Infrastructure

Infrastructure is the set of physical and organisational structures that support the functioning of an economy, including transport, energy, water, telecommunications, and public buildings. Infrastructure provides the services on which production and consumption depend, and it is a major component of public investment.

Types

Infrastructure may be classified as economic or social. Economic infrastructure supports production, including transport networks, power generation and distribution, water supply, and telecommunications. Social infrastructure supports human development, including schools, hospitals, and housing.

Infrastructure may also be classified by the network characteristics. Network infrastructure, including roads, railways, and electricity grids, exhibits the characteristics of natural monopoly, with high fixed costs and economies of scale. Non-network infrastructure, including schools and hospitals, does not have these characteristics to the same degree.

Economic Role

Infrastructure contributes to production by providing services that raise the productivity of other inputs. A reliable power supply, an efficient transport network, and modern telecommunications reduce the cost of production and expand the market that firms can serve.

Infrastructure is also a component of aggregate demand, and public investment in infrastructure is used as a tool of stabilisation policy. The effect of infrastructure investment on demand depends on the speed of implementation and on the response of the economy.

Infrastructure has long-lived effects on the productive capacity of the economy. The capital stock of infrastructure depreciates slowly, and its benefits accrue over many years. The assessment of infrastructure investment must therefore take a long horizon.

Financing and Provision

The financing and provision of infrastructure involve a combination of public and private actors. Public provision is common for network infrastructure, where the characteristics of natural monopoly and the presence of externalities justify public involvement.

Private provision, through concessions and public-private partnerships, has been used to bring private capital and expertise to infrastructure. These arrangements allocate the risks and the returns between the public and the private sectors, and their design affects the efficiency and the cost of provision.

The financing of infrastructure may be through taxation, through user charges, or through borrowing. The choice affects the distribution of the costs and the efficiency of the provision. User charges can align the cost with the benefit and can provide a signal for investment, while taxation spreads the cost more widely.

Policy

Policy questions concern the level and the composition of infrastructure investment, the choice between public and private provision, and the pricing of infrastructure services. The assessment of the appropriate level requires estimates of the returns to infrastructure and of the costs of financing.

The composition of investment matters, since different types of infrastructure have different returns and serve different objectives. The assessment of priorities requires analysis of the benefits and costs of each project, and it is informed by cost-benefit analysis.

The governance of infrastructure investment is also important, since it affects the efficiency of the provision and the quality of the assets. The use of transparent processes, of independent appraisal, and of appropriate maintenance regimes contributes to the effectiveness of investment.

Infrastructure and Productivity

The relationship between infrastructure and productivity is a central question in the analysis of public investment. Infrastructure provides services that raise the productivity of labour and of capital, and the level of the infrastructure stock affects the productivity of the economy.

The empirical evidence on the relationship is mixed. Some studies find that infrastructure investment raises productivity substantially, while others find smaller effects. The differences reflect the measurement of infrastructure, the specification of the models, and the difficulty of identifying the effect.

The effects depend on the type of infrastructure and on the context. Investment in transport and in telecommunications tends to have larger effects in developing countries, where the infrastructure gap is larger, while in developed countries the effects of additional investment may be smaller.

Public-Private Partnerships

Public-private partnerships are arrangements in which the public and private sectors share the financing, the construction, and the operation of infrastructure. The arrangements allocate the risks and the returns between the two sectors.

The rationale for the partnerships is to bring private capital and expertise to infrastructure and to improve the efficiency of the provision. The private partner has an incentive to manage the project efficiently, and the public sector can transfer some of the risks.

The experience with the partnerships has been mixed. Some projects have delivered benefits, while others have been criticised for their cost and for the allocation of risks. The assessment of the partnerships must consider the whole-life cost of the project and the value of the risks that are transferred.

Maintenance and Depreciation

The maintenance of infrastructure is as important as its construction, and the neglect of maintenance reduces the services that the assets provide. The maintenance of roads, of water systems, and of other assets requires continuing expenditure, which is often deferred in favour of new investment.

The depreciation of infrastructure reduces its value and its services over time. The measurement of depreciation is required for the national accounts and for the assessment of the sustainability of the public finances.

The management of the infrastructure stock involves decisions about maintenance, about renewal, and about the replacement of assets. The design of the institutional framework affects the quality of these decisions and the efficiency of the provision.

Summary

Infrastructure provides the services on which the economy depends, and its effects on productivity, its financing, and its maintenance are central to the analysis of public investment and of growth.

See also

• Development Economics
• Public Economics
• Gross Capital Formation