# **Governance Matters for Outcomes in Infrastructure**

We have considerable evidence on the importance of governance to investment returns across sectors. For example, we know that investment in general in Sub-Saharan Africa, where governance is comparatively weak, has had little impact on growth (Easterly, Pack and Devarajan, 2003). This also implies a low return to aid flows --nearly two dozen African countries receive aid worth more than 50 percent of total public expenditures (Moss, 2005). In addition, we have considerable macro evidence that aid performs better in the presence of strong institutions (Collier and Dehn, 2001).<sup>6</sup> For donors, even where individual infrastructure projects provide strong microeconomic returns in weak governance environments, their macro impact is reduced because projects are ‘cherry-picked’ and have little impact on the overall shape or size of a country’s investment program. Indeed, the weak correlation between aid flows and overall investment suggests that aid may frequently displace local investment in strong projects, and the local investment resources are instead consumed or invested in white elephants.<sup>7</sup> The importance of institutions to infrastructure performance also emerges from an analysis of the costs of corruption in the sector. Corruption is a symptom of failed governance, but can also act to further weaken the governance environment. Corrupt acts not only raise the price of infrastructure but can also reduce the quality of and economic returns to infrastructure investment.

In Eastern Europe and Central Asia, construction firms report paying an average of 7 percent of government contract values in bribes to win bids or alter terms (Kenny, 2006). Costs are also raised by the collusion between firms that these bribes can facilitate. Firms pay additional bribes in meetings with labor and construction inspectors. These activities will all raise the price of building new infrastructure. The average cost for a upgrading a two-lane road with a bitumen surface across countries is around $33.2 per square meter. For those countries with below average costs, the Transparency International Corruption

> 6 Analysis of World Bank projects suggests the same thing (Dollar and Levin, 2005, Wane, 2004).  The extent to which institutional development matters to outcomes in infrastructure is suggested by an OED (1999) evaluation of infrastructure projects in Africa, where only 18 percent of projects were considered sustainable in the late 1990s: “infrastructure projects require a level of institutional capacity that simply does not exist in many Sub-Saharan African countries,” the report concluded.  It should be noted that recent scores for sustainability are considerably higher, the 2006 Annual Review of Development Effectiveness (IEG, 2006) suggests that, across regions, 79 percent of infrastructure projects exiting 2001-2005 are sustainable, compared to 56 percent in the period 1996-2000.  The report also suggests that sustainability of all projects in Africa has risen from 38.9 in 1996-2000 to 63.8 2001-2005.

7 A recent metastudy of 43 papers examining the link between aid and accumulation found that, across the studies, aid had a small, statistically insignificant positive effect on investment and a small, statistically significant negative effect on savings (Doucouliagos and Paldam, 2005). Feyzioglu, Swaroop and Zhu (1998) suggest that concessionary loans to a particular sector do not significantly increase spending in that sector (see also World Bank, 1998). At the micro level, van de Walle et al (2005) do find that, depending on their technique, a World Bank project's net contribution to rehabilitated road increments may be as high as 66 percent (i.e., only one third of the aid displaced local spending).

4