World DevelopmentRepOrt1994T 1I -IFRASTRUCTURE FOR DEVELOPMENTWorld Development Report 1994Infrastructure for DevelopmentPublished for the World BankOxford University PressOxford University PressOXFORD NEW YORK TORONTODELHI BOMBAY CALCUTTA MADRAS KARACHIKUALA LUMPUR SINGAPORE HONG KONG TOKYONAIROBI DAR ES SALAAM CAPE TOWNMELBOURNE AUCKLANDand associated companies inBERLIN IBADAN 1994 The International Bankfor Reconstruction and Development / THE WORLD BANK1818 H Street, N.W., Washington, D.C. 20433, U.S.A.Published by Oxford University Press, Inc.200 Madison Avenue, New York, N.Y. 10016Oxford is a registered trademark of Oxford University Press.All rights reserved. No part of this publication may be reproduced,stored in a retri system, or transmitted, in any or by any means,electronic, mechanical, photocopying, recording, or otherwise, withoutthe prior permission of Oxford University Press.Manufactured in the United States of AmericaFirst printing June 1994Photographs Maurice Asseo, 73; Doug Barnes, 13;Curt Carnemark, 37, 52, 89, 109.The boundaries, colors, denominations, and other inationshown on any map in this volume do not imply on the part of theWorld Bank Group any judgment on the legal status of any territoryor the endorsement or acceptance of such boundaries.ISBN 0-19-520991-5 clot hboundISBN 0-19-520992-3 paperbackISSN 0163-5085S I,Text printed on recycled paper that cons tothe American National Standard for Permanence of Paperfor Printed Library Material, Z39.48-1984ForewordWorld Development Report 1994, the seventeenth inthis annual series, examines the link between infra-structure and development and explores ways inwhich developing countries can improve both theprovision and the quality of infrastructure services.Like the health and environment topics of the twoprevious reports in this series, infrastructure is anarea in which government policy and finance havean important role to play because of its pervasiveimpact on economic development and human wel-fare.In recent decades, developing countries havemade substantial investments in infrastructure,achieving dramatic gains for households and pro-ducers by expanding their access to services such assafe water, sanitation, electric power, telecommuni-cations, and transport. Even more infrastructure in-vestment and expansion are needed in order to ex-tend the reach of servicesespecially to peopleliving in rural areas and to the poor.But as this report shows, the quantity of invest-ment cannot be the exclusive focus of policy. Im-proving the quality of infrastructure service also isvital. Low operating efficiency, inadequate mainte-nance, and lack of attention to the needs of usershave all played a part in reducing the developmentimpact of infrastructure investments in the past.Both quantity and quality improvements are essen-tial to modernize and diversify production, helpcountries compete internationally, and accommo-date rapid urbanization. Future success meansbuilding on lessons learned.The report identifies the basic cause of poor pastperance as inadequate institutional incentivesfor improving the provision of infrastructure. To pro-mote more efficient and responsive service delivery,incentives need to be changed through commercialmanagement, competition, and user involvement.Commercial management including financial au-tonomy, accountability, and well-defined objec-tivesfocuses providers of infrastructure serviceson increasing efficiency and meeting customer de-mand. Competition provides users with choices thatcan better meet their needs and compels providersto become more efficient and accountable. Involve-ment of users and other stakeholders in the design, op-eration, and maintenance of infrastructure is alsokey to better perance, particularly in areaswhere competition is constrained.Several trends are helping to improve the perfor-mance of infrastructure. First, innovation in tech-nology and in the regulatory management of mar-kets makes more diversity possible in the supply ofservices. Second, an uation of the role of gov-ernment is leading to a shift from direct govern-ment provision of services to increasing private sec-tor provisionand recent experience in manycountries with public-private partnerships is high-lighting new ways to increase efficiency and ex-pand services. Third, increased concern about socialand environmental sustainability has heightenedpublic interest in infrastructure design and perfor-mance.Differences between and within infrastructuresectors, together with major variations in countryneeds and capacities, mean that the detailed designand implementation of policy re must be tai-lored to specific cases. But there is no question thatthe overall benefits from improving infrastructureare large. Roughly 200 billion is invested in the sec-tor annually in the developing world, and the sav-ings that would accrue from better provision andperance would be substantial. More