[ Infrastructure For Growth TABLE OF CONTENTS INFRASTRUCTURE FOR GROWTH 1.1 WHY INFRASTRUCTURE AND CLIMATE CHANGE MATTERS FOR GROWTH….........................6 1.2 OBJECTIVES OF THE WINDOW………………………………..….................................................7 1.3 AREAS OF TECHNICAL ASSISTANCE……………………………………………….………….........7 1.3.1 REGIONAL ECONOMIC INTEGRATION……………………………………………….………...11 1.3.2 CLIMATE CHANGE…………………………………………………..……….……………............11 1.3.3 CROSS CUTTING AREAS……………………………………………………..……………...........12 1.4 FINANCIAL SUMMARY……………………………………………….……………………..............14 1.4.1 ALLOCATIONS MADE BY THEMATIC AREA…………………………….……………………….14 1.4.2 ALLOCATIONS BY SECTOR……………………………………………….….……………….......14 1.4.3 ALLOCATIONS BY COUNTRY……………………………………………….….……………........15 1.5 PRELIMINARY RESULTS……………………………………………….……….………………...........15 1.6 GOING FORWARD……………………………………………………..……….……………...........16 This is an extract from the first Annual Report of the AusAID-World Bank Partnership for South Asia Umbrella Trust Fund (UTF). To read and download the complete report visit www.PartnershipForSouthAsia.com. The report has been prepared by the PFSA Secretariat led by Tara Sharafudeen, Program Manager and main author. Nicola Vesco, Communications Specialist worked on the design and Nishtha Mehta, Knowledge Specialist assisted with the writing and editing of the report. PHOTO CREDITS IFG SECTION COVER: DAVID WALDORF/WORLD BANK PHOTO CREDITS/AKNOWLEDGMENTS BACKGROUND: CURT CARNEMARK/WORLD BANK BACKGROUND HIGHLIGHT 4: DAVID WALDORF/WORLD BANK ILLUSTRATION PAGE 64: DOMINIC SANSONI/WORLD BANK DIAGRAM 1: IDELDESIGN//SHUTTERSTOCK, INC. 1.1 WHY INFRASTRUCTURE AND CLIMATE CHANGE MATTERS FOR GROWTH IN SOUTH ASIA The infrastructure gap in South Asia is a major chal- ple in them will bear the brunt of climate change due lenge to connectivity and integration both within to disadvantaged geography, limited assets, and a countries and within the region. Infrastructure indica- greater dependence on climate-sensitive sources of tors for the region are close to Sub-Saharan Africa income. South Asia is at the epicenter of the climate and, in doing business surveys, these indicators are change debate due to its extreme vulnerability. High cited as the biggest roadblocks to growth. SAR’s population levels place increasing demands on an electrification rate is well below the average for de- already stressed and largely degraded natural re- veloping countries at 73%. Unreliable and poor ac- source base. With an estimated 600 million South cess to electricity hampers business development. Asians subsisting on less than US$1.25 a day, even Taking “total road network per 1,000 people” as an small climate shocks can cause irreversible losses and indicator, SAR has 2.7 km, while the world average is tip large numbers into destitution. The region is also at 6.7 km per 1,000 persons. The quality of the roads is highly susceptible to natural disasters. Over 50 per- also much lower. The example of the transport sector cent of South Asians – more than 750 million people reveals that it suffers from lack of intra-regional con- – have been affected by a natural disaster in the last nectivity, unrealized potential for rail and inland wa- two decades. With climate change the frequency ter freight transport, and inadequate road and rail and incidence of such natural disasters is projected connectivity of ports with hinterlands, poor and un- to increase. Sea level rise is a further concern as the reliable road transportation and lack of inter-modal region has long and densely populated coastlines. connectivity. These gaps in basic infrastructure are This will have the largest impact on Bangladesh and coupled with poor sector governance, fragmenta- the Maldives. tion of institutions, low capacity and general ineffi- ciencies. This provides both an opportunity as well as a chal- lenge for sustainable growth in the region. South Asia Transport and energy connectivity (i) improves ac- has the world’s largest concentration of poor (44%) cess to goods and services at lower prices, making and undernourished (39%) people. At the same time prices less responsive to domestic shocks; (ii) increas- it has the greatest share of working age population, es access to markets and competitiveness of domes- and one fourth of the world’s middle class consum- tic goods; (iii) helps business develop competitive ers, at half a billion. In the next 20 years, one million advantages and reduce costs; (iv) provides workers, of the region’s youth will enter the workforce every particularly those in rural areas, with greater job and month. To take full advantage of this youth dividend, income opportunities, and movement of labor; and the region has to accelerate job creation while si- (v) increases the access of business to inputs. multaneously raising productivity by tackling gaps in education, infrastructure, and energy while being Another key regional issue is climate change, which sensitive to climate change impacts. is central to the development and poverty reduction agenda. Developing countries and the poorest peo- 