Closing the Gap: Focus on Basic Infrastructure to Meet the MDGs

Author: Ursula Schaefer-Preuss

As world leaders and development partners come together in New York next week (editor:
September 20-22) to review progress on the Millennium Development Goals (MDGs), we
would do well to focus our attention on roads, electricity, information and communication
technology, and low-income urban housing. Because it is these basic infrastructure
services - or lack thereof - that could make or break the achievement of the MDGs.
Unless appropriate attention is given to basic infrastructure, hundreds of millions of people
will continue to struggle in poverty, poor health and deprivation. And without adequate
roads, potable water and sanitation, electricity, information and communication technology
and other essential services, developing countries will be hard-pressed to meet the MDG
targets.
Let's take Asia and the Pacific as an example. Despite its challenges, this is a place where
development works. In less than a generation, development, in its broadest sense, has
changed the face of the Asia and Pacific region. Since the early 1990s, more than 500
million people have broken free of poverty.
Given its rapid growth, the region is likely to meet the goal of reducing by half the
proportion of people whose income is less than US$1.25 a day. But other goals will be
elusive in the absence of essential services. And it remains that, despite the region's
successes, it is home to two-thirds of the world's poor.
Almost 1.9 billion people in Asia and the Pacific live without basic sanitation and 470
million without safe drinking water, both of which are critical to attain the health-related
MDGs. About a quarter of the region's households still do not have access to electricity and
much of the rural population lives far from all-weather roads. Lack of lighting for study and
arduous travel distances discourage children from completing their education. Health
centers cannot function properly without electricity, and the poor need transport to access
health services. Deficient transport and energy systems also prevent farmers from
improving productivity, diversifying crops, reaching wider markets and obtaining higher
incomes. As a result, the rural economy suffers, children go hungry, and families remain
trapped in poverty.
ven relatively small interventions can bring substantial results. In Nepal, over 40,000
people have better lighting, better health care, improved living conditions and access to
technology thanks to the Khimti Rural Electrification Cooperative. In Bangladesh, Grameen
Telecom's Village Phone program has connected more than 23 million people to health care
services, information sources, and employment opportunities - benefiting women in
particular. A simple farm-to-market road on Indonesia's Lombok Island is expected to help
as many as 400,000 rural households transcend poverty.
To meet the MDGs, there needs to be more focus on the means to attain them.
Infrastructure is essential for growth and job creation, which are critical to sustainable
poverty reduction. Moreover, without aligning infrastructure investment to the MDGs, it
will be difficult to reach the targets for child and maternal health, disease reduction, and
women's empowerment.

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The ADB estimates that the Asia and Pacific region will need a staggering investment of
$700 billion each year until 2020 to meet its infrastructure needs. Securing the needed
proportion of these investments to support the expansion of social services to poor and
remote communities currently excluded is essential to meet the MDGs.
National governments need to take a big picture view - for example, by planning rural road
networks along with main arterial roads to help focus attention on remote and vulnerable
groups. They also need to improve governance and reduce the potential for corruption in
the construction of infrastructure, plan and budget for maintenance and repair of roads
and utilities, and decentralize management to encourage local ownership and respond to
community needs.
Building and running infrastructure in "greener" ways can contribute to better
environmental protection. Climate-proofing must be also built-in; nothing drives this point
home more powerfully than recent tragic images of post-monsoon Pakistan, where schools,
hospitals, bridges, roads and power lines have been swept off the map.
And let us not forget the importance of a regional or cross-border infrastructure. Even
regions that are doing well are home to countries lagging in economic and social
development. Linking these countries to larger subregional and regional markets will spur
faster growth, create economic opportunities, and facilitate the sharing of regional
resources, such as power and water.
Needless to say, governments alone will not be able to bridge the infrastructure gap. They
will need to provide incentives for private investment and foster strong public-private
partnerships. While challenging to implement, such partnerships are in fact quite possible.
Multilateral development institutions are well-placed to act as an "honest broker" and steer
private-public projects through commercial and cost-sharing negotiations.
The next five years will be the most critical for the global effort to achieve the MDGs by
2015, and for the Asia and Pacific region to meet the challenge of helping over 900 million
people emerge from poverty. Investing in and managing basic infrastructure services must
be given priority attention. If not addressed, the infrastructure gap will continue to widen,
swallowing up our collective best efforts to free the world from poverty.

Governments leave investors to bridge infrastructure gap

William Hutchings

17 May 2010

The spectre of fiscal retrenchment looming across the world’s developed economies has chilled
governments’ plans to invest in their countries’ roads, schools and other infrastructure, with Portugal
announcing last week that it was shelving plans to build a new airport for Lisbon.

However, the straitened times may result in opportunities for those who manage infrastructure funds – pools of
capital raised from institutional and private investors willing to commit their money for periods of up to 30
years. They may be called on to fill the breach left by government.

