Governance in Infrastructure: Literature Review

“Governance” has risen from obscurity to buzzword in just three decades (Dixit 2009).⁸ Governance has several dimensions, such as economic governance, corporate governance, international governance, regional governance, national governance and local governance (Dixit 2009). An appropriate institutional and policy framework is needed for effective governance (WBI 2008; UNESCAP 2006; ADB 2008).

As noted by Dixit (2009), good economic governance is needed to secure three essential prerequisites: (i) collective action; (ii) enforcement of contracts; and (iii) security of property rights. It assures that corruption is minimized, that the views of minorities are taken into account, and that the voices of the most vulnerable in society are heard in decision-making. Good economic governance is also responsive to the present and future needs of society (UN 2009).

Good governance is one of the three pillars of ADB poverty reduction strategy. Assisting developing countries in improving governance is a strategic priority of ADB in its work to elimina te poverty in Asia and the Pacific (ADB 2009).⁹ ADB recognizes a diversity of political systems and institutional cultures in the region. Nonetheless, it defines four aspects of sound governance which are relevant for all countries¹⁰:

1. Accountability: Officials are answerable to the entity from which they derive their authority; work is conducted according to agreed rules and standards, and reported fairly and accurately.
2. Participation: Public employees are given a role in decision making; citizens, and especially the poor, are empowered by promoting their rights to access and secure control over basic entitlements that allow them to earn a living.
3. Predictability: Laws, regulations, and policies are applied with fairness and consistency.
4. Transparency: Low cost, understandable, and relevant information are made available to citizens to promote effective accountability, and clarity about laws, regulations, and policies.

In general, good governance has eight major characteristics: it is participatory, consensus oriented, accountable, transparent, responsive, effective and efficient, equitable and inclusive, and mindful of the rule of law.

A region's infrastructure network, broadly speaking, is the very socio-economic climate created by the institutions that serve as conduits of trade and investment. Some of these institutions are public, others private. In either case, their roles in the context of integration are transformative, helping to change resources into outputs or to enhance trade by removing barriers. Therefore, an improvement in regional infrastructure is one of the key factors affecting the long-term growth of a region.

The linkages between infrastructure and economic growth are multiple and complex. Not only does infrastructure affect production and consumption directly, it also creates many direct and indirect externalities. It also involves large flows of expenditure, thereby creating additional employment. Studies have shown that infrastructure can have a significant impact on output, income, employment, international trade, and quality of life.¹¹

Infrastructure has always played a key role in integrating economies within a region. Welldeveloped and efficient infrastructure is essential for a region's economic development and growth. In a dynamic concept, infrastructure is seen as a regional public good that moves factors of production within and across countries, thus helping the region attain higher productivity and growth (Figure 1).

In a regional setting, infrastructure is a combination of two components: national and international (regional) infrastructure. Regional infrastructure is seen as one of the major determinants of the economic integration process (Vickerman 2002; Kuroda, Kawai, and Nangia 2007; Venables 2007; Francois, Manching and Balaoing 2009). Regional infrastructure is non-rival in consumption, functions as a regional public good, and enhances regional connectivity. It is often argued that if countries in a region are not linked through efficient infrastructure facilities, then the regional integration process would undoubtedly slow down.¹²

Investments toward improving sector policies, governance, and the institutional environment need to be better targeted. As Kuroda, Kawai, and Nangia (2007: 253) have commented: “The strong need for planning and coordination for cross-border infrastructure requires a systematic institutional arrangement, whether formal or informal. Though in theory, ad hoc institutional and technocratic coordination and negotiations between governments on a project-to-project basis should work well without a formalized institutional or legal framework, in reality this approach has had high failure rates and long lead times, significantly raising transaction costs and making such collaborations infeasible. Strong institutional coordination helps minimize such costs. A systematic, comprehensive, institutionalized approach is essential for success.”

Improved governance and policies have promoted prosperity and stability in participating countries. A study by the ADB-WB-JBIC (2005), for instance, found that the lack of infrastructure sector reform and minimal privatization of existing assets gave little room for competition or independent regulation. According to ADB (2006b), the varying strengths and weaknesses of regulatory regimes between countries make regional infrastructure projects difficult to coordinate and develop, particularly with regard to securing private sector financing, which requires strong regulation to mitigate risks.

In many cases, poor governance operates no differently from a tax: it deters economic activity just as a tax would (Dixit 2009). In order for the benefits of long -term infrastructure investments to trickle down in Asia, the governance of infrastructure is crucial. The ADB, in its Regional Cooperation and Integration Strategy on cross-border infrastructure, tackled a range of issues including public and private roles in provision, regulation, and management.¹³ It highlighted the vital importance of governance, while suggesting several approaches to promoting regional integration.

There have been considerable changes in the delivery of national and international infrastructure services worldwide. However, performance in terms of infrastructure service delivery and quality continue to vary across sectors, regions, and countries. Jones (2006), for example, has noted that in some Asian countries, infrastructure investment has not had the anticipated long-term impact on the quality and extent of utility and transport services. Privatization and competition have had some success in some countries (World Bank 2005); across sectors, there is also evidence to suggest that private provision can improve the quality of services and the extent of provision (Levy 2007). At the same time, however, it appears that many of the institutional weaknesses underlying poor provision and low sustainability are not solved by allowing private investment, and in some sectors private provision is likely to have a comparatively minor role (Kenny 2007).

Successful regional infrastructure development requires appropriate institutional arrangements. Institutional and software components in regional infrastructure are just as important as the hardware components (Kuroda, Kawai, and Nangia 2007). For any hard infrastructure facility to work, well-designed institutional and software support is essential. Jansen and Nordas (2006) argued that trade policies at home and abroad matter most for home imports, together with foreign institutions and home infrastructure.

The importance of institutions to infrastructure performance is also evident from an analysis of the costs of corruption in the infrastructure sector.¹⁴ While corruption is a symptom of failed governance, it can also further weaken the governance environment. Corruption not only raises the price of infrastructure, it can also reduce the quality of, and economic returns to, infrastructure investment. Corruption can lower the quality of public infrastructure (Bose, Capasso, and Murshid 2008); some studies (Tanzi and Davodi 1998; Gulati and Rao 2006; Kenny 2009) also indicate that corruption (petty and grand) in infrastructure development negatively impacts a country's growth. Thus, transparency has been viewed as a key factor in reducing corruption (Kolstad and Wiig 2009).

In Asia, the public sector is involved in regulating and supplying the bulk of national and regional infrastructure. Therefore, there is a strong need for regional public policy. Good governance at the regional level has a direct and positive effect on the local governance of each country in the region (Shepotylo 2006). I call this governance diffusion.

Without adequate regulation and institutions, regional infrastructure provision will be suboptimal (OECD 2009). Therefore, good institutional governance is essential for achieving a seamless Asia.

Since governance is multidimensional, an analysis of governance will have to include more factors than income. The question of how governance should be measured has recently received growing attention. While studies have focused on the links between national infrastructure and governance and institutions, thus far, no empirical study has focused on the links between governance and regional infrastructure. Do improved governance and institutions promote regional infrastructure? The rest of this paper is devoted to answering this question.

Download this Paper [ PDF 569KB| 48 pages ].

Comment(s)

There are [0] comment(s) for this entry. Post a comment.