13 private investors assuming infrastructure-related risks (Marrison 2001). Third, credit providers can gain from coordination to reduce everyone’s risks levels when capital markets are imperfect (Estache and Kartacheva 2003). Finally, related to this literature with important implications for infrastructure is a growing body of research demonstrating the importance of auditing and the limits of creativity in financial designs when financial accountability is limited (see Legros and Iossa 2004).

The final area of research reflects the fact that a large part of infrastructure development takes place at the subsovereign level, with subsovereign entities responsible for the provision of public services (see Freire and Peterson 2004 for an overview). Fiscal capacity is a major issue when it comes to financing subnational investment needs (see Lewis 2003 on Indonesia, for instance), and hence supporting the transition of these entities from sole central government funding to market-based funding where they can also access private financial markets for their needs is critical to mobilizing additional private capital for infrastructure services. The main lesson of this literature is that new instruments will have to do better in terms of generating the appropriate credit enhancement to achieve creditworthiness at the project level and often at the local government level.

# **4. Urban versus Rural Infrastructure Needs**

A large share of the literature on poverty is focused on the rural versus urban poverty debate. It shows that even though urban and rural poor people have much in common, there are some important distinctions—especially when it comes to infrastructure.<sup>11</sup> Because rural poor people live in relatively low-density areas and rely heavily on natural resource-based production, their demands for infrastructure are quite different from those of the urban poor.<sup>12</sup> Both groups tend to have limited access to public infrastructure and services, but the constraints on physical access to job and product markets are bigger concerns for the rural poor (see the case studies by Fan and his various co-authors or van de Walle and Cratty 2004 for recent detailed studies). At the same time, access to network utilities is less important because many of the rural poor prefer more costeffective local solutions for their needs—such as solar energy, water pumps, and satellite-based telecommunications. In the context of urbanization, the growth of megacities is fast becoming a major source of demands for additional infrastructure, creating a sense of urgency in some policy circles.<sup>13</sup> But this is criticized by some academics as favoring excessive urban concentration (see Vernon 2002). New infrastructure also creates additional incentives for rural-urban migration .

These differences in concerns have a long history in the academic literature, and there is not much news to report in this area. But new debates in policy circles are also starting to make

> 11 The minimum population threshold for defining urban areas varies dramatically among countries, but “urban” is typically characterized by density of settlement in a contiguously built-up area, by the structure of economic activity, and sometimes by administrative attributes.

> 12 Diversification of income sources is a key component of rural poverty reduction strategies, and one that depends on infrastructure to be effective (see Ellis 1998 for a survey). In a survey of the literature identifying a poverty trap similar to the one observed in regions with large rural populations, as in Africa, Booth (2004) lists eight factors used by all authors to explain poverty that is mostly rural in those regions. One is poor land and sea transport infrastructure, which makes market development unusually difficult. Fan and others. (2004a, b, c) provide impressive evidence on the various channels through which infrastructure contributes to poverty reduction and show how different these channels can be across as well as within countries.

> 13 There are more than 400 cities with a population of over 1 million—up from 16 cities 100 years ago.