Public Disclosure Authorized Prioritizing Infrastructure Investments in : Pilot Application of the World Bank Infrastructure Prioritization Framework

Public Disclosure Authorized

The World Bank and Ministry of Economy and Finance of Panama

Public Disclosure Authorized

September 2015 Updated April 2016

Public Disclosure Authorized Acknowledgements

This report was authored by Darwin Marcelo, Cledan Mandri-Perrott, and Schuyler House on the World Bank Public-Private Partnerships Infrastructure team with valuable inputs and guidance from the Ministry of Economics and Finance of Panama, particularly Fabio Bedoya, Head of Investment Planning; Angela Dominguez, Coordinator of Investment Program Financing; Eliecer Lara, Project Evaluator; and Lourdes Arjona, Coordinator of Infrastructure. Important data inputs were provided by World Bank local consultants and infrastructure sectoral experts Ivan Estribi, Ivet Anguizola, Raul Bethancourt, Ricardo Cerrud, Wuadalquivir Fonseca, and Janice Campbell.

1 Introduction

Infrastructure services are significant determinants of economic development, social welfare, trade, and public health. As such, they typically feature strongly in national development plans. While governments may receive many infrastructure project proposals, however, resources are often insufficient to finance the full set of proposals in the short term. Leading up to 2020, an estimated US$836 billion - 1 trillion will be required each year to meet growth targets worldwide (Ruiz-Nuñez & Wei, 2014; World Bank). Global estimates of infrastructure investments required to support economic growth and human development lie in the range of US$65-70 trillion by 2030 (OECD, 2006), while the estimated pool of available funds is limited to approximately US$45 trillion (B20, 2014). The past twenty years have also seen a shift towards decentralized infrastructure planning. Many subnational governments, regional entities, and sector agencies have been delegated responsibility for infrastructure planning promote local responsiveness, but responsibility for allocating funds often remains with a centralized finance agency (CFA). While constituencies may propose numerous projects, governments often have insufficient financial resources to implement the full suite of proposals. As such, government must make difficult decisions about which projects to select for implementation within a given investment period. This implies grappling with the relative efficiency and effectiveness of investments as well as project costs and benefits. The multiple considerations of project selection demand improved decision support frameworks that are sufficiently rigorous to accommodate multiple facets, yet practical to implement. Good practice suggests that economic and strategic project appraisals and feasibility studies provide a good basis for project prioritization via highest societal net present value as a ranking metric. The reality, however, is that capacity, resources, and time are often too short in supply to support extensive economic analysis across full project sets. Decision-makers may only have partial information on project costs and benefits, particularly since many are difficult to quantify and monetize. Thus, there is a need for evidence-based infrastructure decision support that is consistent and data-driven but pragmatic and responsive to the needs and current capacities of a government. The World Bank’s Infrastructure Prioritization Framework (IPF) responds directly to these demands by offering a systematic approach to infrastructure prioritization that places financial-economic and social-environmental factors at the forefront of decision-making. The framework is transparent and objective, following a clear step-wise approach, but allows space for deliberation in order to remain responsive to policy priorities. The IPF framework is differentiated in four ways from other approaches to infrastructure decision-making. First, it incorporates national policy goals, social and environmental sustainability considerations, and long-term development aims alongside financial and economic indicators. Second, it is predicated on parsimony and pragmatism. Third, it makes space for policy debate via criteria identification and the selection of projects from mid-priority categories. Fourth, it provides decision-makers with an intuitive, graphical interface upon which to compare alternative investment scenarios. IPF is not intended to replace traditional planning or policy analysis, which remain critical to identifying problems, assessing their relative importance or urgency, and selecting from amongst alternative solutions. These remain important pre-prioritization activities. IPF also

2 does not propose to substitute extensive economic analysis with more basic appraisal in the long term, or for major projects. Rather, IPF can be used employed as a catalyst to improve data collection in order to progress more sophisticated and extensive appraisal methods, including social cost-benefit analysis (SCBA). This report presents the IPF methodology and results of the pilot application to a select set of transport and water and sanitation projects in Panama. The report first gives background information on infrastructure prioritization in Panama, then follows with a description of the IPF in technical and implementation terms. Next, we present the results of the pilot and close with recommendations for implementing IPF to a wider set of proposed projects.

