because, despite progress in increasing access by the population to drinking water, connection rates to sanitation, and in particular to wastewater treatment, remains low.<sup>25</sup>

# **5. Conclusion**

26. Important constraints on the provision of infrastructure investment by local governments are the sunk costs involved in funding these programs, as well as spillovers and economies of scale effects. The sunk costs may be prohibitive in view of local governments’ limited revenue mobilization capacity, including access to finance. But there are options for overcoming these difficulties. For example, crossborder joint ventures have been encouraged in many countries to maximize economies of scale and to internalize the externalities associated with the provision of regional public goods. The OECD experience is illustrative. In France, for instance, small communes contract out service delivery to private regional water companies, and contiguous municipalities often create regional associations to manage services such as waste disposal. Municipalities in Norway frequently co-operate in such sectors as waste disposal, water supply and energy (through the joint ownership of power plants). In Latin America, Peru attempted to decentralize much of its road network to provincial and municipal governments but then failed to provide financing for operations and maintenance (Gutman, 1999). This resulted in widespread deterioration of the network and, ultimately, recentralization (Burki, Perry, and Dillinger, 1999; Humplick and Moini-Araghi, 1996). In Brazil, there are inter-municipal water/sanitation companies, particularly in the case of large metropolitan areas, where the networks straddle local government borders.

27. Another option for mobilizing the private sector in the provision of infrastructure investment is through public-private partnerships (PPPs). At the core of PPP operations is the need to achieve an appropriate balance of risk between the government and its private-sector partners. In Brazil, new legislation has been approved creating instruments for providing private-sector partners with guarantees that the financial commitments entered into by the government in these projects will be honored. The government will be able to create fiduciary funds in a financial institution to honor these commitments. These funds can be capitalized with resources from the budget, non-tax credits, non-financial assets and real estate, among others. Revenues from PPP projects accruing to the government can also be earmarked to finance the settlement of contractual obligations. Several state governments have also passed PPP legislation ( _i.e.,_ Goiás, Minas Gerais, Rio Grande do Sul, Santa Catarina and São Paulo). Options for the provision of financial guarantees vary across the states: Minas Gerais, Santa Catarina and Rio Grande do Sul have opted for the creation of fiduciary funds along the lines of federal legislation, whereas São Paulo and Goiás have created public companies linked to the state treasuries to manage state guarantees.

28. While there are options for boosting local government spending on infrastructure, when deemed cost-effective and growth-enhancing, it is important to safeguard fiscal responsibility. To this end, the Brazilian legislation on PPPs calls for the accounting and reporting of commitments entered into by the governments in PPP contracts in line with the provisions of Fiscal Responsibility legislation for all levels of government. Of particular importance in this regard is vigilance over the possibility of misclassification of debt-creating commitments as current spending as a means of bypassing the debt ceilings set by law. The introduction of a ceiling on government outlays related to PPP projects, possibly defined as a share of

> 25 . While about 80 percent of households have access to piped water, less than two-thirds are connected to public sewerage networks or septic tanks. Moreover, there are large regional disparities in connection rates between the northern and south-eastern states, large and small municipalities, and rich and poor households. In 2000, connection rates for urban households to public sewerage and non-rudimentary septic tanks was 56 and 16 percent, respectively, while for rural households they were 3 and 10 percent, respectively (IBGE, 2000). Urban sewerage coverage reached 70 percent in the South-East but only 2 percent in the North. Only 9 percent in poor rural areas had access to piped water in 2000, although some had access to wells and springs. Of all households earning less than two minimum wages, two-thirds had access to piped water and one-third to sewerage. See OECD (2005), for more information.

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