6 1.2 OBJECTIVES OF THE INFRASTRUCTURE FOR GROWTH WINDOW The main objective of the IFG window is to meet the der, and social accountability, voice & participation, infrastructure gaps in the region by fostering an en- and safeguards. The approach is to support analyti- abling environment for infrastructure development cal work, provide technical assistance, and improve and facilitating infrastructure service delivery. It cov- knowledge generation and dissemination to enable ers two sectors - energy and transport - through two policy and institutional reforms around the themes thematic pillars Regional Economic Integration and supported. It also helps to raise the quality of Bank’s Climate Change. Several Cross Cutting themes that analytical and operational work around the two the- are crucial to realizing sustainable outcomes under matic pillars by funding informed policy dialogue these pillars are also funded, including sector gover- and improvements in the design, implementation, nance and reforms, private sector participation and supervision and evaluation of Bank projects. PPPs, conflict and fragility, social inclusion and gen- 1.3 AREAS OF TECHNICAL ASSISTANCE Several sub-themes are being funded under each thematic pillar along with cross-cutting issues. These are detailed below along with the tasks funded under each area. 1 - REGIONAL ECONOMIC INTEGRATION In addition to cross border integration, activities that address connectivity to lagging regions and communi- ties, between key rural and urban regions and that focus on regional economic development around trunk infrastructure are supported. 7 INTEGRATING LAGGING REGIONS - These are often crucial for economic integration and reducing conflict and fragility in the region. Several of these underdeveloped areas can be found on the borders of countries in the region. These include the NE region in Sri Lanka, the NER in India, and the Chittagong Hill tract in Bangladesh, among others. These regions are integral to cross-border trade. Cross border disputes and conflicts play a major role in the lack of integration within the region. Connecting lagging regions to the mainstream economy is also key to inclusive growth. See Highlight 4 The Challenge of Regional Integration in Post Conflict Lagging Border Regions for details of work funded under this sub-theme. REGIONAL ECONOMIC DEVELOPMENT - Regional economic development lays the foundation for national, regional and international economic integration. It is a process by which public, private and peo- ple (NGOs and CBOs etc.) partners (PPPP) come together to maximize the economic assets of a region. There are several such potential growth corridors along trunk infrastructure in the countries in South Asia. This includes the proposed Inclusive Economic Development Zone around the Eastern Dedicated Freight Cor- ridor (DFC) in India. The DFC has the potential of connecting to the Trans-Asian highway, which is planned to link the South and East Asia regions. RURAL-URBAN CONNECTIVITY - Peri-urban regions at the crossroads of localization and globalization drive much of the growth and trade in emerging economies. They are at the forefront of the economic, social and built environmental change that leads to integration. Businesses relocate to these regions due to lower land and production costs and due to the proximity to markets, trade and transportation hubs. The de- velopment of these growth areas has been haphazard in South Asia. Well designed connectivity and urban- rural integration in these regions can promote greater trade and integration by linking together market towns and their hinterland, where economic production takes place. 2 - CLIMATE CHANGE Within this broad theme, the window is funding activities focused on clean and renewable energy, and leading to improvements in energy efficiency. Reducing the impact of cities on climate change, improving access to green finance, development of climate smart strategies and climate resilient infrastructure delivery are other sub-themes. CLEAN ENERGY AND RENEWABLES - Strategies to lower emissions by diversifying into cleaner energy sources are crucial to SAR. India, the largest energy consumer in the region, is not well endowed with cleaner fuels (1). The hydropower potential in the country while large is not enough to meet future energy needs that are fuelled by rapid growth. There is potential for importing hydropower from Nepal and wind power from Sri Lanka, but challenges are rife in trans-boundary energy trade. There is considerable scope to expand renewable energy through hydropower in India, Nepal, and Pakistan, and natural gas in Bangladesh. Solar and wind power are two other green energy sources that have great potential in the region. ENERGY EFFICIENCY - It can translate into reduction of costs, greater productivity and reduction in GHG emissions. Cost-effective energy efficiency opportunities exist across the entire chain of energy production, dis- tribution, and consumption in all South Asian countries. Governments have a key role to play in specifying and imposing energy