Public Responsibility for Public Services: Moving ... - World Bank Group

Arusha Conference,“New Frontiers of Social Policy” – December 12-15, 2005

E. Sclar, conference paper

Public Responsibility for Public Services: Moving Beyond the Limits of the Privatization Debate Elliott Sclar, Professor of Urban Planning and Public Affairs, Director of the Center for Sustainable Urban Development, Columbia University [email protected]

Abstract: This paper argues that the debate over privatization versus public service which characterized so much of the public service policy debate in the 1980s and 1990s was misframed. It reflected a larger ideological debate about the efficacy of a market liberalization approach to development policy. As framed it was devoid of social content directed at the challenges of building social institutions. Lacking a focus on social policy, the approach did not work as predicted. We are now rethinking how to approach the interrelated challenge of creating social and political institutions that can generate substantial, sustainable and equitable economic development. This issue of a unified approach to institutional development and economic performance has taken on a new urgency as a result of the adoption of the MDGs with their highly specific and comprehensive targets and deadlines. In terms of infrastructure and public services, the real issue is enhancing the organizational capacity of governments to make competent "make or buy" decisions. This paper discusses these issues and then presents examples of a broader approach to the issue of capacity building and infrastructure creation by local governments. It draws on A Home in the City, the monograph on slum upgrading and urban planning produced by Task Force 8 of the Millennium Development Project.

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Part I The Context of the Contemporary Privatization Debate I.1 Background In the closing decades of the last century a widely held belief among mainstream development experts was that the equity and welfare concerns that characterize post World War II thinking about development planning was not working and could be set aside. The equity and welfare, i.e. social policy concerns needed to be divorced from and subordinated to efficiency concerns. The reasoning was threefold. First as an empirical fact development was not taking place as rapidly and uniformly as these experts had expected. Secondly with the end of the cold war there was little ideological need to maintain welfare states in capitalist societies as a bulwark against socialism and communism. Moreover these welfare state social policies were increasingly viewed by a newly resurgent group of neo-liberal thinkers as a net drain on the well being of society. Out of these emerged the belief that development policy must focus on a purer form of economic policy; a policy that put paramount emphasis on considerations of economic efficiency. The belief was that economic efficiency has a direct and immediate bearing on the size and growth rate of the GDP while social policy, although perhaps important, is secondary because it’s main focus is upon redistribution of the social product. Moreover because redistribution is viewed largely as a cost and not benefit, it was feared that its implications for taxation of the wealthy and social programs for the poor acts as a double disincentive. It retards the desire of the wealthy to invest and the ambitious among the poor to work. Thus in all likelihood equity and welfare considerations merely serve as a break upon the rate of growth of the economy. Absent a growing economy with robust output, social equity means nothing, as there would be little to redistribute. The policy message very clearly was that the first priority of global development strategy must be to concentrate on raising GDP regardless of its initial impact on social equity. Only later would it be possible to redress the equity imbalance via social initiatives. Indeed in some versions of this policy approach, there would be little need to do this at all as the forces of the competitive market that economic policy was intended to set free would take care of most of that problem. The conclusion was simply that there exists a tradeoff between social policy and economic policy. This line of argument approximately followed the line of reasoning in the “equality versus efficiency” tradeoff influentially articulated by Okun (1975) in his book. To the extent that the two approaches are case as policy options, they imply a major underlying

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problem. The existence of this tradeoff, implicitly presumes that there is a rational government that is ready, willing and able to effectively phase and implement the policy tradeoffs. Such a clever and rational government rarely if ever exists. It is worth remembering that governments are as imperfect at governance as the real world economy is at creating competition. Consequently social policy and economic policy need to be balanced continually even as government is pressured to be transparent and democratic and barriers to competition are lowered. 1 However a major consequence of the widespread adoption of the belief in the separability and sequential potential of the two policy arenas was that the emphasis in development programs became focused upon matters of “pure” economics. Specifically the emphasis was on a collection of polices described variously as neo-liberal policies or market liberalization policies. The common theme of these policies was to give as full a range as possible to supply and demand forces operating in unregulated and competitive markets. Specific policy initiatives were proposals to deregulate and privatize the domestic economy and a second set of proposals were/are intended to dissolve tariffs and regulatory barriers to international trade in both goods and services. In terms of fiscal policy, liberalization advocates sought to quell the Keynesian ideas that an interventionist state was needed to regulate aggregate demand. Instead these advocates sought to remove government from such an active role via an emphasis on small governments providing limited services and constrained by a need to maintain balanced budgets with low taxes. To the extent that taxation was considered at all, it was generally frowned upon in good supply side fashion as a disincentive to private investment. Monetary policy was intended to stabilize prices and fight inflation. In political terms market liberalization policy followed the famous Jeffersonian dictum that the government that governs least, governs best and especially when it comes to political economy. The entire schema of economic policy initiatives rested upon one crucial assumption: namely that the only source of substantial and sustainable real economic growth is a competitive and minimally regulated private economy. By inference government adds little if anything in the way of real value added. The powerful theoretical implication of this assumption is the decidedly economically determinist belief that social institutions are shaped through the actions of market 1

A more powerful critique of this view is that social policy and economic policy are not effectively separate realms. Although it is intellectually possible to look at them in distinction from one another, in fact they continually interact and shape the political climate in terms of what is possible.

