benefits often accrue to middle-income and rich people rather than poor people. Evidence also shows that traditional cross-subsidies associated with monopoly state-owned firms (where some consumers are charged a price much further below marginal cost than others) often benefit the better off more than poor people (Stern Dethier & Rogers 2005, p. 350). In addition, fiscal constraints on subsidized monopolies often lead them to invest too little in expanding or maintaining services—so marginal, usually poorer, neighborhoods have little or no physical access to a variety of public services.

In many cases, it is cheaper for the government to raise infrastructure funds itself rather than rely on private finance. This is true when the government has greater access to concessional finance, and when private investors make excess profits. This last point highlights that what is important from a value-for-money perspective is not the cost of private capital per se (captured by the WACC)<sup>7</sup> but the price the government pays for it (captured by the IRR, internal rate of return).

If the cost of private capital _is_ greater than public capital, properly adjusted for risk, the case for seeking private investment _for a given project_ rests on efficiency gains. Private investment may be a way of ensuring that the best projects are selected and that access is expanded. A large volume of work has compared the efficiency of private and public infrastructure providers, with the general consensus being that private investment has typically brought efficiency gains. Evidence from Latin American reforms for example suggest significant efficiency gains on average, after the introduction of concession contracts, ranging from 1 to 9 percent per year (Guasch 2004). A number of studies on energy find that private investment has resulted in greater efficiency — 5 to 7 percent per year in Latin America for example. The studies analyzing efficiency in the water and sanitation sector are too few to draw any conclusions. In transport, the evidence suggests that private operators have tended to perform more efficiently. In telecommunications, the general consensus is that there have been significant improvements resulting from private investment.

A more important determinant of performance than private ownership is the degree of competition and the incentives created by the market structure. Estache, Perelman and Trujillo (2005) state that “across sectors, the more relevant variables include the degree of competition, the design of regulation, the quality of institutions and the degree of corruption”. Generally the evidence suggests that private participation tends to result in efficiency gains but is not a sufficient condition, depending on market and institutional conditions. This presentation has focused on market determinants but institutional determinants are also important. Estache and Kouassi (2002) for example find that quality of governance significantly increased efficiency in African water and sanitation services, while the level of corruption significantly decreased efficiency.

> 7 The weighted average cost of capital  (WACC) is the rate of return that an investor can otherwise earn at the same level of risk as the investment it is considering, i.e., the opportunity cost of capital.

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