Measuring the Development Impact of IFC’s Infrastructure Activities – Literature Review
1.
Introduction
Infrastructure investments can boost growth and reduce poverty through the following channels:
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Access to infrastructure services such as electricity, water transport, for the first time or
at a lower cost or better quality;
Growth in GDP and rising incomes and wealth;
Jobs created directly, indirectly through spending on goods and services from other
supplies and also through the ultimate multiplier impacts of this spending;
Business opportunities from spending, growth and increased infrastructure capacity; and,
Taxes generated that fund government services and poverty reduction programs.
Over time, IFC’s approach to measuring its projects’ development effects has evolved (see 3
below for overview) but in practice, measuring ultimate impacts of individual projects or
investment programs (as opposed their inputs or immediate outputs) is difficult especially in
terms of impacts on specific groups such as the poor. Most private infrastructure projects are not
focused specifically on serving the poor or even individual customers. Never the less, their
indirect contribution to economic activity and growth is essential to long term poverty reduction.
2.
Literature Review
To better understand and articulate the impacts of infrastructure investments, INR commissioned
a review of recent economic literature on how infrastructure investment can contribute to growth
and poverty reduction from Dr. Antonio Estache, Professor of Economics, ECARES, Université
Libre de Bruxelles, Belgium.
In four related papers Dr. Estache and colleagues reviewed what the literature said about the
relationships between infrastructure investment and: economic growth; poverty reduction; jobs;
and, private investment specifically. The reviews also sought to assess how far it was possible to
differentiate among infrastructure sub sectors.
The reviews (Annex) confirm the strong potential contribution of infrastructure investment to
growth and poverty reduction, along with a number of issues in this respect. While the literature
supports the belief in a positive link between investment in infrastructure and development, few
if any precise rules about the quantification of impacts are possible. Key messages are
summarized in point form below.
(i)
Infrastructure investment and economic growth
There is a huge body of economic literature about the impact of infrastructure and growth. While
there is still debate about particular aspects some key messages are relatively broadly accepted:
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Economic literature provides strong support for the existence of positive links between
infrastructure investment (very broadly defined as total public investment) and economic
growth. The average statistical relationship shown by recent studies shows a 1% increase in
the stock of infrastructure lifts GDP by 0.08%. More narrow definitions of infrastructure
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indicate returns to investment more than twice this. Impacts will vary by country and region
(e.g. the MENA below found a range of 0.17-0.22%).
 In order to grow and meet their own development/poverty objectives, developing economies
need to invest each year around 6-15% of GDP in infrastructure capital investment and
maintenance depending on region.
 When it comes to different types of infrastructure, the literature indicates that while the
impact of sectors may vary by country and over time:
o Investments that have significant network effects are likely to have stronger impacts
o There is consistent evidence of strong positive impact of energy investments on
growth
o There is well documented evidence for the positive impacts of investments in
telecommunications infrastructure on growth while water and sanitation shows the
least evidence of growth impacts.
o In developing countries, evidence for the positive relationship between transport
investment such as roads and ports and growth is generally relatively strong.
 The poorer a country, the larger the impact infrastructure investment has on growth.
 More than just the quantity of investment counts for the impact investment has. Also
important are the quality of institutions, regulation, and the degree of competition.
(ii)
The impact of private investment specifically
There is an extensive literature and has been a long standing debate about the role of private
infrastructure investment specifically. Private investments can ensure greater investment in
infrastructure than would otherwise have been the case but its impact can specifically be viewed
through the lens of efficiency improvements it may bring; its impact on a government’s fiscal
position and risks; its distribution impacts on the poor; and, its impacts on governance. Key
messages from current literature are:
 Efficiency gains from PPI are common but:
o Can depend on type of project and context in terms of regulatory environment and
governance
o The relative scale of investment may be important.
o Large projects and privatization programs are more likely to have a positive impact
(though require more complex management)
o Outcomes can vary by sector:
 Electricity – generally improved but not always
 Transport – positive in general
 Water and Sanitation – at best mixed
 Telecoms – very strong evidence of efficiency improvements
 Fiscal impact objectives are not always achieved and risks are not always fully planned for:
o Electricity – usually only requires subsidies for special purposes
o Transport – passenger transport often requires support, roads are vulnerable to
demand outcomes
o Water and Sanitation - subsidy/cross-subsidy issues are a recurring problem and
inhibition on private investment
o Telecom – mobile major fiscal contributor
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Governance is important
o The overall message is that independent regulatory capacity has positive impacts in
terms of PPI performance. But it is not easy to do quickly in terms of trade-offs,
capacity building and independence. Interaction between effective regulation and
competition is important.
