# 1. **Introduction**

The problem of low growth in infrastructure industry output and investment for developing and (to a lesser extent) transition economies (DTEs) is well-documented. Repeated studies have shown excess demand, low coverage outside major towns, low investment rates, poor quality, low maintenance and availability rates, etc.<sup>1</sup> This has had a major impact on DTE growth rates. For instance, Calderon and Serven (2002) estimate that a 1% growth in power generation capacity per worker increases GDP growth by 0.09% and a 1% increase in phone lines per worker increases GDP growth by 0.19%.

The problem is how to increase not only the _rate_ of investment but also the _productivity_ of those investments. The dominant model of provision (at least for electricity and telecoms) for most of the twentieth century was by vertically and horizontally integrated state-owned national monopolies. By the 1980s, particularly for electricity, it was becoming increasingly clear that this model was associated with low productivity and unnecessarily high capital-output ratios, associated - at least in OECD and Comecon countries - with large rates of high-cost investment.

Not surprisingly, virtually all developing countries adopted the dominant state–owned monopoly model for their infrastructure industries from the 1950s onward. This was partly because of the dominant ideology of the time and partly because of the influence and models of the colonial powers such as Britain and France as well as of Russia and central planning. The results of this model, however, became increasingly disappointing and from the 1980s there have been increasing moves toward greater use of private investment, privatization and competition in non-network elements – in developing as well as in developed countries. This arose for two main reasons:

- (a) the growing demands on tax revenues that led governments to want to find alternative sources of funding for infrastructure industry investment programs together with the growing fiscal burden of subsidies and cross-subsidies;  and

- (b) the poor efficiency  and expansion record with the need to introduce modern technologies and management practices that, in turn, required the introduction of commercial incentives to increase efficiency.

In DTEs, the recent trend toward commercialization and private investment in infrastructure investment<sup>2</sup> started in Latin America (particularly Chile and Argentina) before spreading to Central and Eastern Europe after 1989 and - to a lesser extentAsia, the Commonwealth Independent States (CIS) and Africa in the 1990s. The mid-

> This paper was prepared as part of the research program on Industrial Organization Policy for Development at the Development Research Group of the World Bank, under the direction of Ioannis Kessides. We are grateful for helpful comments on various aspects of this paper from seminar participants at the University of Cambridge and at City University.  The authors alone are, however, solely responsible for the analysis and the views expressed which should not be attributed to the World Bank or any of its staff or members.

> 1 See Kessides (2004) for a comprehensive recent survey.

> 2 This was a revival of an old trend.  A high proportion of nineteenth and early twentieth century infrastructure investment was privately financed, particularly in railways.  See Stern (2003) for a discussion of UK experience.

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