SRP CONCEPT NOTE TEMPLATE INDIVIDUAL GRANT

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1 SRP CONCEPT NOTE TEMPLATE INDIVIDUAL GRANT A. BASIC INFORMATION Proposal Title Theme Task Team Leader Name Country/Region Managing Unit Country/Sector Manager Name Wider economic benefit assessment of railway rehabilitation in East Africa: Behavioral changes of farmers, firms and miners Transport Richard Martin Humphrey; Atsushi Iimi; James Markland East Africa (particularly, Rwanda and Tanzania), Ethiopia (potential) AFTTR Supee Teravaninthorn (Sector Manager, Africa Transport) Proposal Amount (USD) 193,000 Partners (if applicable) B. PROPOSAL DETAILS 1. Research objectives and alignment with the World Bank Group s (WBG s) twin goals; research questions and key questions and key issues to be addressed; and associated analytical approach. Background. It is well recognized that transport connectivity is essential for economic growth. Whilst there has been considerable interest and work in recent years to understand (i) what those wider economic effects are; and (ii) which are external to current appraisal practices, much of this work has taken place in developed countries. There is correspondingly less understanding on the conclusions for developing countries.. In the literature, the available evidence is thin, except for some studies focused on isolated rural connectivity (e.g., Khandker et al. 2009; Mu & van de Walle, 2011). In recent years, there have been important methodological developments (e.g., Chandra & Thompson, 2000; Banerjee et al. 2012; Jedwab & Moradi, 2012). The proposed work aims to ascertain the relevant wider economic effects in developing countries, ascertain those external to current appraisal practices, and identify changes to the latter to extend these evaluation techniques to establish a robust and practical approach to assess a wide range of economic benefits from a large-scale infrastructure investment in the transport sector. In Africa, transport connectivity remains among most important constraints. African firms are not well connected to the global market. Among others, transport is often recognized as a major constraint in business surveys. Transport connectivity is particularly crucial for landlocked countries. For instance, about 60 percent of Rwandan firms rely on imports for inputs and/or supplies. They have to wait for 15 days for their imports to be cleared at customs. Farmers are also not well connected to local and global markets: Rural accessibility is estimated at less than 30 percent in Africa. Poor connectivity also adds to production costs and hampers modernization in agriculture. In Uganda, for instance, transport costs accounts for more than 20 percent of the total fertilizer cost (World Bank

2 2013). As seen in Mozambique and other resource-rich countries, mining activities are also constrained by unreliable rail operations in the region. Railway has great potential to change the economic structure in Africa. In recent years, there have been renewed efforts toward to reviving railway assets that have been deteriorated, mainly because of lack of proper maintenance. Railway generally has comparative advantage in long-haul transportation of bulky commodities, such as minerals, equipment and agricultural inputs. A multi-national sugar producer in Malawi prefers to send sugar by rail rather than by road to the closer port of Beira. In 2014, together with its neighboring countries, Tanzania embarked upon railway rehabilitation along the Central Corridor connecting inland cities, such as Kigoma and Mwanza, and landlocked countries, such as Burundi and Rwanda, to the port of Dar es Salaam ( Big Results Now program). Many kilometers of railway tracks and other infrastructure will be rehabilitated along the line from Dar es Salaam to Isaka in the next couple of years. The reliability of the services is expected to be improved significantly, for example, with an operational speed increased from 9 to 30 km per hours. The project is expected to dramatically change the economic structure in East Africa. However, an appropriate appraisal approach to ascertain both direct and indirect (wider) economic effects is still missing. The literature from developing countries has little guidance on how to show the impacts of this type of large-scale intervention, beyond conventional static benefit analysis based on estimated transport cost reduction, essentially because of impossibility of randomization, potential self-selection bias, contamination, and externalities. Notably, the economic benefits of investments in the road sector have traditionally been assessed using the Highway Development and Management Model. However there is no equivalent system that is applied in the rail sector, with project analysis being based primarily on the commercial viability of concessions agreements, rather than the assessment of the overall benefit to the economy which are difficult to identify and quantify. There is a need to develop an analysis methodology that will serve to quantify a wide range of benefits that result from rail investments. Objective. The proposed work attempts to address this methodological challenge using the case of the regional transport infrastructure development in East Africa. The work specifically focuses on the possible impacts of the rail rehabilitation project in Tanzania. The rail line between Ethiopia and Djibouti is also expected to become operational in the next couple of years. Economic benefits are expected to spread over the East African region. To avoid the possible risks of contamination and externalities over the long term, the work will focus on medium-term behavioral changes among key economic players in three sectors: farmers, firms and mining companies. Without behavioral changes observed, longer-term development impacts would be illusive. Methodology. In the agriculture sector, the work will focus on farmers fertilizer use, which is critical to increase agricultural productivity in the region. In Zambia, timely availability of fertilizer could increase maize yields by 11 percent on average (Xu et al., 2009). In Tanzania, agriculture is mostly small-scale subsistence farming with minimal use of fertilizer. Improved fertilizer availability may also affect the farmers crop choice toward cash and export crops. Along with farmers fertilizer use, the work will model their crop choice decision and estimate production outcomes with fertilizer demand together. The work will rely on existing data, such as LSMS and agriculture census, if any, and carry out targeted farmers surveys, if the existing data do not have sufficient data points along the project areas. In the industrial and service sectors, the work will examine firms inventory behavior, which is a crucial determinant in their productivity particularly in East Africa. Annual inventory costs are estimated at between 7 to 16 percent of the value of inventory (Brown, 2011). Improved transport connectivity can reduce firm inventory (Shirley & Winston, 2004; Li and Li, 2013). In East Africa, as discussed above, potential savings in transport costs and time are significant. Unreliable transport infrastructure is also crucial, adding to firm inventory costs. The conventional inventory model (i.e., economic order quantity model) will be applied with region-specific connectivity measurements