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structures and not the other way around. Activist social policy cannot impact economic performance in any positive way, but an economic policy that promotes governmental minimalism could perhaps create conditions under which equitable social conditions could emerge on their own. The watchwords of this policy approach were “getting markets right” and “getting prices right.” The belief was that if we could just succeed in establishing competitive markets the rest of the problems that societies faced would either be solved are at least be more malleable to a solution. The competitive markets would stimulate the evolution of equitable social institutions that would in turn compliment the markets. The world implied by this approach was a Friedmanesque landscape (Friedman 1962) of capitalism and freedom. Hardy competitive markets would invariably lead to democracy and democracy would further encourage competitive markets. Together the institutions of minimalist government and competitive markets would create broad based prosperity for free people living in peaceful and democratic societies. However that is not what happened. To a large extent the relaxation of regulation and the dissolution of redistributive social policies led to a worsening of the equity problems of the world’s poorest people. In 1990 when the full impact of market liberalization was being to be experienced the World Bank estimated that approximately 2.7 billion people were living on less than $2 USD per day, a standard measurement of poverty. Eight years later the number had risen by about 100 million to 2.8 billion. (World Bank 2002) Moreover income inequality between the richest and poorest nations doubled over the past four decades. (Rischard 2002) As experiments with market liberalization proceeded, it became apparent that at best this approach was successful in a highly circumscribed and limited number of instances.. Moreover the liberalization never produced the burst of robust economic growth that was supposed to lift up the poor and minimize the need to impose redistributive social policies. In an important paper Ocampo (2004) noted that between 1960 and1990 Latin American GDP growth averaged 2.7 percent per year. In the 13 years from 1990 to 2003, the era of full blown liberalization and structural adjustment, the GDP growth rate dropped precipitously to 1.0 percent per year. The impact of slowed economic growth combined with an exacerbation of wealth and income inequality worsened the situation of the world’s poor. The collapse of the Argentine economy from middle class status to widespread impoverishment became a powerful case in point. Its downfall was directly attributed to its vigorous adoption of neo-liberal economic policies and the

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movement away from a package of redistributive social policies. (Krauss 2001) For Africa the situation has been even worse with a reversal in life expectancies and increases in childhood mortality rates.

I.2 The Millennium Development Goals and the Reconnection of Social Policy with Economic Policy The adoption of the Millennium Development Goals (MDGs) by the world’s heads of state convened at the UN General Assembly in 2000 has played a crucial role in changing this state of affairs. The adoption of the MDGs accelerated the process of intellectual reassessment of the narrowly economistic approach to development policy that led to the extreme emphasis on market liberalization in the 1980s and 1990s. More importantly because of the commitment of a highly specific time horizon for the achievement of these broad social goals and associated targets, (UN Millennium Project 2005a), it is no longer possible to separate social policy from economic policy. Because the goals are time specific (i.e. they have a deadline of 2015) they have also created a greater sense of urgency for the need to find a comprehensive approach to the development challenge. Increasingly expert opinion no longer views economic policy and social policy as sequential phenomena but rather as simultaneous, complimentary and comprehensive approaches to the challenges of global development. In this post MDG world these two policy fields are now more often seen as the two sides of a single coin. Social policy with its emphasis on investments in human capital and the renovation of the social institutions of governance and individual rights are now seen as necessary for the establishment and sustainability of viable market based policies of development. The two together are now judged as the necessary and sufficient conditions for launching the successful cycles of economic development and democratic governance that are envisioned by the MDGs. This reconnection of social and economic policy is exemplified in the ways in which the existence of the MDGs has subtly refocused the target of development policy. (UN Millennium Project 2005a) No longer is development valued as an end in itself. The full measure of success of any development policy goes beyond the growth rate of per capita GDP. Success is now measured by the extent to which GDP growth contributes to a reduction in the size and scale of a nation’s poverty. The importance of this shift in emphasis cannot be overstated. Development in

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the service of poverty reduction leads to very different choices about acceptable strategies, policies and expected outcomes. It is no longer satisfactory to merely assert that some investment program or economic policy will “create jobs.” The value of these jobs hinges on social policy too. Precisely who will fill these jobs and at what price to the environment will they be created? This shift has the effect of making the issue of the impact of a development strategy upon the nature and shape of social institutions of paramount importance. To put the matter in economic terms, the existing manifestations of poverty are, for all intents and purposes, the visible measure of the deficiencies in the stock of human capital and the vitality of civic institutions – matters of social policy. These deficiencies in turn are precisely the fetters on the ability of poor nations to achieve adequate levels of economic growth and development. Consequently social policy to overcome these deficiencies via improvement in social institutions is in effect economic policy writ more broadly. Moreover social policy articulates an approach to development that must of necessity value context, culture and history. When so specified development policy and its underlying theory are cut loose from the intellectual reductionism that has caused so many supposedly “hard headed” economic policy initiatives to fail. Instead we have a more complete understanding of the multi-dimensional development dynamic at the center of the policy making process.

