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Prioritizing infrastructure investments: Panama’s long-term path to PPPs

Cledan Mandri-Perrott's picture
Also available in: Español


Editor’s Note: The World Bank Group is committed to helping governments make informed decisions about improving access and quality of infrastructure services, including, where appropriate using
 Public-Private Partnerships (PPPs) as one delivery option.  This approach is further enabled by working on: strengthening data, building capacity, developing and testing tools, promoting disclosure and encouraging engagement with all relevant stakeholders.  

The World Bank Group has tools to enable better informed decisions around PPPs. In this series of three posts for the PPP Blog, the World Bank’s Cledan Mandri-Perrott and Darwin Marcelo introduce the Infrastructure Prioritization Framework (IPF), one of the PPP Tools available for PPP professionals. And explain how it can help governments with competing infrastructure needs, and describe its application. For more on this and other tools, please visit the
PPP Tools page.

Click here to read the previous blog in this series, "Prioritizing infrastructure investments: Helping decision-makers do their job."

In Panama, a healthy economic climate and enthusiastic institutional support provided an ideal testing ground for the World Bank’s Infrastructure Prioritization Framework (IPF). The country’s GDP growth and economic buoyancy in 2014 motivated an ambitious public investment program, accompanied by a high number of infrastructure project proposals to the Ministry of Economics and Finance. Coupled with political commitment to narrow the deficit, Panama moved to implement select projects for a five-year strategic period.

A prioritization methodology was initially endorsed via Panama’s Government Strategic Plan 2015-2019, and called for a systematic prioritization of public investments with consideration of socio-economic and environmental factors. In keeping with the 2008 Social Fiscal Responsibility Law, the Government Strategic Plan sets forth action areas for investments in economic sectors, social, infrastructure, developments of people, environmental and governability over a five-year period. The 2015-2019 Plan is premised on achieving social equity, better standards of life for all Panamanians, and sustainable economic growth. 

The Strategic Plan accounts for public investments of approximately US$19.5 billion for the following five-year period. Of this planned total, 15.2% (US$2.96 billion) is marked for road projects, whereas 18.9% (US$3.69) is designated for water and sanitation. The Strategic Plan is also linked to the Five-Year Investment Plan, which specifies allocations to various government ministries, agencies, and corporations for public expenditure.

The 2014 World Bank Panama Country Partnership Framework (CPF) also calls for technical assistance to Panama on infrastructure prioritization (p. 19). In keeping with the Strategic Plan and CPF, in April 2015, the Ministry of Economy and Finance of Panama engaged the World Bank to undertake a technical advisory project to prioritize a select set of projects in the transport and water and sanitation sectors. Nineteen projects in transport and 35 in water and sanitation were included in the IPF pilot application.

Planners from several agencies, in consultation with the Ministry of Economy and Finance and a team from the World Bank, agreed on a set of component SEI and FEI variables. The SEI variables initially selected included the number of beneficiaries (BEN), direct jobs created during implementation (EMP), population of poor serviced by the project (POOR), social and environmental risks (SER), and the carbon footprint (CO2). The final analysis used only the first three, due to data problems and lack of specificity in the risk variable. Efforts to improve the data quality are currently underway.

Developing Panama’s Infrastructure
Infrastructure features heavily in Panama’s strategic goals. This is based on (a) an aim to reduce infrastructural constraints on per capita GDP (see Loayza et al, 2004, and Araujo, et al, 2014); and (b) recognition that national growth has stemmed largely from the transport, commerce, and construction sectors. Construction has become a key economic driver due to investment (public and private) in residential and non-residential infrastructure (1.9% contribution over the past five years). The sectors also created most of the new employment from 2007 to 2012, particularly for low-skilled workers (World Bank, 2015).