3 developed. Over the medium to long term, reduced inventory would likely reduce firms operating costs and improve their profitability. These will also be measured by estimating a firm profit or cost function, if data are available. Existing data, such as Annual Survey of Industrial Production (ASIP) and BEEP, will primarily be used, but additional firm surveys will be carried out if the existing data do not have sufficient data points along the project areas. In the mining sector, the modal choice is an important factor to succeed in timely exports of minerals. Give the recent buoyancy in international commodity prices, mining is becoming increasingly important in East Africa. Gold, which is a major mineral extracted in the region, is not infrastructureintensive, but other exploitable mineral resources, such as cassiterite, coal, coltan and tinstone, are exported from Burundi, Rwanda and the eastern part of DRC through the Central Corridor, mainly on roads, because of unreliable rail operations. Some miners have been trying to switch a route to the Northern Rail Corridor. But it does not seem to be successful yet, because of other bottlenecks. The proposed work will use a conventional transport modal choice model to examine preferences of mining companies (e.g. Haralabides et al. 2011). Mining production and export data will be combined with industry surveys. In general, the Northern Corridor is relatively reliable but costly, while the Central Corridor is cheap but not reliable at the moment. The work is expected to cast light on this important tradeoff. Challenges. Since the project is targeted, it is a challenge to establish robust causality between the intervention and the impacts. Essentially, infrastructure placement is endogenous. To partly mitigate this risk, first, the work will focus on medium-term behavioral changes among economic players, before discussing the longer-term impacts. Second, the work will rely on several quasi-experimental methods that have recently been developed. The instrumental variable (IV) method can be used. Instruments can be constructed based on the historical events in the colonial era (Jedwab & Moradi, 2012). The colonial border between Britain and Germany seems promising. Instruments can also be constructed by drawing straight lines connecting historic cities and ports (e.g., Chandra & Thompson, 2000; Banerjee et al., 2012). In-between cities are arguably considered to receive exogenous benefits. To complement the IV methods, the counterfactual will also be constructed along the other rail corridor (TAZARA) connecting Dar es Salaam to Mbeya (and Zambian) based on the underlying characteristics, such as crop suitability and firm agglomeration. Then, the difference-in-difference matching will be used to examine the impacts. Similar approaches will be applied to the case of Ethiopia. 2. Proposed work program, including activities, implementation plan, and team members (indicate units or affiliated organizations). Activities. The proposed work includes: (i) data collection, (ii) analytical work, and (iii) dissemination, for each of the sectors. While the necessary surveys and data collection will be carried out by local survey firms, the Bank will take the lead of analytical work in collaboration with the EAC countries. Team. The work will be led by Martin Humphreys and Atsushi Iimi (AFTTR). Technical support will also be provided by other sector colleagues, such as Henry des Longchamps (Senior Railway Specialist) and Sevara Melibaeva (Transport Economist). If the Ethiopian case can be included, James Markland (Senior Transport Specialist) will also work with the team. 3. Operational and/or policy relevance of proposed research. The Bank has long been engaged in regional transport corridor development in East Africa. In 2014,

4 Tanzania Railways Limited (TRL) has embarked upon large capital improvements on the central line, to which the World Bank is contributing $300 million. The Bank is also carrying out an intermodal transport study in the East Africa Community to facilitate the technical discussion among the stakeholders. The proposed work will be complementary to these ongoing operations. It is also expected to demonstrate the importance of restoring rail assets in the region. Africa has many other nonoperational, though potentially operational, rail assets. 4. Extent of proposed collaboration between Development Economics Vice Presidency (DEC) and operations as well as collaboration between Bank staff and researchers from developing countries. The team discussed the research idea with Transport anchor colleagues as well as DEC researchers. This proposal can be incorporated into the transport thematic program proposal led by the transport anchor, if possible. 5. Expected outputs and outcomes. The primary outputs are policy research working papers, which will also be aimed at some academic journal. Based on these papers, a main consolidated report will also be prepared as a methodological guidance note, which is expected to contribute to demonstrating a rigorous and practical way of evaluating wide economic benefits from large-scale infrastructure projects. 6. Dissemination strategy, including plans to reach out to policy makers of developing countries. The primary outputs will be disseminated to the EAC countries through a workshop. The Bank team will also use the results to extend the policy discussion with other potential clients in the region. The work will facilitate the regional discussion and coordination for rail development, promoting regional integration and economic growth. Ideally, it is expected to demonstrate a wide range of expected economic benefits from rail asset rehabilitation to not only Tanzania but also other African countries. C. PROPOSED BUDGET Expenditures under SRP Total Expenditures over life of activity, of which

5 Activity FY15 FY16 SRP Bank BB Other sources AG: Data collection AG: Follow up Firm: Data collection Firm: Follow up Mining: Data collection Analytical work Dissemination Total SUBMITTED BY: Atsushi Iimi (AFTTR) DATE: March 30, 2014 TASK TEAM LEADER/UNIT ENDORSED BY: Supee Teravaninthorn (Sector Manager, Africa Transport) DATE: March 13, 2014 Sari Soderstrom (Senior Manager, Sustainable Development, Africa) DATE: March 31, 2014 TTL MANAGER/DIRECTOR