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THE WORLD BANK OPERATIONS EVALUATION
DEPARTMENT
Background Paper on
The Bank’s Assistance to Energy and Transport:
Summary and Conclusions
Anthony Churchill
Director-General, Operations Evaluation: Gregory K. Ingram
Director: Ajay Chhibber
Manager: R. Kyle Peters
Task Manager: Gene Tidrick
2005
This paper is available upon request from OED. It was was prepared in The World Bank
2002 as a background paper for the China Country Assistance Evaluation. Washington, D.C.
ENHANCING DEVELOPMENT EFFECTIVENESS THROUGH EXCELLENCE
AND INDEPENDENCE IN EVALUATION
The Operations Evaluation Department (OED) is an independent unit within the World Bank; it reports
directly to the Bank’s Board of Executive Directors. OED assesses what works, and what does not; how a
borrower plans to run and maintain a project; and the lasting contribution of the Bank to a country’s
overall development. The goals of evaluation are to learn from experience, to provide an objective basis
for assessing the results of the Bank’s work, and to provide accountability in the achievement of its
objectives. It also improves Bank work by identifying and disseminating the lessons learned from
experience and by framing recommendations drawn from evaluation findings.
OED Working Papers are an informal series to disseminate the findings of work in progress to encourage
the exchange of ideas about development effectiveness through evaluation.
The findings, interpretations, and conclusions expressed here are those of the author(s) and do not
necessarily reflect the views of the Board of Executive Directors of the World Bank or the governments
they represent.
The World Bank cannot guarantee the accuracy of the data included in this work. The boundaries, colors,
denominations, and other information shown on any map in this work do not imply on the part of the World
Bank any judgment of the legal status of any territory or the endorsement or acceptance of such boundaries.
Contact:
Operations Evaluation Department
Knowledge and Evaluation Capacity Development (OEDKE)
e-mail: eline@worldbank.org
Telephone: 202-458-4497
Facsimile: 202-522-3125
http:/www.worldbank.org/oed
Acronyms
AAA Analytical and Advisory Services
GOC Government of China
IDA International Development Agency
IFC International Finance Corporation
Table of Contents
Introduction............................................................................................................................1
Unresolved Issues ..................................................................................................................1
The strategic Challenge..........................................................................................................2
Alternative and New Directions.............................................................................................3
New Directions: Energy.........................................................................................................3
New Directions: Transport.....................................................................................................4
Highways ...............................................................................................................................4
Urban Transport .....................................................................................................................5
Logistic Services....................................................................................................................5
Railways.................................................................................................................................5
Conclusions............................................................................................................................5
PREFACE
This paper is based on two papers by Anthony Churchill and Cordula Thum: The Bank’s
Assistance to China’s Energy Sector and The Bank’s Assistance to China’s Transport
Sector.
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Introduction
1. Infrastructure loans and credits (transport and energy) represent almost half the
Bank’s portfolio in China. The projects although large for the Bank and small relative to
total Chinese investments in these sectors, have provided substantial value added to
China through the combination of the discipline of the project process and as a means of
introducing new technologies. Almost all of these projects have been successful in terms
of their physical accomplishments. Infrastructure was built on time and within reasonable
cost parameters. Rates of return have been close to original estimates. New technologies
have been successfully introduced and social and environmental issues have received
greater attention. By any standards, this has been a remarkable achievement.
2. Less successful, especially in transport, have been the attempts to use project
lending to produce policy and institutional changes. This is a judgment that probably
reflects the Bank’s own impatience and frustrations with trying to increase the pace of
reform in China. The Chinese, on the other hand, with their concerns for order and
stability have not always taken on full ownership of the even minimal reforms contained
in the Bank’s projects. They have understood and absorbed many of the lessons inherent
in the Bank’s project cycle but have had difficulty in moving from success in a particular
project to the need for changes in the economic and institutional framework. This
reflects, in part, the fact that different people build projects than make investment
decisions and, in part, the sheer size of the country that inhibits the dissemination of
ideas.
3. Change, however, is taking place and it is not always easy to see the connection
between these changes and Bank activities. Many of the steps the Bank has introduced to
improve the efficiency of the project process have laid the foundations for more general
reforms in the economic and administrative framework. The financial management
systems required by the Bank has revealed weaknesses and lack of accountability in the
existing framework. The introduction of modern management tools and technology has
opened up the possibility of change in most of the infrastructure sector. In the railways
for example,new information and cost accounting systems have made possible the
consideration of separating infrastructure costs from operating costs and thus eventual
changes in ownership and administration.