Background

In Panama, the current economic outlook and institutional supports spurred pilot application of the IPF. First, GDP growth and economic buoyancy in 2014 motivated an ambitious public investment program, accompanied by a high number of infrastructure project proposals to the Ministry of Economics and Finance. This was coupled with political commitment to narrow the deficit, and thus demanded that Government select some projects and postpone others for implementation during the following five-year strategic period. Institutionally, the application of a prioritization methodology was endorsed via the Government Strategic Plan 2015-2019, which called explicitly for systematic prioritization of public investments and consideration of socio-economic and environmental indicators. In keeping with the 2008 Social Fiscal Responsibility Law, the Government Strategic Plan sets forth action areas for investments in economic sectors, social, infrastructure, developments of people, environmental and governability over a five-year period. The 2015-2019 Plan is premised on achieving social equity, better standards of life for all Panamanians, and sustainable economic growth. The indicative plan is to be reviewed and updated annually to account for changes in forecasted income and expenses and the availability of capital to service project costs. As such, it recognizes that project execution is dependent on the availability of sufficient finance. The Strategic Plan accounts for public investments of approximately US$19.5 billion for the following five-year period. Of this planned total, 15.2% (US$2.96 billion) is marked for road projects, whereas 18.9% (US$3.69) is designated for water and sanitation. The Strategic Plan is also linked to the Five-Year Investment Plan, which specifies allocations to various Government ministries, agencies, and corporations for public expenditure. The 2014 World Bank Panama Country Partnership Framework (CPF) also calls for technical assistance to Panama on infrastructure prioritization (p. 19). In keeping with the Strategic Plan and CPF, in April 2015, the Ministry of Economy and Finance of Panama engaged the World Bank to undertake a technical advisory project to prioritize a select set of projects in the transport and water and sanitation sectors. Nineteen projects in transport and 35 in water and sanitation are the purview of the IPF pilot application herein.

Developing Panama’s Infrastructure Infrastructure features heavily in Panama’s Government Strategic Plan 2015-2019, based on (a) an aim to reduce infrastructural constraints on per capita GDP (see Loayza et al, 2004, and Araujo, et al, 2014); and (b) recognition that national growth has stemmed largely from the

3 transport, commerce, and construction sectors. Construction has become a key economic driver due to investment (public and private) in residential and non-residential infrastructure (1.9% contribution over the past five years). The sectors also created most of the new employment from 2007 to 2012, particularly for low-skill workers (World Bank, 2015). While there is evidence of economic constraints from infrastructure, Panama has been ranked highly in international comparisons: it is one of the most competitive countries in the region on infrastructure developments, according to the Global Competitiveness Ranking prepared by the World Economic Forum, and the country has positioned itself as a key trade and logistics hub, naturally centered around the . Nevertheless, certain infrastructure subsectors have lagged, including urban connectivity and energy. With respect to the decision processes for infrastructure funding, a medium-term fiscal framework sets the budget ceiling for the central government, decentralized institutions, public companies and financial intermediaries. Institutions register programs and projects that require budgetary resources into a project bank (BP) maintained by the Ministry of Economy and Finance (MEF). The BP links pre-investment activities (e.g., proposal and appraisal) to budget execution. Assessments of proposed projects take into account the budget ceiling and the physical and financial performance of each institution. Based on this, the Directorate of Investment Programming (DPI) of the Ministry of Economy and Finance (MEF) provides a preliminary recommendation. This is then reviewed and modified by another MEF directorate, the Directorate of National Budget (DIPRENA), which assigns the final figure for each institution.

