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Measuring the development impact of loans used for public investment projects

16-12-2011

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This was the theme of a roundtable discussion held by the EIB earlier this month. With the ever-increasing interest in leveraging aid with loans, the issue of how to measure impact seems a pertinent question to ask.

The discussion centered on how the EIB intends to measure and monitor the impact of their investment projects, as required under the renewed mandate for external EU financing given by the European Parliament and Council. But as the discussion progressed and they presented the broad categories of indicators they plan to use, one began to wonder what they have been using up to now to look at impact. Even to calculate the expected financial and economic rates of return on their projects, this requires some kind of estimate of direct and indirect impacts. If there are no indicators of impact at present, 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? So prior to looking at new indicators, the underlying financial indicators currently used would be a good start.

And then one might ask what is expected from the new impact indicators? 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 and their usefulness.

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. That might 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 only superficial figures which reflect a very vague estimate of what may be taking place.

Going further, what would the indirect impacts be expected to be of a project such as building a road, and how we might expect these to play out? Unless there will be a road toll, public investment is presumably expected to raise local economic growth which is therefore expected to translate into higher tax revenues, which will filter back to government, with some amount used for loan repayments.

With a more rigorous impact approach you could get a potentially better estimate of the impact on tax revenues and get a better handle on expected returns to investments. But even then, 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 how reliable a mechanism might it be that translates public investment into economic activity and tax revenues? And will the new indicators help understand that?

As is so often the case, a lot depends on what you want the information for, and what assumptions you make. Until you know that, and have some specific indicators to discuss rather than broad conceptual frameworks, it’s hard to say how useful the EIB proposed indicators will be.


This blog post features the authors personal views and does not represent the view of ECDPM.

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Economic Transformation and TradeDevelopment Finance and TaxationEuropean Union (EU)Europe