How do we tell which infrastructure projects will work?

This article was originally published on The World Bank’s Africa Can End Poverty blog.

It’s the classic conundrum that governments typically grapple with. Which projects are most beneficial in the long-term? How do large, expensive projects impact on the debt dynamics and macroeconomic stability? While there is a need for large infrastructure investment in the developing world it is often difficult for governments to determine the most beneficial projects.

Typically, the tools used to evaluate projects differ within governments. Moreover, current models are often complicated, time- consuming and do not take into account the localized impacts of specific projects or fail to assess the full impact on the economy. As the appetite for large infrastructure projects rises in developing countries demand for an adequate user-friendly model is likely to rise.

With this in mind and in response to a request from the Nigerien authorities, we developed a simplified model that assessed the impact of a specific project on the economy. The model was designed to estimate the impact of this investment project on a discrete set of macroeconomic variables, such as trade, growth, inflation and debt. To do this, it was explicitly developed to take into account the increase in demand that occurred during the project’s implementation as well as the estimated impact of the project’s anticipated returns on the economy. The model helps better understanding how the execution of investment projects affect debt sustainability, as debt sustainability analyses often overlook the economic impact of funds borrowed and overly focus on their financial terms.

As a test case, we used the Kandadji Dam project in Niger to simulate the macroeconomic impact of a large infrastructure project. With a fairly large project cost – estimated at $785 million or around 10% of Niger’s gross domestic product (GDP) in 2013 – it was vital to estimate the net impact the project would have on Niger’s economy.

Interestingly, we found that the revenues generated by the project would add 0.45% to the GDP and the increased demand for domestic production during the construction phase of the project would increase the country’s GDP by 0.25% above the current projection. The model also revealed that certain sectors such as construction and transportation would benefit from the increased demand during the construction phase and once operational, the dam would primarily boost agricultural output and electricity generation.

Throughout the project’s implementation phase there would be a marked increase in imports, which would adversely affect the balance of payments. However, upon completion of the project there would be a beneficial shift in terms of trade, with imports falling back to normal levels coupled with a boost to exports. The impact of the project on debt dynamics and macroeconomic stability was also assessed. While the costs for the program are significant, since a large proportion of financing is concessional the model estimated there would be limited effect on the fiscal deficit and debt burden for the government.

Our aim is the model will enable governments to obtain a long-term view on the macroeconomic impacts before they undertake large infrastructure projects so that they are able to make informed choices. With minimal customization, the model can be used to assess projects or programs across various sectors and can be replicated across countries.

For more information on the computational aspects of the model, please see Modeling the Impact of Large Infrastructure Projects: A Case Study from Niger.

Publication does not imply endorsement of views by the World Economic Forum.

To keep up with the Agenda subscribe to our weekly newsletter.

Author: The Niger Macroeconomic and Fiscal Team works on improving the quality of public investment management and efficiency in Niger taking into account the country’s budgetary resources, weak private sector, and fiscal management challenges. Olivier Beguy is an Economist based in Chad.  Sebastien C. Dessus is the Program Leader based in Washington, DC. Abdoulahi Garba Economist based in Niger. Hayman Jason is an Economist and Consultant. Johannes Herderschee is a Senior Economist, based in Washington, DC. 

Image: Workers level the earth on the Mombasa-Nairobi highway construction project in Athi River, 20 km (12 miles) from Nairobi. REUTERS/Elizabeth Nganga.