This may be a question answered in Economics 101, but what are the assumptions behind offering loans to developing country governments for public investment projects?
The question arose for me the other day while attending a roundtable discussion of the EIB and how they intend to measure and monitor the impact of their investment projects. There must be some underlying assumptions since they expect repayment and they calculate an economic rate of return! And how come I've never wondered about this before?
All I could think of, is that public investment is expected to raise economic growth which is therefore expected to translate into higher tax revenues, some of which will be used for loan repayments. Is that really it though? Of course there will hopefully be additional other positive externalities which one should take into account to reflect the "true" value of the investment. But at base, if you assume the loan will be repaid, you also have to assume some mechanism for that to happen, which means you have to have some idea of direct impacts. But I'm pretty sure there's no ear-marking of revenues from these kinds of projects for loan repayments in budgets, especially since we can't measure the impact unless we really make an effort. That then raises the question whether or not the ex-ante loan calculation is actually related to the specific investment, or just to a general expectation of ability to repay based on other factors?
This then relates back to the discussion being held, which was about how the EIB intends to measure the impact of its investments, as required under the renewed mandate for ex-EU financing given by the European Parliament and Council. What is expected from this measurement of impact? How will this differ from whatever is already used in the economic rate of return calculation? Do they really want to understand the impact or just to have some figures to put in the annual report?
Because the reason for the indicators and monitoring is likely to determine the nature of the indicators. If you really, genuinely want to measure impact in order to learn lessons for future development-related investments, then presumably the process needs to be pretty rigorous. To me that would imply pre-investment surveys of households and firms, with periodic follow-ups, something which could feasibly be carried out by local agencies in conjunction with local statistics offices - it could even use existing surveys taking place in a country or region. Then you could say something about the real impact of the investment project, and better understand the mechanisms at work. If not, you risk producing a CSR-type report of figures which are pretty much meaningless. With a more rigorous approach you could also get a potentially reasonable estimate of the impact on tax revenues and get a better handle on expected returns to investments.
But again, I may be missing something. Can it really be just through tax receipts that we expect a financial return? The discussion of taxation in developing countries highlights the huge amount of evasion, the weak administration or even the weak incentives to raise taxes, so it makes me wonder how reliable an assumption that would be. Maybe I just need to go and ask them. As a colleague of mine likes to ask, "what are your assumptions"? It's a good question I think.
As for the EIB's indicators, until there are some actual indicators to discuss rather than broad conceptual frameworks, it's hard to say how useful they will be.