The public finance of infrastructure: issues and options

Using economic principles, the author provides criteria for financing infrastructure services where consumption-related user charges can be levied effectively. In light of the suggested criteria, the author examines the experience of developing countries in financing publicly provided infrastructure services in transport (road), water, telecommunications, and power. In developing countries, most infrastructure is provided by the public sector, although the private sector has become increasingly involved. Because it is difficult to raise funds through general taxes, self financing of these services remains a desirable second-best policy, one that almost all developing countries endorse. But experience suggests that, except in telecommunications, full cost recovery is more the exception than the rule. Financing remains inadequate. The political economy of tariff setting is an important element in low improperly designed user charges, infrequent adjustments for inflation, and poor enforcement. Such sectors as water, power, and transportation drains funds from the treasury, although their impact varies from sector to sector. When it is difficult to get budget transfers to materialize - especially during a fiscal crisis - there is often a reduction in nonwage operations and maintenance expenditures. As a result, services deteriorate. The private provision of infrastructure services is often suggested as an alternative. The private provision of services can certainly reduce the public sector's financing requirement. For infrastructure services for which technological advances have made competition possible, the market system could ensure efficient private provision of services, which could be a relief to the public sector. But for services that require a single provider to achieve economies of scale and similar benefits, the private provision of services will work only if an appropriate rate of return is assured - and only if user charges cover costs.