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Robert Howie, head of alternative investment at consultant Mercer, said: “There are medium-term issues with
government-sponsored projects, but there is a demand for upgrading and repairing infrastructure in Europe and
North America. Governments looking to the private sector will, we think, create opportunities for investment.”

Duncan Hale, head of infrastructure investment at consultant Towers Watson, said most infrastructure managers
operating in developed markets aimed to invest in projects at the operating stage, so-called brownfields, rather
than the designing and building stage, or greenfields. He said: “Fiscal issues will provide an opportunity to
infrastructure funds if governments try to monetise their existing assets by selling them. An increase in private
investment looks attractive to governments.

“It is unproven. There must be a question mark over how more private investment will play out socially,
whether the public will accept it or not. But it is probably an opportunity.”

A report published last year by the American Society of Civil Engineers gives an idea of the scale of demand
for capital: it estimated that, over the next five years, the US alone needs to invest $2.2 trillion (€1.7 trillion) in
its critical infrastructure. That includes more than $900bn in roads and bridges, and more than $250bn on the
provision of drinking water and waste removal.

The most actively discussed area is widening roads from three to four lanes, with the fourth lane being a toll
road. There is talk about airport development, for example at Chicago.

US legislators have been far less willing than Europeans to resort to the private sector to finance infrastructure.
The US federal authorities last month blocked a project to use private finance to turn Interstate 80 into a toll
road, despite the acceptance of local states and the completion of an expensive bidding process.

Philippe Camu, responsible for Goldman Sachs Infrastructure Partners’ European business, said: “In the US, the
infrastructure privatisation floodgates should open as the government owns a large number of brownfield assets
that it could use to finance its budget deficit.

“However, the political will has to be there and the greater public has to accept that the private sector can own
and run infrastructure assets in their interests.”

In Europe, the European Union wants more competition in the energy distribution industry, which means
breaking up the ownership of supply chains. That would provide investors with opportunities to buy a gas
pipeline, an electricity grid or other utility assets that are already producing cashflows. The EU also wants help
building wind farms and other sources of renewable energy to meet long-term climate change targets.

Stephen Ellis, managing partner of Gravis Capital Partners, a fund manager that focuses on providing debt
finance for UK infrastructure projects put together under the Private Finance Initiative, a collaboration between
the public and private sector, said he expected the new UK government to shift its focus.

He said: “I think the same, total amount of resources will be allocated, but with a different emphasis. I would be
very surprised if there wasn’t a severe cutting-back in areas such as the Ministry of Defence, information
technology and transport, but I expect more spending on schools and hospitals, although some of that will be
more about refurbishment. That’s good for us, we’ve always preferred schools and hospitals to MoD projects.”

Managers and consultants expect governments to shift the nature of their support from the supply of capital,
which would add to their already bloated fiscal deficits, to the provision of guarantees and regulatory promises
that will not appear on state balance sheets. At the same time, private sector debt financing has become less

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readily available and more expensive. As a result, fund managers will have to be cautious about their choice of
assets.

In return for exercising this caution, managers charge investors heavily, according to investment consultants.
Towers Watson has criticised infrastructure managers in general for trying to charge fee structures similar to the
2% management fees and 20% performance fees charged by private equity and hedge funds, despite the
significantly lower risk of their investments.

Howie said: “The negotiating power has shifted towards investors and we have seen more attractive fee levels
and structures. But there is some way to go before they reach the levels and structures that investors want.”

Ellis, whose firm’s fees are lower than many infrastructure fund managers because, as a debt investor, it does
not charge performance fees, said there had always been a lot of discussion about the fair sharing of rewards. In
defence of management fees, he drew a parallel between fund managers and contractors. He said: “I have not
noticed contractors becoming particularly rich.

“These are tough deals to close, and it’s expensive to bring teams together, analyse the project and come up
with a proposal. The costs of bidding are so high that they have to make it back somewhere. Contractors are
well paid for the deals they’ve won, but they have taken a bath on the ones they didn’t win.”

Bridging the infrastructure gap

Additional infrastructure is needed to ease the congestions that afflict the lives and productivity of millions.
Photo: Raj Anikat/ DrikNews
Fabio Pittaluga and Sabah Moyeen
BANGLADESH can reasonably aspire to become a middle-income country by 2021.This transition will
ultimately require further shift in the economy towards higher value-added manufacturing and services. Such a
transformation, among others, will require substantial investment in physical infrastructure (especially power
sector, ports, industrial estates or economic zones, and transportation) all of which has a physical “footprint” —
land.

At present, the situation in Bangladesh is characterised by a combination of inadequate power supply, congested
ports and underdeveloped transport networks — including roads, bridges, and railways. Recent surveys by
private sector operators consistently cite access to power and gas among the biggest obstacles to investment.
Energy shortages are choking households and businesses alike.