efficiency standards, coming up with incentives and certification programs for industry and utili- ties, and improving the regulatory environment for PPPs. This neglected area can yield quick wins at a low cost. CITIES AND CLIMATE CHANGE - Cities, the engines of growth as the region transitions to services- led growth, are also major contributors to GHG emissions. South Asia is undergoing rapid and unplanned urbanization and its cities consistently rank at the bottom of global livability surveys. Rapid urbanization is accompanied by growing demand for transportation, energy, water supply and sanitation and increased generation of wastewater and solid waste contributing to the growth in GHG emissions. There are untapped opportunities for South Asia’s cities to enhance densification and simultaneously improve services and quality of life while reducing the GHG footprint. 1 - Oil reserves are 789 million tons of oil equivalent and gas reserves are 1,101million tons of oil equivalent (Government of India, Integrated Energy Policy). 8 CLIMATE SMART DEVELOPMENT AND GREEN GROWTH - Countries in South Asia will be increasingly challenged to develop and implement climate smart development strategies (low carbon, low water, low energy, and green growth), taking into account the impacts of climate change on development outcomes. There is considerable scope to develop national, state, city, and sectoral strategies and action plans for cli- mate smart and sustainable green growth in South Asia. GREEN FINANCE - Green finance is fundamental to the investments needed for green technologies and green growth. It requires tapping into, international and domestic, public and private financial flows through a variety of instruments besides carbon finance. Competitive, profit-oriented private initiatives are essential for getting to least cost options for climate mitigation and adaptation. Public policy will play a crucial dual role in growing this sector: by establishing regulatory and incentive frameworks to catalyze private invest- ment and by generating public resources for needs not addressed by private flows. INTEGRATING ADAPTATION AND MITIGATION CONSIDERATIONS INTO INFRASTRUCTURE - New infrastructure can be made climate resilient by ensuring that an asset is located, designed, built and operated with the current and future climate in mind. Existing infrastructure can be made climate proof by ensuring that maintenance regimes incorporate resilience to the impacts of climate change over an asset’s lifetime. Achieving more climate resilient infrastructure requires that impacts of climate change be a key consideration in the way infrastructure is planned, designed, built and maintained. 3 - CROSS CUTTING THEMES Several crosscutting themes are essential to achieving optimal and sustainable results under the main pillars. Sector governance and reforms are fundamental to overcoming the institutional and governance deficit in South Asia. Social inclusion, gender equity and access are essential to ensure inclusive growth and achieve- ment of the MDGs. Social accountability along with voice and participation can enable beneficiaries and civil society groups to engage with policymakers and to make service providers more responsive to con- sumer needs. South Asia has a recurring motif of fragility and conflict both intra and cross border that affects development outcomes and requires substantial investment in the reconstruction and rehabilitation of infra- structure. This calls for a light footprint and for development partners to play the role of honest brokers. Infra- structure connectivity in fragile environments also requires a good understanding of the political economy to develop sustainable models of service delivery. Mobilizing private investment and creating an enabling environment for private actors is crucial for closing the financial and service delivery gaps and for achieving lasting outcomes. Environmental and social safeguards provide important benchmarks for performance for both public and private sectors. Safeguard policies allow the potentially adverse environmental and social impacts of invest- ments to be identified, minimized, and mitigated. The region lacks the expertise needed to design and imple- ment safeguard policies, and for capacity building especially through South-South cooperation. The IFG window has so far funded five tasks for $1.67 million. Proposals are being evaluated for the next phase of funding. Of the activities funded, two come under the regional integration, and one can be classified un- der the climate change theme. Two other tasks support the cross-cutting themes. These are briefly described below. Diagram 5 indicates the key themes and the projects funded for the IFG window. 