The next section explains the difference between _market failure_ (which legitimizes regulatory interference) and governance failure (on why optimal solutions for sector governance have not been implemented), while clarifying connections between political distortions, framework conditions for the sector—and hence sector performance. Section 3 explains how the most common private agendas in politics will tend to influence sector decisions in infrastructure. Implicitly, this section points at how political incentive problems can be revealed and why they need to be addressed—or at least considered— when recommending a policy for sector governance. The intrinsic challenge of actually addressing accountability problems is addressed in Section 4. Based on these discussions, Section 5 lists standard policy recommendations for infrastructure governance and discusses their exposure to different political distortions. Several innovative initiatives for better sector performance seem promising to reduce the consequences of a weak welfare-focus in politics. Conclusion follows.

# **2. From market failure to political failure in infrastructure**

The (informal) limits to the ability of governments to deliver in their efforts to correct market failures in infrastructure highlight the political economy of reform as a central policy issue. The case for accountability in sector-specific governance is clearly a cross-cutting issue closely linked to accountability at the top political level. This paper addresses policy choices and implementation in the sector and how accountability can be addressed from a sector-perspective.

## **2.1. Why don’t governments fix market failures?**

At the very basic level, the case for government intervention in infrastructure is generally well recognized and understood and stems from the existence of well-documented market failures in the sector (scale effects, provision of essential services, investment risks). Theory also tells us that governments can react to market failures with a menu of instruments, including price and quantity regulation, taxes, subsidies, assignment of property rights or simply by taking over a firm or a sector.<sup>4</sup> Evidence, however, suggests that governments are as likely to fail as markets. Multiple goals in politics and the lack of capacity in design and enforcement of policy tools are among the reasons, as discussed. Undeniably, however, the risk of failure is also closely linked to the ways civil servants and politicians responsible for fixing market failures in the sector are disciplined with checks and balances and democracy. Infrastructure development—particularly in Africa—is often much slower than demanded by populations and expected by donors; see the result of the recent AICD study,<sup>5</sup> for instance, or Estache and Wodon (2005) – while Keefer and Khemani (2003) point at how democratization has failed poor voters in many developing countries. Infrastructure pricing policies in Latin America have tended to be much more regressive than claimed by public and private providers (Foster, Estache, and Wodon, 2002) and subsidies in the sector have often failed to reach those who need it most and helped instead those who need it least (Komives et al. 2005 and 2007 or Bacon and Ley, 2010). Private agendas behind sector-specific governance put the effect of policy choices and huge investments at risk. Even if difficult in practice to distinguish between benevolent and non-benevolent distortions in politics, the latter category will also have to be addressed.

Indeed, with huge budget allocations, public good characteristics, the essential value of the services, complex contracts, and opportunities to hide corruption, the infrastructure sectors are among the more exposed sectors to biases at the political level.<sup>6</sup> These facts make it quite likely that distortions in politics can be part of the explanation of performance failures. This is why researchers and practitioners alike argue that _governance failure_ in the sector should be central to any assessment of the sources of

> 4 See Laffont and Tirole (1993) and Armstrong and Sappington (2006, 2007) for an overview of regulatory approach on fixing market failures in infrastructure industries.

> 5 See Briceño-Garmendia, Smits, and Foster (2008).

> 6 For reviews of corruption in utility provision, see Boehm (2007);   Kenny and Søreide (2008); Estache (2009).

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