Unresolved Issues
4. There are two issues that are not unique to the infrastructure sectors but that do
have a major impact on present lending and future strategic concerns. Resolution of these
issues will open up the strategic options infrastructure sectors.
5. The first is the strong Chinese ‘preference’ for what can be described as a “tubs
standing on thei own bottoms” philosophy of borrowing from the Bank. Basically it
means enterprises or institutions should not borrow from the Bank unless they have the
direct means of repaying the Bank. This may make sense for private commercial
transactions but can result in significant distortions in the case of the provision of public
goods. It is an issue of greater relevance for the transport sector where there is a higher
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public goods element than in the energy sector where benefits are more directly related to
consumption. In highways, for example, it has produced the toll road with its tax
distortions that constrain the distribution of a free public good. It also limits one of the
main functions of government – to redistribute resources. It is a constraint on the Bank’s
ability to assist the government in its developmental role in stimulating economic growth,
for example, in financing roads in the poorer regions with limited capacity to repay.
6. The second issue is China’s insistence on limiting borrowing from the Bank to
direct foreign exchange expenditures. This may have made some sense in the early days
when foreign exchange scarcities were extreme. It does not make sense in the present
situation of large foreign exchange reserves and a growing market based economy. It
makes it difficult for the Bank to lend significant amounts in important development
areas with low foreign exchange requirements. Distributions systems in electric power
are examples where the Bank could make an important contribution but may be limited
by this unnecessary constraint. It also leads to a lot of game playing in defining foreign
exchange content.
The Strategic Challenge
7. The ineligibility for IDA and a lower share of Bank funds for China over the past
few years together with the greater availability of domestic funds at lower interest rates,
has forced a reexamination of the strategies behind Bank lending. In the infrastructure
sectors the issue is how to maintain the pace of reform with a smaller lending program.
Given the large infrastructure lending programs of the past two decades, one strategic
option is to assume that this lending has been sufficient to achieve as satisfactory a level
of knowledge transfer within the limits of the project process. The ‘graduation’ of the
port sector is a case in point. From now on the smaller lending program should focus less
on expanding capacity and more on a limited number of areas of concern in which the
Bank can produce significant value added to China’s development processes. In energy
this could lead, for example, to a focus on renewables, in transport, on feeder roads. In
order to maintain a continuing role in the overall dialogue on reforms in the infrastructure
sectors, more resources would be devoted to the policy dialogue. Given the right advice
and knowledge, the Chinese should be capable of undertaking the appropriate actions
without Bank lending support.
8. This is a high risk strategy. Unfortunately, giving the right advice and providing
the appropriate knowledge does not always work. Firstly, countries do not always
recognize the ‘right’ advice and, secondly, governments are not always able to implement
this advice because of competing and often contradictory political and economic claims
on resources. The GOC in well aware, for example, of the need to introduce a fuel tax but
cannot do so without getting a consensus on how to share the resources between the
center and the provinces.
9. A further risk is internal to the Bank. There is usually a close correlation between
the size of the budget allocated to non-lending services (AAA) and the size of the lending
program. It is difficult to expand non-lending services in the face of a declining lending
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program. In the case of China, even with a large infrastructure lending program, the
amounts of resources devoted to sector work, for example, has been relatively limited.
10. It is also difficult for countries to judge the efficacy of the advice and technical
assistance services they receive. Much of it is supply driven; countries are offered advice
and technical assistance by institutions that have their own agendas on what is good for
China or their own consulting industry. The fact that these services are often ‘free’
further degrades their value. Free goods are not always treated seriously. The failure of
many TA programs around the world is the result of supply driven programs that have
been treated as free goods by their supposed beneficiaries.
11. The Bank’s comparative advantage in the advisory business is that it is not free;
Bank support is tied to a lending program. It is in the Bank’s interest, if it wants to be
repaid, to insure that the borrower is in a position to generate the necessary resources. On
the country’s part, given that the money has to be repaid, there is a reluctance to commit
to activities that, in their view, is not in their best interests. In any case, most
development problems are less about what to do than how to do them. The ‘how to’ is the
great strength of the Bank’s project lending.
