Potential USAID Support for MilitaryOperations:

the Economic Development DimensionPresented at thethe

Joint Operational Environment Seminar Joint Operational Environment Seminar Lockheed Martin Center for InnovationLockheed Martin Center for Innovation

Suffolk, Va., 26 – 28 JuneSuffolk, Va., 26 – 28 June

Juan A. B. BeltDirector

Office of Infrastructure and Engineering (I&E)Bureau for Economic Growth, Agriculture and Trade (EGAT)

USAID

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Outline

• Some characteristics of failed & post conflict: they are not good places to promote economic development

• Lessons learned from post conflict and other “difficult” situations

• USAID Study of “Operating Contracts”: useful to impose discipline of state-owned enterprises (SOEs)

• Cuba: USAID/EGAT/I&E used lessons learned in planning process led by US DOC

• USAID role in the IA process*: coordination with economic development “branch” of USAID should be improved

• Conclusions

* Disclaimer: my own personal opinion put forth to establish a dialogue

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USAIDs Strength is Enabling Civil Authority Activities; these Activities Should Begin at the Planning/shaping

Phase

Le v

e l o

f E

f fo r

t

Phase 0

PhasesOPLAN activationOPLAN termination

Global Shaping

Theater Shaping

DeterPhase I

Seize theInitiativePhase II

DominatePhase III

StabilizePhase IV

EnableCivilAuthorityPhase V

Shape Shape

OPLAN xxxx

Shaping

Phase 0

OPLAN

xxxx

Shaping

Shaping Activities

Deterring Activities

Seizing the Initiative Activities

Dominating Activities

Stabilizing Activities

Enabling Civil

Authority A

ctivitiesUSAID’s Area of Expertise

Recognition thatthere is an early

role for engaging In mid-term issues

Should USAID be more involved?

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Failed States: Main Economic Characteristics

• Financial instability: high public sector deficits, inflation, unstable exchange rates

• Socialist (in general), large proportion of productive capacity owned by the state; price controls; weak property rights

• Public sector ineffective and corrupt • Doing business difficult: red tape & corruption• Brain drain• Utilities and many SOEs not viable financially• Unemployment high; restrictive labor policies• Physical Infrastructure damaged through neglect

POSTCONFLICT IS WORSE– damaged infrastructure as a result of conflict– increased criminal, political & sectarian violence– civil disorder

CONCLUSION: Not easy to promote economic growth in post-conflict situations

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COUNTRY USAID PROGRAM SIZE (FY

2006)

INDEX OF ECONOMIC FREEDOM

Afghanistan 1 nr Colombia 2 73 Haiti 3 135 Sudan 4 nr Liberia 5 nr Kosovo 6 nr Iraq 7 nr Lebanon 8 77 DRC 9 nr Nepal 10 121 Cote d’Ivoire 11 105 Sierra Leone 12 141 Somalia 13 nr

-- Only countries with somewhat adequate environment for investment: Colombia and Lebanon --Rebuilding countries: a bad neighborhood--nr: no ranking. No reporting to World Bank, IMF, etc. Ranking for Iraq &Afghanistan forthcoming in 2008

Cuba is ranked 156 of 157Which country is ranked 157?

In General, USAID’s “Rebuilding Countries Lack Economic Freedom

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General Lessons and Considerations

• “Models” cannot be imported but lessons can be learned & applied: one of the key roles the Bureau for Economic Growth, Agriculture and Trade “learning and teaching”

• Key decisions must be taken by local authorities: buy-in important, need for consultation

• Expediency vs. legitimacy: reforms should be made rapidly but are the authorities legitimate?

• Who are the potential reformers?; How can we reach out to them during the planning/shaping phase?

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Lessons: Promoting Economic Development in Difficult Situations

1. Introduce market friendly policies: laws & regulations

2. Strengthen market economy institutions: more difficult & time consuming than #1

3. Establish social safety net and/or employment/livelihood programs (difficult & costly)

4. Protect health/education gains: indicators can deteriorate rapidly (USSR)

5. Pursue discipline in existing state-owned enterprises (SOEs)

6. Encourage establishment of new enterprises mostly by improving the enabling environment: #1-4

Three points:– Very difficult even under normal circumstances & much more

difficult in post conflict– Necessary: growth necessary for peace (El Salvador example)

– Issue: need to move fast but authorities may lack legitimacy

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Discipline for existing SOEs: important because they are usually large in relation to the size of the economy: power, water, telecommunications, ports, factories, hotels, restaurants, etc

