FINANCING INFRASTRUCTURE IN DEVELOPING-COUNTRIES - LESSONS FROM THE RAILWAY AGE

In recent years suggestions for reforming the provision and financing of infrastructure services in developing countries have focused on pri vate participation. This alternative to public financing is seen as a way both to minimize the inefficiencies of public administration and t o avoid the reed for external borrowing. In fact, for much of the nine teenth century, infrastructure projects were privately financed and bu ilt. This approach, however, did not obviate the need for government i ntervention and foreign capital. Because of the difficulties of assess ing projects, investors were reluctant to commit their funds, and gove rnments turned to subsidies and loan guarantees to encourage investmen t. Often, however, government intervention only replaced one set of pr oblems with another. Investors with government-guaranteed loans had no incentive to monitor the firm's performance-a limitation that led to the diversion of funds and frustrated the public interest. This articl e draws out the implications of this experience for policymakers in de veloping countries today.