efficient,more accessible, and less costly infrastructure ser-vices are also, of course, essential to more effectivepoverty reduction.As in the past, World Development Report 1994 in-cludes the World Development Indicators, whichoffer selected social and economic statistics for 132countries. The Report is a study by the Banks staff,and the judgments made herein do not necessarilyreflect the views of the Board of Directors or of thegovernments they represent.Lewis T. PrestonPresidentThe World BankMay 31, 1994111This Report has been prepared by a team led by Gregory K. Ingram and comprising John Besant-Jones,Antonio Estache, Christine Kessides, Peter Lanjouw, Ashoka Mody, and Lant Pritchett. Valuable contri-butions and advice were provided by Esra Bennathan, Koji Kashiwaya, Miguel Kiguel, Lyn Squire, andPaulo Vieira Da Cunha. Assisting the team were Ritu Basu, Leslie Citroen, Marianne Fay, ChristineKerr, Kavita Mathur, Dambisa Moyo, and Sarbajit Sinha. The work was carried out under the generaldirection of Michael Bruno.Many others inside and outside the Bank provided helpful comments and contributions see theBibliographical note. The International Economics Department contributed to the data appendix andwas responsible for the World Development Indicators. The production staff for the Report includedAnn Beasley, Kathryn Kline Dahi, Stephanie Gerard, Audrey K. Heiligman, Cathe Kocak, Jeffrey N.Lecksell, Nancy Levine, Deirdre T. Murphy, Hugh Nees, Kathy Rosen, Walton Rosenquist, DavidTheis, and Michael Treadway. The support staff was headed by Rhoda Blade-Charest and then RebeccaSugui and included Laitan Alli, Michael Geller, and Paul Holtz. Bruce Ross-Larson provided editorialadvice and assistance. Trinidad S. Angeles served as administrative assistant. Anthony Rowley wasthe principal editor.Preparation of the Report was greatly aided by background papers and by contributions from par-ticipants in consultation meetings, both of which were supported in part by the Policy and Human Re-sources Development Fund financed by the Japanese government. The names of participants in theconsultation meetings are listed in the Bibliographical note.ivDefinitions and data notes ixOverview I1Infrastructure achievements, challenges, and opportunities 13Infrastructures impact on development 14Origins of the public sector role in infrastructure 22The record of perance 25Diagnosis and directions for change 322Running public entities on commercial principles 37Lessons of success and failure38Corporatization 40Focused goals and accountable management 41Pricing for financial independence 47The need for a political commitment to re 513Using markets in infrastructure provision 52Unbundling services for competition 53The range of market alternatives 55Paths to market provision 64Conclusion 714 Beyond markets in infrastructure 73Decentralization and participation involving users73Improving budgetary allocations 79Subsidies and transfers to the poor 80Addressing externalities 82Elements of infrastructure planning 84Conclusion 885Financing needed investments 89Old ways of financing infrastructureand new 89The spread of project financing achievements and lessons 93Institutions and instruments for resource mobilization 102Prospects 108Infrastructures role and record 2Diagnosing the causes of poor perance 6New opportunities and initiatives 7Options for the future 8Implementing re 10Potential payoffs from re 11ContentsV6Setting priorities and implementing re 109Choosing among alternatives institutional options and country conditions 109Sectoral agendas for re 114Payoffs from re 121Bibliographical note 123Appendix Infrastructure data 139World Development Indicators 151Boxes1 What is infrastructure 22 Main messages of World Development Report 1994 21.1 Returns on infrastructure investment- too good to be true 151.2 The importance of infrastructure to economic development an example from China 181.3 Throwing infrastructure overboard 191.4 Infrastructures direct and indirect effects in rural India 211.5 Households responses to unreliability of water supply 301.6 Public failures raise private costs 301.7 Infrastructure activities threaten the Black Sea environment 342.1 The right way to run a public utility a look at Botswanas Water Utility Corporation 382.2 Severance pay eases layoffs in Argentina Railways 402.3 It took ten years to corporatize Indonesias main ports 412.4 Whats special about Korean perance agreements 432.5 Management contracting in Guinea-Bissau-a success story 442.6 AGETIPs involving the private sector in Africas urban infrastructure 452.7 Designing tariffs to achieve financial autonomy while addressing multiple goals 482.8 Can earmarking improve highways 503.1 Divided they stand unbundling railway services 553.2 Regulatory cycles in the United States 573.3 Tailoring concessions to sectors and government objectives 623.4 Success of a lease contract-Guineas water supply 623.5 Cte