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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 private participation. This alternative to public financing is seen as a way both to minimize the inefficiencies of public administration and to avoid the need for external borrowing. If fact, for much of the nineteenth century, infrastructure projects were privately financed and built. This approach, however, did not obviate the need for government intervention and foreign capital. Because of the difficulties of assessing projects, investors were reluctant to commit their funds, and governments turned to subsidies and loan guarantees to encourage investment. Often, however, government intervention only replaced one set of problems 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 article draws out the implications of this experience for policymakers in developing countries today.