Clay Lowery's testimony, given yesterday to the Senate Committee on Foreign Relations, makes a case for the role of the multilateral development banks (MDBs) in catalyzing economic growth and reducing proverty thru infrastructure investment.

Lowery argues that the role of the MDBs is "additionality" -- the idea that they need "to bring something to the table that the host country or private sources cannot or will not". And that thru selective and innovative investments, the MDBs can catalyze "orders of magnitude more in private investment" (see pg. 4 of 5) in these countries were investment is so badly needed.

He goes on to say that if the MDBs are ever going to realize their full potential towards stimulating private infrastructure investment, economic growth and poverty reduction, that they will need to:

• Address the regulatory regime issues so that investors have a degree of certainty and and a clear path for cost recovery;

• Promote realistic expectations about the benefits of private capital;

• Seek new mechanisms such as output-based aid and public-private partnerships that address the sustainability of private infrastructure services.

Lowery's exposition on page 1 and 2 linking infrastructure to poverty reduction is well written and provides many illustrative examples, but is not necessarily new. It is the usual justification given by developed country governments to fund emerging markets infrastructure.

Incidentally, in a proposal submitted by CRGP earlier today we began the introduction by making more or less the same arguments,

Infrastructure development is intimately tied to economic development and poverty reduction at both the macro and household level. And yet, "many in the international development community - DFID included - now think of the infrastructure sector, especially major infrastructure, as the preserve of the old-fashioned and, in some minds, discredited forms of aid" (DFID, 2002).

One reason for this shift in attitudes is that infrastructure has increasingly become mired in criticism, controversy and conflict as anti-development activists have learned to target large, highly-visible, symbolic projects in their anti-development campaigns (Khagram, 2004).

This proposal seeks to launch a multi-year, multidisciplinary effort to better understand the mix of factors that condition the likelihood that large infrastructure development projects will face potentially fatal forms of institutional conflict or emergent political opposition. Our goals is to identify forms of governance - either proactive or reactive - by policy makers and project managers that are effective in minimizing the negative impacts of such conflict.

This study thus offers the potential to: (1) reduce poverty by enhancing the delivery of major infrastructure investments through better governance; and (2) reshape perceptions such that infrastructure is more widely viewed as a legitimate means to development and poverty alleviation. [This is an excerpt from a CRGP proposal submitted to the ESRC-DFID Joint Scheme on international poverty reduction on July 13, 2006. The proposal was titled "Private Infrastructure Investment for Poverty Reduction".]

However, in our proposal, building on the work of our General Counsels' Roundtable, we set out to address the problem of distressed and failed infrastructure from a perspective that is slightly different from Lowery, but clearly complementary to his third bullet point on "new mechanisms".

The focus of our proposal is on understanding the "institutional and political clashes of emerging country governments, local workers and ratepayers, indigenous groups, multilateral development agencies, rich country investors, engineers, contractors and operators, [which] have created overwhelming governance problems for the economical and sustainable development and operation of infrastructure" and on improving the robustness of project governance structures to buffer these conflicts. We believe that an emphasis on project governance structures is particularly important, for the following reasons,

The development challenge is exacerbated by the fact that in many places where infrastructure is lacking, national governance and property rights are weak (North, 1990; de Soto, 2000; Krasner, 2004) and corruption runs rampant (Shleifer & Vishny, 1993). The challenges of working in emerging markets are manifold, including security, human rights, bribery, armed conflict, business involvement in politics, etc. In such locations, project governance structures face additional strains and stresses that are generally absent in countries that uphold strong legal-rational frameworks for contracting, procurement and dispute resolution (Guasch, 2004). In order for projects in weak and transitioning states to succeed, it is necessary for sponsors to develop a better understanding of the kinds of self-standing project governance structures that can compensate for weaknesses in the host societal institutional framework (OECD, 2005).

References:

De Soto, H. (2000) The Mystery of Capital. New York: Basic Books.

DFID (2002) Making Connections: Infrastructure for poverty reduction. A policy paper by DFID. 1-36.

Guasch, J.L. (2004) Granting and Renegotiating Infrastructure Concessions: Doing it Right, Washington, D.C.: The World Bank.

Khagram, S. (2004) Dams and Development: Transnational Struggles for Water & Power, Ithaca: Cornell University Press.

Krasner, S. (2004) Governance Failures and Alternatives to Sovereignty. Center for Democracy, Development and the Rule of Law Working Paper.

North, D. (1990) Institutions, Institutional Change, & Economic Performance, Cambridge: Cam. Press.

OECD Investment Committee. OECD Risk Management Tool for Investors in Weak Governance Zones. 2005; 1-21.

Shleifer, A. and Vishny, R.W. (1993) Corruption. Quarterly J. of Economics 58, 599-617.

Posted by rjorr at July 13, 2006 12:26 PM