305 35668 privatesector P U B L I C P O L I C Y F O R T H E NUMBER NOTE 2006 Postconflict Infrastructure MARCH Jordan Schwartz and Trends in Aid and Investment Flows Pablo Halkyard As war and civil strife subside, can governments turn to the private Jordan Schwartz sector to restore basic services? Postconflict countries suffer from (jschwartz3@worldbank.org) is a senior infrastructure disproportionately low levels of private investment in infrastructure, specialist in the Finance, with only small-scale service providers likely to emerge during and right Private Sector, and Infrastructure Department after conflict. Larger investors are slow to enter, and when they do they of the World Bank's Latin PRESIDENCY focus almost exclusively on the easily secured and most profitable America and the Caribbean subsectors. Yet some countries have been able to couple aggressive VICE Region. Pablo Halkyard (phalkyard@worldbank.org) reform and liberalized policies to attract infrastructure investments is a private sector soon after conflict abates. What does their experience tell us? development associate in the World Bank and Developing countries affected by conflict, par- vate participation in infrastructure in post- DEVELOPMENT International Finance ticularly those that can be characterized as weak conflict countries.2 Corporation's Private Sector or nonfunctioning states, have been markedly Development Vice Presidency. SECTOR less successful than others in attracting private The paradox of postconflict aid flows . . . This Note summarizes an investment in infrastructure.1 These countries Aid tends to peak immediately after conflict analysis from a paper by also face the greatest needs, because of the lack (figure 1). As a country emerges from conflict PRIVATE Jordan Schwartz, Shelly of investment during conflict and because of and captures the attention of the international Hahn, and Ian Bannon their low income levels--more than three- community, donors generally increase aid to (2004). A companion quarters of the nonfunctioning states are classi- support peace and begin reconstruction. Using Note explores policy fied as low income. Thus while poor com- aid effectively during the early postconflict years GROUP options for postconflict munities in all developing countries suffer from is extremely difficult, however. Within the first countries seeking to lack of access to infrastructure services, those in decade aid tends to initially spike, then to grad- BANK attract private investment conflict-affected countries suffer disproportion- ually decline. But during this initial period most in infrastructure ately (table 1). postconflict countries face political and admin- (Schwartz and Halkyard Despite the challenges these high-risk coun- istrative constraints that limit their capacity to 2006). tries face in attracting significant, long-term pri- absorb this increased aid. WORLD vate investment in infrastructure, private activity The constraints on absorptive capacity are does occur. The patterns of this activity suggest especially severe for project aid. Setting up THE policy approaches that could help expand pri- administrative, accounting, financial manage- P O S T C O N F L I C T I N F R A S T R U C T U R E T R E N D S I N A I D A N D I N V E S T M E N T F L O W S time postconflict countries develop the capacity Table Infrastructure services: indicators of access, use, and quality to efficiently absorb it. This is also precisely 1 Sub-Saharan Africa when such countries badly need infrastructure Conflict- Non-conflict- High- investments to sustain the initial postconflict Infrastructure affected affected South income growth spurt and help prevent a relapse into service countries countriesa Africa countries conflict.3 Research has shown that faster growth Electricity (kilowatt-hours tends to reduce the risk of further conflict used per capita) 96 384b 3,793 8,421 directly and cumulatively by raising income lev- Telecommunications (fixed els (Collier and others 2003). and mobile lines per 1,000 people) 19 67 410 1,283 . . . and of postconflict investment flows Roads (percentage paved) 13 27 20 93 Water (percentage of The initial period of high growth and large aid population with access inflows in postconflict countries is paralleled by to improved source) 52 67 86 96c a period of inactivity in private investment in infrastructure: little such investment typically Note: Data are for the most recent year available in the source. Averages weight each country equally. a. Excludes South Africa. occurs for the first five years after conflict abates b. Based on nine countries for which data were available. (figure 2). Large-scale investments in infra- c. Based on data for Australia, the Republic of Korea, Spain, and the United Kingdom. Source: World Bank, World Development Indicators database (2003 edition). structure tend to materialize only after post- conflict countries have maintained stability for ment, fiduciary, and procurement systems takes a sufficient period--that is, at about the time time, especially in countries where conflict has that aid slows and growth declines. Again para- weakened institutions and human capacity. doxically, it