Alternatives and New Directions
12. Can the Bank use the more limited funds available for project lending to maintain
and support a central role in the policy dialogue? Will it be possible to avoid premature
graduation of many parts of the infrastructure sectors? A positive answer to these
questions requires careful consideration of the alternatives. The Bank’s dialogue with
China over the infrastructure sectors is at a critical juncture and it would be in the
interests of both China and the Bank to consider less risky alternative strategies that build
on the strengths of project lending. This review of the Bank’s infrastructure program
suggests a number of areas where continued project lending, at the highest levels
possible, could result in significant value added on the part of the Bank.
New Directions: Energy
13. Major progress has been made in improving generating capacity and the
development of wholesale generating markets. Continued progress, however, will be
endangered by failure to address the retail or distribution side of the business. Ultimately
it is the retail consumer that generates the cash and efficient pricing in the wholesale
market is not possible without responsive retail markets. In China the distribution
systems are riddled with inefficiencies. The Bank could make a major contribution to the
sector by assisting China in addressing the problems of the distribution enterprises
particularly the smaller municipal owned ones. It will not be easy but it is an area where
carefully designed projects could contribute significantly to the development of more
efficient, equitable, and less polluting distributions systems. The potential benefits are
very large.
14. Coal is the major primary fuel in China. Its production, transport and use
dominate the infrastructure investment decisions. The Bank has played a limited role in
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the coal sector and given the stakes involved it would be worthwhile to try and find a way
of supporting improvements to this sector either through mining, power, or railway
transport projects. A good place to start would be to update and expand the sector work
done in 1995 that developed a tool for examining the trade-offs between power and
transport in making decisions about coal. This will not be an easy task; there are major
institutional issues to be addressed and the Bank will need to think through its strategy
and come up with an approach that engages the GOC interest.
15. For years, every report on energy in China talks about the importance of
developing and utilizing gas. The Bank has had some success in improving the
management of this sector through its technical assistance programs. Yet progress in
slow. Massive investments are required to develop the primary infrastructure and the
general assumption is that these investments should be undertaken with the help of the
large international enterprises. Given the risks associated with the lack of a regulatory
infrastructure and explicit public support, it is not surprising that there have been no
takers. Would not a large Bank and possibly IFC presence be an important means of
jump-starting this sub-sector? The wider availability of gas could result in a meaningful
alternative to coal in the power sector. In the rest of the world, gas-fired generation has
resulted in smaller, less polluting plants and less dependence on huge power grids with
their costly network expenses.
New Directions: Transport
Highways
16. The development of the highway system remains a piece of unfinished business.
Significant progress has been made in dealing with contracting and construction
supervision problems but there is still much to be done. Attempts to introduce private
financing of roads have addressed some of the shorter term financial problems but in the
long run because highways are an almost pure public good, continued public investment
will be required. The major problem with expanding the highway network in China is the
lack of adequate financing mechanisms rather than the constraint of physical resources.
China has no fuel tax – a major source of highway financing the world over.
17. One strategy for the Bank would be to support the needed highway investments
by becoming a partner in a road fund or funds that would draw on a fuel tax for most of
its revenues. This would allow the Bank to wholesale its practices in highway
construction and, more importantly, place the Bank in a position where it could influence
the overall resource allocation decision on what is to be built as well as where and when.
The Bank’s experience in highway design and network construction would be spread
over a large program and contribute substantial value added to transportation in China.
18. Two important pieces of information or sector work are required to further the
policy dialogue on highways; one involves the collection, on a regular basis, of freight
and passenger rates, the other a study on road user charges that would highlight the costs
and benefits to use of the highways. In China, the costs of transportation are so high
relative to what could be expected from a modern highway system that the one
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unambiguous measure of success will be the lowering of freight and passenger rates.
Measuring these changes will be a powerful tool for judging success.
19. Given the on-going discussions of possible fuel tax surcharges, it will be
important to address the more fundamental issue of the impact on economic growth and
distribution of resources of existing charges and taxes on road users. Without this base
line, it will be difficult to make credible recommendations on the structure and
administration of fuel taxes. The size of the country and the differences between urban
and rural areas suggests there is considerable scope for variation in both local and
national taxes on fuels.
