Developing a National Infrastructure Plan (Step 2) 84

The principal focus of the Infrastructure Management Unit should be a National Infrastructure Plan, which should ideally have a number of features that cause it to be the principal manual that articulates a country’s infrastructure management system and guides how that country will develop, maintain, and operate infrastructure as inputs to predetermined societal outcomes. Consequently, the plan should set out how a country’s infrastructure management system is to work and in doing so, it should address each of the following elements.

5.1.9.1 Establishes the government’s policies regarding infrastructure through the National Infrastructure Plan (Step 2a).

The National Infrastructure Plan is the appropriate document to articulate the material elements of a nation’s infrastructure management system. Reference should ideally be made to a National Development Plan from which specific infrastructure development objectives are drawn. These objectives may include revenue maximisation, minimising costs of service, increasing the quality of services, expanding access to services

(especially in an isolated geographic areas), improving welfare, protecting the environment, developing opportunities for local industry to provide services and raw materials, improving the local capital market, reforming the public sector, regional development, and transferring risk away from government (World Bank 2001, p. 16).

5.1.9.2 Determines a means by which infrastructure performance across the whole country can be measured as objectively as possible (Step 2b).

Measuring performance in some holistic sense is not easy, because a tool that can accurately measure qualitative and quantitative factors must first be identified. One means, as discussed in Section 3.2.2, is benefit-cost analysis, but this has been seen to have a series of pitfalls which make it a questionable choice as an analytical tool by itself. Another option is multi-criteria analysis, which is a process that accepts that decision-making necessary involves a degree of subjectivity, so a yardstick is needed to measure both subjective and objective considerations. GDP growth can be selected as a measure, but this would be unreliable given the many other factors that contribute to GDP growth. The same argument can be applied to other types of overall welfare indices save, perhaps, for a robust National Happiness Index. Whatever tool is chosen, it must be applied consistently across a nation’s entire infrastructure if the results are to have any hope of being a reasonable basis for measuring whole country infrastructure performance.

5.1.9.3 Recording the legal and regulatory framework regarding infrastructure (Step 2c)

Aside from listing and describing laws, regulations, and rules, a statement regarding how the legal and regulatory framework will be developed over time so that the infrastructure development objectives can be achieved should also form part of the National Infrastructure Plan. This is because a major problem in developing countries is that legislation is often less well developed than higher income countries. Sometimes this legislation is translated for the benefit of international investors into English, and

some of the meaning intended by the original documents is lost. To compound the problem further, there is a tendency for laws relating to security over real and intangible property to be less clear than financiers of major capital projects would prefer. Project developers have two choices in this situation, which are to try to influence legislative change, or to deal with legislative shortcomings in project documentation. As it is usually too difficult to change legislation (unless the project concerned is very large), developers consequently aim to improve project documentation, especially between the project company and the government.

Figure 10 below illustrates the major agreements and structure of a typical

commercially financed project. We can see that there are a number of potential direct interfaces with government (shown in red shading) which include:

a. The license agreement between the government and the company that will develop the project;

b. A direct agreement between the government and the lenders to the project company (because they want to have certain assurances made directly to them rather than second hand through the project company itself);

c. Raw materials supply and product sales agreements. In countries that have significant state ownership of resources and utilities, it is not uncommon for a private developer to build a project that will process raw materials supplied by a state-owned enterprise, and then sell the finished product to another state-owned enterprise.

In addition to contractual arrangements between a project company and government, a project is also subject to a myriad of laws that govern the project. It is in the agreements between government and the project company where the developer seeks to give clarity to (or contract out of) those laws.

Figure 10 – Typical Structure of a Commercially Financed Infrastructure Project

Source: Author

Kessides (1993), Harris (2003), and Guasch (2004) all consider a further challenge of this regulatory risk in developing countries as a major concern to infrastructure financiers. The result of this is two-fold. Firstly, financiers prefer bilateral agreements to reliance on regulation and, as each project has agreements that are negotiated on a case-by-case basis, there is no one standard. Secondly, as developing countries evolve their infrastructure policies, it is not unusual for a regulator to be established. The new regulator’s role is made very difficult because it must try to assert a common standard amid a range of projects that have individual agreements. The new regulator’s

preference would be to unwind those agreements so that it can perform its functions without having its hands tied, but this risks the financing for those projects collapsing. Project financiers who have entered into arrangements on one understanding are not inclined to accept the imposition of a newly established regulator, particularly in developing countries where there are questions about the degree to which the regulator is truly independent of government.

The National Infrastructure Plan therefore affords an opportunity for government to set out its intentions regarding the principal laws affecting infrastructure. This often leads to the development of standardised project agreements that limit the scope for

negotiation, and by strengthening legislation so that project agreements do not have to fill legislative gaps and uncertainties.