is during those initial postconflict Immediately after conflict, countries can better years that investments are most needed to pro- absorb aid provided as direct budgetary support. vide basic services, reignite the local private sec- But many donors face restrictions on providing tor, strengthen growth prospects, and lessen the such support or have governance concerns that likelihood of a return to conflict. dissuade them from doing so. So, for a post- conflict country needing substantial investments Small-scale private providers step in in infrastructure, aid-funded projects offer little In contrast to large investors, small-scale private relief in the initial postconflict phase. service providers are quick to set up shop after To make matters worse, paradoxically aid conflict abates--and sometimes even during begins to decline precipitously at just about the conflict. In Cambodia hundreds of tiny private GDP growth and official development Investment in infrastructure projects with Figure assistance by year after conflict Figure private participation by year after conflict 1 2 Percent El Salvador Other countries 20 2002 US$ millions Year 0 400 800 1,200 1,600 ODA as a percentage of GDP 0 10 1 GDP growth 2 0 3 0 1 2 3 4 5 6 7 8 4 Year 5 ­10 6 7 ­20 8 Note: Based on data for 10 countries that have emerged from war since 1990 and for Note: Based on data for 10 countries that have emerged from war since 1990 and for which eight years of consistent data were available: Azerbaijan, Cambodia, El Salvador, which eight years of consistent data were available: Azerbaijan, Cambodia, El Salvador, Georgia, Lebanon, Mozambique, Nicaragua, Rwanda, Tajikistan, and the Republic of Yemen. Georgia, Lebanon, Mozambique, Nicaragua, Rwanda, Tajikistan, and the Republic of Yemen. Source: World Bank, World Development Indicators database (2003 edition). Source: World Bank, Private Participation in Infrastructure (PPI) Project Database. power networks established themselves through- Investment in infrastructure projects with private participation by out the countryside during and after the civil Table country and conflict status, 1990­2002 strife of the 1990s, effectively filling the void left2 by the nonfunctioning national utility. Similar Non-conflict- All conflict- Nonfunctioning affected affected conflict-affected stories can be found throughout postconflict Indicator countries (107) countries (31) countries (25) countries. Indeed, about half the countries with Average total investment significant small-scale private provision of water in 1990­2002 and electricity services are conflict affected (US$ billions) 5.9 3.6 0.6 (Kariuki and Schwartz 2005). Average annual investment (US$ millions) 455 278 46 Diverging trends in investment levels Average annual Developing countries affected by conflict have investment as a attracted far less large-scale private participation percentage of GDP 0.92 0.93 0.74 in infrastructure than other developing coun- Countries with no tries (table 2). Still, the trend in private partici- investment (percent) 3 13 16 pation in conflict-affected countries is similar to Note: Figures in parentheses are the number of countries in the category. that for all developing countries (figure 3). That Source: Authors' calculations based on data from World Bank, Private Participation in Infrastructure (PPI) Project Database and World Development Indicators database (2003 edition). suggests that, as a whole, conflict-affected coun- tries are subject to the same supply-side con- Trends in investment in infrastructure projects with private participation straints as other developing countries. Figure by country group, 1990­2002 But the trend for nonfunctioning conflict- 3 Conflict-affected and Nonfunctioning affected states, which face even greater chal- non-conflict-affected countries conflict-affected countries lenges in attracting investment, diverges (US$ billions) (US$ billions) dramatically from the general ups and downs of 100 4 the overall trend. The likely reason is that the risks associated with investing in infrastructure 80 Non-conflict affected 3 in nonfunctioning states are so great that they deter all but a few investors, with a profile far dif- 60 2 ferent from that of the general community of infrastructure investors. 40 1 Nonfunctioning conflict affected The sectoral sequencing of investment 20 All conflict affected 0 Private investment in infrastructure in post- conflict countries follows a clear sequence of 0 ­1 sectors, with mobile telephony the only one 1990 1992 1994 1996 1998 2000 2002 likely to attract significant investment immedi- Source: World Bank, Private Participation in Infrastructure (PPI) Project Database. ately after conflict (figure 4). All the post- conflict countries analyzed had at least one pri- vate mobile operator investing in the country retail risks make privatizing distribution difficult, after it emerged from war. The willingness of particularly in the early postconflict years. In mobile operators to invest in high-risk environ- transport most private investment goes to sea- ments reflects the rapid cost recovery allowed ports, probably because container terminals