Encouragement: important to bring new players. In many countries, such as those in Easter Europe, new enterprises have been the main sources of growth

•Monitoring and influencing managerial behavior to reward efficient stewardship of assets & to discourage tunneling & asset stripping; performance-based management contracts can play a role•Hard budget constraints on enterprises; requires tariff rationalization and increases

•Adequate legal/regulatory environment•Simplifying regulatory and licensing procedures•Providing basic infrastructure is key for establishing the basis for competitiveness and economic growth

Lessons: Need Discipline and Encouragement

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Lesson: A Virtuous Circle of Peace & Security, Investment, Economic Growth, Jobs, Peace and

Security

Jobs

Peace and Security

Economic GrowthPrivate Investment

• Peace & Security required for investment

• Investment required for growth

• Growth required for jobs

• Jobs required for Peace and Security

El Salvador, with USAID support, carried out far reaching economic reforms in the midst of implementing the Peace Accords. The growth that ensued made it easier and more sustainable to reinsert ex-combatants. Gangs (“maras”) an issue today

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Lessons: How to Create jobs Before Sustainable Growth Begins- General Considerations

• A difficult but important problem• Mantra: programs should be demand driven &

community led

• Advantages: better information on needs, may lead to reconciliation, bypasses ineffective and inefficient central government institutions & conducive to local procurement (i.e. local construction firms)

• Challenges: tension between short term results and sustainability; and possibility of “capture" of program by local power brokers

Source: Demand-Driven Approaches to Livelihood Support in Post War Contexts, Piet Goovaerts, et al, ILO-World Bank, 2006

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Lessons: How to Create jobs Before Sustainable Growth Begins- Design Considerations

• First: comprehensive mapping exercise of livelihood opportunities and resources & on local capacities, resources and skills

• Implement both community-based and individual livelihood support activities

• Emphasize farming, fishing and construction & their related support sectors including– USAID contractors have experience in sub-contacting

local engineering & construction firms

• Prioritize credit provision from the outset

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Lessons for Infrastructure

• Infrastructure usually damaged; need to restore rapidly; power most important

• USG concentrated on reconstruction of physical facilities & fuel purchases

• SOEs: asset stripping, tunneling & plain stealing common

• May need to establish “receivership” to provide “discipline” in SOEs

• Difficult to get private investment in post-conflict:

– high economic and political risk– lack of counterparts– low user rates insufficient to cover costs– low ability of users to pay

• Sustainability & private participation should be “on the table” since day one; more difficult in some sectors than in others

Easiest: cellular telecomMost difficult: Water & transport, except ports which is easier ($ revenue)Medium: power

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Continuum Between Totally Public and Totally Private

--TA and/oroutsourcing contracts for certain aspects such as bill collecting

Management contracts with incentives for performance

Leases Concessions

May work if there is full cooperation from managers

Introduce discipline; private firm runs company; similar to receivership

Private firm operates & maintains; investment funded by public sector

Private firm operates & maintains; investment by private firm

PUBLIC

PRIVATE

Operating Contracts

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Lessons from Study of Operating Contracts

• Important EGAT role: “learning & teaching”• Study of operating contracts: performance-based

contracts that transfer responsibility for managing operations of SOEs to private firms

• Will only present conclusions of study

• Dissemination:– Course on use of operating contracts planned for October 2007– Could make special presentation to US Military

• Task Manager and Author of Report: – Allen Eisendrath, I&E; aeisendrath@usaid.gov; 202-712-0483

• Implementation:– proceeding with OCs in Afghanistan & may begin Iraq July 2007– Would welcome opportunity to cooperate with US military

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Lessons: General Comments on Operations Contracts as Tools to Introduce Discipline

• In times of stress (post-conflict, transitions from socialism, or post-disaster) corporate governance of enterprises deteriorates and asset stripping and tunneling accelerates

• Need to establish a “receivership” in the immediate term, to manage utilities on behalf of the “owners” and “customers”, i.e., the citizens; like bankruptcy proceeding

• Tendency by USG in post conflict situations to concentrate on reconstruction of physical facilities and fuel purchases; customer-facing functions are often neglected

• In the long term, private ownership or concessions may be the most efficient solution but operation contracts are a good solution to provide “discipline” in the interim

• Operation contracts are not a silver bullet but one more tool; they have been used successfully for decades

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The Sustainability Challenge for Water, Sanitation & Electricity in Difficult Situations

Lessons: Uti l i t ies in Many Countries Face a Vicious

Circle

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Lessons: Usual Problem Poor Utility Governance & Management

Rebuilding infrastructure and turning it over to local public authorities not enough to ensure improved services. Newly rehabilitated facilities are often not properly operated and managed and will fail over a short period of time. Useless to increase supply if interface with customers is broken. Root causes include:• Rampant corruption• Weak utility governance• Bad management• Low rates

Mazar e Sharif:“privatization” of power

distribution

Indonesia: “privatization”

of water distribution

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1. Which case problems were addressed?

