corruption, including when compared to the case where industry lobbying is reinforced with campaign funding. The following discussion summarizes how politicians can interfere with the optimal design of sector policy simply to gain personally.

_Table 5. Likely consequences of corruption in the infrastructure politics_

|**Strategic planning: Identification**<br>**and prioritization of projects**| Selection of projects dependent on options for bribes, rather than<br>development plans<br> Coverage target and access less of apriority|
|---|---|
|**Market structure, entry and**<br>**evolution**| Risk of collusion<br> Award procedures manipulated|
|**Mode of service provision: SOE,**<br>**PPP, PPI**| Mode depends on ties between individual politicians and service<br>providers<br> SOE may continue if manipulated for corruption<br> Procurement practices in traditional procurement & PPP particularly<br>exposed|
|**Pricing [[and subsidies**| Subsidies may get lost in corruption<br> Producer subsidies|
|**Oversight and regulation**| Not a priority<br> Control on performance and accounting is kept weak<br> Limited access to information|

**_Strategic planning:_** A major risk with corrupt infrastructure politics is that the allocation of scarce resources to infrastructure projects is driven more by the search for short-term private profits for politicians rather than weaknesses in terms of sector performance. White elephants, like roads that lead to nowhere and water treatment stations that never work, may be the best illustration of the risks associated with corrupt decision-making processes. The search for rewarding projects can lead politicians to push for unjustified investments. Similarly, they may lead construction companies to overstate their payoffs and consultants to inflate demand estimates, while politicians can take part in the short-term benefits.  The often-underestimated consequences of misallocated resources are the rationing of much-needed service expansion. The opportunity cost of making the wrong choices is clearly very high in countries where coverage rates for a basic service are low.

**_Market structure :_** Political decisions about market design—and the extent to which a sector should be exposed to competition—are an area where governance failure has been frequently observed. A decision to “introduce competition gradually,” for example, may encourage bribes: Unless a bribe is paid, the politicians will not restrict competition. As a similar mechanism to create opportunities for corruption, Rose-Ackerman (1999) notes that “corrupt officials may present information to the public that makes the company look weak while revealing to favored insiders that it is actually doing well.” There may be a gap between the actual price of the asset and the price announced in public, with the difference ending up in the pockets of corrupt politicians and their cronies.<sup>42</sup>

**_Mode of service provision:_** The direct consequences of political corruption for market structure decisions will depend on how bribes can be extracted. Shleifer and Vishny (1994) explain how the extraction of bribes may be subject to how dependent a privatized firm will be on subsidies. It may be easier for a corrupt politician to demand bribes from a weak company that is dependent on subsidies than from a company that is better able to manage exposure to competition. An implication is also that privatization will be welfare-enhancing if it makes political interference more difficult. Besides, corruption may

> 42 For empirical support for theories on corruption and strategic planning on market structure, see the studies of privatizations in South America (Manzetti, 1999; Guasch, 2004) and Russia (Puntillo, 1996; Black, Kraakman, and Tarassova, 2000). For a discussion of how corruption may influence different phases of privatization in infrastructure, see Boehm and Polanco (2003). For a brief overview of research on corruption in utilities, see Estache (2009).

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