offer by the sector's economics. the potential for earning hard currency and Beyond telecommunications, the attractive- because bulk facilities can be incorporated into ness of infrastructure investments in postconflict vertically integrated logistics systems. Investments countries drops precipitously (Schwartz, Hahn, inrail,roads,andairportsnormallyoccuronlysev- and Bannon 2004). Power projects remain some- eral years after conflict. The water and sanitation what attractive, particularly in generation, where sector receives the least investment and is the last projects start to emerge three years after conflict to receive foreign investment--though it often and increase in frequency after five years. But has the greatest needs. P O S T C O N F L I C T I N F R A S T R U C T U R E T R E N D S I N A I D A N D I N V E S T M E N T F L O W S Sector distribution of infrastructure infrastructure are more sensitive to perceptions projects with private participation by year of political and economic instability than those in Figure after conflict other businesses, such as extractive or final assem- 4 Telecoms Energy Transport Water bly industries. Infrastructure investors also are Number of projects more sensitive to improvements in country risk viewpoint Year 0 4 8 12 16 ratings in conflict-affected countries than in oth- ers; and these countries are rated riskier on aver- 0 age. That means that improving the underlying 1 is an open forum to factors influencing political and economic risk encourage dissemination of 2 ratings may lead to faster growth in infrastructure public policy innovations for 3 investment in conflict-affected countries than in private sector­led and other developing countries. 4 market-based solutions for development. The views 5 published are those of the 6 authors and should not be 7 Notes attributed to the World 1. For a list of conflict-affected countries (broken Bank or any other affiliated 8 down between functioning and weak or nonfunctioning organizations. Nor do any of Note: Based on data for 10 countries that have emerged from war since 1990 and for states), see Schwartz, Hahn, and Bannon (2004, annex 1). the conclusions represent which eight years of consistent data were available: Azerbaijan, Cambodia, El Salvador, Georgia, Lebanon, Mozambique, Nicaragua, Rwanda, Tajikistan, and the Republic of Yemen. Except where otherwise noted, data for conflict-affected official policy of the World Source: World Bank, Private Participation in Infrastructure (PPI) Project Database. countries in this Note refer to that set of countries. Bank or of its Executive 2. For an in-depth discussion of policy options, see Directors or the countries The effect of country risk Schwartz and Halkyard (2006). they represent. While trends in general foreign direct investment 3. Collier and others (2003) estimate that a country (FDI) cannot be correlated with country risk rat- emerging from a civil war typically faces a 44 percent To order additional copies ings for developing countries, trends in private chance of returning to conflict within five years. contact Suzanne Smith, investment in infrastructure can be--for both managing editor, conflict-affected and non-conflict-affected coun- References Room F 4K-206, tries (figure 5). That suggests that investors in The World Bank, Collier, Paul, V. L. Elliott, Håvard Hegre, Anke 1818 H Street, NW, Hoeffler, Marta Reynal-Querol, and Nicholas Sambanis. Washington, DC 20433. Correlation between country risk and 2003. Breaking the Conflict Trap: Civil War and Development private participation in infrastructure in Policy. New York: Oxford University Press. conflict-affected and other developing Telephone: Figure countries Kariuki, Mukami, and Jordan Schwartz. 2005. "Small- 001 202 458 7281 5 Scale Private Service Providers of Water and Electricity." Country risk Fax: rating Policy Research Working Paper 3727. World Bank, 001 202 522 3480 Washington, D.C. 50 Email: Schwartz, Jordan, and Pablo Halkyard. 2006. Conflict affected ssmith7@worldbank.org "Rebuilding Infrastructure: Policy Options for Attracting 40 Private Funds after Conflict." Viewpoint series, Note 306. Produced by Grammarians, FDI/GDP in developing World Bank Group, Private Sector Development Vice countries Inc. 30 Presidency, Washington, D.C. Non-conflict affected Schwartz, Jordan, Shelly Hahn, and Ian Bannon. 2004. Printed on recycled paper 20 "The Private Sector's Role in the Provision of 0 1 2 Infrastructure in Post-Conflict Countries: Patterns and Investment in infrastructure projects with private participation as a percentage of GDP Policy Options." CPR Working Paper 16. World Bank, Washington, D.C. Note: Excludes Mozambique and the Philippines from conflict-affected countries. Country risk ratings are by Euromoney. They range from 0 (lowest) to 100 (a perfect score). Source: Authors' analysis based on Euromoney country risk ratings and data from World Bank, Private Participation in Infrastructure (PPI) Project Database and World Development Indicators database (2003 edition). T h i s N o t e i s a v a i l a b l e o n l i n e : h t t p : / / r r u . w o r l d b a n k . o r g / P u b l i c P o l i c y J o u r n a l