chapter  5
25 Pages

Financing infrastructure LUIz D E MELLO AND DOUGLAS SUTHERLAND

Introduction Global infrastructure investment needs are estimated by the OECD at about 2.5 percent of world GDP per year in the coming 20 years in the areas of electricity transmission and generation, surface transport (roads and rail), telecoms, and water. Estimates could rise to some 3.5 percent of world GDP if additional energy-related investments (such as oil, gas, and coal) are taken into account. In the developing world, rapid urbanization requires increased public investment in water, sanitation, transport, and urban amenities to meet the needs and demands of a growing urban population and to deliver on MDG commitments. Rising incomes in emerging-market economies create demands for addressing deficiencies in provision, upgrading existing infrastructure, and improving access to the underserved population. The need to replace and update ageing infrastructure, and to maintain competitiveness in international markets in an increasingly tight budgetary environment poses challenges for governments in mature economies to provide and finance infrastructure. At the same time, technological change affects the nature of, and scope for, government provision of infrastructure services in developing, emerging-market, and mature economies alike. The huge resources required to meet infrastructure demands call for combined efforts by the government-including the central and subnational administrations, as well as the public enterprise sector-and private-sector partners. In particular, where infrastructure provision and financing are carried out in a decentralized manner, coordination rises in importance, particularly when resources are limited. Within the government, coordination of infrastructure provision amongst subnational jurisdictions, as well as with national priorities and line ministries, is required to ensure investment is well designed and not wasteful. At the interface with the private sector, governments of all levels need to consider the best arrangements to ensure value for money. In this context, the role of subnational governments needs to be set in a broader context of government intervention. Governments intervene in infrastructure provision to address market failures that could lead to the under-provision of services, to take into account externalities or public-good features when they are predominant, or to limit the exercise

of market power in the case of natural monopolies. This broader context includes decisions on the ownership structure (public or private) of infrastructure, the delivery modalities (pure government provision, public procurement, concessions, PPPs, etc.), the financing options for these different modalities (budget appropriations, user charges), and the regulatory regime for service delivery (market-and/or government-based regulation). In this chapter, we address general issues related to infrastructure investment but focus on fixed networks, such as water/sanitation, energy, and transport. These networks are interesting, because they require investment that is lumpy and largely irreversible, and therefore costly, which calls for considerable financing for instalment and maintenance. They also account for the bulk of infrastructure development budgets around the world and also often generate a future stream of revenue that accrues to the provider. Moreover, fixed networks concern most of the infrastructure investment already under way around the world and the bulk of demand for future investment. Infrastructure investment in other sectors, including for the provision of social services, such as health care and education, is discussed in Chapters 3 and 13. This chapter identifies a few general principles that should guide policymakers’ choices for financing infrastructure investment in a decentralized setting. By raising efficiency, there are substantial savings to be made from the choice of appropriate financing, given that the costs of infrastructure investment are substantial. In particular:

• The choice of financing instrument depends on the nature of the investment (size, revenue-generating capacity, potential for competition), the modality of service delivery (pure government provision, procurement, concession, PPP), the budgetary capacity of the jurisdiction (breadth and depth of own taxes, intergovernmental transfer arrangements, borrowing constraints), and the technical capacity of the jurisdiction to design and negotiate contracts with private-sector providers.