its importance is maintenance of the existing infrastructure stock. Indeed, it is often argued that infrastructure policy is biased toward the realization of new investments at the detriment of the maintenance of the existing stock. Two main reasons for politicians having such a bias have been mentioned. Rioja (2003) posits that maintenance is tax-financed, while new investments rely on soft international loans, which are more palatable to politicians as long as they do not have too many strings attached. Alternatively, new investments may have higher “political visibility” and shorter “horizon” than maintenance, which only has gradual effects on the quality of the infrastructure stock (see for example Maskin and Tirole, 2007, and Dewatripont and Seabright, 2006). This lower-than-optimal level of maintenance has two consequences. First, it reduces the life-span of the existing stock of infrastructure itself. Rioja (1999) and Kalaitzidakis and Kalyvitis (2004) have modeled this phenomenon in the context of exogenous growth models. Second, it is well documented that it also implies higher operative costs and reduced duration of private capital, such as trucks operating on low-quality roads or machines connected to unstable voltage lines.

- _Adjustment costs._ A closely related aspect is signaled by Agénor and MorenoDodson (2006). Improvements in the stock of infrastructure capital are likely to reduce private capital adjustment costs, through at least two related channels. First, by lowering the logistic cost of such investments and second by allowing for the substitution of palliative private investments in devices such as electricity generators for more productive investments in machinery for example. Ample evidence from firm-level surveys such as investment climate assessments (ICAs) backs up this assumption (see evidence of this in Lee, Anas and Oh (1996) for Indonesia and Nigeria, Alby and Straub (2007) for Latin America, Reinikka and Svensson (2002) for Uganda among others). Improvements in the stocks of infrastructure, as they make the services more reliable, reduce firms’ necessity to invest in substitutes in order to hedge against potential service interruptions, thereby freeing up resources for private productive investment. Reinikka and Svensson (2002) show that this may be aggravated by a selection effect, as the firms that actually invest in substituting devices are the bigger or more profitable ones, resulting in even larger investment shortfalls.

- _Labor productivity_ . Another posited channel is the potential effect on labor productivity due to reductions in time wasted commuting to work and stress, as well as to the more efficient ways of organizing work time as a result of improved information and communication technology, learning by doing, etc...

- _Impact on human development_ . Numerous microeconometric studies have documented that better infrastructure induces improvement in both health and education<sup>10</sup> , which increase labor productivity both in the short term by making the existing stock of human capital more effective, and in the medium and long term by inducing additional investment in education.

- _Economies of scale and scope_ . A few examples include better transport infrastructure that, by lowering transport costs, leads to economies of scale, better

> 10 See for example Galiani et al. (2005) and Thomas and Strauss (1992).

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