I.3 Recasting the Privatization Debate The key elements in the older purely economic policy approach to development was the belief that the role of government had to shrink if the private sector was to have room to expand and fulfill its wealth creating mandate. Privatization was seen as a way to facilitate this shrinkage of the intrusion of the public realm into the private. Privatization was cast as in some sense the opposite of what was then in place. It took two general forms; the placement of state owned enterprises back into the realm of the private economy and the private provision of public services. It is this second form of privatization that is the focus of concern here. Public services are the ways in which governments carry out their economic and social mandates. Consequently privatization initiatives that impact these impact the quantity and quality of governance and hence the effectiveness and legitimacy of both economic and social policy. Over the past two decades there has been an almost universal push to shrink public sector involvement in the direct provision of public services. In order to understand how this came

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about, it is useful to remember the context into which the call for privatization was originally inserted. Privatization was a critique of the rationalistic and technocratic conception of the modern state that developed in the closing decades of the last century in the welfare states of the West. The progressive/ modernist conception of an activist government that was powerfully rooted in Western democracies in the belief that there was a “public interest” that was more important than the sum of private interests that comprise society. It was assumed that there existed a cadre of politically disinterested and highly competent civil servants who would act to satisfy the demands created by that public interest. Popularly elected governments set the public interest agenda and the professional civil service carried it out. The economic rationale for these government interventions in otherwise market oriented societies derived from the realization that even the most ideally competitive markets will fail whenever specific goods and services create benefits that exceed the value gained by the direct participants (buyers and sellers) in that market. These wider benefits or externalities will be under produced relative to their social value because private transactions only account for private costs and benefits. Social benefits such as those found in public health, education, transportation, and environmental regulation would be under produced and hence under consumed absent public action. (Musgrave, 1939, Samuelson, 1954) The solution to the underproduction of these valuable externalities by unregulated markets was their direct production via government involvement. In this formulation of public management the presumption was that in the presence of market failure government must directly produce valued public goods using public employees and public managers. This older classical school of public management came under attack by the privatization advocates as a part of the broader movement favoring market liberalization. According to these neo-liberal advocates public service did not work as it was envisioned in its Wilsonian and Weberian formulations. Instead it is ineffective and inefficient. Public servants were neither paradigms of competence nor of disinterested public service. More often they were self-serving (i.e. “rent seeking”) individuals who enriched themselves at the expense of the taxpaying public through willful inefficiency, incompetence and occasionally corruption. While there are always certainly elements of truth in this indictment, specific deficiencies were less important than the more general libertarian critique of the modernist welfare state as a drain on the individual initiative that the libertarians view as the ultimate true source of all wealth creation.

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Consonant with this critique of the classical welfare state these neoliberal advocates called for a new paradigm of public service known as the New Public Management (NPM). NPM promoted the idea that even if market failure makes public intervention necessary it is also the case that markets can be superior in both cost and quality to the direct delivery of public services by public managers. (Hood, 1991, Kettl, 1997 and Osborne and Gaebler, 1992) Under a NPM regime public managers should view themselves as akin to “venture capitalists” serving the public good. These “new” managers must no longer think of themselves as the providers of service but rather as those who shape the services. Using the analogy popularized by Osborne and Gaebler (1992), the public sector’s job is to steer the ship of public service provision rather than row it via the direct provision of public service. NPM advocates do not dispute the existence of market failure as a rationale for public production, although they might hold it is far less frequent than the advocates of classical public management believe. Rather they argue that the production of public goods and services can be accomplished more efficiently and effectively via the use of private providers operating through transactions in the private market place; i.e. privatization. To a large extent the privatization debate as it took place in the last two decades could be separated from this larger ideological debate about the proper role of the state and narrowly characterized as an argument over the efficacy of NPM. When framed that way the basic argument is never about the need for public provision of public goods. Instead it becomes a discussion about whether the private market could do a better job of producing these outputs than public employees. Put slightly differently, setting aside the ideological portion of this debate, the pragmatic disagreement revolves around the issue of the transaction costs of using the market to supply public services. Transactions costs economics (TCE) was originally developed by Williamson (1987) as a further elaboration of the earlier work of Coase (1937) to explain the reason for the existence of large private corporations such as General Motors. It was an attempt to explain why the “make or buy” decision of business firms so often resulted in “make” rather than “buy.” Later Williamson (1999) extended this work as a rationale for public bureaucracies. For those advocating privatization on ideological grounds, the transaction cost argument was never crucial. They dismissed transaction costs as insignificant. (Eggers and O;Leary 1995, Osborne & Plastrick 1997 and Savas 2000) However the body of pragmatic and empirical academic literature that has been growing since the early 1990s suggests that transactions costs

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are a significant reason why so many privatization experiments have failed. There has been a gathering of arguments based in both theory and analysis that argues for the notion that the transactions costs of buying public services in the market rather than “making” them through direct public action are often high due to the difficulty of effective contract specification, information asymmetry between buyers and sellers, divergence in priorities between principals and agents, uncertainty about the future, the instability of competitive market structures and the high costs of contracting monitoring. (Pitelis 1991, Nelson 1997, Kavanagh and Parker 1999, Sclar 2000, Brown & Potoski 2003a and 2003b, ActionAid International, 2004, World Bank 2004a and 2004b, Vining, Boardman and Poschmann 2005)