(iii) Infrastructure Investment and Poverty Reduction
Academic literature focused specifically on the impact of infrastructure investment on poverty
reduction is less common than that focused on its impact on growth. Never the less, there are
strong messages from development literature generally, from work on the impact of larger
reforms on poverty that enabled private infrastructure investment, and from work on assessing
the relative effectiveness of different approaches to providing services to the poor. .
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(iv)
Infrastructure investment can benefit the poor through improved access to infrastructure
services (that empirical evidence shows is valued) or through improvements in the quality of
services and reductions in their price Importantly, the poor can also benefit indirectly from
the faster growth that investment in infrastructure bring.
Ensuring and optimizing the positive impacts for the poor from projects require careful
assessment and planning:
o Overall income impacts on the poor, even where there are reductions in costs and unit
prices, may depend on the pricing structure that determine overall affordability
(minimum quantities, connection fees, credit access, quality etc available compared to
alternatives). Assessments of net impacts can be complex.
o In some cases, very careful and demanding evaluation processes may be needed to
come to an overall view for assessment and design (control groups etc).
o For some sectors, the evidence for a consistent impact on the poor is reasonably
strong. For example rural roads and modern mobile networks.
o In other sectors such as electricity, while improvements in efficiency and quality
typically help the poor, the details of access programs and tariff designs can be
important in determining who benefits.
o In the case of water, catch up cost recovery measures and tariff design may be
determining impacts in short term.
Overall, the potential of private infrastructure to help the poor is going to be best realized
through careful design and a consistent overall policy framework.
Infrastructure Investment and Jobs
Estimates of the numbers of people employed in infrastructure are imprecise. As a capital
intensive industry, typically the numbers of direct operational employees are not high per unit of
investment. However, from a national statistical perspective, total numbers employed in a sub
sector may be relatively large depending on the boundaries drawn. For example, transport sector
statistics can include all of the drivers employed in the sector in addition to those who build and
maintain roads. In addition, from a policy perspective, a program of continual investment in
infrastructure can be a relatively important source of jobs especially if more labor intensive
forms sub sectors and forms of construction are targeted. Key messages from the review of
literature are:
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3.
Infrastructure is major employer directly and indirectly if relatively broad definitions of
sectors are uses. ILO estimates indicate around 1% of workforce is in the energy and water
sectors but 6-7% in telecommunications and transport.
Within infrastructure, there may be routes to increasing the direct and indirect impacts of
investment by focusing on more labor intensive process. For example, different ways of
building roads, and according to some studies, choosing some forms of renewable energy vs.
some forms of fossil.
A longer term impact on jobs from infrastructure investment is going to come from its impact
on growth. Overall infrastructure to employment elasticities can be estimated from
infrastructure to growth and growth to employment elasticities. By region, estimates vary
from a 1% increase in the stock of infrastructure leads to 0.1-0.07 % increase in employment,
with poorer regions at the upper end of the range.
A forthcoming WB MENA study provides some further indicators of the relationship
between infrastructure investment and jobs. The relationships reviewed vary by sector and
country with typically the impact of infrastructure on jobs being greater in poor countries
and in sectors with low skilled jobs :
o Around 8% of the Regional work force is employed directly and indirectly in
infrastructure – c 4.5m million jobs in the region.
o Construction (very broadly defined) jobs account for a further 11% of total jobs some
part of which will be infrastructure related.
o Depending on the sub region, each $1bn in infrastructure investment leads to 26,000110,000 direct and indirect jobs in the short run including construction. Allowing for
a multiplier impact of two would mean the total impact would be double.
o Investment in infrastructure needed to meet growth objectives would lead to 4.5m
jobs over time (equal to about 4.5% total employment).
A LAC study (Crisis in LAC: Infrastructure Investment and the Potential for Employment
Generation) gives broadly similar messages to the MENA study for the LAC region.
o Impacts vary by country and sector but $1bn infrastructure investment in the LAC
region is leads on average to an estimated 40,000 direct and indirect jobs in short term
and possibly double this allowing for induced multiplier impacts.
