Bridges to Growth, Not Roads to Nowhere: Scaling Up Infrastructure Investment in Low-Income Countries

By Hugh Bredenkamp and Roger Nord

(Version in  Français )

For low-income countries, the absence of reliable infrastructure—roads, railways, ports, but also power supply—has become an increasingly binding constraint on growth. And we know that investment in infrastructure can raise productivity, boost growth, and help reduce poverty. But as straightforward as it sounds, getting investment decisions right is no easy feat.

For starters, low-income countries have massive investment needs. The World Bank has estimated that, in sub-Saharan Africa alone, the total financing need is around $93 billion per year. And one third of this still unfunded.

Even when financing is available, there’s a raft of other issues to tackle. What investments offer the biggest boost to growth? How much investment is needed and by whom? How to finance this investment without taking on too much debt?

New sources of growth and investment

Many low-income countries showed a lot of resilience during the global economic crisis. A global recovery is now underway, but it remains fragile and uneven. In particular, the more fragile outlook for many advanced economies means they’re less likely to be a big source of growth or financing for the foreseeable future. The key issue now is for low-income countries to unlock new sources of growth and investment financing. At the same time, the more robust recoveries of dynamic emerging market economies and their new status as development partners brings fresh perspectives. After all, scaling up investment was a large part of their successful shift to a higher growth path.

Against this backdrop, the IMF recently sponsored a one-day conference on the issue of scaling up infrastructure investment in low-income countries, which was a chance to bring these different perspectives together. Several overarching messages emerged.

1.  Stronger framework for public sector investment decisions

There are several broad principles that can guide better investment decisions

  • First, countries need to develop a coherent strategy for scaling up infrastructure that maximizes the growth potential.
  • Second, countries need to follow through on their investment strategies. For this, they need a strong institutional framework that keeps implementation in line with the strategy, ensures that projects are properly appraised and good projects selected, and sees that adequate resources are budgeted so that investment projects can be completed and maintained. Good governance and strong public financial management systems are critical.
  • Third, countries need to be savvy about how they finance the scaling up.
    • They need to make sure that the fiscal revenue base is strong and growing—through tax reform and good revenue administration—so that the public sector can more easily afford the debts it takes on.
    • They need to ensure that all borrowing indeed finances investment, and hence growth, not consumption.
    • They also need a good debt management strategy to ensure that the overall amount and type of debt that the country assumes is within its capacity to repay.

2.  Support for capacity building

Multilateral institutions and donors can help with financing, of course, but their contribution to capacity building is equally important.

From the IMF’s perspective, this includes helping countries to design budgets consistent with infrastructure plans, to build capacity to manage their debt, and to develop better tools to assess the likely growth returns from investment.

But, new development partners have their own, fresh perspective on how to fill infrastructure gaps, so they have knowledge to pass on. The Chinese, for instance, have had a lot of success in planning coherent investment, constantly reassessing infrastructure gaps and reorienting resources. They also ensure that their infrastructure projects are linked up—for example, if they build a port, they also build roads and railways that lead to the port. Low-income countries can benefit from this kind of experience.

3.  A bigger role for the private sector

While the government needs to define the strategy and identify gaps, there are areas where it is sensible to rely mostly on private sector investment. The energy sector and telecoms are two examples of where a mixture of public and private sector investment can work.

Tapping private sector equity financing also allows investment to be scaled up beyond what the government might be able to afford. So it is crucial that governments create the all important enabling environment—good tax system, good governance, and a sound legal framework—and give confidence that the environment will allow a proper return on private investments.

While it’s difficult to do justice to the richness of discussions at the conference, we hope it can set the stage for ongoing dialogue about how low-income countries can increase the volume and quality of investment in a sustainable way.

7 Responses

  1. Thanks a lot for the insights into IMF forum.It has really opened my eyes to the nature and extent of infrustucture in Africa.

  2. [...] nuevas fuentes de crecimiento y financiamiento de la inversión —sobre todo teniendo en cuenta lasgigantescas necesidades de inversión de los países de bajo ingreso— plantea una multitud de cuestiones; entre [...]

  3. [...] in LICs. Unlocking the new sources of growth and investment financing–particularly given the massive investment needs of LICs–raises a raft of other issues, [...]

  4. [...] in LICs. Unlocking the new sources of growth and investment financing–particularly given the massive investment needs of LICs–raises a raft of other issues, including: how to finance investment without taking on too much [...]

  5. Everything you have mentioned is important. My experience is, however, that once infrastructure investment is funded through loans that all the benefits find their way to the financiers and very little finds its way to the local population. Most of the infrastructure investments by foreign powers require that their own construction companies benefit and thus no skills transfer takes place — so what are the benefits? Most of the borrower countries land up with an increased debt servicing problem and the developed countries find themselves a source of natural resources that they can plunder with impunity because that is the way to have their loans serviced and repaid. Eventually all the borrower has is dilapidated infrastructure and a resource barren country.

    This is what has been going on in most of the developing countries. They have become the international beggars for debt relief and the ruining of their economies through unconcerned and/or corrupt leaders. My feeling is that unless we ensure that the required skills base is developed, the investment in infrastructure will only contribute to an impoverishment of everyone making use of foreign loans.

  6. The wisdom of the I.M.F. is shown again in this article: easy to understand and right to the matter.
    Yours truly,
    Mr.Stéphane luako Lombo-D.R.Congo
    Future business consultant

  7. The absolutely best of this excellent conference was that it was promoted by the IMF. This evidences a much welcomed more explicit acceptance by the IMF of the importance of the asset side of a country.

    I sincerely hope this will also lead to the reconstruction of one of the most important infrastructures of the country, namely their commercial banking system, and which objectives has been unfortunately reduced by the Basel Committee to a simplistic “just not defaulting”… as if a world where banks and their clients do not default, could be a world that moves forward.

    Let me repeat again, in the whole set of regulations that has come out of the Basel Committee there is not one single line that refers to the purpose of our banks, and of course… how can you regulate well without that?

    The extremely important role of the banks in helping the society to take the right kind of risks it needs, and not only to help them to avoid some of the wrong risks it does not need, is something that should be on the forefront of the World Bank agenda, but, unfortunately, it is not. And so, of course, I am not the one to complain if the IMF picks this up.

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