I.4 Government as a Social Institution However as with the larger debate over reconnecting social policy and economic policy, it is necessary to contextualize the privatization discussion. For starters it is important to recall that government in addition to service provision to “citizen-consumers,” has vital legitimating functions. These include resolution of social conflict and overseeing the degree of social equality or inequality depending on the circumstances. If competent and transparent government is to play its vital role in development, it is important that both the service delivery and legitimation functions of government be nurtured. The ways in which governments choose to serve societies are as important as the tasks they undertake in this service. To understand how these connect, let us consider the NPM in more detail by reviewing the work of Osborne and Gaebler. In their best selling books Reinventing Government (1992) they present a pristine example of the emphasis on the service delivery over the legitmation function of government. For these authors “government” operation should approximate the hypothesized behavior of individuals and firms as portrayed in neoclassical textbook idealization of the perfectly competitive market. Instead of being bureaucrats carrying out the mandates of elected governments, these civil servants must become rational maximizers in the public interest seeking success via “deals” made in “competitive” markets. The unique role assigned to government for these authors’ remains the classical responsibility for the provision of crucial goods and services that private markets do not easily create, if at all. To the extent that government must bear this responsibility these authors argued that “government” must “steer and not row” the ship of state. By that they meant that “government” should minimize their direct

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service provision role as much as possible. To the extent that it is possible they urged that “government” should be continually striving to “empower” “communities” to solve their own problems rather than to provide them with services. To the extent that it must actively solve problems it should do this by influencing market forces rather than creating new public programs. In all its endeavors “government” should view itself as a business striving to meet the needs of its “customers” and not its “bureaucracies.” As with its private sector counterparts “government” should concentrate on “earning” money, not “spending” it. The Osborne and Gaebler view of government is admittedly only one of the ways with which privatization advocates view the issue (Von Weizsäcker, Young and Finger , eds. 2005). Nonetheless it is helpful at illustrating the ways in which the debate over privatization severed the social legitimating roles of the public sector from a more narrowly focused service delivery role. If it is the case that we want governments to invest in human capital and lead the creation of strong democratic institution of governance and civic life then we must view and evaluate the role of government in its full breadth. Government and the public sector are society’s common ground. They create the place where collective decisions are made and where individuals are not “customers” but citizens; stakeholders in a common present and common future. Societies must and do make difficult decisions, decisions that can cause great rifts in the populace. A strong society is one in which governments are able to make these decisions and quickly heal the inevitable political rifts. This is a good measure of how well a particular government is able to carry out its legitmation function. If one accepts this view then two problems immediately become apparent vis-à-vis the idealization of government created by Osborne and Gaebler. The first problem is with their easy deployment of abstract notions of “government,” “community,” “competitive,” “customers,” and “bureaucracies.” I place these in quotation marks to underscore the highly abstract nature of their usage of these terms. Each of these concepts is highly complex and interactive, thus as serious social policy analysis, the “entrepreneurial” argument falls flat because its simplicity fails to address the complexity in which actual social existence occurs. The entire case is made in terms of idealized strawmen. “Community” is good although we do not know whether it is meant as a spatial construct that coincides with the political boundaries of places or if it is a social construct that runs across space and time. “Bureaucracy” is bad because it is conflated with meaningless red tape and not public accountability. The larger problem here is that they effectively reduce the

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governing function from its importance as an agency of social legitimacy and political discourse to one of entrepreneurial deal making and service delivery. The notion that such deal making can lead to corruption in the legitimation function is banished from the discussion, as is the notion that public officials add value through the accountability that their agencies create as opposed to just generating red tape. Finally the notion of citizens as “customers,” while it does help to point up the market metaphors, in which the authors contextualize government, it simultaneously serves to further diminish the vital social functions that governments also must play in their decision making dialogues with citizens. From an economic point of view, the implicit notion that that the private sector by and large is the major creator of value is wrong. Government through both its provision of service and its role in mediating social conflict and making collective decisions adds at least as much value to the economy as does the decisions of private parties. Because the public sector does create so much value, decisions about how to deploy public sector assets become critical. As we move into the 21st Century, it is no longer a matter of debating privatization versus direct public provision. Instead it is a matter of critically understanding how the value chain of public production works in a 21st century world and delineating the conditions under which it makes more sense to partner with outside providers, what regulatory mechanisms are needed to make it work and when is it simply better to directly provide services. The answers to these questions must not be narrowly defined in terms of comparative direct costs. It must be framed in terms of both the legitimating and service delivery functions of government.

I.5 Re-Framing the Privatization Question For our purposes privatization refers to those situations in which private parties are brought into the process of providing services for which the government remains accountable. This is a slightly broader definition than the more customary one where privatization occurs when a private provider takes on a formerly publicly performed function. The reason for the alteration is to emphasize the point that we are not looking at the act of change but rather at the dynamics of the relational process between the public and private entities and the implications for efficiency, effectiveness and competence of the governance function. Given that definition, there are several forms that this public-private relationship can take. These range from the full divesture of a public service to contracting with a private provider to perform a portion of a

