Infrastructure projects are big-ticket items. They are very alluring and thus, very susceptible to political capture by powerful political interests. In Asia alone, there is a huge demand for infrastructure, which hence, provides great temptation. We have already seen a number of these projects, some of them considered white elephants, being reviewed in Malaysia since the 14th general election.
The incessant demand for infrastructure financing
In 2017, the Asian Development Bank (ADB) estimated that developing Asia will need to invest US$26 trillion from 2016 to 2030, or US$1.7 trillion per year, to maintain its growth momentum, eradicate poverty and respond to climate change (climate-adjusted estimate). Without climate change mitigation and adaptation costs, the total amount is reduced to US$22.6 trillion, or US$1.5 trillion per year. Of the total climate-adjusted investment needs of US$26 trillion over 2016, US$14.7 trillion will be for power and US$8.4 trillion for transport. Investments in telecommunications will reach US$2.3 trillion, with water and sanitation costs at US$800 billion over the period.
The US$1.7 trillion annual estimate is more than double the US$750 billion ADB had forecast earlier in 2009. A key factor for this increase is the expected continued rapid growth forecast for the region that will generate new infrastructure demand. It is likely these figures will be revised upwards as Asia continues to grow faster than most regions.
Infrastructure is a socio-economic enabler and is included in some of the 17 United Nations Sustainable Development Goals —the 2030 global agenda to “end poverty, protect the planet, and ensure prosperity for all”. While Goal 9 is to “build resilient infrastructure, promote sustainable industrialisation and foster innovation”, Goal 6 (water), Goal 7 (energy), Goal 8 (work and economic growth), and Goal 11 (cities) have direct links to increased infrastructure investment and development.
There is a high correlation between GDP per capita and public infrastructure development. There is also a strong negative correlation between infrastructure availability and poverty, measured as a percentage of population below the international poverty line. However, there are also many benefits that are not so easy to quantify, including those that are related to society at large. As an example, the indirect benefits of transport projects include supporting the local and national tourism industries and the promotion of small and medium-sized industries.
White elephant projects
“White elephant” projects are high-capital-cost projects with grossly negative social rates of return. These are usually executed due to political capture, which can only happen where there is a weak and opaque appraisal and approval system.
White elephant projects can be:
• Excess-capacity infrastructure, sometimes known as “bridge to nowhere projects”. Examples of these are roads or airports with little or no traffic demand. Operation and maintenance (O&M) will still have to be funded. Some critics have cited both the East Coast Rail Line (ECRL) and High Speed Rail (HSR) as white elephant projects.
• Capital investment that is completed but for which little or no O&M funding is available over its operating life such that minimal services are delivered relative to its potential capacity. Examples are hospitals or schools without adequate professional staff and supplies. These situations can arise where: (a) donor agencies fund the capital investment, but a completely inadequate budget provision is made for the O&M; or (b) corrupt motivations exist to provide short-term contracts and job benefits without negative consequences for the lack of long-term service delivery. Public private partnerships (PPP) are supposed to address this shortcoming.
• Capital investment that is never completed and abandoned, such as incomplete bridges, houses and buildings. Typically, these projects are motivated by corrupt access to contract funds where there is no effective oversight and accountability in the administration of contracts or subsequent use of the capital assets.
These project abandonment problems can be limited by: (a) a strong and transparent appraisal and approval process; (b) involvement of external financial institutions with a stake in the performance of the project; and (c) the use of variable length authorisation and appropriation of funding. If the funding is fully authorised and appropriated up front in legislation, then the initiation of the investment project requires explicit commitment, and attractive projects are more likely to get approval. In addition, the abandonment or reversal of the project requires explicit legislative action and not merely a failure to appropriate or spend budgeted funds.
Avoiding building bridges to nowhere
The key to avoiding building bridges to nowhere is an effective and transparent project appraisal system. It will ensure infrastructure projects support a country’s economic and development strategies. This should be part of a national Project Investment Management (PIM) System. A rigorous project identification and selection system will act to screen inappropriate and inefficient projects from getting into the project cycle and possibly gaining political capture. A robust appraisal system helps by:
• Screening out “white elephant” projects that exert large draws on the capital and current budgets without providing any significant social and economic benefits;
• Designing projects and programmes in terms of technology, scale, timing, organisation, ownership and financial arrangements to maximise net economic benefits;
• Ensuring proper costing and financing of the investment phase of a project to allow completion within time and financial budgets;
• Ensuring that self-financing projects are financially viable and that non-self-financing projects will have adequate maintenance and operational budget support over their operational lives so that the benefits of the expected service delivery can be realised;
• Ensuring that the risks of a project are diversified or allocated to those parties that can absorb them at the lowest cost or have the control and incentives to ensure that the risks are minimised; and
• Ensuring equitable distribution of the gains and losses from a project to the key stakeholders, including the private partners; any low-income group targeted by poverty alleviation projects capture most of the benefits; and any group suffering major costs due to the project, for example, cost of resettlement or environmental damage.
Besides having a robust and transparent PIM system, project appraisals are key to ensuring that infrastructure planning is aligned with economic and development strategies of a country. There are several issues and key challenges in implementing an effective appraisal system:
1. Institutional arrangements for project appraisals. The task of project appraisals to support and complement the functions of fiscal management and economic planning. In many countries, these two functions are under different ministries. These tasks can be further complicated in countries where there are greater degrees of decentralisation in which sub-national governments may be involved in economic planning. In Malaysia, certain states have well-staffed economic planning units to carry out this function.
2. Lack of clear and transparent guidelines or conflicting guidelines. Unless the guidelines are clear, transparent and adhered to, there is a high degree of possible political interference and political capture of projects.
3. Lack of public sector capacity to carry out appraisals.
4. Lack of demand for high-quality project appraisal. It is always a challenge to have politicians and bureaucrats seeing the need for, and demanding, high-quality project appraisals. They may see projects as a means to collect rents and may find ways to circumvent transparent processes for their political capturing. Unless the demand is there for these appraisals, work on project appraisals will be wasted. Transparency of the processes, with results of the appraisals published, will help to provide some checks and balances.
5. Appraisals during the operational phase. Most project appraisals are done on projects before construction, and only a few are carried out during the operational phases.
Setting up and operating a robust PIM and project appraisal system is not rocket science. It just needs political will. The window has just opened.
H K Yong is a development banker. He was the PPP Adviser of the Commonwealth Secretariat London, where he advised governments of the 53 member countries on PPP policies and provided capacity building to public servants.