Financial markets have been distorted by state ownership, monopolies, directed or subsidised credit and short-term policies benefiting favoured groups. Infrastructure provision has been undermined by governments pursuing objectives unrelated to efficient service delivery. Inadequacies in finance and infrastructure create barriers to opportunities, obstruct competitors from entering markets and reduce incentives for existing firms to improve productivity.

A chapter in the World Bank’s World Development Report 2005 argues that developing country governments need to be more active in increasing competition among providers of finance and infrastructure. They should also improve the management of public resources to get more for their money when they finance or subsidise infrastructure services.

Although governments have often maintained that state ownership and financial interventions are required to bring credit and infrastructure to rural poor people, the overall record has been discouraging. State-controlled finance institutions have generally supported political projects with little economic value, made poor quality loans and benefited better-off constituencies rather than those most in need.

The World Bank shows that:

• Frequent power cuts and voltage fluctuations stifle business, as do long delays for phone connections (common where there is no competition).
• Many developing country governments reduce competitiveness by blocking competition for providing international telephone call services.
• Firms often pay unnecessarily high electricity prices as governments direct utility companies to keep prices down (often to benefit middle class households) effectively taxing the firms to make up the difference.
• Under public ownership, ports tend to be overstaffed, have restrictive labour practices and attract corruption.
• Developing countries spend too little on regular road maintenance. Donors prefer construction projects whilst politicians prefer large investment projects that offer them opportunities to make public appearances at official openings or collect bribes.

Some governments are taking new measures to ensure macroeconomic stability, foster competition and prevent banks from taking excessive risks. They are realising that directing credit, even when it may help meet some social objective, is difficult in practice because it often goes in the opposite direction of current market forces. Where credit bureaus have been given freedom to share information, microfinance lending has been encouraged – especially by commercial lenders without pre-existing relationships with borrowers in rural areas.

Policy-makers should realise that:

• Subsidised donor-provided microfinance cannot meet the demand of all potential borrowers: commercial microfinance that mobilises the savings of the general public has to be promoted.
• Securing the rights of borrowers, creditors, and shareholders and enforcing transparency and disclosure requirements is vital to ensure good corporate governance.
• Banking systems work better when discipline is encouraged through market monitoring rather than through strong state supervision. This could include monitoring by large depositors, debt holders, shareholders and rating agencies.
• Investment in rural feeder roads connecting farmers to remote markets has high returns in agricultural growth and rural poverty reduction.
• While introducing competition into the electricity sector is not as easy as with telecommunications, the prospective benefits mean it is worth working on: in large markets competition will be fostered by separating electricity generation from its transmission, and distribution from retail supply.

Competition pushes firms to be more efficient, reduces prices and reassures customers they are getting reasonable treatment. This in turn reduces pressure on governments to regulate in ways that weaken property rights. Where competition works, it can help infrastructure provision avoid the problems that have traditionally afflicted it under both public and private provision.

Source(s):
‘Finance and Infrastructure’, World Development Report 2005 (chapter six), World Bank and Oxford University Press, September 2004 Full document.

Funded by: World Bank

id21 Research Highlight: 24 June 2005

Further Information:
Timothy Irwin
World Bank H3-281
1818 H Street NW
Washington D.C. 20433
USA

Tel: +1 202 473 7143
Fax: +1 202 522 3481
Contact the contributor:  tirwin@worldbank.org

The World Bank

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'Reforming Infrastructure - privatization, regulation; and competition' World Bank Policy Research Report

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