Old Ways of Financing Infrastructure

Old Ways of Financing

Governments have been bearing more of the burden of infrastructure
expenditure than they can reasonably be expected to manage.
 Under today’s tax system – Tax revenues & government borrowings
are the predominant source of infrastructure finance.
 Borrowing – Whether from official or private sources is backed by a
government’s full faith & credit and thus by its tax powers.
 Under this system – Government bear virtually all risks associated
with infrastructure financing.

Private sponsorship & financing offer the twin benefits of additional funds
and more efficient provision especially valuable because substantial new
investments are needed to meet the demand.
Today’s Financing Patterns

Developing countries are spending billions of amount on infrastructure
development.
 90% or more of it is derived from government tax revenues or
intermediated by governments.
 Infrastructure’s share of total government investment is rarely less than
30 % and sometimes as much as 70 %.

External Finance – Used primarily to import needed equipment
In the electric power & Telecommunications sectors

External Borrowing – often reflects macroeconomic constraints
Used to finance local expenditures for construction, equipment &
Maintenance

The Dominican Republic – One of several countries with a very heavy
reliance on foreign funding.
 Limitations of the Present System

The main advantage of the present system is that
1. In most counries the government is the most creditworthy entity and
2. Is able to borrow at the lowest rates, making possible infrastructure
projects that might not other wise be financially viable.

Balanced against this advantage has been
1. The difficulty of maintaining accountability.
2. Leading often to high costs of provision for the consumer.
3. Moreover, being creditworthy does not imply that governments have
unlimited access to resources.
Reasons why governments may be well advised to entrust to private
sponsorship those infrastructure investments that can be undertaken by
private entrepreneurs.

Government’s ability to spend on infrastructure has been severely
constrained, in part because Poor performance and pricing have strained
government budget.

International donor policies and practices have sometimes reinforced
distortions in recipient countries. Many donors have focused on financing
new physical construction rather than on maintaining or improving existing
infrastructure.

A World Bank review of urban water supply & sanitation projects identified
problems like……
1 Serious Cost overruns The group of projects as a whole cost 33 % more than
the appraisal estimates
2 Time Overruns 46 % of the projects required two to four extra years to
complete
3 Maintenance was severely neglected because of lack of funds that created
shortages of skilled staff and spare parts.
4 The review found that borrowers had often failed to comply with loan
covenants, especially those relating to pricing & financial performance.

The full or partial tying of aid – The requirement that funds be spent on
goods or services purchased only form specified countries.

DAC – Development Assistance Committee