Three ways to improve the quality of infrastructure investments

We all agree that we want quality infrastructure, because we know that quality reduces project risks, increases availability and durability over a project’s lifecycle, improves customer experience and as such makes the infrastructure worth the investment. But how can we ensure quality?

The IDB –as well as other development banks– uses a suite of safeguard policies to ensure the environmental and social quality of the infrastructure projects it finances. While this helps project owners comply with certain minimum environmental and social standards, this must be accompanied by a process of continuous improvement as is standard in quality management. To that end we must clearly define what sustainable infrastructure is and how it can be achieved and sustained over time.

Taken in its broadest sense, sustainable infrastructure encompasses all four sustainability dimensions: social, environmental, economic and institutional sustainability. With institutional sustainability I mean an institutional set up which ensures good governance, that is adequate upstream planning, preparation, execution and operation of infrastructure projects by transparency, accountability, measurability, and trackability of results. The importance of this was recently highlighted by Garry Bowditch, a leading Australian infrastructure expert. Bowditch stresses the importance of “institutional architecture to help the various parts of the infrastructure system work together – markets, land use, planning, approvals, project prioritization, funding, financing, delivery and operation”. This architecture is crucial because it can provide the certainty needed for long term investments and the avenues to manage and mitigate the inherent risks of infrastructure projects. More specifically, in his paper “Infrastructure Imperatives for Australia” Bowditch identifies three imperatives for better infrastructure project preparation and implementation, which can serve as critical recommendations for the development of sustainable projects financed by the IDB:

1. Create markets for infrastructure projects and services,

The rationale is to change the way how infrastructure is managed: “Governments typically approach infrastructure procurement on a project-by-project basis and as a result their interactions with the market are often uncoordinated and fragmented. When demand from government is lumpy and ‘stop-go’ in nature this can exacerbate the cost of infrastructure and lower the quality of market responses.” This affects the development of the infrastructure market and the ability of bidders to provide best possible services and innovation.

A unified market for infrastructure assets and services makes sure all the different parts of the infrastructure system work together. It ensures proper planning and avoids the common pitfalls of infrastructure procurement: e.g. that infrastructure is treated as a static-physical asset and is procured without proper consideration of the services it will deliver, or that new infrastructure is instead of choosing to renovate and/or make better use of existing infrastructure.  A strong infrastructure market should be defined as having:

• long term pipeline of projects,
• strong private sector participation and ownership,
• a shift from assets to outcomes and service delivery,
• innovation, responsiveness, and ability to scale-up,
• full cost recovery,
• regulations to protect the long term interests of consumers in the absence of market competition.

2. Enhance the attractiveness of infrastructure projects for private funding

Mobilizing private funding for infrastructure projects is crucial to bridge the infrastructure gap in Latin America and the Caribbean, and indeed elsewhere in the World. For this we need improved transparency in the infrastructure project generation process, higher certainty concerning the framework conditions for project execution and reduced risk for the operation phase. A long term infrastructure pipeline and better, broader and more independent cost benefit analysis are the major levers to reach this. It is therefore recommended by Bowditch that:

• To implement a consistent and unified methodology for cost benefit appraisals to have better comparability, and ensure full transparency for all public projects listed for consideration including those rejected,
• A culture of continuous improvement for project evaluations by reviewing them upon completion and 10 years after,
• To align infrastructure funding and capital market development through long-term bond market development, superannuation and pension fund preferences, and
• To enhance investment attractiveness through higher asset utilization: For this, price signals should guide supply and demand for infrastructure; full cost recovery should improve the attractiveness of private investment; and new technologies can enhance asset utilization.

3. Overhaul infrastructure for radical innovation and productivity growth

Improving productivity and harnessing the power of innovation in the infrastructure sector are important preconditions for increased infrastructure productivity. The recommended methods to promote this are:

• Placing outcomes as the central premise in infrastructure procurement is an innovation in itself, but also a catalyst for innovation in the provision infrastructure services as it shifts the focus from the physical attributes of an asset to the service to be delivered.
• High quality decisions which reflect the whole of government considerations ensure consistency and a streamlined approval process which is the most important precondition for efficient implementation.
• Long–term strategic land acquisition based on prior identification of strategic land corridors in cities and regions speeds up project implementation as it avoids delays from property disputes.
• Well qualified, multidisciplinary and teams in the relevant government agencies, equipped with the necessary decision making power and actively involving the project contractor are crucial for speed and quality of the delivery process.
• Better information and analytics for infrastructure construction and operation and the use of big data for infrastructure service planning can dramatically boost the performance of existing infrastructure assets as well as the efficiency and optimization of new infrastructure service offerings

In order to improve the quality of our infrastructure, institutions for good governance are key. While this topic is primarily in the sovereign responsibility of our partner countries, Multilateral Development Banks can help: for example, with workshops on how to set up and operate national project evaluation and preparation facilities. The IDB organized one in Colombia and one in Paraguay in the last 12 months.  It can also help to support platforms for the standardized presentation of infrastructure projects for the investment community. That is why the IDB recently hosted the launching of the International Infrastructure Support System: a platform of the sustainable infrastructure foundation, which is supported by a broad alliance of National and Multilateral Development Banks. Setting up an “ecosystem for quality infrastructure” still requires additional efforts, but we have taken the first steps, and we know the environmental, social and economic gains will be immense.