9 [ ] HIGHLIGHT THE CHALLENGE OF REGIONAL INTEGRATION IN POST CONFLICT LAGGING BORDER REGIONS Conflict is endemic in South Asia. Conflict in border areas is persistent due to the ne- glect of these areas that are remote. One such highly sensitive geo-political region is the North East Region (NER) of India, comprising seven states called the seven sisters. Six of the seven states have seen armed conflict and rumblings are still heard from time to time. This is an area of strategic importance that borders five countries -Bhutan, Ban- gladesh, China, Nepal and Myanmar - and stretches across the eastern foothills of the Himalayas. The bordering areas in Bangladesh and Myanmar have also seen conflict with rebels often taking refuge across borders. The slow pace of industrialization and lim- ited opportunities for productive economic activities have led to a distressed economy and an alarmingly high rate of youth unemployment of 14%, despite high rates of lit- eracy. This frustration of the youth provides fuel for insurgencies. Agriculture remains the backbone of the economy, contributing close to 26% of the regional GDP and employ- ing over 75% of the population, with agricultural workers being predominantly women. However, the region is well endowed with natural resources. Its energy reserves include more than 40% of the hydropower potential, 37% of estimated petroleum reserves and 15% of natural gas reserves of India. This puts the NER at the center of the energy secu- rity and trade equation for India and for South Asia. In addition, with significant deposits of mineral reserves like limestone, clay and iron ore, the region could be one of the economic drivers of SAR’s economy. NER is also emerging as an important gateway for trade with Bangladesh, Myanmar, Thailand, Laos, South-west China and further east. The area is of great strategic importance and GoI has acknowledged this with its ”Look- ing East” policy which focuses on development of the region and on energy trade with Bangladesh. The Bank plans to support the development of the transmission and distri- bution grid in six states with lending of $1.5 billion. GoI will support electricity generation. Given the complexities of infrastructure delivery in NER the IFG window is funding key work that will improve the design of the project and ensure sustainable regional integra- tion and trade. This includes key diagnostics of the utilities, a study of gender impacts, and of the political economy of energy delivery in this post conflict region, PPP options and the development of a communication strategy. The assessment of the utilities that has been completed points to poor institutional frameworks and low capacity as the key challenges to be overcome for sustainable energy security and trade in the region. 10 ] 1.3.1 REGIONAL ECONOMIC INTEGRATION NER DISTRIBUTION AND TRANSMISSION PROJECT: is for assessing opportunities and challenges to improv- crucial for integrating a lagging post conflict region ing electricity sector integration in the South Asia with other parts of the country and region and for Region, with particular attention to how activities regional energy security and trade. The work funded aimed at improving integration can impact the ad- includes diagnostic studies of transmission and distri- equacy of electricity supplies to meet growing total bution companies in six states of the NER with a view demand and increase access to affordable elec- to facilitate institutional reforms and build capacity tricity sources. It looks at increasing the reliability of of the companies to strengthen transmission and dis- supply, whether domestic or regional to reduce the tribution in the region. It will help raise the quality of burden of economic disruptions from interruptions the design of the $1.5 billion Bank-funded project. in supply. It also examines the economic efficiency See details in the Highlight box. and environmental sustainability of supply, to reduce threats to health and the ecosystem and assess the REGIONAL STUDY ON ENERGY SECURITY AND TRADE: financial sustainability of enterprises in the sector. aims to create and disseminate a knowledge base 1.3.2 CLIMATE CHANGE Green House Gas (GHG) Accounting for Transport sions. It will take into consideration the many fac- Projects: while the Bank is an advocate for green tors involved in the consumption of fossil fuels and technologies and growth, it has not introduced GHG in estimating GHG emissions (e.g., quality of fuels, accounting in its own projects. It now plans to intro- vehicle kilometer travelled, travel speed, driver’s be- duce GHG accounting in the energy, transport and havior, modal choice, vehicle technologies, etc.). forestry sector projects. This activity pilots GHG emis- A highway project in Sri Lanka and the Rajasthan sion accounting in transport projects in South Asia by Rural Roads Project in India have been selected for customizing improved methodologies and tools for the pilots. The aim is to develop methodologies that select projects. It will measure emissions before and are cost effective and easily transferrable to gov- after project interventions to determine the impacts ernments. This is particularly important because the (positive or negative) thus impacting project design. public sector is providing investments that are signifi- In addition, the approach will examine congestion cantly larger than the support provided by develop- and energy efficiency as ways to reduce GHG emis- ment partners. 