Fiscal support for infrastructure: Toward a more effective and transparent approach

1. Fiscal support for infrastructure:Toward a more effective andtransparent approach Timothy Irwin World Bank 29 June 2004 Infrastructure in East Asia and the Pacific: Bali workshop Based on background paper written with Hana Brixi

2. Fiscal policy toward infrastructure can be improved by more directly confronting trade-offs Most governments have the following goals: • Securing major new investment in infrastructure • Keeping customer tariffs low, especially for some groups • Reducing budget deficits and debt without raising taxes. The goals usually have to be traded off. But governments, advisers, and official lenders have often favored policies that seem to avoid trade-offs, by exploiting problems in measurements of deficits and debt. Work in progress

3. Trying to avoid tradeoffs have caused problems Often they have favored • Guarantees, subsidized lending from state-owned banks, and other disguised subsidies over direct cash subsidies • Take-or-pay contracts over ordinary public borrowing. With the result that • Fiscal problems go unnoticed until too late • Fiscal support is poorly targeted Work in progress

4. What’s needed to improve fiscal policy? Greater capability to estimate costs and risks of guarantees and long-term purchase agreements More acceptance of direct subsidies and traditional borrowing when they are the best of the feasible options Better rules shaping fiscal decisions—for example: • Budget rules that incorporate the cost of guarantees • Accounting standards that better measure the budget deficit and public debt. Work in progress