A. Introduction

By John Hodges
Department for International Development
U.K.

The raison d'être of development agencies is to reduce and, to the extent possible, eliminate poverty. However, there can be no sustainable poverty elimination without sustained economic growth. Figures released in the World Bank's 1994 World Development Report (see Figure 5.1) show a close correlation between economic growth (measured in GDP/capita) and Investment in Infrastructure. Experience suggests that adequate infrastructure provision is required to promote growth and that, over time, advanced economic growth depends on adequate and reliable infrastructure. The bottom line, therefore, is that sustained economic growth requires appropriate levels of infrastructure investment.

FIGURE 5.1 Economic Growth/Infrastructure Investment

Source: World Bank

The current total level of infrastructure investment in developing countries amounts to roughly $300 million per year. This includes expenditures on maintenance, new construction and rehabilitation. Of this $300 million:

• 10% derives from Official Development Assistance;
• 20% derives from private sector investment; and
• 70% comes from government revenues.

Experience shows that current rates of investment are insufficient for maintaining existing infrastructure, let alone expanding infrastructure services to promote sustained economic growth. Given that current ODA flows have, at best, stabilised and may in fact be decreasing slightly overall, developing countries are faced with a Catch-22 situation: local budgets depend on economic growth, but local economic growth depends on infrastructure, which is mostly financed through local budgets. Present levels of investment in infrastructure in developing countries are, in most instances, inadequate to facilitate sustainable economic growth. This is not only manifesting itself in increasing rural poverty, but also in the rising demands of ever-expanding urban populations on the infrastructure of cities and towns, which are already experiencing difficulties meeting present needs.

The only viable mechanism that is going to mobilise the necessary investment in infrastructure in the developing world will come from increased private sector participation. This is the great challenge facing the donor community today: how can donor agencies leverage additional private sector investment into key infrastructure services?

The following chapter describes one promising approach for small and medium-sized cities. By working closely with municipal governments to build capacity and reduce transaction costs, as well as financial and political risks, UNDP's Public-Private Partnerships for the Urban Environment (PPPUE) facilitates collaborations that can help close existing infrastructure funding gaps. PPPUE has recently announced the launch of a new phase, in which several national Programmes will build on the experiences of a previous piloting effort, and will begin implementing capacity assessments and enabling activities for several cities in the Year 2000. It is hoped that this initiative will succeed in attracting additional financial, human and institutional resources to help meet the essential infrastructure needs of cities in developing countries.

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