Infrastructure: A Developing Country Need

“Infrastructure is easy to recognize than to define” (Grimsy and Lewis; 2002). They provide basic services to the society and play a basic role in a country’s development. They facilitate economic uplift by providing facilities to the production of goods and services. Subsequently they play key role in poverty reduction. Infrastructure services are characterized as capital intensive goods which are immobile and lumpy and need longer duration to generate revenues.

The infrastructure activities can mainly be categorized as follows:

2.1.1 Physical Infrastructure

This is the type of infrastructure which provides the network for the functioning of modern industrial nation.

Transport (Toll roads, light rail systems, bridges and tunnels)

Energy (power generation and supply)

Telecommunication (telephones)

Water (sewerage, waste water treatment and supply)

2.1.2 Institutional/Social Infrastructure

This is the type of infrastructure which contributes to the social and economic uplift of the society.

Civil and criminal justice system/ Legal framework (prisons and courts)

Healthcare system (hospitals)

Education (schools)

Social services (museums)

Government accommodations

2.2 Significance of infrastructure for a Developing Country

For statistical convenience, countries are designated as ‘developed’ or ‘developing’ country. A developing country can be described as a nation with low level of material well-being. Developing countries are considered to have no significant industrialization as compared to their population and have medium to low standard of living.

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“Access, quality and price of infrastructure are all important drivers of a country’s and a region’s competitiveness, growth and poverty reduction. Lack of adequate infrastructure can limit gains in productivity, raise the cost of logistics and production, reduce business profitability, and constrain opportunities for economic and social progress” (C. Briceño et. al.; Dec 2004).

A country’s sustainable development and economic growth largely depends on affordable and efficient infrastructure provisions. Governments have recognized that infrastructure provisions play a key role in economic uplift which subsequently lessens poverty- thus dealing with the core issue of a developing nation. They directly contribute to the welfare of society by facilitating services; such as roads, electricity, telecommunication, sewerage system, and health and education. Infrastructure network facilitates industry/enterprises goods production by lowering input cost which in turn gives lower total cost. This lower total cost enlarges the market which again reduces the cost. This market enlargement ultimately brings economic growth to the society. The figure below describes briefly how infrastructure services contribute to the development of a society.

Figure 2.1 How Infrastructure Contribute to Development

(Source Proudehomme; 2004)

2.3 Infrastructure – A Demand-and-Supply Gap Analysis

While the developing countries have well recognized the needs and investments have risen, the supply of infrastructure services is still in serious shortfall. The gap continues to widen mainly because of the higher demand than actual supply. Although the problem is more severe in low-income countries but the middle income countries are also facing a huge shortfall. In addition, rural areas where most poor people live in developing countries are going through severe shortage of infrastructure supply, but urban areas are also under pressure.

Table 2.1 Investment and maintenance expenditure needs as % of GDP; (average 2008-2015)

Country Income

Investment

Maintenance

Total

Low Income

7.0

5.5

12.5

Lower-middle income

4.9

3.3

8.2

Upper-middle income

1.3

1.0

2.3

Total developing

2.7

4.1

6.6

Source: Yepes (2008)

Note: Infrastructure includes water, sanitation, transport and telecom sectors.

This lack is mainly because infrastructure investments are characterized by capital intensive, requires a longer duration for planning and construction, and gradually come in to full capacity usage, need longer duration to generate revenues, and are considered immobile and lumpy goods which can not be relocated.

But with growing fiscal constraints and competing needs for public finance, governments in developing countries are considering private participation in order to meet their infrastructure challenges. The high capital cost of infrastructure services and increasing financial needs are becoming well above the public ability alone thus emphasize has been shifted from public driven to private driven infrastructure procurement.

Public-private-partnerships (PPPs) for infrastructure are becoming vital not only because of the high capital cost but to bring technical innovation and management expertise for more efficient delivery of the services. This new approach of public procurement to infrastructure provision is perceived to reduce public borrowing and minimizing public administration inefficiencies.

For low-income countries, due to high political and economic risk, there is a huge lack of infrastructure investment. Due to this lack of investment, gap between infrastructure demand and supply continues to increase. As infrastructure provisions contribute to the development of a society, this huge shortfall of infrastructure provisions in low-income countries decelerates the process of development. Subsequently, low-income countries find themselves in an unavoidable low-level equilibrium trap which discourages private investment in such turbulent economies.

“This lack of ventures in building adequate infrastructure can be attributed to weak tariff regulation, reluctance in honouring concession commitments, inconsistent enforcement of laws, corruption, poor governance practices, lack of availability of long-term local currency financing at fixed interest rates, weak accounting and disclosure norms, and weak securities legislation” (Ajay Sagar; 2006).

2.4 Infrastructure Procurement

2.4.1 Available Models

Build, Own and Transfer (BOT)

Build, own, Operate and Transfer (BOOT)

Others

2.4.2 Financing Options

Through public sector funding/revenues

Through foreign loans or grants-in-aid by bilateral or multilateral development agencies

Through direct foreign investment

Through joint ventures by public and private sector joint participation

By providing one or a mix of all types of government supports, as given below, to attract private investors:

A financial guarantee or cash subsidy

Debt or equity investment

Complementary investments