1. Investment in Public Infrastructure : Productivity for Equity T Lalithasiri Gunaruwan Department of Economics University of Colombo Presentation made at CePA Seminar November 24 th 2015

2. Welfare Infrastructure Socio-economic development needs infrastructure [Ex: Transport – Mobility – Inclusivity Schools – Education – Knowledge – Social upliftment]

3. Welfare Infrastructure Public Investment Infrastructure calls for Public Investment -Capital Budget of the Government

4. Welfare Infrastructure Public Investment Taxes Debts Public Investment demands either taxation or debts (which again need taxation for their servicing)

5. Welfare Infrastructure Public Investment Taxes Debts

6. Taxation, if not properly structured… …. over-burdens socially vulnerable segments in a developing economy excessively dependent on “indirect taxes” …. Therefore, it is important to :  Make appropriate choice of infrastructure (types and modes) and prioritise among candidate projects and programmes  Ensure investment productivity: Design and “Appraisal” of projects are key  Deploy appropriate modality of implementation and execution  Resort to most favourable methods of financing

7. Choice and Priority … Example : Mobility infrastructure (highway vs railway) CriterionHighwayRailway Capacity< 500 pax per minute (?)>1500 pax per minute Space usage30 m (two lanes per direction) <20 m dual carriage way Capital CostRs 4000 - 6000 mn per km< Rs 400 mn per km Operating mode Road vehicles (cars/vans/buses) Trains Fuel for 2000 pax km 13 Litres (by 50 seater bus) 50 litres (by car with 4 pax) < 5 litres by double DMU

8. Failure to strike correct choice and priority..  Resource wastage ….  Excessive capital requirement..  Affordability issues of services [high fares or high subsidies needed] …  Exclusion possibility [Highways exclude many]  Externality issues [poor are likely to be affected more]

9. Investment Productivity [Max benefits for min possible inv] Why ?  To avoid unnecessarily high exp, and thus borrowings  To maximise benefits, including income distribution, linkage creation leading to multiplier effects How ? Putting into effect existing capital assets Effective project design and appraisal for new inv

10. Ineffective utilisation of assets …? Capital Assets already in place, but unused or under-ulilised:  Expenditure made ….  benefits not received at all or partially while public coffers service debts and assets get corroded/dilapidated resulting in tax payers shouldering a burden for nothing ! Are there examples ?

14. Modality of Implementation and Execution …. Competitive Procurement..  Tender Procedure …. calling for bids  Competition among suppliers can be envisaged  Wider choice for the procurer (Govt)  Cost effective procurement  Minimum room for corruption Reduces over-Expenditure Reduces waste Minimises leakages But, increasingly voluntary offers are entertained and implemented ….???

16. Cost differentials (Out of 137 Highway Projects over the past 10 years Technology : Asphalt) FundingAve K Cost (per metre Km) Differential GoSL5.0-- Japan/EU6.5+ 30% ADB/WB10+ 100% Korea/China15.75+ 215%

17. Recent Railway Projects …. Project / ProcurementDomicile of Contractor Value of Investment Coastline track rehabilitationIndia$ 89.0 Mn Talaimannar rail track (106 km) reconstruction (MWH-TMP) India$ 231.0 Mn Jaffna rail track reconstruction (OMT-PAL, 91 km) India$ 185.4 Mn Matara-Beliatta new track (28 km)China$ 250.0 Mn 20 DMUs from IndiaIndia$ 70.0 Mn 13 DMUs from ChinaChina$ 121 Mn 15 Pakistan Tank WagonsPakistan$ 2.0 Mn Signaling & Tel - Northern LineIndia$ 86.5 Mn Procurement of Railway BridgesBelgium$ 7.0 Mn

18. Excessive Expenditure…. Project / ProcurementDomicile of Contractor K Exp Intensity Talaimannar rail track (106 km) reconstruction (MWH-TMP) India$ 2.3 Mn Jaffna rail track reconstruction (OMT-PAL, 91 km) India$ 2.0 Mn Matara-Beliatta new track (28 km) China$ 8.5 Mn TDK-OMT local construction (10 km) Sri Lanka Railway $ 0.4 Mn Signaling & Tel - Northern LineIndia$ 2.5 Mn per station (Ave) Signaling Sub-contract (for 6 station) India$ 0.25 Mn per station (ave)

19. Railway CapEx (Local Estimates)….. Activity / Capital AssetUnitCost ($ Mn) Rehabilitation of rail track (for 100 kmph travel speed) Per km0.40 Procurement of Rails UIC 60Per km of single track0.12 Procurement of Concrete sleepers Per km of single track0.20 Complete Signalling and Communication system Per kilometre0.15

20. Modality of Implementation and Execution …ctd Ensuring High Productivity of New Investment Maximise Economic Linkages in project execution  Employment of local economic forces Will enable maximisation of VA per given quantum of investment  Increased Capital Productivity  Local Capacity Building  Strength for future This was a specific objective in the past ….

23. Broadening of KV line Double Tracking of - Panadura – Kalutara South Polgahawela - Rambukkana Ragama – Ja-Ela Third line to Ragama Mihintale Railway, …etc. Colour-light signaling up to Rambukkana Greatest Effort was Reconstruction of Tsunami Damaged Coastal Railway in 57 days ! …Have we forgotten …???

30.  Fourth line Between Fort and Maradana, with Signalling and Controlling  Introduction of Token-less Signalling system between Peradeniya and Kandy  Track reconstruction beyond Vavuniya..  VNA-TDK (4 km) was completed before April 2009  TDK – OMT (10 km) was ready by end-2010 Cap Exp was aprx 1/3 rd a million USD per km

32. SLR effort between VNA - OMT

33. When Contracts are undertaken by Foreign Companies …. Foreign parties tend to maximise employment of inputs of their country of origin …  Repatriation of returns on factors (profits, wages, etc..) An increasing trend in such a practice could … … destroy local entrepreneurial ability … kill engineering /innovative talent … increase foreign debt … influence GNP/GDP ratio

35. Methods of Financing …. In case borrowing is needed ….  Multilateral sources would be more advantageous  If borrowing from bilateral sources is unavoidable, ensure competitive bids are called for project cost cum financial proposal in two envelopes …. Enables NPV based competition  If borrowing from a single country becomes unavoidable, still call competitive bids from potential suppliers from that country

36. Transfers : to right direction ! Has to be from “rich” to “poor” if transfers are needed No justification to subsidise “infrastructure for rich” at the cost of “poor” Ex: “Road Development Authority” is run without seeking profits on tax money (largely indirect sources), while “rail roads” are on the account of the train operators !

37. Strategic approach … Identify requirements, and most socio-economically optimum solutions  “poor friendly” Ensure capital productivity …. “design and appraisal” of projects to be efficient Competitive financing and procurement  avoidance of unnecessary debt burden on poor Modality should be to “drive the economy” also, in addition to “shouldering the economic burden of infrastructure”  Linkage creation and employment benefits => helping poor