safe drinking water and sanitation facilities, spending on the water sector has increased substantially and private participation in the rural water supply has been successfully encouraged.

Further efforts are, however, necessary, particularly in the education sector, to achieve the objective set in Rwanda’s Vision 2020, i.e. to create a knowledge based economy by 2020 and reach the envisaged middle-income status. Skills development is crucial to supply the industry and especially the services sector with well educated and trained labor.

As expected in this scenario, the additional aid leads to an increase in the growth rates for government consumption of education, health and water and sanitation services of 3.3 percentage points (Table A-3). Government investment in these sectors also increases (Table A-4), while real government consumption and investment growth for other sectors do not change. Regarding the contributors to GDP, the growth rate of agriculture and industry only change marginally, while the targeted government sectors expand, leading to higher growth rates of government and nongovernment services (Table A-5).

The MDG as well as the education indicators improve across the board compared to the BASE scenario (Table 6 and Table A-7). Gross and net primary school completion rate improve markedly, reaching 115 and 50 percent, respectively. As a result of the educational expansion, employment growth is more rapid for the more educated. However, the shares in the total labor force switch only quite slowly in favor of those with more education (Table A-6).

# _4.2.2. Additional aid allocated to infrastructure (AID-INF)_

The lack of infrastructure, particularly electricity, transport and water, is one of the main impediments to growth and regional competitiveness as pointed out by the Country Economic Memorandum (World Bank, 2007), the Diagnostic Trade Integrated Study and the recently completed Investment Climate Assessment (ICA). The poor state of infrastructure has limited the development of all sectors of the economy and is a major factor lowering the returns to trade and exports. According to the ICA, over 70 percent of firms in the manufacturing sector reported electricity to be a major constraint. Almost 40 percent of firms in Rwanda said that transportation was a serious obstacle, higher than all comparators for the East African Community (EAC)<sup>9</sup> , except Kenya, where 53 percent of firms ranked transport as a serious obstacle. Finally, subjective ratings by transport operators in Rwanda were significantly lower than that of operators in the other EAC countries. In general, transport and energy costs tend to be higher in Rwanda than in neighboring EAC countries as well. Investment is necessary to improve the infrastructure in Rwanda, thereby enabling the development of many sectors of the economy.

In contrast to the previous simulation, where aid was used to expand spending on human development services, now increased aid is spent on infrastructure by investing and raising growth in its capital stock, accompanied by an increase in recurrent government infrastructure services, representing higher operations and maintenance costs. Generally, a larger infrastructure capital stock leads to a productivity increase in all activities as well as an improvement in MDG and education indicators since it is considered as a determining factor for those indicators as summarized in Table 1.

> 9 The member states of the EAC are Tanzania, Uganda, Kenya, Rwanda and Burundi. Rwanda became a full member of the EAC on July 1, 2007.

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