5.1.9.4 Developing and strengthening institutions (Step 2d)

The prospects for making institutional improvements lies in having clear roles and responsibilities, minimising overlap between institutions, providing clarity to processes so that coordination between institutions is promoted and ensuring people having the appropriate capacity to carry out their functions.

One way that institutions can be strengthened is through the adoption of common operating procedures (Jones 2007, p. 255) to support the standardised documentation discussed in the preceding section. Aside from the documentation efficiency, a further benefit of standardisation is that the government, by doing so, makes a clear statement that it is in control of the decision-making process. Very often in developing countries there is a shortage of legal and commercial experience amongst bureaucrats, which is made even more difficult when English (the language of most international agreements) is a second or third language. A common response to that situation is to allow

developers to draft their own documents for presentation to their governmental

counterparts. This has a couple of major drawbacks, including a forced departure from an orderly procedure and inconsistency of documentation across projects, leading to more governmental resources being required to understand the nature of transactions being entered. Moreover, developer led documentation transfers undue control to the developer and developers will naturally present developer friendly agreements that must be negotiated towards the government’s preferred position rather than in the other direction. The effect of this is that government’s ability to play a strong regulatory role is undermined and local ownership and control over projects can be lost.

Perhaps the enduring feature of standardisation is that there is less room for

disagreement about the intent of well-structured agreements that have been carefully thought through as part of an overarching infrastructure management process rather than being crafted in the heat of battle for an individual project. In this regard, it becomes even more difficult for a developer to challenge agreements that import

features from international legal agreements and treaties. An example is the

UNCITRAL Model Provisions for Privately Financed Infrastructure Projects (United Nations Commission on International Trade Law 2004), the UNCITRAL Model Law on Procurement of Goods, Works and Services (United Nations Commission on

International Trade Law 1999) and provisions of World Trade Organisation agreements such as force majeure. Each of those naturally needs to be considered in light of

prevailing legislation in the country strengthening its laws and institutions, but

international investors are likely to be encouraged by best practice language even if they grumble about the limited scope allowed them to vary contracts.

Good processes and documents are only as good as the people who apply them. This means that building institutional and human capacity to work with the new tools is needed too. External help, possibly with development bank technical assistance

funding, can help finance and source consultants for these initiatives. Obtaining finance and skilled people to help improve organisational and human performance is a small impediment compared to other human factors that get in the way of making positive changes. Prime amongst these are the distorting effect of corruption, which is especially important in the context of infrastructure because of its capital intensity and capacity to “lose up to 20% of construction costs to corruption” (Kenny, Economics et al. 2006, p. 4). Patronage and transparency do not cohabit well, so it is not surprising when a senior official does not support reforms that would lead to clear, standardised approaches that are able to bear scrutiny. This is less likely when patronage is endemic and that official has had to buy their position within government. It is, of course, difficult to see

evidence of corruption first-hand, but it is possible to see decisions that are apparently illogical being made that lead to distortions and misallocation of scarce resources in countries that can ill afford to make poor decisions. Consequently, rooting out

corruption and obtaining commitment from senior level bureaucrats is a pre-requisite to good institutional reform (Kenny 2007, p. 24).

Even with honest government, the road to institutional and human capacity

strengthening is fraught with challenges. These include entrenched bureaucracy that has developed inertia and an inability toward change. An example of this is in the

information silos and lack of delegated authority that mark some governments and institutions. It is a problem when the person at the top does not communicate well with staff or give them some autonomy to make decisions. Organisations with these features

become dysfunctional and good-quality junior and middle management staff becomes disenchanted. To them, personal capacity building and training helps their chances of finding a better-paid job in the private sector, which is a loss for the government and possibly the country too (James 1998).

Exacerbating the flight to the private sector are public sector pay scales, which generally are lower than the private sector. This is a problem because staff are more inclined to work to rule on their public service employment than find ways to improve personal and organisational performance, so salary scales are a major impediment to institutional strengthening. In part this can be addressed by introducing performance- based pay but this means government wide change, which is especially challenging. One way to address this is for the government to create special entities, like an Infrastructure Management Unit, that has more commercial employment conditions. Aside from attracting and keeping talent, it would be possible to fund extra wage costs through engagements with the private sector. For example, bidders for infrastructure contracts might be required to pay a price for the tender documents that help finance the special unit.

A further means of strengthening human capacity is to limit the number of workshops to avoid “workshop fatigue” (United Nations Human Settlements Programme and EcoPlan International Inc 2005, p. 69), and the amount of international travel that is financed by international public and private organisations. This would mean that staff would have more time on the job, although it is fair to say that not all of the many excursions staff take are wasteful. However, greater governance of out of work events will increase productive time and reduce the opportunities for commercial organisations to curry favour with government officials.

It can be seen that many institutional shortcomings lie in work cultural practices. Developing countries are not alone in facing many of these issues however. The problem is that in solving these difficulties for infrastructure, they are also solved right across government.