Transport Roads are Panama’s weakest link with respect to trade infrastructure. Contrary to the country’s elevated position on international rankings for port and air transport infrastructure, Panama ranks 44th in the quality of road infrastructure (WEF, 2015), and road density is amongst the lowest in Central America. Rectifying this is particularly important, as Central America has yet to take full advantage of potential gains of regional integration and trade connectivity. The physical trade network limits bilateral trade, and logistics costs can be as much as 50% of the final price of traded goods. Estimates suggest that exports stand to double with integration (Marcelo, et al, 2010).

Water In the water sector, three government bodies are responsible for policy and investment: (a) the Ministry of Health, via the Directorate of Water and Sanitation (DISAPAS), oversees sector planning and service delivery in towns and rural areas; (b) the National Water and Sewerage Institute / Instituto de Acueductos y Alcantarillados Nacionales (IDAAN) is responsible for urban areas and rural communities with over 1,500 inhabitants; and (c) the National Authority for Public Services (ASEP) supervises and regulates urban provision (World Bank, 2015). There are observed coordination problems, as infrastructure investments may be made in parallel, with no integrated sector investment plan. In this way, a structured prioritization process has much to offer in the way of organizing project selection, both within and across water agencies. One move towards better coordination, however, is in the development of a new Interagency Commission for Drinking Water and Sewerage (CIAPAS), involving the three agencies responsible for water and sanitation policies and investments. Regular meetings of working committees are held to address water and sanitation policy issues and disaster risks.

4 Whereas 94% of Panama’s population has access to an improved water source, only 73% have access to improved sanitation (World Bank b, 2015). Development needs in the sector are concentrated in the comarcas,1 where many residents have little or no access to improved water supplies and sanitation. While public service quality, coverage, and reliability is generally lower in dispersed rural areas, services are particularly poor in the comarcas (World Bank, 2015). Poor water and sanitation coverage has major implications for child health, including the prevalence of diarrheal illness, and life expectancy overall. As such, if improving access to water and sanitation in the comarcas is identified as a key policy goal, this can be coded into future analysis via the inclusion in the social-environmental indicator. Figure 1. Access to running water in the dwelling, by concentration of indigenous peoples

Source: World Bank, 2015

Poverty The concentration of poverty in rural indigenous areas has important implications for infrastructure development.2 Indigenous residents of comarcas have markedly low access to basic services and infrastructure, and, whilst needs are also evident in urban areas and amongst other segments of the population, slow development and particularly low conditions in these areas cannot be overlooked. This requires that decision-makers deal with the inherently different economic performance of proposed projects in rural areas in some sectors in a way that does not penalize the communities where needs are greatest.

Infrastructure Prioritization Framework

The Infrastructure Prioritization Framework is a quantitative approach that synthetizes and displays financial and economic as well as social and environmental indicators at the project level and considers these alongside the public budget constraint for a sector. Results are displayed graphically to map comparative performance along these dimensions. While the IPF is quantitative in nature, it employs knowledge that is practice-based or political and opens space for deliberation in criteria and project selection. The approach recognizes

1. Comarca indígena or ‘comarcas’ in Panama are five indigenous regions, representing 20% of the national territory, which hold special administrative status alongside provinces. The comarcas are Ngobe-bugle and Campesino, Kuna Yalar, Embera-Wounan, Kuna de Madugandi, and Kuna de Wargandi. 2. 42% of Panama’s extremely poor residents live in the comarcas.

