ASi" kUCTURE FlOR DEVELOPMENT

-.Bo'x5. Warning signs from the nineteentht century
Throughout the nineteenth century, when infrastructure foDr investors to monitor management performance while
was largely in , private hands, contemporaries corn- opening the way for promoter to negotiate so-called
plained.that many wo,rthwhile psojects.were. neglected 'sweetheart' deals-with construction and suppl_y corn-
* f~~~or lack of financing& Some of the complaints reflected panies. Because'many infrastructure projets were onte of
mthe, difficulties of financing pioneerng transportation a kin&- the practice could be readily disguised. It now
(especially railway) projets. Oter complaints were' appears that bond guarantees led to higher construction
* ~~~~self-serving efforts to shift alt risk on to government costs.
* ~~~~budgets, and in many cases the financial bankruptcy of Larnlggrants. During the nbineeeth cenhury, lands adenterprises
hiad. severe consequences for government joining railways and canals were often ceded to promot-.
financer.
ers, ailowing them to profit from the many side busi-
Governments all over the world provided aid to pri- nesses that grew up around their investments By
vrate infrastructure pro*ets hin various forms, includinkg providing collateral that could be used to back bonded
direct subsidies. Two isrmnsin use then and of cur- debt, land grants--like interest guarantees-corrected
rent interest- as went are financial guarantees and. land for capital miarket imperfections. In Canada during the
grants .. 1550s and 1860s, defaults on guaranteed bonds drained
Guaamnfras In In dia, if a railway company did niot at-. government revenues. In 1871. therefore, the Canadiant
tain a minimum rate of Meumn of, for example, 5 patcent, House of Commons adopted a policy, of land grants as a
the government made up the difference under the terms way to subsidize railway construction without having to
-of a guarantee badcked by its futI powers of taxation. Such raise the rate of taxtion. Land grants proved most effec-
-guarantees were also critical in the, constructon of the tive in such large speculative ventures as the Indian rail-
Canadian railways. But guarantees remnoved incentives moads and the transcontinentalines in the United States.
Project financing, which permits- sponsors to ment support does-n'ot disappear One-time grants,
raise hinds secured by the revenues and assets of a of either capital or land, are the preferred mediaparticular
project, is often used in new ventures that niLsm for ensuring efficient opertion.
* ~~have no track records. This technique requires a cnet n rnsh rjc iacn
dearer defineation of risk than is the case with traditional
public projets. Allocatin risk among partid- Established companies-such as privatized telepants
has often been a difficult and lime-consumiing commnunications and electric power utilities-have
* ~~process, but nwsafeguards and conventions are a credit history, a customer base, and tangibl asets
evolving to deal with project risks and complexities.- that can be offered as security to lentders. New corn-
Providing funds to a project is an important oh- panies-as in electric power generation, toll woads,
Jective in itself, but the financing process also serves or envirounmenta infrastructure-have ontly the
another important end. Monitoring -by financial poecofa future earnings stream to support bornmarkets
-and institutions complements regulation rowings. For themn, a key issue is what recourse
and competition in servce dehivery- As such;it pro- lenders have if investments fail to produce the exvides
anotlher mechanism foDr investors to impose pected returns.
discpline. Norms for devising incentive and pen-- The financing of a project is said to be non recourse
alty mechanisms to ensure performance by private- when Ienders are repaid only from the cash flow
sector interests axe becoming dlearer- Privately sport- generated by the project or, in the event of complete
sored and financed projects, measure their success failure, from the value of the project's assets.
against.contractually agreed targets. for new capac- Lenders myalso have limited recourse to the assets
ity, construction costs, and time overruns and of a parent company sponsoring a project An imagainst
indicators of servce qluality-
portant policy question is whether government tax
The continuing role of the government lies in in- revenues should be used to provide recourse, in te
suiring the private investor against policy-induced form of guarantees to lenders.
risks. M-oreover, certain types of infrastructure-. The use of nonrecourse or limited-recourse. firural
roads and, to a lesser extent, sewerage and nancing, also known as project financing, is a transisanitation-may
be unable to finance themselves tional response to new needs arising from'activities
through user charges. Thus the nteed for govern- recently brought withiin the orbit of -the private sec-
'94.