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government function. An example of the former would be TPG Post the privatized Dutch postal service. As of 2003 it became a stand-alone and for-profit international operation that still provides traditional postal services in the Netherlands but that also competes globally as a package delivery organization. In the latter category are service functions that are unique to government or to governmental responsibility. Examples include the incarceration of prisoners or fire services to a municipality. Of less interest here are contracts with outside vendors to purchase services that they also supply to private firms and organizations such as contract construction or janitorial services 2 . In between these two extremes there are various forms of service and management contracts, lease contracts, build-operate transfer (BOT) managements, concessions, and public-private partnerships. All of these have important implications for the way in infrastructure is created and public services delivered. It is the relational aspects of these rather than specific forms that are the focus of this paper. Regardless of form, it is generally the case that privatizations work best in instances where the transactions costs are low. However in many of the crucial service and infrastructure intensive projects that are central to urban development in the poorest cities in the world, the transactions cost challenge is a mixed bag in which some of these costs are quite low but others are quite high. The challenge is usually to design a structure in which the public sector can take advantage of private providers in those areas where the transaction cost is low and restructure its own operation to maintain either direct responsibility or tight control where these costs are high. The bottom line here is that from an economic standpoint it is important that we move this debate beyond the limited and dichotomous “for it or against it” one that characterized so much of the policy conversation in the 1980s and 1990s. What is needed is a nuanced approach to the mix of outsourcing, tight regulation and direct service provision that can characterize democratic and effective governments in the coming decades. The starting point for this must be the recognition of the ways in which the evolution of information and communications technologies have drastically altered the boundaries of

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In the case of janitorial services it could be argued and indeed has been argued if the service had been provided by government workers and was then turned over to private corporations this would indeed be privatization. Yes if our concern is only with the act of change. Moreover in a country like the United States this replacement would likely lead to a fall in living standards for public janitors who had higher government wages and health insurance. However in this case the service function is a support function and not a primary function. There is a marketplace of firms that routinely provide this service to the private sector and transactions costs are exceedingly low as monitoring is straightforward; the work was performed or it was not.

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organizations and lowered the transaction cost of using longer “supply chains” or “value chains” to produce goods and services. Going all the way back to Coase’s (1937) original insight it is important to remember that the reason we organize ourselves into firms and agencies rather than simply rely on markets to accomplish so many tasks is that there is a cost to using markets and that cost can be higher than the bureaucratic costs of internal organization and operation. However at the dawn of the new millennium it is now the case that, thanks to information and communications technology, the costs of using the market in many instances has dropped significantly. Situations ten or twenty years ago when the transactions costs of markets were higher now make it more feasible to engage the market in the creation of value chains that lower the cost of operation. But this must be done with a very important caveat; governmental agencies are not simple analogues to private firms. Instead they have to always be mindful of the duality of their existence which is to both provide services and to protect civil society through their actions as a legitmator of the commonweal. In terms of the service provision, regardless of whether it is provided by tendering or direct action, the government remains responsible for it. When a service is privately provided, the supplier can always withdraw from the business if it ceases to be advantageous. Thus to the extent that we seek to “maximize” public resources in the pursuit of public service provision we must be aware that this is essentially an issue of constrained maximization. It is maximization given the need to maintain legitimacy for democratic governments that bear responsibility for public services. In terms of privatization decisions this means in practice that no matter how badly a particular decision goes, government continues to bear the risk for failure. If it shuns this risk it opens up the possibility of delegitmating governance with all the attendant social costs. Central to the argument here is the assumption that one result of the changes in the cost of information processing and transmission resulting from changes in information and communications technology is that the boundaries between the sphere of governmental and private organizations become far less rigid. As with value chains in the private sector, so too with value chains in the public sector a great deal of inter-organizational inter-penetrability is now possible. As the organizational spheres dissolve through information processing and easy communications the debate over how public mandates can be fulfilled becomes exceedingly

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challenging. Simple public-private delineations become less real and more imaginary. This presents us with both great opportunities and great risks. Given that central argument, the salient issue is not whether services are provided by contractors but rather the democratic competence of the public officials charged with making the public sector’s “make or buy” decisions. Competent and democratic governments create efficient and effective services. This is very different from the way in which the privatization argument was originally posed in the 1980s and well into the 1990s. The original argument was that outside service providers, disciplined as they were by competition, would be able to improve public sector performance that had eroded under the lazy growth of monopolistic bureaucracy. If it were true it was in essence a very easy fix for incompetent and even corrupt public governance. However it must be recognized that when government is incompetent in the first instance rarely if ever does such a privatization live up to its promises. That is especially the case when government officials are not only incompetent but also corrupt. The two usually go handin-hand. In such cases the experience is that the inefficiency and ineffectiveness of the public sector carries over to the private providers. Privatization can’t cure public sector deficiencies. When they exist it can only worsen them. However in the hands of competent and transparent governments, in an era of declining information transmission and processing costs, private agents can add a great deal to the process of accomplishing the public mission. It is my argument that improvement of governance and hence public sector performance will only occur by putting the concerns of building democracy on an equal par with the concerns about economic efficiency that drove privatization advocacy such as Osborne and Gaebler in the last century. Democracy, which rests on meaningful citizen participation in government, will improve public sector performance. Attempts to improve public sector performance separate from efforts to democratically improve governance will always prove disappointing. In the jargon of technical social science, both sets of institutions (government and markets) are simultaneously determined. Causality runs in both directions. Further complicating matters are that both governments and markets are creatures of their own history. Path dependency matters greatly.

