# **1. Introduction**

Despite the very clear evidence that a well-functioning infrastructure system is needed for economic development, there is substantial variation across countries in infrastructure supply and quality. Many researchers blame lasting differences in the availability and quality of basic infrastructure services like roads, electricity, and water for a large part of growth divergences.<sup>2</sup> The failures or limited successes of previous approaches to make systemic and lasting improvements in service delivery continue to fuel debates on how the infrastructure sectors can best be organized and regulated. To a large extent, the challenge stems from two basic observations: there are many options available, and none seems to work universally. For each sector, there are alternative market structures alternative forms of ownership, different contract arrangements between the various actors, various allocations of responsibilities, and alternative institutional arrangements for regulation. Picking the right combination of these various policy options has proved to be an overwhelming challenge for many policymakers.

Choosing between competing policy options can be particularly difficult if those involved in infrastructure politics have multiple goals. There is a crucial political dimension to decisions about infrastructure that tends to be underestimated in much of the advice given to governments. Each country has different initial conditions and reasons to choose a given policy combination. Moreover, within each country, different politicians and their constituency may have different perceptions of the ideal policy combination—and in particular, the role of the state in the sector. These differences across countries will often come into play in regulated industries like water and electricity utilities, ports, toll roads or airports **,** where services are so essential, while the risk of market failure is high.

This paper addresses governance failure as a likely explanatory factor behind unsuccessful infrastructure policies and weak sector performance. Certainly, we recognize the fact that politicians will generally make sector decisions in line with strategies for better sector performance for the benefit of the society. When sector performance is weak, there can be numerous legitimate explanations–including institutional capacity constraints. This paper, however, zeroes in on the ways that sector politics may be biased, and often rendered ineffective or even result in perverse outcomes, when policymakers have personal motivations that constrain their focus on welfare for the society as a whole. Empirical information about the nuances in such political distortions is close to nonexistent, although the intuition about the resulting biases in sector governance can be very clear. Based on such intuition, literature reviews, and experiences in the sectors, this paper explains how infrastructure reform is exposed to political distortions and discusses how these insights can render policy choices more realistic and effective.

The focus of this paper is not the politics per se, but rather the outcomes of infrastructure decisions that matter for growth and poverty reduction. In this context, political incentives matter only insofar as they substantially impede outcomes and lead to weaker service delivery. Better understanding of the political realities may result in more realistic performance targets and provide country-context guidance for “second best”— deviation from more standardized “best practice” in policy recommendations to “second best” outcomes.

How to understand decisions to deviate from best practice is not straightforward. Such choices will always demand a more comprehensive appreciation of the given country context at the specific time when a diagnostic is being conducted. Real life choices often require arbitration across conflicting recommendations from theory and best practice. Relevant research has been carried out to understand the politics behind sector regulation in social science, but hardly any research has focused on infrastructure specifically and hardly any builds on the recommendations in regulation theory.<sup>3</sup> Rather than presenting results, this paper proposes a research agenda.

> 2 See, for instance, Estache and Fay (2010) for a survey of articles investigating the impact of infrastructure on growth and development and Straub (2008) for a focus on the growth impact.

> 3 For more discussion, see Keefer and Kemani (2003); Mehrotra (2006).

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