dIvoires experience with a concession for water supply 633.6 Telecom privatization the case of Venezuela 663.7 The evolution of private power in the Philippines 673.8 Regulation and privatization which comes first The case of Malaysia 683.9 Development of regulatory capacity in Argentina 693.10 Jamaicas regulatory roller coaster for telecommunications 693.11 Participation as regulation an initial step in Bangalore714.1 Mexicos inunicipios help themselves 744.2 Applying innovative approaches to water and sanitation planning 774.3 Power in Purang and roads in Ethiopia 784.4 Centralized and decentralized infrastructure planning in Malaysia 794.5 Assessing a projects reach water in Kathmandu 824.6 Women can benefit from infrastructure, but success lies in the details 854.7 Donor coordination in infrastructure the African experience864.8 The World Banks experience with project uation 864.9 Incorporating environmental concerns early in planning some recent lessons from Sri Lanka 874.10 Population resettlement and project design Thailands Pak Mun hydropower project 885.1 Is there a free lunch-limits to government finance 915.2 Tapping international capital markets 93vi5.3 Warning signs from the nineteenth century 945.4 A successful first step in Guatemala 975.5 Land grants and eminent domain 985.6 Mexicos toll roads a big push that faltered 995.7 Leveraging through guarantees in Thailand 1005.8 Look before you leap limiting government exposure to contingent liabilities 1015.9 Successful municipal credit in Colombia 1036.1 Ingredients of good perance under alternative institutional s TillText figures1 As a countrys income grows, the amount of infrastructure increases 32 The composition of infrastructure changes with country income level 43 Infrastructure has expanded tremendously in recent decades 54 Urban populations have better access to safe drinking water than rural populations 65 Annual gains from eliminating mispricing and inefficiency are large relative to investment 111.1 Public infrastructure investment is a large fraction of both total and public investment in developingcountries 141.2 Per capita availability of major infrastructure is closely related to income levels 161.3 Infrastructure services differ substantially in their economic characteristics across sectors, within sec-tors, and between technologies 251.4 The rural-urban gap in access to power and water in developing countries narrowed over the pastdecade271.5 Efficient and effective delivery of infrastructure services does not always accompany increasedavailability 281.6 There is very high unmet demand for telephone connection 311.7 Walking is a transport mode used frequently by the poor 332.1 The adoption of commercial principles in 1984 allowed Togos water utility to increase coverage andproduction. but a perance agreement in 1989 was needed to improve financial outcomes462.2 Costs are seldom fully recovered in infrastructure 473.1 Unbundling activities increases the options for competition and private sector involvement 563.2 Leases and concessions in infrastructure sectors are common, even in low-income countries 603.3 Privatizations in telecommunications can lead to large gains 654.1 Countries with decentralized road maintenance have better roads 754.2 Participation increases water project effectiveness by improving maintenance 764.3 In water and sewerage, the better-off often get more subsidies than the poor 804.4 Even in some erly centrally planned economies, infrastructure subsidies went mainly to thebetter-off 815.1 Large shares of official development finance for infrastructure go to energy and transport 905.2 Official lending for infrastructure has increased, but publicly guaranteed private loans havefallen 905.3 Infrastructure is a large share of privatization proceeds; foreign financing of infrastructureprivatization is important in Latin America 1055.4 Infrastructure equities are contributing to the growth of Argentinas capital market 1065.5 Infrastructure equities have outpered other stocks by a huge margin 1075.6 Options for financing increase with administrative capacity and maturity of domestic capitalmarkets 108Text tables1.1 Value added of infrastructure services by country groups 131.2 Average economic rates of return on World Bank- supported projects, 1974-92 171.3 Expansion of infrastructure coverage in low-, middle-, and high-income economies,recent decades 261.4 Percentage of the poorest and richest population quintiles with access to infrastructure, variouscountries 322.1 Common management problems in public sector infrastructure entities, 1980-92 39vii3.1 Contractual arrangements for private water supply 613.2 Value of infrastructure privatizations in developing countries, 1988-92 645.1 Portfolio and foreign direct investment in developing countries, 1990-93 925.2 Infrastructure project financing for projects funded and in the pipeline, October 1993 955.3 Project financing