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I.6 Planning Service Delivery for an Urban World The issue of how to deliver services is not occurring in a vacuum. The context of demands faced by government also matters greatly. For the first time in human history we are, for all intents and purposes, living in an urban world. By 2007 the world’s population will officially be predominantly urban. (UN Millennium Project 2005b) Presently slightly less than one-half of the six billion plus people on the planet are classified as urban. Over the next 30 years, virtually all of the world’s population growth will occur in the urban areas of low- and middle-income countries. The world’s urban population is projected to grow by more than 2 billion by 2030, while the rural population will stabilize and then decline by an estimated 20 million (UN-HABITAT 2003a, b). Ninety-four percent of this urban population growth will be in less developed regions. This means that virtually all the additional public service needs of the world’s future population will have to be addressed in the urban areas of low- and middleincome countries. Increasing numbers of the world’s poor will be city dwellers. Poorer families consistently have higher birth rates (due in part to inadequate reproductive health services), and most rural-urban migrants are poor. This implies that the percentage of the poor in the cities and towns of low-income countries will increase. But even if the percentage of slum dwellers in these cities remains the same, by 2030 almost 1.7 billion of the expected approximately 3.9 billion urban dwellers in low- and middle-income countries will be living in slums. These findings have enormous implications for both the needs for public services and the structures through which these services are to be delivered. The problems will be acute. Socially and politically we are considering governance for populations that will be extremely heterogeneous, reflecting complex and far ranging sets of interests; among which are the interests of the, generally better off, residents of the formal housing sector, the interests of those living in slums, local trade associations and labor unions, private investors, a range of national and local government politicians and public officials, international donors and international lenders. In order to respond to this diversity of interests it will become important to be able to develop sophisticated yet transparent mechanisms of governance, planning and public administration. Governments must involve their citizens in the planning and delivery of services and be able to represent them to private partners who could add value to the endeavors. Furthermore given the problems of urban poverty that these governments must address, this

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effort must be carried through with approaches that are defined by clear commitments to social equity and social justice.

I.7 A Pro-Poor Urban Focus Public policy is never neutral in terms of the ways in which it distributes costs and benefits. Urban policy in developing cities was for a long time anti-poor in its focus. The initial policy assumption was that the millions of poor people accumulating in squatter settlements and slums in and around the growing cities of developing countries were illegitimate. There housing was razed and they were pressed to either return to the places from which they came or to move elsewhere. But there was nowhere else and all the policies did was exacerbate bad situations. Starting in the 1990s policies of harassment were replaced with policies of neglect. In the vacuum that was created, the urban poor figured out many creative solutions for themselves. Many of these have great promise as bases for urban poverty reduction programs as well as mechanisms of local governance. In recent years and especially with the creation of the MDGs there has begun to dawn a new consensus that the problems of the urban poor must be actively addressed. In this section we consider how urban public management might be organized to specifically redress this imbalance. The approaches have great bearing on how we balance public and private responsibility in the creation of urban public services. The substantive needs in the areas of municipal service such as water infrastructure, transport, economic development and medical care changes little with place and time. But in almost every area of concern there is usually more than one way to approach a problem, and differences from place to place reflect the values of those making the policy decisions. Here the emphasis will be on approaches that put the concerns of the urban poor first. There are two related issues that must be considered as we look at each service area; finance and cost recovery and the specific nature of individual services. The two are connected. Given the scarcity of public resources in poor countries, one of the key elements of concern to those responsible for designing municipal service delivery mechanisms is the issue of cost recovery from service users. In the name of cost recovery, over the past two decades, international financial agencies and several international donors have attempted to impose private operation in inappropriate circumstances, often with dire consequences for the poor. The belief was that private operation would ensure efficient services and that users, including the

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poor, would pay the lowest possible prices while covering costs with little or no public subsidy. While there have been successful cases, too often privatizations done for these purposes have had disastrous consequences and have had to be reversed at great cost. This assumption was wrong. Rather with proper involvement of the urban poor in service delivery, there are many instances where basic services have been created and offered at rates affordable to the urban poor. The solutions involve collaborative and appropriate design and innovative structures of tariffs and subsidies. Much depends on the physical, historical, and institutional characteristics of each location and the depth of service coverage. The goal in all cases must be to provide efficient and equitable services, taking the pressing needs of the urban poor into consideration. There is no one right way to undertake these ventures.

Part II. The Organization of Infrastructure Services II.1 Network Infrastructure in an Urban Context: Some Background The most critical services for urban residents are the ones provided by network infrastructure: water, sanitation, electric power, transportation and telecommunications. The implications for any lack in these services for health and well being as well as economic productivity and orderly urban growth are obvious. Therefore in Part II of this paper we turn our attention to questions of how these services might be organized to better serve the needs of poor urban residents and improve the prospects for economic productivity gains and orderly spatial urban development. In the post World War II period, the period from 1945 through 1975, these questions would have merited little attention. The answer was easy; government should either organize and provide these services or allow for their provision via the actions of regulated private providers. The political rationale for this answer was that the dominant ideological belief of the era was that an activist state was needed to mediate between the vagaries and inequalities of a market oriented economy and the social welfare of society. This political rationale was complimented by an economic one rooted in what economists identify as the problems of “natural monopolies.” Natural monopolies are situations where because of high barriers to market entry, it is more efficient to have a single provider of a particular product. This situation is endemic to the supply of networked infrastructure. There is almost invariably a high fixed cost involved whenever we seek to put such infrastructure in place. It is neither spatially nor economically feasible to have

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more than one set of water pipes or electric lines running through a city and into each residence and business. To sustain competition in these examples would mean to double the cost of the infrastructure and split the user generated revenues from the households and business approximately in half. It would be the worst of two worlds: overcapacity and under utilization. To avoid the problems associated with competitive supply (assuming it where physically feasible) as well as the problems of monopolistic supply the emergence of a single provider, either in the guise of government provision or of a regulated utility was considered the proper response in cases of “natural monopoly”. This economic conventional wisdom came under attack by the neo-liberal policy orthodoxy that emerged in the late 1970s to replace this earlier modernist view of the role of the state. The argument put forth by the libertarian economic theorists who articulated the new conventional wisdom was that while there are parts of the infrastructure network that, because of the limits of technology, do lend themselves, of necessity, to monopolistic supply, it is not the case that the entire package needs to be either publicly supplied or tightly regulated.

