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# **Box 4:  Investment in infrastructure**

Improving infrastructure networks and service delivery in developing countries requires huge amounts of investment, estimated at 7.5 to 9 percent of GDP for low-income countries for the next five years. Meeting these needs will require more funding than is currently allocated. For low and low middle income countries, spending levels are up to 3 percent lower than estimated needs. The private sector accounts for about 20 percent share of infrastructure spending, equivalent to only 10 to 15 percent of estimated annual needs. The public sector (government, utilities) is the largest contributor, spending between 2 to 4 percent of GDP and accounting for about 70 percent of total infrastructure spending. In recent years public investment has declined as a result of expectations of private sector participation, fiscal adjustment programs, and decentralization. Eight Latin American countries, for example, saw a drop from 3 percent of GDP to 0.8 percent during the 1990s. Public investment declines have been compounded by a sharp fall in official development assistance (ODA), which accounts for the remaining 10 percent of investment spending. With overoptimistic expectations of private sector participation, ODA started to decline in the 1990s; infrastructure commitments from multilateral banks fell from $18 billion in 1996 to $13.5 billion in 1999, though by 2002 they had recovered to about $16 billion.

_Source: Briceño-Garmendia et al 2004; Estache 2004; Izaguirre 2004_

# _Financial sector_

55. In financial sectors, privatization is desirable but the impact on other firms and the economy as a whole means it needs to be done carefully compared to normal commercial firms. Experiences from countries such as Argentina, Chile and Mexico show the need for sequencing the phasing out of state ownership over time with new private entry and improvements in the regulatory environment. Involving reputable and experience foreign owners is also often part of a successful strategy as they can bring the necessary skills, products, and training to the host country and provide better allocation decisions (World Bank 2001). Minimizing government ownership in privatized banks appears to be important. A recent study of bank privatization in Nigeria, for example, found negative effects of minority government ownership on the performance of many of the privatized banks (Beck et al 2005). In the banking sector more broadly, Clarke, Cull and Shirley (2005 forthcoming) find that when government holds a portion of the stock, especially a majority of the stock, banks continue to perform poorly. Continued government ownership also reduces credibility, creates continued pressures for lending toward favored borrowers, and negatively affects the earnings prospects of the banks which then harm investors and taxpayers (Caprio 2004).

# _Social sectors_

56. Public-private partnerships (PPPs) in social sectors such as health and education are on the rise because of the perceived inefficiencies of the state sector and the perceived advantages of bringing in the private sector in terms of increased competition, specialized skills, and flexibility and innovation. Yet, there are relatively few assessments of the impacts and lessons of PPPs in social sectors, most of which are found in health. The findings of recent reviews are summarized in Box 5.