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Estimating the Economic Multiplier Effects of IFC Investments in the Power Sector. Evgenia Shumilkina Development Impact Department, IFC Presentation at Let’s Work – Pillar 2 Workshop London September 17th, 2015 Background IFC infrastructure operational power team requested to develop a practical tool to provide ex-ante quantitative estimates of the economic impact of IFC investments in the power sector. Minimum data requirements and programming requirements due to large number of projects across different countries. Approaches reviewed: - Econometric modelling - Computable General Equilibrium (CGE) - Input-Output (or Social Accounting Matrix, SAM) multiplier analysis Estimates to be included into the Development Impact section of the Board papers. At the implementation stage. On-going work on the IFC comprehensive model based on system dynamics. 2 Background (Cont’d) Social Accounting Matrix (SAM) multiplier analysis - extension of IO analysis - allows for an estimation of multiplier effects for a large set of countries with minimum data requirements. The approach has a number of limitations and based on numerous assumptions. Collaboration with academia and Let’s Work Partnership. Prof. Michael Lahr (Rutgers University, International IO Association) prepared a background note “Estimating Economic Impacts of New Electricity Power Generation and Transmission Facilities in Developing Nations”. The note proposes the use of the input-output methodology for an ex-ante assessment of the effects of the power projects including effects from an increase in the supply of electricity in the situation of limited data availability. EcoMod developed Excel templates for 20 countries. The report and templates for the pilot countries were peer-reviewed by WB Energy Unit and verified as technically sound by DEC expert. 3 Economic Effects of Investments in the Power Sector The tool helps to estimate GDP and employment impacts resulting from IFC investments in power generation resulting from: i) Local expenditures in Engineering, Procurement and Construction (EPC). Capturing direct, indirect, induced effects through backward production linkages. ii) Local expenditures in Operations and Maintenance (O&M). Capturing direct, indirect, induced effects through backward production linkages. iii) Increase in power supply. Capturing induced effects through forward production linkages that account for the increased supply of inputs to upstream industries. Forward linkages are particularly important for the energy sector as it provides key input into the majority of other sectors in the economy. 4 Excel-based Tool IFC/ECOMOD have developed an Excel-based tool to assist Industry Economists with the task of estimating multipliers. Excel models are available for 20 countries and rely on inputs shown below. Once the inputs are entered, the models automatically compute multipliers for GDP, output, and employment for a specific country. 20 countries with the majority of IFC historical projects and projects in the pipeline. 5 Country Coverage South Asia Africa LAC Bangladesh India Nepal Cameroon Cote D’Ivoire Ghana Kenya Mozambique Nigeria Senegal South Africa Uganda Brazil Mexico EAP Indonesia Philippines E/MENA Egypt Georgia Pakistan Turkey 6 Excel Model Cover Sheet: Inputs 7 Using Excel Tool: Step 1 STEP 1. Collect necessary project-level data (the majority of the data is available from the project’s documentation). For the amount of additional power supply: - Tariff level - GWh produced - Transmission and distribution losses For EPC and O&M estimations: - Detailed EPC (construction) costs - Detailed O&M costs 8 Using Excel Tool: Step 2 STEP 2. For EPC and O&M, determine Foreign v Local costs. EPC and O&M Expenditures are based on project documents Line items need to be bucketed into local and foreign components, based on each project’s particular attributes 9 Using Excel Tool: Step 3 STEP 3. Allocate the EPC and O&M costs (in 2007 USD) by sectors of the economy. Sector EPC O&M Expenditures Expenditures In M 2007 USD In M 2007 USD c_Agriculture 0.0 0.0 c_Mining&Fuel 0.0 0.0 c_Manufacturing 0.0 0.0 c_Electricity 0.0 0.0 c_Water 0.0 0.0 c_Construction 0.0 0.0 c_Trade 0.0 0.0 c_Transport&Com 0.0 0.0 c_Finance&Insurance 0.0 0.0 c_OthServices 0.0 0.0 c_PubServices 0.0 0.0 Total 0.0 0.0 10 Using Excel Tool: Step 4 STEP 4. Determine the amount of additional power in monetary terms (in 2007 USD). Additional Power Supply in M 2007 USD = (Additional Power Supply in GWH * Tariff Level) - T&D losses 11 What we See from the Historical Projects Results of testing 19 historical IFC projects indicate that: 1. Estimates for GDP and employment from EPC and O&M expenditures are much lower (as expected) than the estimates for an increase in power supply. 