Infrastructure

high-risk infrastructure

High-risk infrastructure projects' success depends upon the existence of transparent and accountable public revenue management systems to translate increased fiscal revenues into pro-poor investments. Infrastructure projects premised on promoting growth through revenue generation for the central government and rely on the ‘trickle-down theory’ for poverty reduction are often termed 'high-risk'. High-risk projects are more often than not capital intensive, where the only 'development' benefit to the country is through government received revenues. Often, they are enclave infrastructure projects that generate few permanent jobs and create only minimal spillover economic benefits for local business. Sadly, these types of infrastructure projects have rarely succeeded in reducing poverty or contributing positively to sustainable development.

Large, high-risk infrastructure projects rarely improve the livelihoods of affected communities or the poor more generally in a sustained and equitable way. There are no doubt exceptions but several independent project and sector-level evaluations of controversial infrastructure projects confirm this finding. The genesis of the World Commission on Dams (WCD) and Extractives Industry Review (EIR) was in part an explicit recognition of the inability of high-risk infrastructure (often energy-export projects) to deliver positive development outcomes. The WCD and EIR provide a framework and recommendations on the development of projects and role that the World Bank should take in the extractive industries and dam sector. Both boasted the involvement of local communities in their findings and recommendations.    

There is a compelling decades-long record of the failures of many large, high-risk infrastructure projects to produce positive development outcomes. Controversy has historically centered on large, high-risk, export-oriented infrastructure developments, particularly in the energy sector (e.g. Chad-Cameroon, Camisea).

Politics, not poverty, drives the current push for large, high-risk infrastructure at the MDBs. The problems posed by large, high-risk infrastructure, centralized approaches to infrastructure delivery, and the excessive faith in the private sector to provide basic, affordable infrastructure to the poor have been well documented. Yet the pressure to ramp up such infrastructure lending continues unabated. This suggests that lessons learned from past mistakes have not yet been internalized and translated into concrete improvements in what sectors are prioritized, what projects are selected, and in the design and implementation of individual projects. Understanding the politics behind the drive for large, high-risk infrastructure – at the expense of others forms of ‘smart infrastructure’ – may help explain this disconnect.

Five special, significant risks that help explain why High-risk projects often fail:

1. Flawed project selection: The story of large infrastructure is often a story of power. Large infrastructure often fails to benefit the poor because the wrong projects were initially selected and financed. Decision-making processes in most countries for identifying infrastructure lack transparency and accountability.

2. Inadequate governance: The necessary governance conditions are often not in place to enable large, high-risk infrastructure projects to contribute to growth and poverty reduction. Without minimum conditions, such as the rule of law, fiscal transparency, a functioning independent judiciary, and free press, citizens lack the means to hold their governments accountable to poverty reduction goals and social and environmental standards, or to seek redress for grievances when rights are violated in the context of large, high-risk infrastructure projects.

3. Susceptibility to corruption: Certain characteristics of large infrastructure – natural monopolies capable of generating large rents, big construction and management contracts, etc. – make it particularly prone to corruption. According to the World Bank, about half of its anti-corruption investigations that led to corrective actions are infrastructure projects. Corruption undermines development effectiveness.

4. Disproportionate impacts on local communities and the environment: A key risk confronting most large-scale infrastructure is the inequitable distribution of benefits and costs. Free, prior, and informed consent should be adopted as a guiding principle, especially for indigenous groups, to help ensure that at a minimum, the poor who live in the project area benefit from such major investments.

5. Shoddy economic and financial analysis: Many large infrastructure projects fail to deliver the benefits originally claimed because of faulty economic and financial analysis. Cost-benefit analysis tend to overestimate revenues and underestimate costs (e.g. Yacyreta project). Concession agreements and project contracts tend to favor large multinational companies with key risks usually assumed by host governments.

recommendations

In order to improve their contribution to development, MDBs must embrace pro-poor, decentralized infrastructure much more vigorously. A significant shift in the portfolio is required from high-risk, capital intensive (often enclave) infrastructure to pro-poor, ‘smart infrastructure’.

Political commitment is an absolute prerequisite to real change – where the commitment is in place, the recommendations can be usefully taken up, but without it there is little hope for progress.

1. Establish explicit sector/sub-sector lending targets to promote pro-poor, smart infrastructure. Key to the success of these targets is (a) clarity on which sectors and sub-sectors (e.g. small-scale irrigation, renewable energy) additional business should be encouraged and the types of projects that would be contained in these sectors and (b) clarity on the methodology for calculating the baseline lending levels in each sector.

2. Ensure that a comprehensive and participatory options assessment is conducted before a decision is made to proceed with any large infrastructure program or project. Transparency and participation in the assessment will help ensure least-cost solutions are adopted; affected communities and the public benefit; and corruption is mitigated.

3. Ensure minimum governance conditions and sectoral capacity before investing in infrastructure. Infrastructure projects whose poverty-reduction potential depends on revenue generation can only succeed in a context in which there are basic assurances of a minimum level of government accountability to the public.

4. Develop sector-specific anti-corruption guidelines. The World Bank (likely to be followed by other MDBs) is in the process of developing an anti-corruption and governance framework to help guide its future operations.

5. Strengthen protections of social and environmental rights of affected communities and the environment, upholding the highest international environmental and social rights and standards. The project process must recognize a range of entitlements including the entitlement of affected parties to (i) participate in negotiating the outcomes of the options assessment process; (ii) participate in negotiating the implementation of the preferred option; and (iii) negotiate the nature and components of mitigation.

6. Establish minimum transparency and participation provisions throughout project implementation. MDBs should revise their Information Disclosure policies to establish minimum provisions for information disclosure and public participation during implementation. This will improve not only anti-corruption efforts but also the development effectiveness of infrastructure projects.

7. Require robust independent monitoring mechanisms for large-scale infrastructure projects. One effective mechanism to help ensure risky infrastructure projects contribute to poverty reduction is to appoint a high-level panel of ‘eminent persons’ to oversee the project during preparation and implementation.

8. Promote certain policy or operational reforms and good practice guidelines to help create an enabling environment for smart infrastructure. Lending in support of smart infrastructure is hampered at many MDBs because of operational or policy bottlenecks or the lack of clarity on some key content issues.

9. Alter staff incentives to focus on development effectiveness not lending volumes. Truly independent audits of development effectiveness (and specifically the poverty impacts of infrastructure projects) – not lending volumes – at the country level need to be conducted.

10. Set up a small, independent evaluation unit to measure impacts of infrastructure lending in reducing poverty.