Furthermore, bottlenecks and horrific traffic jams in Dhaka and inter-regional roads have become a part of daily
life. There is no doubt that additional infrastructure is needed to ease the congestions that afflict the lives and
productivity of millions. While sustained development is possible and is underway, major infrastructure gaps
need to be filled to relieve the stress on the quality of life of the citizens. However, the challenge of getting
access to a significant footprint in a land scarce and overpopulated country is seldom addressed adequately. Yet,
implementing agencies of the Government, financing institutions and private sector leaders deem access to land
for growth and development as one of the primary stumbling blocks in bridging the “infrastructure gap.”

In the past, the issue of “public good” related to benefits accrued to society at large via infrastructure projects
was seen by states as an overriding benefit vis-à-vis those impacted by land acquisition. Many legal frameworks
— including those in Bangladesh — were based on the principle of “eminent domain,” or the right of the state
to expropriate for the sake of public good (electricity, water, roads, etc.).

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Eminent domain legislation is based on the principle of legal rights to lands that the affected person has to
demonstrate to the state in order to obtain compensation. In Bangladesh, however, this is complicated for two
reasons:

* Complexities in determining legal claims over lands;

* Existence of many squatters (or illegal occupants) that are part of the fabric of Bangladeshi society and many
of whom are the victims of river erosion.

Furthermore, forced evictions are not indicators of democratic processes, as they often result in a “re-cycling”
of poverty rather than eradication. And it is often the poorest sections of the Bangladeshi population who are
affected, because there is no possibility of voicing their concerns.

It is difficult to estimate how many people will be affected in this journey to middle-income status, but if we put
together the proposed eastern by-pass road, the need for additional fly-overs, roads, rehabilitated canals to
prevent flooding, transmission lines, power generating plants, and so on, it is not difficult to envision that a
large number of people will be affected by such projects.

Currently, the legal instrument for expropriating lands for public purposes is the 1982 Land Acquisition and
Requisition of Immovable Property Ordinance. The Ordinance presents significant challenges in its application.
Only people who can demonstrate legal title to lands are eligible for compensation, compensation rates are often
inadequate, and no assistance is provided to affected people to move elsewhere.

Effectively, there is no resettlement policy to facilitate people’s movement from the areas of impact to other
zones. In practice, this means that compensation alone does not allow people to retain the same standards of
living in other locations, and in many cases their situation is exacerbated.

However, despite the weak legal framework on land acquisition and the policy vacuum on resettlement of
affected people, the government has taken some very good steps to implement projects where affected people
are fully safeguarded. This happened during the construction of the Jamuna Bridge in the 1990s and is currently
the case in the preparation of the background work for the Padma Bridge.

In the case of the Jamuna Bridge, for example, the government implemented a resettlement program. Similar
steps are being taken for the Padma Bridge, which requires the relocation of approximately 4,000 families. In
both cases, the government has also chosen to provide compensation for squatters — people with no legal title
to lands and who are not covered by the 1982 Ordinance.

The Jamuna Bridge also signaled a shift in focus from compensation alone to restoration of livelihoods for
affected people. An ex-post Brac study concluded that, while not perfect, considerable success was attained in
other aspects of the resettlement program, such as a significant increase in affected people’s average annual
income despite their shrinking land-base, and the quality of housing for the resettled ones also improved.

In addition, as a result of the resettlement program, affected persons had better access to health services,
drinking water and sanitation — not an insignificant achievement in Bangladesh.

However, despite the good practice emerging from the Jamuna Bridge experience, to date Bangladesh has no
clearly formulated resettlement policy for project-affected people. The experience of the Jamuna Bridge has
established a “precedent” — linked mostly to large infrastructure projects — rather than a “tradition” for formal
resettlement plans to mitigate project impacts on affected people.

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At this historic juncture, when there is a possibility of leaving poverty behind, Bangladesh needs to reform the
domain of land acquisition and resettlement and move on to a more conducive legal, policy and implementation
environment to ensure that its growth potential is not compromised.

There are a number of innovative approaches to resettlement, from market-based examples to community-
driven ones where the state invests in the capacity of people to find their own solutions as opposed to providing
ready-made options. The concept of “benefit sharing” with affected people is also being experimented with in
various countries. But there is no “one-size-fits-all” approach that can be readily replicated.

Bangladesh will need to find its own solutions, homegrown out of a dialogue between the different parts of its
body politic. To that effect, Brac Development Institute is spearheading a policy dialogue with the government,
the private sector, civil society and the media to explore homegrown solutions.

The experiences of Jamuna and Padma provide fertile ground and should not be relegated to large infrastructure
projects, as effective and responsible resettlement planning is equivalent to poverty reduction and improved
standards of living for those affected.

Fabio Pittaluga is Senior Social Development Specialist, World Bank, BD. and Sabah Moyeen Social
Development Specialist, World Bank, BD.