Clogged Metropolitan Arteries

Bad conditions of mobility and accessibility to jobs and services in most metropolitan regions in developing countries are a key development issue. Besides the negative effects on the wellbeing of their populations associated with traffic congestion and time spent on transportation, the latter mean economic losses in terms of waste of human and material resources.

That led me to read with much interest a recent book – available on Google Play – on the impact of rail-based networks in São Paulo and Mumbai written by Jorge Rebelo, a transport specialist who worked for more than 25 years at the World Bank. São Paulo and Mumbai are both mega-metropolitan regions with about 20 million inhabitants and in dire need of quick solutions for better mobility and accessibility for their populations. As their population and income grew, auto and motorcycle ownership and their use also increased in both cities. Their mass transport systems are overloaded and traveling conditions are reaching their limit or are above their limit at peak-hours. Congestion is becoming unbearable in these two megacities and any new infrastructure requires relocation of houses and businesses, a very sensitive issue which in turn demands careful planning and heavy investment.

Both Mumbai and São Paulo metropolitan regions have extensive suburban railway networks dating from the 19th century that are now serving primarily a huge number of mostly low-income commuters every day. Built initially for transportation of freight and intercity passengers, these railways are now major commuter networks which are used by millions of passengers every day. According to Rebelo, both mega-metropolitan regions have delayed too long the substantial extension of their subways and other rail based systems either because of lack of coordination between levels of government and/or unreliable financing mechanisms which did not allow the required continuity to ensure annual additions to their rail based systems. The price for having procrastinated in facing those challenges has been huge!

Increasing challenges with mobility are of course not unique to those two mega-metropolises. Nineteen of the twenty-six largest metropolitan areas in the world are in non-advanced economies and most of them have suffered from a mismatch between, on the one hand, the fast dynamics of densification and transformation of space use and, on the other, the slower pace of institutional adaptation and/or investment finance to cope with the evolution of transportation needs. Mobility difficulties have become more intense even where population dynamics and rural-urban migration are not major factors, like in Russia, as approached by JungEun Oh and Kenneth Gwilliam in a recent World Bank review of the urban transport sector in the Russian Federation:

 “Russian cities are undergoing critical economic and social changes that affect the performance and condition of their urban transport systems. While the population of most large cities in Russia (over one million residents) has remained relatively unchanged over the last decade, the average income of the urban dwellers has sharply increased. The number of private cars per capita has increased rapidly, generating a demand for urban mobility which is increasingly difficult to meet.”

Through the long series of projects and analyses with which the World Bank has been supporting urban transport improvements in developing countries over the years – openly accessible on – one can notice how challenges associated with the mismatch between evolution of urban transport needs and institutional and investment finance responses are widespread in the developing world. One can also see how far ago those challenges had already become significant. For instance, a World Bank appraisal report on a project in Rio de Janeiro more than 20 years ago stated the following:

 “Urban Transportation is in a crisis in Brazil. Although the nation has invested heavily in the sector over the past 15 years, the effective demand for urban transport services particularly in major metropolitan regions (MRs), increased by about 82% in the last decade, and under present pricing policies, exceeds the existing peak hour supply in most MRs. To add to this capacity shortage, the Brazilian urban transport sector suffers from institutional problems due to a lack of coordination between the three levels of government responsible for urban transport in the MRs.

Not by chance, the issue of coordination between levels of government is highlighted in a set of policy proposals argued in Rebelo’s book – one that certainly serves as a reference for most metropolitan areas in developing countries. First and foremost, it is fundamental to establish some sort of real, effective Metropolitan Authority as a coordinator of long-term planning, evaluation and prioritization of new investments and coordination of their tariff and subsidy policy. This has also been pinpointed in a recent World Bank report – Institutional Labyrinth:

 “Typically, multiple agencies, at different levels of government, are involved in the management and delivery of urban transport infrastructure and services. More often than not, there is little or no coordination among them. This results in duplication and inefficiency in the use of resources and poor-quality services. The need for institutional coordination across space and function is increasingly being recognized as critical to developing an integrated and comprehensive urban transport system.”