2. How were operating contracts tendered and awarded?

3. What responsibilities were given to the operator?

4. What incentives did the operator have to improve performance?

5. How well did the incentives work?

6. How were services and cost recovery at the end of the contract?

Lessons: USAID Study of the Use of Operation Contracts

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Lessons Analyzed by USAID

Location Name Sector

Cambodia * BOT, BOO private water companies Water

Cote D’Ivoire * SODECI Water

Georgia * United Energy Distribution Company Electricity

India – Bhiwandi * Torrent Power Franchise Electricity

India – North Delhi North Delhi Power Limited Electricity

Kosovo Korporata Energjetik e Kosoves (KEK) Electricity

Mali * Energie du Mali Electricity & Water

Senegal SDC contract with SONES Water

Sudan * Yei Electric Cooperative Electricity

Tajikistan * PamirEnergy Electricity

Uganda * National Water & Sewage Corporation’s Mbale Service Area

Water

Red = local contractorBlack = foreign contractor

* = large proportion of poor customers

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Lessons and Basic conclusions of the USAID assessment #1

1. Incentive based operating contracts reviewed are ‘turning around’ poorly performing electricity & water utilities & providing reliable services in difficult situations.

2. The contracts are reducing technical and commercial losses, increasing billing rates and collections, and introducing efficient and accountable management.

Electricity meters and wires in Mazar e Sharif

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3. They work in difficult environments—post-conflict situations, disaster relief, desperately poor local economies with weak & corrupt government.

4. No single formula applies to every situation. Models include management contracts (Kosovo, Georgia), divestiture with regulation (North Delhi), incentive-based management contracts with former employees (Uganda) and lease & concession contracts (Pamir; Cote d’Ivoire; Senegal).

Lessons and Basic conclusions of the USAID assessment #2

USAID is taking steps to avoid this in Egypt

Egypt: New Wastewater Plant

Yerevan, Armenia: Defunct Wastewater Plant

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5. Successful designs are tailored to the local situation. Each case is uniquely constructed.

6. Operators should have enough control to be able to manage the business. Employees should get financial gains from better performance. Consumers should not face immediate tariff increases; some service improvement must take place

Electricity distribution systemMazar e Sharif

Lessons and Basic conclusions of the USAID assessment #3

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Lessons from USAID Study: On-going Applications in Post Conflict and other

“Difficult” Settings

Afghanistan water, sanitation & electricity

Thailand wastewater treatment plant

contracts

Nagpur & Bhubaneshwar

water & sewerage operating contracts

Northern Uganda water & sanitation in

IDP areas

Yerevan water & sewerage lease

Montenegro & Georgia Water Reform

Initiatives

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Cuba Interagency Planning ProcessUSAID Provided Support

Great interest on Cuba after Fidel Castro transferred power to his brother Raul Purpose of slides: illustrate some of the issues related to planning from the Development perspective; planning led by the USDOC

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Cuba Key Problem: Electric Power

• Reliance on subsidies from Venezuela: $2 billion?

• Electricity tariffs very low for households; do not cover costs• Generation plants deteriorated: lack of maintenance & the use high sulfur

crude oil as plant fuel• Distribution & transmission network deteriorated: lack of maintenance and

hurricanes• Blackouts/civil disturbances in 2004-06• Castro solution of small gensets costly to operate but have added

distributed capacity to system rapidly (1,000 MW?)• Positive developments in 2006/7

– Energy efficiency program (mandatory)– Energas/Sherritt gas plants (376 MW; 500 in future)

• GOC claims:– Installed capacity: 3,400 MW; – Peak demand: 2,500 MW

• If true, blackouts less likelySecondary distribution network

after Denis, July 7, 2005Juan A. B. Belt, Power Sector Reforms in Market and Transition Economies: Lessons for Cuba