II.2 The Experience of Electricity Production and Distribution Consider, for example, the production and distribution of electric power. Instead of the unified production and distribution of the utility monopolies that grew up with the industry, it is possible to reorganize the process by breaking the industry into its component elements. By doing this, it becomes possible to capture the efficiency gains of competition and minimize the social and economic costs of an intrusive state and monopolistic inefficiency. The key is to break utility monopolies into their three component parts: production, transmission and distribution. In terms of production, it is possible to have many competitive power generators. Hence is it is possible to envision a competitive market for power production. Transmission and distribution are another matter. The transmission grid is of necessity a piece of unified infrastructure that needs to be a natural monopoly. Distribution to final users is also monopolistic infrastructure. However the two do not need to belong to the same party. Once the production of power is transformed into a competitive commodity, the challenges of managing the transmission gird that brings the product to market can be put in the hands of one separate entity and the retail distribution into the hands of another. One model for the transmission grid is to organize its control in the hands of a not-for-profit manager governed by an industry board. It becomes

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responsible for acting as the traffic cop in moving power from producers to retailers as well as overseeing the maintenance of the grid itself. Retail distribution only requires the transformation of the existing utility companies with their lines into individual homes and businesses as just that part of the business. They would continue to collect the tariffs from the consumers and rebate them to the producers. Similar analyses could be done for other elements of network infrastructure. (Nelson 2005) The important point here is that there is no need for the same older model of state supply or state regulation that characterized the post war period to continue to be thought of as the only one. In the case of electric power the advocates for deregulation believed that the use of competitive power generators would induce both new efficiency into the industry and bring lower prices to consumers. While the theory is elegant in its simplicity it is this same simplicity that has caused it to fail in several places. The Enron scandal has its roots in the fact that with the creation of a competitive power production market it is also possible to create a futures market to help further rationalize the production market as power is a perishable commodity. It cannot be stored and must be used as quickly as it is produced. This market with all its opportunities for creating deals outside the market when combined with the way in which California deregulated its utility industry became something of a perfect storm leading to a massive corporate bankruptcy and a regulatory debacle. These events do not invalidate the reorganization but they do demonstrate that the practice still has some distance to go. Most importantly they suggest that it is not as simply efficient in practice as it was on paper. As these deficiencies are cured the costs of and necessity for regulation increases. Whether the added regulatory costs in the context of developing state’s regulatory competence are greater or less than the costs of competent direct production remains an open question. In addition, as the blackouts in the northeaster portions of the US and Canada in the summer of 2003 revealed the challenge of managing the monopoly element of the transmission grid is also a serious and costly problem to rectify. The final open question here concerns the final costs to customers. The basic argument for the deregulation, reorganization and privatization of the industry was that competitive power production would drive down the costs of power for consumers. As recent events in the petroleum industry have shown, the retail prices of power for consumers are driven much more by the cost of energy than by the efficiency of the producers. Whether the efficiency gains in production can overcome the new regulatory costs of a decentralized infrastructure network is the final open question. In

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subsequent sections we will review cases in which community based organizations have been posed as alternatives to even this model of network infrastructure. This suggests that there are several ways in which we can proceed as we strive to create network infrastructure in the developing cities of the world.

II.3 The Cost Recovery Question While organizational models of service delivery pose one set of challenges, cost recovery presents a second, related but also different one. Cost recovery for network public services falls out along a continuum that ranges from complete cost recovery from users to a need for ongoing public subsidy. Some network public services (such as telephone service) have lent themselves easily to deregulation and privatization with almost universal full private sector cost recovery; others (such as electric power) have had a mixed record. In high income countries electric power has been well provided by private companies. This is not the case in low-income countries and I believe it is not simply a matter of income difference. The salient feature of electric power in developed countries is its universal availability. This permits the high fixed costs of infrastructure creation and maintenance to be spread over virtually the entire population. This has the effect of making the fixed cost portion of individual electric bills comparatively low. In developing countries this is not the case. Indeed the challenge is precisely to attain universal coverage. (Sclar 2005) Hence to rely solely on user fees for fixed cost recovery is to almost guarantee failure for universal coverage. The higher relative per unit fixed costs which the existing base must carry exacerbates the low income problem. In the lowest income countries, per user costs for infrastructure are so high for the poor that they often place services beyond reach or create heavy cost burdens (ActionAid International 2004). This shortfall in turn invites theft of services and lower total revenues on one side and the poor economic performance this engenders serves to discourage outside investors from making sufficient investments in the system to effectively lower the per unit fixed costs. In these cases at least for the foreseeable future there is a strong need for the provision of subsidy to low income urban residents. Experience shows that it is generally unwise to attempt purely market-based cost recovery solutions where a large proportion of the expected customer base is low income. This is especially true when the goal is to extend trunk lines (transmission lines in the case of electricity) to unserved or underserved areas. The interesting cost recovery challenge concerns how to strike

