**_Strategic planning:_** Private sector interest groups—in engineering or construction, for example—as well as individual firms with significant sector experience, will often have an influential role during the planning process of infrastructure investment. Decisions are based on a large set of issues, including geographical location, technology, and labor requirements. The bargaining process with different interest groups may not be expected to deliver an efficient outcome and thus the eventual outcome can often be steered in a direction that benefits the private sector without losing the electorate’s trust.<sup>34</sup> For example, private sector interests may go in the direction of large projects (hydro-plants, massive transportation system) where more cost-effective alternatives may exist. Excessively large projects are likely to be preferred to more welfare-efficient projects if the political benefits are large compared to the surplus generated by efficient projects (Robinson and Torvik, 2008).

**_Market structure:_** As a result of private sector pressure, market deregulation to facilitate entry can be postponed to please an incumbent provider, for instance. In other cases, privatization by divestiture of public services can be promoted by an industry-friendly politician who attempts to please the interest of a concentrated industrial bourgeoisie in the country. Private sector firms may not reduce the influence of different interest groups on infrastructure politics. According to Willig (1994), the advantage of being private stems from the insulation it brings from arbitrary political and self-serving influences. Public companies, on the other hand, are more prompted to be influenced by interest groups like labor unions (Shleifer and Vishny, 1994; Bertero and Rondi, 2000).<sup>35</sup>

**_Mode of service provision_** : The mode of service provision may be biased to benefit specific firms or the private sector in general. This bias may take the form of distortions in procurement rules so that they are not applied to deliver the best combination of quality and price, but steered in a specific direction. With this possibility in mind, PPP details can be designed to make it look like as if a competitive process has taken place, while in reality the terms are made to fit with the favored service provider’s interests, whether an incumbent, a new entrant, or a local or  foreign firm (see Auriol et al., 2009). In addition, a regime that is overly friendly to industry will be more inclined to accept greater risk on the government’s part, while contributing significantly to the investments and placing few, if any, claims on the government’s ownership shares. Regardless of political accountability before or after the deal, the state ends up bearing too much risk, typically over a long period of time.

**_Pricing and subsidies_** _:_ Politicians, responding to the interest of the private sector, may also adopt counter-intuitive tariff instruments. This is the case of adopting inverted Ramsey prices when there is no clear externality or equity concern or using a flat tariff in the presence of supply rationing. In other cases, some sophisticated solutions can be implemented with very little impact. Examples include congestion pricing or discriminatory pricing with little impact on final prices as politicians attempt to please some groups while protecting others. Wieland (2006), for example, presents many examples of how price structures were modified to please interest groups in the German transport sector. Pricing rules are sensitive to different types of political influence and this complicates discretionary decision making at the regulatory level.<sup>36</sup>

**_Oversight and regulation_** : The active role of consumer groups will often be decisive to combat overly strong industry-friendliness in sector governance. However, many of the deals are complicated and critical outsiders may not be able to identify potentially unfair benefits to the service providers. Strategies to avoid manipulation will often have to be incorporated in the framework conditions and controlled ex ante by sector experts with a clear welfare perspective. In practice, there are solutions to prevent risks of hidden benefits to the industry. In Peru, for example, an arrangement was chosen where a major natural

> 34 On the other hand, Henisz and Zelner (2006) pointed out that lobby pressure can have a disciplinary effect on politicians. For instance, a higher level of industrial representation among the consumers of electricity lessens the incentives of political actors to satisfy the demands of concentrated geographic interests, labor unions, and construction firms to build large projects thus reducing the rate of costly infrastructure deployment.

> 35On the other hand, workers of privatized companies also have large stakes in reform processes and can influence the policymaking process, as shown by qualitative studies of privatization (Murillo, 2001). 36 See Laffont (2000).

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