2. Estimates for GDP and employment from an increase in power supply are to some extent proportional to an increase in a country’s total capacity due to an investment. 12 Comparison of the Results for Masinloc (Philippines) To have a point of reference, the results for Masinloc project were compared to the results of the in-depth evaluation of this project conducted by Steward Redqueen in 2015. The table below shows the impact of the additional 129 MW from the IFI investment in Masinloc on GDP and employment estimated with the help of two methodologies. Change EcoMod Template Steward Redqueen Evaluation GDP 0.12% per year 2013: 0.08% 2014: 0.12% 2015: 0.13% 2016: 0.09%* Employment 62,000 2013: 28,364 2014: 41,279 2015: 44.464 2016: 28.672 * The SR evaluation provides estimates only for 2013 - 2016. The results for other years of plant’s operation are expected to be in the similar range. 13 % change in Total Capacity vs. % change in GDP and Employment 9% 8% 7% % change in country’s total capacity vs. % change in GDP* 6% 5% 4% 3% 2% 1% 0% 0% 2% 4% 6% 8% 10% 12% 14% 16% 14% 16% 9% 8% % change in country’s total capacity vs. % change in employment* 7% 6% 5% 4% 3% 2% 1% 0% 0% 2% 4% 6% 8% 10% 12% *Results for 17 countries. The graphs are based on the estimates for increase in power supply and does not include estimates for EPC and O&M expenditures. 14 Pilot Countries: Summary of Effects on GDP and Employment (Preliminary results – not for quotation) 341 MW Power Plant (Gas) 181 MW Power Plant (Hydro) 3/. 459 MW Power Plant (Gas) 1/. Multiplier effects are expressed in per annum terms. 2/. For EPC and O&M expenditures, only local expenditures are taken into account (ie. local provision of goods /services)15 3/. The power supply increase in Georgia is small due to the fact that the project exports 75% of its power to Turkey Assumptions of the Model In addition to the typical limitations and assumptions of the IO models (fixed prices, constant returns to scale, fixed commodity input structure, fixed industry technology, static model, etc.) it is important to take into considerations limitations related to the estimations of the impact from an increase in the power supply. The results of the SAM multiplier analysis capture the output effects rather than price effects. Such analysis might more applicable in the situation of regulated prices and when lack of available electricity represents a bottleneck to the ability of firms to enhance their productive capacities. We also need to be careful with the supply effects mentioned above as they are based on the following assumptions: 1. Electricity shortage is a bottleneck and the new supply would be fully used. 2. The distribution of electricity use continues as it was prior to the installation of new facilities. 3. There are enough available factors of productions (labor, capital, natural resources) and intermediate inputs do not impose a constraint. Regarding 1st assumption, the lack of adequate electricity supply represents a serious bottleneck, given that the % of firms identifying electricity as a major constraint is 76% in Nigeria, 52% in Bangladesh, and 31 % in Georgia. 2nd assumption might hold in the short run, but with the time, as the companies adjust their production to higher availability of electricity supply and the new technologies develop, this assumption will be less likely to hold. 16 Assumptions of the Model (Cont’d) Regarding 3rd assumption, the significant increase in the production in almost every activity in the country would require more factors of production and intermediate inputs and would inevitably create significant price movements and some other bottlenecks in the economy. In order to properly capture these complex effects CGE model might be more appropriate. The data from the Enterprise Surveys provides some indication of how much more the economies are capable of producing with the existing resources if there was a reliable supply of electricity. According to the surveys, the losses of annual sales due to electrical outages are 3.7 % for Bangladesh, 2.4 % for Georgia, and 8.5 % for Nigeria. 17 Data sources SAM/IO source: GTAP 7 (base year 2007) The employment data is from the ILOSTAT1 database of the International Labor Organization (ILO) or from the ILO database LABORSTA (not being updated anymore). The data on GDP deflators is from the World Bank Development Indicators database. The data on the engineering, procurement, and construction (EPC) costs and on the operations & maintenance (O&M) costs is from projects’ documentation. 18