of GDP would need to be allocated for infrastructure investment.<sup>4</sup> This is the case, at least for developing countries where there is greater scarcity of man‐made and human capital related to infrastructure.

Economics would direct policy makers towards cost‐benefit analysis, but given incomplete information and uncertainty, a multidisciplinary approach is needed. The complexities of infrastructure investments indicate that a single methodology which provides a single ranking of infrastructure investments is far from desirable. All methods have advantages and disadvantages. The paper proposes a methodological framework for prioritization of infrastructure projects and portfolios to holistically equate trade‐offs among different policy objectives per key infrastructure sectors. The analysis suggests that it is not desirable to have a single methodology, providing a single ranking of infrastructure investments, because of the complexities of infrastructure investments. Rather, a multidisciplinary approach should be taken. Decision makers will also need to account for factors that are often not easily measured. While having techniques that enable logical frameworks in the decision making process of establishing priorities is highly desirable, they are no substitute for consensus building and political negotiations.

The paper is organized as follows. Section 2 begins with a discussion on the tension between economic growth and welfare when infrastructure interventions are being prioritized. This is followed by a methodological framework for prioritization of infrastructure projects and portfolios. Section 4 presents a stylized prioritization of these investments. Finally, section 5 presents concluding remarks.

# **2. Economic Growth versus Welfare Debate**

There is a false dichotomy between prioritizing large‐scale infrastructure versus addressing the needs of the poor. At a very basic level, this dichotomy is false because many large‐scale infrastructure investments may concurrently facilitate economic growth and increase the welfare of poorer populations. For example, a large transport project may primarily target facilitating trade of raw materials, but at the same time it may also connect isolated poorer populations to better services. A more interesting debate is at which stage of development a particular infrastructure investment has a higher impact on economic growth versus on welfare. For instance, a power distribution project may have large welfare impacts given that it enables education and health outcomes, which may in turn translate into future economic growth as a more educated, healthier labor force join the labor market in the medium to long run. Yet, it may also facilitate growth in manufacture today, which in turn may promote short‐term economic growth. The remaining of this section thus briefly discusses the linkages between infrastructure, economic growth, and welfare improvements.

## **2.1 Infrastructure and Economic Growth**

Investment in infrastructure is accumulated in man‐made capital formation and thus contributes to GDP growth.<sup>5</sup> A significant number of micro and macro studies find a positive link between infrastructure investments and growth (see Straub, 2008), which holds for both long‐run economic growth and specific

> 4 Based on information from a previous study (Fay and Yepes, 2003), Estache and Fay (2007) estimate that developing countries might need 6.5 percent of GDP, on average, during 2005‐2015 period. Of which 2.3 percent would be needed to maintain the existing infrastructure, whereas remaining 3.2 percent would be required for new infrastructure projects.

> 5 See for example Yoshino (2008), Calderón and Servén (2004), Estache and Fay (2010).

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