Private sector infrastructure financing brings well-being and equity: Can we prove it?

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We know that developing countries face huge infrastructure investment financing gaps that must be filled if we’re to achieve the Sustainable Development Goals. Expanding access to infrastructure and improving services can increase productivity in various sectors of the economy and improve quality of life.  Electricity raises the productivity of firms and workers, for instance, and in general makes life more comfortable, healthy, and safe.

The infrastructure gap has given rise to concerted efforts among the international community to leverage all forms of finance—including the private sector—for sustainable development. 

As we’re under the aegis of international development, and in response to a mandate for systematic analysis from our stakeholders (see this evaluation from the World Bank Group’s Independent Evaluation Group) how do we ensure that private financing of infrastructure yields broad-based benefits? And how do we measure its welfare and distributional impacts?

A two-year work program intends to improve our ability to do this. Specifically, we’ll look at how impacts are distributed among groups that differ by income, education, gender, age, geographic location, and other characteristics. So far, we’ve developed a framework; reviewed literature; inventoried approaches, tools, and methods; and initiated pilot studies.

Here are some insights from this ongoing project.

Well-posed questions

To identify the causal relationship between private investments and development outcomes—and how that relationship changes across different groups and locations—we start by identifying the channels through which impacts occur. These channels are changes in access, price, and quality of infrastructure services resulting from a project.

The causal relationship can be represented by a theory of change with three components—causal chain, outside conditions and influences, and key assumptions.

If an intervention is appropriate, adequately implemented, and reaches the intended beneficiaries, then it brings about behavioral changes in line with expected outcomes, producing welfare impacts (benefits and costs). When applied to private sector projects, four major factors influence welfare:

  • Market income
  • Non-market income
  • Consumer goods and services that can be priced on the market
  • Access, affordability, and quality of non-market goods and services

There are a few difficulties in applying our theory of change to private sector projects though. First, it’s difficult to account for the impact of financing arrangements, as we need to understand how a financing structure affects project design.

Second, how do we define the counterfactual scenario against which welfare changes are benchmarked? Should the appropriate comparator(s) be “no project,” a fully publicly funded project, a public-private partnership (PPP)? The choice of a counterfactual must be context-specific in order to be credible, and the results of the analysis depend a lot on that choice.

Authors: Ambar Narayan and Esther Illouz, nfrastructure Finance, PPPs and Guarantees (IPG), World Bank
Authors: Ambar Narayan and Esther Illouz, Infrastructure Finance, PPPs and Guarantees (IPG), World Bank.

The private sector delta

In accounting for all welfare and distributional impacts, we include not just project outputs, but also the source of finance and delivery arrangements. The net benefit from private financing (private sector “delta”) will depend on the specific scenarios of financing compared.

Financing (public, private, or mixed) refers to who provides upfront resources to build and start operating infrastructure. The total cost of capital and recurring finance will affect welfare—current or future—via user fees, taxes, or budget that is available for other public investments. Ultimately, users or taxpayers pay the full cost of infrastructure service. The financing of a project is associated with pricing and regulatory decisions and an expected cost recovery profile over time, with a trade-off between financial viability and inclusion. For example, the risk of excluding low-income users can limit the ability of policymakers to increase user fees in pursuit of financial viability. 

Last but not least, there are other implications of private versus public financing, such as differences in project efficiency and quality, which affect monetary and non-monetary aspects of welfare.

What do we have so far?

Rather than inventing new approaches, we call for a judicious application of well-known methods for ex ante and ex post evaluations.

The pilot studies we’re supporting—conducted by colleagues in Côte d’Ivoire, Ethiopia, Jordan, and Kenya—aim to refine methods and create examples that can be replicated in other countries. We also hope to develop curated technical resources and build awareness of the need to conduct robust poverty and equity analysis to inform future projects, more systematically.

For the pilot studies, we’ve selected projects that mobilize private capital, as well as interventions that improve the enabling environment for private sector solutions with transformational potential.

Each pilot has unique methods of analysis adapted to the type of intervention, and the results will be contextual. In Kenya, the analysis looks at direct and indirect job and welfare impacts on the poor from a housing project that seeks to expand households’ access to finance. In Jordan, we’re analyzing employment (and earnings), pricing, and broader economic impacts from key sector reforms—disaggregated by gender and other characteristics. In Ethiopia, we’re assessing reforms’ distributional impacts in the logistics and telecom sectors.

In the case of Côte d’Ivoire, based on pre-project simulations, the integrated rapid urban transit bus system in Abidjan has set targets such as ensuring that 52 percent of poor residents of Greater Abidjan reach the city center using public transport within 60 minutes compared to 27 percent today; 50 percent of weekday ridership is female; and 75 percent of poor users are satisfied with the new system. How the PPP is designed could affect these outcomes.

We’ll have more to write. For now, our message is this: in addition to looking at overall impact and alignment with a country’s development goals, we must pay attention to how the benefits and costs of private sector-financed infrastructure projects are distributed—to ensure that the poor and vulnerable groups of society benefit. 

 

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Shifting the paradigm: Three routes to maximizing infrastructure finance for development

Moving gender-lens infrastructure investment from niche to mainstream: What will it take?

 

This blog is managed by the Infrastructure Finance, PPPs & Guarantees Group of the World Bank. Learn more about our work here.

Authors

Esther Illouz

Knowledge Lead, Infrastructure Finance, PPPs and Guarantees (IPG), World Bank

Ambar Narayan

Lead Economist, Poverty Global Practice, World Bank

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