infrastructure connectivity: definition, importance, and ... · infrastructure connectivity:...

Infrastructure Connectivity:

Definition, Importance, and Challenges

Iza Lejárraga, Head of Investment Policy Linkages Unit Directorate for Financial and Enterprise Affairs

Hanoi, Viet Nam 20 December 2016

2

Overview of Presentation

DEFINITION AND MEASUREMENT ASSESSMENT OF IMPACT OF CONNECTIVITY ROLE OF PRIVATE INVESTMENT IN CONNECTIVITY

CHALLENGES IN CONNECTTIVITY INITIATIVES N

“linkages of communities, economies and nations

through transport, communications, energy, and

water networks across a number of countries.”

“a seamlessly and comprehensively connected and integrated Asia-Pacific

through the pillars of Physical Connectivity, Institutional

Connectivity and People-to-People Connectivity.”

“depth and breadth of a country`s integration with the

rest of the world, as manifested by its

participation in international flows of products and

services, capital, information, and people.”

Growing demands for connectivity

• G20-IIWG Strengthening Global Infrastructure Connectivity Forum, Singapore April 2016, jointly organized by the World Bank and OECD, with strong support from the Chinese G20 Presidency.

• Culminated in the launch of a G20 Global Connectivity Alliance, first coordination meeting among MDBs in Washington DC, October 2016.

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“Good roads, canals, and navigable rivers, by diminishing the expense of carriage, put the remote parts of the country more nearly upon a level with those of the neighborhood of the town. They are upon that, the greatest of all improvements.”

Adam Smith, An Inquiry into the Nature

and Causes of the Wealth of the Nations

Importance of connectivity for inclusive growth has long been recognised …

…but connectivity has become more complex and cross-cutting : new dimensions

Digital connectivity

Soft connectivity

Quality of connectivity

Integrated connectivity

Multi-scale connectivity

Despite indicator proliferation, we do not have

an all-encompassing metric for connectivity

Index What they capture

Soft infrastructure Hard infrastructure

Services Regulation/ Standards

Institutions

Road/rail Maritime Air ICT/Digital

World Bank Logistics Performance Index

DHL Global Connectedness Index

Huawei Global Connectivity Index

McKinsey Global Connectedness Index

UNCTAD Liner Shipping Connectivity Index

World Bank Air Connectivity Index

OECD Services Trade Restrictiveness Index

OECD Trade Facilitation Indicators

7



CHALLENGES IN CONNECTTIVITY INITIATIVES

OECD Trade in Value-Added data suggests varying

degrees of participation of countries in GVCs

8

Source: OECD (2016), OECD-WTO Trade in Value Added Database.

Share of foreign value added in gross exports 2011, in %

0

5

10

15

20

25

30

35

40

45

KO

R

CH

N

ME

X

ITA

TU

R

DE

U

FR

A

IND

CA

N

GB

R

ZA

F

US

A

JP

N

AU

S

AR

G

RU

S

IDN

BR

A

SA

U

Foreign value added in gross exports, %

To what extent does

infrastructure have a

catalytic effect?

What type of

connectivity matters

most for countries by

level of development

and structure of trade?

Problem: endogeneity

20

40

60

80

100

Ba

ckw

ard

In

t. In

de

x

.2 .4 .6 .8 1ICTs Index

20

40

60

80

100

Ba

ckw

ard

In

t. In

de

x

.2 .4 .6 .8 1Transport Infrastructure Index

20

40

60

80

100

Ba

ckw

ard

In

t. In

de

x

.4 .6 .8 1Border Efficiency Index

20

40

60

80

100

Ba

ckw

ard

In

t. In

de

x

0 .2 .4 .6 .8 1Business Environment Index

Y Axis measures Imports of intermediates as a % of total Imports

Infrastructure and Backward Integration

Proxies for physical and digital connectivity, covering hardware and software

Source: OECD, preliminary estimates, forthcoming study.

Composite indicator of connectivity

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

SG

P

SW

E

DN

K

CH

E

NL

D

ISL

FR

A

BE

L

DE

U

FIN

GB

R

CA

N

KO

R

NO

R

US

A

JP

N

AU

T

NZ

L

IRL

AU

S

ES

P

PR

T

TW

N

ISR

MY

S

ES

T

SA

U

CH

L

CY

P

CZ

E

LT

U

HU

N

SV

N

ZA

F

TU

R

TU

N

HR

V

SV

K

LV

A

BR

N

TH

A

GR

C

ME

X

ITA

CH

N

IND

CR

I

BR

A

PO

L

CO

L

IDN

KH

M

PH

L

AR

G

BG

R

VN

M

RO

U

RU

S

OECD Average

G20 Average

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• The finding that the impact increases with the level of income suggests ICT requires more skills, institutions to be leveraged

• Findings suggest that improvements in ICT have effect not only on the volume of trade, but also on the structure of trade (ie., greater specialisation in intermediate and capital goods, tasks, services)

1. ICT connectivity is found to have the largest effect in GVC participation, and this increases with the level of income

• Transport also has high effect on GVC participation which, in contrast to the case of ICT, grows inversely to the level of income.

• No discernible evidence of one mode of transport having a greater effect: complimentary effects and importance of multi-modality.

• The effects of soft infrastructure are as important as those of soft infrastructure, particularly border efficiency and control of corruption

2. Transport connectivity is found to be more a important driver of participation in GVCs for lower-income countries

Strong evidence of impact of connectivity in

countries’ participation in GVCs

Evidence of structural transformation and positive

spill-overs (neighborhood effects) from connectivity

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• Connectivity infrastructure has a greater effect on Global Value Chains than in overall trade flows (ie, elasticity for trade in intermediates higher trade in final goods): Just-in-time production

• The larger the supply chain is (manufacturing), the more important the effect is: delays and disruptions have higher repercussions.