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Cuba: Infrastructure Priorities Slide 1

#1 Develop Infrastructure Strategy: ideally, in support of local officials; who are the potential reformers (“good guys”)

#1 Power – Plan A: support UE to improve control systems to introduce

discipline & minimize asset stripping and tunneling– If A not feasible, Plan B: performance-based management

contract to introduce discipline & minimize asset stripping and tunneling

– Minimum investment to “keep the lights on”– Develop laws, regulations and institutions to encourage private

participation

#2 Water and sewerage– Main issue is to avoid deterioration that could have a rapid effect

on health standards. Opportunity for asset stripping and tunneling low in Havana and Varadero (foreign operator)

– Sector reform can follow but introducing private participation much more difficult than in power and telecommunications

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Cuba: Infrastructure Priorities Slide 2

#3 Transport sector• Airport and port security• Private participation in port and airport operations quite possible:

revenues denominated in foreign exchange• Mechanisms to improve the management and maintenance of

the highway & road network

#4 Telecommunications• Foreign partner so less need to introduce discipline• Introduce competition, which would require renegotiation of

exclusivity agreement– Land lines– Cellular– Submarine cable

• Cuba’s highly educated population can benefit from modern telecommunications and export ICT services (“near shoring”)

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• Main information gaps– Level of subsidies from Venezuela– Fiscal situation today & after regime change– Financial accounts of Union Electrica and CUPET – Information on potential reformers

• Issues– Initially authorities will lack legitimacy; constitutional issue– Need far-reaching reforms to improve position in Index of

Economic Freedom– Property claims; political issue in US (Fla & NJ, particularly)– Fiscal issue– Power sector– “Mafias” may try to take over SOEs; all major enterprises are

run by former military officers

Cuba: Information Gaps and Issues

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• Schematic organization of USAID: role of EGAT, main Washington Economic Development unit

• US Department of Commerce Planning for Cuba: infrastructure contribution by EGAT

• Future challenges

• These slides represent my personal opinion

Next Slides: USAID Role in IA--Present Situation and Future Challenges

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USAID Schematic Organigram

USAID Administrator(also Director of Foreign Assistance)

S/CRS

4 regionalBureaus

(different from State)

DCHA•OMA•OFDA, etc•DG

•ST•LT

GlobalHealth

EGAT•Macro•Business support•Agriculture•Environment•Credit•Infrastructure (I&E)formal link withOMA & S/CRS

DCHA ST except DGOMA link w. military

EGAT: mainly Long Term focusAd hoc involvement w. military

Formal links I&E-OMA

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USAID: Possible Contribution to IA Process?Illustrations from Cuba Infrastructure

Asset Shaping to dominating

Stabilizing Enabling

Direct hire

Planning, budget, TORs for next phases, analysis of situation w. public sources & Intel

Physical/institutional assessment, initial discussions with authorities, supervision of consultants

Discuss long-tem strategy for sector, including role of private sector

IQCs Not involved except to carry out specific studies; security issue

Physical/managerial assessment

Operations contracts & other support to SOEs

Regular contracts

Not involved Not involved Privatization support, energy efficiency highway & port concessions

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Organizational Challenges/Changes(this refers to the economic development “branch”)

• Challenges: – EGAT weak formal links with military– USAID’s workforce mostly in the field; limited backfill in DC;

lack of experienced economists/private sector officers – Specialized ‘stove pipes’ within USG– No funding for planning or contingencies at USAID/EGAT– No culture of participating in exercises at USAID/EGAT– Some may question working with military

• Potential improvements:– NSPD-44 – Whole of Government approach to R&S– Country Reconstruction and Stabilization Group (CRSG)– Interagency Management System (IMS)

• Integration Planning Cell (IPC)• Advance Civilian Team (ACT)• Field Advance Civilian Teams (FACTs)

– Active Reserve Corps and Civilian Reserve Corps– More information sharing, exercising, and planning with DOD– Formalizing the role

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Conclusions

• Post conflict countries: achieving economic growth & job creation difficult but necessary

• To increase probability of success, economic development issues must be considered at the earliest stage

• Cannot neglect the customer-facing functions of utilities

• Operating contracts can be one more tool to promote discipline in SOEs

• USAID: unique capabilities in economic development may not be fully utilized

• USAID/EGAT effectiveness in support of the US military can be improved

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Questions?

Juan A. B. Belt

jubelt@usaid.gov202-712-4137