# **<mark>1. Introduction</mark>**

Contrary to an initial impression and against the background of extensive literature on the success and failure of private sector participation in infrastructure, the great majority of infrastructure services are still delivered by state owned enterprises (SOEs). A recent World Bank survey (Estache and Goicoechea, 2005) has found that the private sector is less widespread than it is often assumed both in the academic and policy arena. Roughly, only one‐third of the developing countries can count on private operators for the delivery of electricity, water, or railways services.<sup>**1**</sup> The largest presence is in the fixed line telecoms business where about 60% of the countries rely on private operators. Moreover, the results of the survey show that the private sector has roughly contributed 20‐25% of infrastructure investments in developing countries on average over the last 15 years or so.

Although the definition of developmental goals in infrastructure service provision and, more importantly, the methodology to be used to assess the extent to which such developmental goals have been met remain controversial, some progress has been made both in the academic and policy arena. Notably, the focus of analysis has shifted from the resources used (inputs) to the services delivered (outputs). This has prompted the development of an ambitious measurement agenda, aimed at capturing both the efficiency and equity goals of infrastructure provision, as well as the institutional and governance arrangements needed to reach such goals. In turn, the measurement agenda devoted attention to the extent to which improving SOE performance can bring about substantial gains in developing countries. A number of studies estimated that even a relatively small improvement in operational efficiency, say 5%, could free resources around 1‐5% of GDP.<sup>**2**</sup> SOE inefficiency reduces economic growth and the pace of development in many ways. First, SOE operational losses create budgetary pressure and contribute to the country’s increasing fiscal deficits. Subsidization of SOEs can increase public debts, raising real interest rates and reducing overall investment. Second, financing SOE losses causes the diversion of resources from essential public tasks. It leads to overall misallocation of scarce resources, thereby, harming the country’s growth potential and its development goals.<sup>3</sup> Last but not least, poor infrastructure provision greatly limits the economic opportunities for poor households and enterprises with no means to opt for alternative sources of generation of water, transport and electricity.

In light of the above, governments may want to consider spending as much time and effort benchmarking and assessing the performance of public infrastructure providers as they do (or would do) for private operators. In order to increase the _accountability_ of the sector and minimize costs to the other stakeholders (i.e., the users and the taxpayers), governance arrangements need to be carefully designed and monitored.

1 This result is even more striking considering that in this context the existence of private sector participation simply means that these sectors have been unbundled enough to allow some parts to be operated by the private sector. In many instances, the segments in which the private sector is present might not be essential to the operation of the infrastructure service.

2 See Jones (1991) and the earlier studies referred to therein.

3 A thorough review of the sources of SOE inefficiencies is described by Akram (2003), Omran (2002) and World Bank (2004) respectively for the case of Bangladesh, Egypt and Iraq. See also the interesting debate discussed in Basu (2005).

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