11 1.3.3 CROSS CUTTING AREAS REGIONAL STUDY STATE FRAGILITY AND SERVICE DE- foreign currency financing using a variety of options. LIVERY: the study examines how to better integrate The task funded will support Power Grid in entering marginalized communities and lagging areas of SAR the international loan market for the first time on its into the economic mainstream by overcoming insti- own credit, setting a precedent for other regional tutional bottlenecks and other drivers of fragility and public sector entities. Based on a market sounding, conflict. It addresses the issue of poor physical and credit enhancement through the World Bank’s PCG social connectivity, and economic integration as is essential for this large open market borrowing and they relate to low capacity conflict affected areas, for the long tenor of 12 to 15 years from commercial with a view to defining more effective engagement banks, suitable for capital investment in transmission strategies and responses to weak institutions, slow operations. growth, and conflict. This work will include case stud- ies on Afghanistan, Nepal, Pakistan and Sri Lanka. To successfully negotiate and close this landmark The goal is to develop an analytical framework and transaction would require the use of experienced operational guidelines that allow for better design guarantee specialists who know and understand and implementation of infrastructure interventions in the business and the Bank’s guarantee instrument, conflict-affected and fragile areas of South Asia. and have a track record of completing challenging transactions in difficult market and country environ- PRIVATE SECTOR PARTICIPATION THROUGH PARTIAL ments. The window is financing the financial and le- CREDIT GUARANTEE: Power Grid Corporation of India gal advisory support for the World Bank guaranteed is the national transmission company of India and a syndicated loan transaction. The activity marks a key player in regional energy trade in South Asia as landmark transaction nationally and in South and for example in the Indo-Nepal Energy Trade project. East Asia. This would be the first time a World Bank It is also the main developer behind the North East Guarantee would be used to mobilize private sector Region Grid. The Bank is offering the first Partial Credit financing in India, signaling the readiness of the coun- Guarantee (PCG) in South Asia, and the second one try’s power sector to attract international commercial ever at the Bank, to enable the company to raise financing. The funds would result in an intra-regional US$500 million of private financing to complement grid that would enhance connectivity to lagging re- Bank financing for the Power System Development gions improving their growth prospects. An efficient Project V (PSDP V). The project will strengthen the national transmission grid would contribute to greater national grid in order to increase reliable power ex- cross-border trade by moving excess energy from changes between regions and states of India, and across the country for trade and by improving elec- potentially between other countries in South Asia. tricity access for intra-regional transport and logistics The project would strengthen the transmission system networks and producers of tradable goods. Diagram in the power deficit regions and increase inter-re- 1 indicates the thematic areas and sub-themes and gional transmission capacity. The company has large activities funded under the IFG window. financing needs for capital expenditure and plans to mobilize US$18 billion, including US$2 to 2.5 billion of 12 1: PILLAR L 3: NA 2: PILLAR NGE PILLAR TING REGIO IC S-CUT OM CHA CROS MES ECON ION C LIMATE AT THE INTEGR • Focus on transport and energy con- • Focus on clean energy and renewables • Sector governance and reforms nectivity • Focus on energy efficiency • Social inclusion, accountability, voice, • Connectivity to lagging regions and gender equity and access communities/groups • Address links between urban growth and climate change • Focus on fragile states and conflict/ • Regional economic development post-conflict regions • Support climate smart development & • Rural-urban connectivity green growth • Mobilize private investment • Green finance • Improve capacity for environmental and social safeguards • Integrate adaptation and mitigation considerations into infrastructure delivery P P O R T IF G SU • Framing Responses to State Fragility in South Asia to analyze the needs of • GHG accounting in South Asia marginalized, fragile, and post-conflict region to measure greenhouse gas emis- communities to better integrate them into sions and determine impacts of transport the economic mainstream projects in India and Sri Lanka • Sustainable Development of Transmis- • Using innovative financing structures sion and Distribution Sector in North to leverage private sector financing for Eastern Region of India to improve India’s national transmission company transmission and distribution of power Powergrid to promote a stronger intra- to lagging regions and support future regional grid to improve energy con- cross-border trade nectivity and trade • South Asia Energy Security and Trade Study to analyze challenges and oppor- tunities for regional energy integration and facilitate trade among South Asian countries Diagram 1 - IFG Thematic Pillars Supported 13 1.4 FINANCIAL SUMMARY 1.4.1 - ALLOCATIONS MADE BY THEMATIC AREA The window has a corpus of AUD 20 million AUD 11.3 million has been received from AusAID. Of this $1.67 mil- lion has been allocated. Figure 1 indicates the grant amount under each theme. 