or consumer accounts. The current constellation of macroeconomic tailwinds provides a unique opportunity for policy makers to rationalize energy prices and to improve fiscal policy. Decoupling external oil prices from fiscal deficits may decrease vulnerability to future oil price hikes – something that may very well happen in the medium term. Furthermore, cheap oil offers a great opportunity to introduce carbon taxation and address the negative externalities from the use of fossil fuels.
The World Bank’s latest South Asia Economic Focus (April 2015) titled “Making the most of cheap oil” provides deeper insights regarding South Asia’s diverse policy challenges and opportunities stemming from cheap oil.
A first major realization is that the pass through from oil prices to domestic South Asian economies is as diverse as the countries themselves, thanks to a variety of different policy environments across countries and oil products. This is also reflected in recent dynamics, seeing India taking determined action towards rationalizing fuel and energy prices, even introducing a de facto carbon tax and beginning to reap fiscal and environmental benefits. Other countries have so far shown less or no enthusiasm towards reform, in spite of significant and/or increasing oil dependency (particularly in electricity generation, one of the region’s weak spots).
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Originally, black boxes in airplanes perform routine gathering and storing of data on all airplane operations during fly time. In the event of a specific accident or crash, the log data can be analyzed to determine or clarify the causes of an incident.
A black box for cars is a video recording device with an acceleration sensor and a GPS receiver module. It can record any situation happening in front of a vehicle and store the information in the form of digital images into a built-in memory card. A vehicle’s black box is not a newly developed technology, but an application of existing video-recording technologies for the purpose of increasing road safety. This simple technology also has played a crucial role in solving or clarifying causes related to traffic crashes. Above all, the black box for vehicles has resulted in a decrease of traffic crashes, thus saving lives.
In South Korea, for example, taxi drivers first installed vehicles’ black boxes back in 2008. Since then, vehicle black boxes have been rapidly adopted by taxis throughout the country, under the sponsorship of local governments and insurance companies.
When you combine death-by-smog with deaths related to exposure to dirty indoor air, contaminated land and unsafe water, the grand total of deaths from all pollution sources climbs to almost 9 million deaths each year worldwide. That’s more than 1 in 7 deaths and makes pollution deadlier than malnutrition.
This fact deserves to be better known, as there are ready solutions. Inaction is not an option.
We often think of amenities such as quality streets, squares, waterfronts, public buildings, and other well-designed public spaces as luxury amenities for affluent communities. However, research increasingly suggests that they are even more critical to well-being of the poor and the development of their communities, who often do not have spacious homes and gardens to retreat to.
Living in a confined room without adequate space and sunlight increases the likelihood of health problems, restricts interaction and other productive activities. Public spaces are the living rooms, gardens and corridors of urban areas. They serve to extend small living spaces and providing areas for social interaction and economic activities, which improves the development and desirability of a community. This increases productivity and attracts human capital while providing an improved quality of life as highlighted in the upcoming Urbanization in South Asia report.
Despite their importance, public spaces are often poorly integrated or neglected in planning and urban development. However, more and more research suggests that investing in them can create prosperous, livable, and equitable cities in developing countries. UN-Habitat has studied the contribution of streets as public spaces on the prosperity of cities, which finds a correlation between expansive street grids and prosperity as well as developing a public space toolkit.
My first name – Ke – is so short that many think they are just the initial letters of two very long names. So they call me Dr. K. E. Fang when they first met me.
But I am actually very happy about it, because K. E. also stands for “knowledge exchange.” Over the past seven years, I have been very proud of doing K.E. work to facilitate communication and collaboration between the World Bank and client countries, and between client countries themselves, in my specialized field – urban transport planning and management.
As an urban transport expert and a Task Team Leader for investment projects, I used to spend most of my time and energy in technical and operational work – such as advising our clients on policy issues, and how to prepare and implement infrastructure investment programs and projects.
For example, in Rio de Janeiro — despite efforts by the government to convene all transit operators during the planning stage —private rail-based operators were reluctant to participate in the design of the system because they feared that the bus system would stand to benefit more from integrated fares. In the end, the government went ahead with its plans.
Today, although the integrated fare system benefits the poor, it fosters the inefficiency of inter-municipal buses that receive a subsidy that allow them to survive despite low load factors. Several of those routes should have been integrated with rail. There was also fraud by van operators using transport routes and the system’s smart cards. Consequently, the subsidy rose very quickly.
Even so, Rio de Janeiro’s system is a blessing to low-income users, and overall ridership increased. If challenges are met, the system can work better for everyone. Efforts must be done to fine-tune the system, close loopholes, decrease fraud and reward the most efficient parts of the system.
In my previous blog entry, I wrote about nine suggestions for designing and implementing integrated fare systems. Now, in addition to the initial example from Brazil, I’d like to share a few other experiences and lessons regarding integrated modal fares.
When there is a regional transport agency, an integrated fare system’s level of service can be monitored from a central location, provided buses are equipped with GPS and smart card systems (as in Santiago, Chile).
As international donors gather this week in Brussels to mobilize resources for Guinea-Bissau, the government and people of this West African nation appear ready for a fresh start.
In 2013, investment commitments to infrastructure projects with private participation declined by 24 percent from the previous year. It should be welcome news that the first half of 2014 (H1) data – just released from the World Bank Group’s Private Participation in Infrastructure (PPI) database, covering energy, water and sanitation and transport – shows a 23 percent increase compared to the first half of 2013, with total investments reaching US$51.2 billion.
A closer look shows, however, that this growth is largely due to commitments in Latin America and the Caribbean, and more specifically in Brazil. In fact, without Brazil, total private infrastructure investment falls to $21.9 billion – 32 percent lower than the first half of 2013. During H1, Brazil dominated the investment landscape, commanding $29.2 billion, or 57 percent of the global total.
Four out of six regions reported declining investment levels: East Asia and the Pacific, South Asia, Africa, and the Middle East. Fewer projects precipitated the decrease in many cases. Specifically, India has experienced rapidly falling investment, with only $3.6 billion in H1, compared to a peak of $23.8 billion in H1 of 2012. That amount was still enough to keep India in the top five countries for private infrastructure investment. In order of significance, those countries are: Brazil, Turkey, Mexico, India, and China.
Sector investments were paced by transport and energy, which together accounted for nearly all private infrastructure projects that were collected in this update. The energy sector captured high investment levels primarily due to renewable energy projects, which totaled 59 percent of overall energy investments, and it is poised to continue growth due to its increasing role in global energy generation.
The energy sector also had the biggest number of new projects (70), followed by transport (28), then water and sewerage (12). However, transport claimed the greatest overall investment, at $36 billion, or 71 percent of the global total.
While we need to see what the data for the second half of 2014 show, what we have to date suggests that infrastructure gaps may continue to grow as the private sector contributes less. It also suggests that, in many emerging-market economies, there is much work to be done to bring projects to the market that will attract private investment and represent a good deal for the governments concerned.