The rapid transformation of space use and densification of connections between urban areas tends to turn previous transport- and urban-related political and administrative mandates obsolete and dysfunctional. Natural political inertia or resistance then often becomes a hindrance to building some sort of new, effective authority able to cope with the evolving metropolitan reality.

Some other recommendations follow in Rebelo’s book. For instance, there should be a search for financing mechanisms that are less dependent on floating government general budgets. A greater use of Public-Private Partnerships seems to be a trend in many parts of the world, and that might require operating subsidies. Therefore, financing mechanisms to guarantee the payment on time of those subsidies must be in place to avoid situations where concessions risk failing when operating subsidies are not paid on time. Revenues from advertising, use of station space, real estate developments around stations and urban operations can also be carefully planned.

Another key consideration is to strongly encourage the transparency of the bidding and evaluation process to foster international competitiveness and decrease costs. It also seems advisable to create an inventory of projects contained in the long-term strategy well beyond preliminary design stages. That would cut in the implementation schedule and make projects more attractive from a political standpoint. Finally, in most cases probably with the help of the judiciary, an effort must be made to find ways to simplify and accelerate expropriation/resettlement processes that may be deemed as necessary. All these recommended procedures require a definition of lines of authority appropriate to the evolving metropolitan reality.

The reality is some of the developing world’s transport infrastructures are beyond simple congestion; they are in danger of complete collapse or paralysis. There is reason to believe, however, that authorities in many countries have got the message and started to act more decisively. For instance, Mumbai just had its first monorail inaugurated and there are other rail and metro projects underway under the leadership of the Mumbai Metropolitan Region Development Authority. Sao Paulo and Rio are also undertaking substantial programs to try to address their mobility issues, and it’s high time they do it. Pay-offs from adjusting institutions and finance to the urban dynamics are clearly huge. It’s time to unclog the arteries of urban transport now to prevent stroke and paralysis tomorrow!

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Sovereign Wealth Funds Are Coming Home

Followers of this blog have read several recent pieces on the changing landscape of investment finance in developing countries, particularly in natural resource-rich countries. We have approached the rise of development banks partially filling the void left by the retrenchment of international banking. We have also highlighted how  less tax avoidance on extractive industries can be obtained and how that would make a huge difference in terms of resources available for local investment in those countries, provided that appropriate policies are put into place. Furthermore, we have pointed out the emergence of new forms and contracts of resource-backed investment finance, including a redirection toward home in asset acquisition made by developing countries’ Sovereign Wealth Funds.

I have invited three colleagues who have been studying the subject more closely to write the short piece below. Hope you will enjoy it as much as I did.


Sovereign Wealth Funds Investing at Home: Opportunity Fraught with Risks

Håvard Halland, Alan Gelb, Silvana Tordo

Traditionally, economists have advised countries where oil, gas or mineral reserves are discovered to invest extractives revenues abroad, ensuring a continuous future revenue stream from the return on accumulated foreign assets. The structure to do this became known as a Sovereign Wealth Fund (SWF). More recently, it has become accepted policy for resource-rich developing countries to invest a larger share of resource revenues at home, through the national budget. Now, some of these countries are turning the concept of the SWF on its head by using SWFs directly for national investment, particularly in infrastructure. For many public finance experts, such intentions cause warning lights to flash, and for good reason – the risks are substantial. As several countries push ahead with this new role for SWFs, what can be done to minimize the risks, and could there be potential advantages? A recent Economic Premise by Gelb, Tordo and Halland addresses these important questions.

The Evolving Agenda of Sovereign Wealth Fund Policy

SWFs have become so common that it is easy to forget that the term has been in use for less than a decade. However, there has already been a paradigmatic shift in the way SWFs are expected to be used for development. Until three or four years ago, oil and mineral producing countries were advised to save resource revenues abroad according to some version of the permanent income hypothesis, which posits accumulation of foreign savings until returns on accumulated capital are sufficient to provide an even future revenue stream. For many developing countries, this always seemed like an outrageous idea, given urgent needs to expand infrastructure investment at home. Eventually, economists arrived at the same conclusion, considering domestic investments a potentially beneficial complement to foreign savings in cases where they contribute to increased economic productivity. For example, a new power plant can provide reliable access to electricity where power cuts previously hampered firms’ output.