3. The impact connectivity infrastructure, especially ICT, is higher on trade in intermediates than on trade in final goods

• Better connectivity infrastructure in country A (domestic and cross-border) is associated with better trade performance of country B.

• The benefits cannot be internalised by country A: require multi-country investments and supra-national coordination.

4. There is a positive externality on improvements in infrastructure connectivity, especially ICT: free-rider problem

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Investments in transport have low and declining levels of

fixed capital formation: under-provision of connectivity?

Source: OECD National Accounts statistics, Capital Formation by activity, ISIC4; UN National Accounts

Official Country data. Coverage limited to 26 OECD countries for which data are available.

1.6% of GDP 1% of GDP

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

2005 2006 2007 2008 2009 2010 2011 2012 2013

General Government, Transport function

Median Upper bound (95%)Lower bound (5%)

Gross Fixed Capital Formation, % of GDP

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

VH: Transportation and storage

Median Upper bound (95%)Lower bound (5%)

Gross Fixed Capital Formation, % of GDP

• Returns more exposed to a range of non-physical connectivity barriers

• Externalities, network effects and asymmetric distribution of costs and benefits across the border

• Multiple constituencies involved: more difficult to obtain consistent prioritisation and support

• More complex project governance for preparation, tendering and monitoring

• Network interface barriers (e.g. technical standards and communications systems)

• Legal and regulatory differences that require harmonization

Very limited number of cross-border projects found in

available PPI databases: more information needed

0 100 200 300 400 500

Argentina - Brazil(Sao Borja Toll

Bridge)

Burkina Faso - Côted'Ivoire

(Abidjan-…

Kenya-Uganda(Kenya-Uganda

Railways)

Mali - Senegal(Dakar-Bamako

Railway)

Mozambique -South Africa

(Maputo Corridor…

South Africa -Zimbabwe

(Beitbridge Border…

Only 6 cross-border projects in the WB PPI, 1995-2014

Key challenges of cross-border infrastructure projects

0 100 200 300 400

USD million

~1400 is the total # of transport

projects in the PPI database

Private participation has increased, yet highly concentrated:

10 countries account for 60% of global private investments

0

5

10

15

20

25

30

35

40

Total OECD countries

# of countries

A. # of countries recurring to private investment every year

Around 30 countries recur to PPI every year in the recent past

B. Geographic distribution

Overall, similar concentration in terms of number of deals

Source: OECD (2016), based on Dealogic Projectware data. Covers 31 OECD and 80 non-OECD countries.

Data in constant 2014 international dollars, 1995-2014.

India 15%

United Kingdom

10%

China 7%

Australia 5%

Spain 5%

United States 4%

Korea 4%

Brazil 4%

France 3%

Portugal 3%

Others 40%

Foreign participation likely to matter for connectivity:

60% of private investments in OECD, 36% in non-OECD

Foreign sponsor participation in transport

0

10000

20000

30000

40000

50000

60000

70000

80000

OECD countries

Total Foreign sponsor participation

Constant 2014 international USD, million

0

10000

20000

30000

40000

50000

60000

70000

80000

Non-OECD countries

Total Foreign sponsor participation

Constant 2014 international USD, million

Source: OECD (2016), based on Dealogic Projectware data. Covers 31 OECD and 80 non-OECD countries.

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Asymmetric distribution of gains (costs)

across countries

Coordination demands are higher across

countries

Harmonization of different standards & regulations

Foreign policy dimension

(inc. national security)

Common challenges for cross-border initiatives:

In search of problem definition and good practice

Insights from Investment Policy Reviews of ASEAN

(OECD Policy Framework for Investment)

• Improving physical infrastructure and notably regional links remains a

key challenge for boosting productivity in the region:

• Short-sighted infrastructure services regulations sometimes hinder greater

connectivity and trade & investment integration.

• Limited planning and co-ordination impede exploiting policy complementarities,

private investments and great efficiencies in infrastructure investments (e.g. lack of multimodality planning; lack of integrated infrastructure)

• Lack of modern regulatory and institutional frameworks is alsoa constraint

for mobilising more efficiently private participation in infrastructure, although most countries have advanced in this reform agenda in the recent past (e.g. lack of sound legal frameworks for investments in PPPs; lack of PPP units or adequately staffed equivalent authorities; lack of consistent Value for Money assessment frameworks)

Common problems:

Key take-away: most strategies for infrastructure investments in ASEAN remain domestic; connectivity by definition cross-border!

ASEAN Infrastructure Fund

•Provides loans of around $300 million/year to finance infrastructure projects in the transport energy, energy, water and sanitation, environment and rural development

•Mobilizes regional savings, including foreign exchange reserves

Africa50 Infrastructure Fund

• Objective to reach $1 billion in early 2017

• Mobilize long term savings from within and outside Africa and private investors

• Focuses on sectors mostly in the energy, transport, ICT, and water sectors

Connectivity requires innovative forms of

financing and strong trans-national governance

Need to identify elements of good practice

to inform connectivity initiatives: TEN-T

1. long term vision and leadership (2015-2030)

2. strong transnational governance

3. Integrated strategy and co-ordination

4. careful management of local and environmental impacts (quality investments)

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Contact: [email protected] [email protected] [email protected]

Thank you for your attention! Is our work on the right track? How can it be more relevant for the region?

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