20. A third potentially important piece of sector work relates to traffic safety. China
has one of the worst safety records in the world. Modifying driver behavior is the key to
improving this record and as experience elsewhere indicates, it will require a holistic
approach that goes well beyond highway design and enforcement measures and involves
everything from vehicle design to insurance requirements. A comprehensive study,
drawing on global experience, would be of great assistance to the Chinese in identifying
where institutional and other changes are required and how the Bank might help.
Urban Transport
21. As China goes through the process of urban transformation, the cities will grow
very rapidly and without forward-looking policies it will be a chaotic and inequitable
process. The large cities, the present area of Bank involvement, will inevitably get the
resources they need to manage the process – how well is another question. What is often
overlooked is that in this urban transformation process is that the small and medium size
cities will grow even faster. Their lack of human resources and experience to manage the
process can be looked on as a disaster or an opportunity to intervene before they become
disasters. The Bank has considerable experience in developing programs to support a
more efficient and equitable growth process in these cities. In China, the challenge will
be to identify projects that would put in place the intermediary or wholesale institutions
that would be able to reach the large numbers of smaller towns and cities.
Logistic Services
22. The flow of information in the transport networks is as important as the actual
physical movement of goods and services. With the assistance of the Bank, China is now
exploring ways of improving the efficiency of the physical networks by improving the
flow of information and the efficiency of inter-modal transfers. This is an important and
new emphasis where there is a strategic role to be played by both government and the
private sector. Great care needs to be taken, however, that the dynamic efficiencies of a
competitive private sector are not submerged in the interests of establishing ‘orderly’
processes.
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Railways
23. The Bank’s project lending in railways has added to capacity and produced an
increasing willingness to engage in the reform dialogue. This is going well and China is
well aware of best international practices and what needs to be done in China. The pace
of change is slow. The Chinese preference for order and stability contrasts with the
Bank’s desire to move at a faster pace. The present strategy of modest project lending
combined with an intensive dialogue over reform appears to be the right strategy but
could be supported by greater sector work on the part of the Bank. Without a continually
deepening knowledge base, the Bank runs the risk of being marginalized in the reform
process.
24. There are two obvious areas for expanding this sector work. One of them has
already been mentioned in the context of the energy sector – the interrelationship
between railway investments, power plant location, coal mining, and transmission lines.
The second involves the development of pricing models based on the growing data base
coming out of the cost accounting studies. At some point the railways will have to move
beyond the present national tariff and develop a multitude of tariff structures that reflect
costs, including congestion costs. The success in changing the public role from operator
to regulator in the present monopoly situation will depend on the ability to develop a
consensus on how to charge for services.
Conclusions
25. China’s growth will generate enormous demands for expanding public
infrastructure. Well over half of total public investments will continue to be in these
sectors. The Bank has played an important and successful role in assisting China in
improving the efficiency and equity of these investments. The job is far from finished – it
has just become more complicated.
26. The Bank’s major objective of poverty reduction must be treated with care in the
Chinese context. Direct lending for poverty reduction is not necessarily the most
expedient or effective way in every sector of addressing poverty issues. This is
particularly true of infrastructure where investment is essential for growth and benefits
widely distributed across all income classes. The Bank, for example, may contribute
more to poverty reduction in the road sector by lending for highways than for feeder
roads. It may make more sense for the Bank to confine feeder road lending to integrated
rural poverty projects than as components of highway projects. In the case of electric
power, improved distribution systems will have a major impact on lower income groups
but if they become the exclusive target of this lending, the benefits will never reach them
as they will be preempted by commercial and business interests as well as higher income
groups.
27. The move from simple capacity expansion to greater emphasis on how to manage
the process in a market economy is a major challenge for both China and the Bank.
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28. There is general agreement that policy changes and institutional reforms must
now be the major focus of Bank assistance in the infrastructure sectors. The issue is how
to do it. In a new era of reduced lending programs, increasing policy and advisory
services is obviously important. Success requires increasing these services while at the
same time maintaining the Bank’s traditional strengths in project lending. Some of the
new directions suggested above should help identify those areas where the Bank’s advice
and project work can come together to support the new emphasis. The task will be made
easier if the issues surrounding institutional repayment and foreign exchange
requirements can be satisfactorily resolved.
29. The greater emphasis on policy and institutional matters will require the Bank to
update and maintain its knowledge base. Finding ways to increase the present low level
of sector work is a priority.