23.58% Cross-Cutting Themes 2.36% Climate Change 74.06% Regional Economic Integration Figure 1 - IFG Allocations by Thematic Area 1.4.2 - ALLOCATIONS BY SECTOR Of the sectors funded, energy received the largest portion of grants nearly 67% followed by conflict and fra- gility approximately 30% and transport sector with 3% of funding. Other activities that address the key themes of the IFG window are under consideration for funding. Energy 69.78% Transport 2.75% Cross-Cutting Themes 27.47% Figure 2 - IFG Allocations by Sector 14 1.4.3 - ALLOCATIONS BY COUNTRY Three of the five tasks funded are regional in nature and received approximately 56% of the grant amount. Two tasks were funded in India with 44% of the funds being allocated by country. In the next phase of IFG funding, more tasks focused on other South Asian countries and the region are to be funded. 56% Regional 44% India Figure 3 - IFG Allocations by Country 1.5 PRELIMINARY RESULTS IFG newest window in the PFSA UTF was set up in June 2012. The five tasks funded are still under implementa- tion. There are however interim results available from two of the tasks funded. NE TRANSMISSION AND DISTRIBUTION PROJECT - Government of India has initiated a program to strengthen the inter-state and intra-state transmission and sub-transmission infrastructure in the region as a part of its wider efforts to develop the energy resources in the NER for electricity trade within and outside the region, and to expand and strengthen transmission systems and make possible last mile connectivity to households. GoI has sought Bank support for investments in the intra-state transmission and distribution network and for institutional reforms and capacity building initiatives across the 6 states of Assam, Manipur, Mizoram, Meghalaya, Tripura and Nagaland. Assessments of the utilities in all six states were carried out to identify the key challenges to institutional reform and capacity and the institutional strengthening interven- tions needed in each state. Diagnostic assessments of all six states in the NER have been completed. These have revealed weak institutions and low capacity as the key challenge in all six state power institutions and systems. 15 REGIONAL STUDY ON ENERGY SECURITY AND TRADE - Inception workshops were held in Delhi, Kathmandu, Islamabad, and Dhaka, along with meetings with a variety of stakeholders including govern- ment advisors, regulators, power market players, and organizations. Besides this discussions have been held with AusAID, ADB, USAID and the SARC secretariat and energy office. AusAID staff attended the regional workshop in Delhi and the consultations that followed. The common view expressed was that the study was valuable and timely. Participants highlighted a number of domestic policy challenges that had to be ad- dressed to meet growing demand and for regional energy trade. The strengths and weaknesses of the two broad approaches to regionalization were discussed: a more incremental model in which bilateral projects build up to multilateral cooperation, and a framework model by which consultations towards a broader re- gional approach are initiated. Consultants are in the process of being hired for the analytical work. Based on the consultations undertaken, advisors with experience and insight into national issues in each country and also regional issues are being selected. Workshops are to follow in Afghanistan, Bhutan and Sri Lanka shortly. 1.6 GOING FORWARD The activities funded through the IFG window will cross border trade with Bangladesh via the Ganga continue to address key climate change issues and and Brahmaputra rivers. Under the climate change to mainstream climate change considerations into pillar the tasks to be funded includes a green urban the Bank’s work program in the South Asia region. transport strategy for Afghanistan. Under the cross It will also support the many dimensions of regional cutting theme a program to build in country capac- economic integration. The next phase of activities ity for environmental safeguards taking into account are currently being finalized. These will cover among green growth and climate change will be launched others, under the regional economic integration pil- through the facilitation of national centers of excel- lar a study of ports, trade and logistics in South Asia. lence. The window will continue to fund strategic Another task will look at building inland waterways and innovative tasks under the focus areas. in India that can link to the DFC and make possible 16 17