5 that project selection cannot be entirely dissociated from the political economy of a sector. Particular projects may be chiefly valued by governments and other stakeholders due to key policy goals which are non-economic in nature, or due to considerations that objective indicators cannot measure, such as upholding election promises, promoting social cohesion, or honoring culture. As such, the IPF accommodates policy and political responsiveness in two ways: through the selection of criteria (indicators) for assessment and by leaving a degree of freedom in decision-making through provision of two references for judgment (the indices). The IPF was created in response to observed government demand, including a needs for (a) improving infrastructure planning at national and sector levels; (b) considering large projects sets with scarce planning resources; (c) meaningfully addressing environmental and social factors; and (d) balancing analytical efficiency, derived from standardization, with policy and political responsiveness. Institutionalizing a systematic approach to prioritization is further justified by public demand for evidence, value, and legitimacy in infrastructure decision- making. These logics are detailed in Marcelo, et al, 2016. To be deemed legitimate and comprehensive, prioritization must be based on sound evidence that affords meaningful comparison. Many project comparisons are inherently technical; thus, IPF is designed to employ quantitative measures to the greatest extent possible to limit subjectivity. Furthermore, comprehensiveness requires that project comparisons make space for multiple policy goals and facets of project selection. This lends support to employing multi-criteria approaches, with criteria selected to reflect considerations of effectiveness and value, as well as sector and national policy goals. The IPF captures the strengths of multi-criteria decision approaches, but also allows use of inputs from cost-benefit analysis (CBA).3 The process by which infrastructure is prioritized must also be administratively and politically feasible. This suggests that governments adopt the principle of parsimony – using the least amount of relevant information needed to inform a decision. Administrative feasibility means that approach can be implemented within limits of institutional capacity, cost, time, and data availability. And political feasibility accepts that prioritization cannot be totally unresponsive to political factors. In summary, most infrastructure policy contexts demand the reconciliation of highly technical and objective policy analysis with more political and practice-based inputs, all within the resource means of government.

The IPF Process

Implementing the IPF is relatively straightforward, following five steps: (1) selecting decision criteria; (2) gathering project indicator data; (3) calculating social-environmental and financial- economic indices; (4) plotting projects and budget limits; and (5) selecting projects (see Figure 2). In this section, we describe implementation in terms of these steps, with direct reference to the Panama pilot. An extensive technical description of the IPF methodology is also detailed in Marcelo, et al, 2016.

3. We recognize multiple approaches to investment decision-making, including social cost-benefit analysis (SCBA). For an extensive discussion of alternative approaches, see Marcelo, et al, 2016. Whereas SCBA requires fully monetized information on costs and benefits, IPF makes use of available inputs (e.g., financial CBA). IPF’s value-adds to CBA are in (a) directly treating non-marketed impacts in ‘natural’ units; (b) relieving the burden of making and justifying assumptions required to monetize benefits and costs; and (c) dealing directly with issues like equity and social justice.

6 Figure 2. IPF Process Map •Deliberation with decision I makers, experts, and key Select Criteria stakeholders Variables may be adjusted in the case of data problems or new information

II •Source project data (CBA elements incorporated when available) Prepare Data •Transform / standardize data

III Construct •Variables combined to create SEI and FEI Performance •PCA applied when objectivity is preferred Indices

IV •Plot SEI and FEI coordinates Plot Visual •Quadrants defined by budget constraint Interface

V •Based on informed political and Select Projects technical debate •Quadrant A = high priority

Source: Marcelo, et al, 2016 One important pre-analytical step is the delineation of proposed projects to which the IPF will apply. This may include the full universe of projects proposed to Government, or a select set. In the case of the Panama pilot, experts from the Ministry of Economy and Finance (MEF), in consultation with participants from the Ministry of Public Works / Ministerio de Obras Públicas (MOP), Ministry of Health / Ministerio de Salud (MINSA), and the National Water and Sewerage Institute / Instituto de Acueductos y Alcantarillados Nacionales (IDAAN), a consultant in charge of the Government’s Strategic Plan, and experts from the World Bank, randomly selected 34 and 19 projects in the water and urban mobility sectors, respectively. Basic information for these projects was obtained from the Banco de Proyectos, the platform of the National Public Investment System (SINIP), where all public investments carried out by state agencies are recorded at the national level. Only projects above US$ 5 million were included in this exercise, as they are bound to meet the data requirements of Article 12 of Law 25 (amending Article 23 of Law 34 on Social and Fiscal Responsibility). This law indicates that investment