Current Measures of Potential Impact
Financial Performance as a good indicator of potential development impact
IFC’s investments are exposed to commercial risk and IFC has a strong portfolio management
and reporting system that provides up to date and consistent information about the business and
financial performance of the companies it finances.
At the core of IFC’s mission is the well supported belief that the development of thriving private
business is essential for and will promote economic development and poverty reduction. While
commercial performance need not equate to economic or development performance, IFC only
supports investments that meet hurdle economic rates of return (ERRs) adjusted for market
distortions and externalities and that also meet IFC’s environmental and social standards.
Reviews of project development results by IEG demonstrate a strong positive correlation
between project financial success and development success. ERR outcomes, which are mainly
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driven by commercial results, are a long standing and valid measure of the potential of an IFC
supported project or portfolio to contribute to development. Projects with high ERRs, all things
being equal, will contribute more than low rate of return projects.
Reviewing Project Development and Financial Outcomes with XPSRs (Expanded Project
Supervision Reports)
IFC supplements its annual investment supervision reports (PSRs) with expanded supervision
reports (XPSRs) that evaluate the overall development impact of its projects. XPSRS re-estimate
ERRs and other expected outcomes based on 5 years of post commitment experience and
updated views of future outcomes. They review outcomes across financial, development and
other dimensions and come to an overall judgment of a project’s development success based on
these. While prepared by IFC investment staff, independent quality control is assured by the
active engagement of IEG in the process. About 50% of IFC projects on a random basis are
evaluated to give a statistically significant view of overall investment outcomes.
Based around XPSRs and/or other evaluations, IEG from time to time evaluates IFC’s activities
across particular sectors or themes and such evaluations contribute to the understanding of
Infrastructure’s impacts. Recently, these evaluations have tended to be a part of overall WBG
reviews that bring a broader perspective but may dilute the focus on IFC issues specifically.
Development Impact Tracking System (DOTS)
While the XPSR process enables IFC to more systematically assess and describe its development
results, it has a number of weaknesses. Having to wait until 5 years after commitment to evaluate
projects, means there is relatively little information available about more recent projects that may
be more relevant given changes in strategy and the nature of projects supported. XPSRs do not
deliver clear measures of impact that some stakeholders want.
IFC’s Development Impact Tracking system (DOTS) aims to address these needs by tracking the
impacts of infrastructure projects through project life by collecting specific “reach” indicators of
impact. These are also be used to help make annual judgments of a project’s likely overall
development success. The DOTS approach also meets the demands of stakeholders to more
explicitly describe IFC’s ultimate development impacts (e.g. people connected to an
infrastructure service), as opposed to inputs (e.g. IFC funds invested) or immediate outputs (e.g.
KWH electricity produced).
IFC Development Goals (IDGs)
The IDGs use reach indicators to define key objectives for IFC in different areas. The
Infrastructure IDG is based on the numbers of individuals who benefit from infrastructure
services such as power, water, telecoms, transport provided by a client supported by IFC - in
terms of access to a service for the first time or better quality or more of a service.
The DOTs process and IDGs help enrich IFC’s understanding of its impact in Infrastructure and
provide useful information to describe this in a way that gives stakeholders an idea of impacts in
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different areas and changes overtime. Difficult issues remain such as about attribution (the
impact of IFC investment specifically versus that of a client’s overall business); the
heterogeneity of the value of different sorts of impacts within and across sectors (e.g. effectively
equating the value one person getting a new power connection to one person getting marginally
better or more service); the high degree of approximate estimation of the numbers of people
impacted (e.g. the numbers of people benefiting from a new power station that supplies to the
grid can only be approximately estimated using rough rules of thumb); the lack of information in
most cases, about what type of people benefit; and, the administrative complexity of trying to
collect and maintain quality and consistency of data (In all, INR now tracks more than 40 reach
indicators).
In addition, a large part of IFC’s infrastructure investments are made in projects that may not
directly supply individual customers. For example, an investment in a commercial cargo port
may serve only business customers. A railway investment may be intended to mainly support
freight trade and have only a small passenger component. The principal development and
poverty reducing benefits that such projects bring are through jobs, spending, reduced costs to
business users and ultimately economic growth. While it is possible to track the immediate
outputs of such projects in terms in tons of freight moved, for example, their indirect impacts
through growth are much more difficult to quantify. IFC is currently piloting the measurement of
Gross Value Added (GVA) as a common indicator of contribution to growth.
CNGSF
May 2012