SWFs that Invest at Home

Several recent and upcoming oil and mineral producing countries, such as Tanzania, Uganda, Mozambique, and Sierra Leone, as well as Zambia, are now considering the use of their SWFs for direct domestic investment, outside of the national budget. In fact, this role for SWFs is not as new as it sounds, and Gelb and others (forthcoming) count fourteen SWFs that invest domestically, including well-established funds such as Singapore’s Temasek and New Zealand’s Superannuation Fund. These two funds, and several others, are commercial investors on par with pension funds and other privately owned funds, where the composition of the domestic investment portfolio is determined on the basis of expected financial returns. For other SWFs, including Malaysia’s Kazanah, several funds in the Gulf States, and more recently the Nigeria Infrastructure Fund, the investment mandate goes beyond financial returns to include development objectives.

Why Resource Revenues Might be Safer Abroad

Using SWFs for national development purposes carries significant risks. From a macroeconomic perspective, there is the risk of exacerbating damaging boom-bust spending cycles. On the investment side, quality, productivity and integrity of investments may suffer, particularly in contexts where there is a high risk of investment decisions being affected by political and lobbying pressure, and the risk of low-productivity, badly selected and poorly implemented “white elephant” projects is high.

It could be argued that, in the light of such risks, SWFs investing domestically should make domestic investments based purely on financial returns. However, equity markets in developing countries tend to be underdeveloped, and new infrastructure projects are frequently considered too risky to be bankable on purely commercial terms. Under such circumstances, SWFs’ opportunities for domestic investment could be very limited, and their contribution to development marginal.

Addressing the Risks of Domestic Investment

How can the integrity of SWF’s investment processes be ensured, reducing opportunities for corruption and politicization while bringing additional expertise to the investment process? In their forthcoming piece, Gelb, Tordo and Halland propose three main avenues to address such challenges.

Firstly, they suggest that domestic investment projects should compete for funding with foreign assets, rather than be fixed at a certain portfolio share. In periods of low domestic returns, or when there are indications of asset bubbles, investments would be channelled abroad. If the investment project has a clearly defined development objective, it would still be benchmarked against the financial return on foreign assets, but allowance could be made for a limited mark-down from the benchmark rate. Determining an acceptable “home bias” of this kind is challenging, and there are few examples to draw on. Gelb, Tordo and Halland discuss this issue in a forthcoming paper and suggest possible solutions. Investments that cannot be expected to yield a competitive return, such as for example public schools, would be undertaken through the national budget.

Secondly, partnering with experienced international investors can strengthen the integrity of the investment process and the quality of investments, by bringing additional oversight and expertise. The Nigeria Infrastructure Fund provides an example of this, having signed cooperation agreements with General Electric, the Africa Finance Corporation and the International Financial Corporation.

Third, SWF governance structures must ensure that investment decisions will be made independently of political and other pressures. Operational independence of professional management from the Board needs to be solidly embedded in the SWF governance structure, as well as an arms-length relationship between Board and the government as owner of the SWF.  Additionally, if the SWF is large relative to the rest of the economy, coordination with overall macroeconomic policy is needed to avoid exacerbating macroeconomic cycles. Coherence with investments funded through the budget needs to be ensured by coordinating with the overall national investment program.

Looking for the Upside: Potential Opportunities and Advantages

The use of SWFs for domestic investments carries significant risks. But can there be an upside too? An SWF that invests domestically on a commercial or quasi-commercial basis could act as an expert investor that shares risk and crowds in private investment to projects that would otherwise not be bankable but have an important development impact. Where necessary the SWF could boost its capacity by involving foreign majority investors. The first paradigmatic shift in developing countries’ resource revenue policy changed the emphasis from a focus on foreign savings to include a larger share of domestic investments. The next shift may see an expanded role for SWFs as active domestic investors. However, the risks are high, and the level of success will depend on the establishment of strong checks, balances and governance structures.

Alan Gelb is a Senior Fellow at the Center of Global Development in Washington, DC. Silvana Tordo is Lead Energy Economist for the Sustainable Energy Department, Extractive Industries. Håvard Halland is a Natural Resource Economist for the Poverty Reduction and Economic Management (PREM) Network of the World Bank.

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