While there is evidence of economic constraints from infrastructure, Panama has been ranked highly in international comparisons: it is one of the most competitive countries in the region on infrastructure developments, according to the Global Competitiveness Ranking prepared by the World Economic Forum, and the country has positioned itself as a key trade and logistics hub, naturally centered around the Panama Canal. Nevertheless, certain infrastructure subsectors have lagged, including urban connectivity and energy.

Transport
Roads are Panama’s weakest link with respect to trade infrastructure. Contrary to the country’s elevated position on international rankings for port and air transport infrastructure, Panama ranks 44th in the quality of road infrastructure (WEF, 2015), and road density is amongst the lowest in Central America. Rectifying this is particularly important, as Central America has yet to take full advantage of potential gains of regional integration and trade connectivity. The physical trade network limits bilateral trade, and logistics costs can be as much as 50% of the final price of traded goods. Estimates suggest that exports stand to double with integration (Marcelo, et al, 2010).

Water
Whereas 94% of Panama’s population has access to an improved water source, only 73% have access to improved sanitation (World Bank, 2015). Development needs in the sector are concentrated in the comarcas,[1] where many residents have little or no access to improved water supplies and sanitation. While public service quality, coverage, and reliability is generally lower in dispersed rural areas, services are particularly poor in the comarcas (World Bank, 2015). Poor water and sanitation coverage has major implications for child health, including the prevalence of diarrheal illness, and life expectancy overall. As such, if improving access to water and sanitation in the comarcas is identified as a key policy goal, this can be coded into future analysis via the inclusion in the social-environmental indicator.

There are observed coordination problems, as infrastructure investments may be made in parallel, with no integrated sector investment plan. In this way, a structured prioritization process has much to offer in the way of organizing project selection, both within and across water agencies. One move towards better coordination, however, is in the development of a new Interagency Commission for Drinking Water and Sewerage (CIAPAS), involving the three agencies responsible for water and sanitation policies and investments. Regular meetings of working committees are being held to address policy issues such as water and sanitation supply and disaster risks, amongst others.

Poverty
The concentration of poverty in rural indigenous areas has important implications for infrastructure development.[2] Indigenous residents of comarcas have markedly low access to basic services and infrastructure, and, while urban areas and other segments of the population are also in need, slow development and particularly low conditions in indigenous areas cannot be overlooked. This requires that decision-makers deal with the inherently different economic performance of proposed projects in rural areas in some sectors in a way that does not penalize the communities where needs are greatest.
 
The experience in Panama showed the potential of the IPF to support infrastructure decisions, particularly in environments characterized by limited institutional and technical capacity and data restrictions. Although the IPF is not intended to replace best practices in project selection, such as Social Cost Benefit Analysis (CBA), or obviate efforts to improve appraisal in the pre-selection stages of public investment management, it can be used as a catalyst to identify needed information in order to progress toward more sophisticated appraisal methods and selection frameworks.
 
One important challenge when implementing any kind of prioritization tool relates to the appropriate use of financial and economic indicators in conditions of low information. We recognize the value of incorporating available CBA elements on the financial and economic side of the IPF. To integrate these elements to the framework when information is extremely limited, additional criteria is required. For example, if only project cost and some measurable benefits are known, additional variables must be considered to build the FEI.
 
The process of discussing relevant indicators by which to select projects is a catalyst for improving information and institutional capacity levels to move towards more complex analyses. In Panama, the discussions with policy- and decision-makers prompted by the IPF have bolstered improvement of the current National Public Investment System. The IPF can be a valuable starting point for improving infrastructure project appraisal by inciting aspirational discussions about the kinds of data that would be most helpful to deciding amongst infrastructure projects.
 

Notes:

[1] Comarca indígena or ‘comarcas’ in Panama are five indigenous regions, representing 20% of the national territory, which hold special administrative status alongside provinces. The comarcas are Ngobe-bugle and Campesino, Guna Yala, Embera-Wounan, Kuna de Madugandi, and Kuna de Wargandi.

[2] 42% of Panama’s extremely poor residents live in the comarcas.

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