# _<u>Box 11: Does regulation improve construction outcomes in developing countries?</u>_

<mark>Weak oversight and corruption in construction regulation may help to account for the apparently fragile relationship between regulations on the books and outcomes on the ground.</mark> _<mark>Doing Business</mark>_ <mark>surveys suggest that the number of procedures required in order to get permission to build a warehouse varies considerably between countries. The average number of procedures was 16 in rich countries, and 20 in low income countries, with the time taken to comply 157 days in rich countries and 229 in poor countries. It is not clear that this extra regulatory burden is improving outcomes -there is no correlation between the number of procedures and the number of worker accidents across countries, for example. More broadly, greater regulation in countries at similar levels of income is associated with lower compliance with international quality standards as measured by ISO 9000 compliance, more perceived corruption and a larger informal economy (Djankov, La Porta Lopez-de-Silanes and Shleifer, 2000).</mark> <mark>These results should not be taken to suggest that regulation is an unnecessary burden in developing countries, but it should instill caution regarding solutions which involve even greater regulation –will that regulation be enforced fairly, or will it act as one more source of rents for officials, with little impact on quality and safety?</mark> Given the high cost of complying with regulations regarding retrofit and earthquake proofing, their comparatively low benefit, and the significant negative side-effects of such regulation in environments prone to corruption, the optimal solution may be to focus, simplify and limit such regulation – alongside similarly complex rules regarding land use. In particular it might be best to focus limited regulation and oversight capacity in areas where potential returns are highest – large public buildings, for example.

# **The Political Economy of Public Construction Projects**

In addition to their role as regulators, government officials are the largest customers for construction firms around the world. Given the repeated accusations regarding the particular fragility of government buildings such as schools and hospitals in recent earthquakes, it appears likely that there are a particularly acute set of political economy factors related to such construction.

Benefit-cost analysis may bring further clarity to the tradeoffs presented to an official deciding on construction methods as much as for private individuals. As it is more expensive to construct earthquake-resistant buildings, the official faces a choice between construction of more buildings with a risk of collapse at some point in the next 100 years or construction of fewer buildings with lower risk of collapse. These costs of mitigation are immediate, then, but the visibility of such measures is low, and any benefits are likely to accrue to a politician’s successors. And we have seen that public appetite for such construction appears to be limited.<sup>37</sup> 37 An additional element that applies to local construction projects is the potential moral hazard presented by levels of government. Local governments may feel able to skimp on mitigation on the implicit 22