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a balance. Direct subsidy from government or donors or cross-subsidy from higher income users does not preclude regulated private operation. For subsidization to work, however, the government must have the capacity to regulate effectively and in the interests of the poorest citizens—and the record on this account is not reassuring (World Bank 2004b). Thus going forward we need to move beyond the economic logic of market based solutions and properly account for the implicit needs for public management and the ability of government to supply it. It should be noted that we should approach this with a dynamic understanding of managerial capacity. With the proper structuring government capacity can grow along with the system.

II.4 Bringing the Community into the Picture The discussion about how to efficiently and effectively provide networked public services has, typically, tended to be bimodal; government and private for-profit-firms. In this section we review the positive results that have been attained through the involvement of the organized urban community in service delivery. Consider the question of initial cost and cost recovery. The highest per consumption unit in networked infrastructure is the retail distribution hook up to places or residence and commerce. Evidence from the field suggests that one of the best ways to lower the costs of network infrastructure services in the “last mile” (or the link from the trunk line to the consumer) is through partnerships, often linking formal and informal actors at different geographical levels and relying on different technologies. 3 In Benin, for example, Cotonou’s Program for the Protection of the Environment has built successful partnerships, integrating informal actors in the delivery of services to unserviced and outlying settlements to provide garbage collection, recycling, and an improved water distribution system organized and facilitated by the Partnership for Municipal Development. The inclusion of scavengers in waste management in the North West Province in South Africa and the community-based women- oriented initiative in the state of Kerala in India illustrate similar approaches. Many other community-driven processes have worked with or sought to influence government to improve the provision of water and sanitation. In Luanda, Angola, a local NGO 3

The examples that follow in this section derive from two background reports commissioned by Task Force 8 of the UN Millennium Project. (UN Millennium Project 2005b) The cases of Benin, Columbia, India, and South Africa are cited in Serageldin, Solloso, and Valenzuela (2003). The cases of Angola, Bangladesh, and Pakistan are cited in d’Cruz and Satterwaite (2004).

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(Development Workshop Angola) has supported the construction and management of 200 standpipes, each serving about 100 families. Locally elected water committees manage these standpipes in collaboration with the water utility and the local authority. Half the funds from users are retained by the committees for operation and maintenance, 30 percent goes to the water company, and 20 percent goes to the local authority. Despite difficulties (getting regular supplies to some standpipes, getting support from local authorities), local organizations are handling the “retail” part of water provision. Where local (public or private) water agencies are too weak to extend provision to unserved, low-income communities, this kind of partnership can be valuable (Cain, Daly, and Robson 2002). In South Africa the Municipal Infrastructure Grant Program, a partnership between the national and provincial government, municipalities, and communities, addresses the lack of basic services in the country. It offers grants to poor households and funds infrastructure projects. As of 2003 it had completed 2,323 infrastructure projects, and another 910 are under construction. Given the magnitude of the challenge, the government redefined the program’s scope to focus on upgrading and rehabilitating existing systems and reinforcing links with local economic development. In view of its impressive performance, the program’s budget was increased to R2,357 million in 2003/04, making it one of the largest programs of its kind in the world. Amid widespread violence and civil strife, Colombia has addressed issues of urban poverty through programs and partnership linking central and local actors. The Housing and Environmental Improvement Program (established in 1994 and funded by the Inter-American Development Bank) funds infrastructure, community facilities and public services, land regularization, and the production of core housing and serviced lots for marginalized settlements. Provincial authorities and municipalities provide co-financing. Families receiving subsidies must make contributions in cash or in kind amounting to at least 5 percent of the value of the project components requested by the community. The work of the Orangi Pilot Project, which mobilized local people to improve sanitation, health, housing and other aspects of their communities, is well known (Hasan 1997a, b; Zaidi 2000). Another example from Karachi of the role of community organizations is the awami (people’s) tanks in Orangi. These community-managed public water tanks in areas far from water mains are built by community organizations or local philanthropic bodies and supplied with water by commercial water contractors (Ahmed and Sohail 2003). The British NGO

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WaterAid has supported many examples of community- managed water and sanitation provision. It views these projects as ways of encouraging and supporting local water and sanitation agencies to become more effective. One program in Bangladesh works in 150 slums in Dhaka and Chittagong, with support managed by seven local NGOs. The program provides for water points supplied through connections to the metropolitan water authority lines, installs tube wells (where connections were not possible); builds sanitation blocks, community toilets with septic tanks, household water-seal pit latrines, and footpaths; improves drainage; manages solid waste; and provides hygiene. Most facilities are provided on a full cost-recovery basis, with users repaying construction costs in installments. The funds recovered go to additional slum projects.

II.5 Lessons Learned About Community Participation One of the most important lessons of these examples is about the power of a tripartite arrangement in creating public infrastructure and services for cities in developing countries. Such an arrangement permits community based organizations to become co-equal partners with the public sector and private providers. The result is that it can vastly improve service delivery of the older two party structures that dominated the service design debate in the last two decades. The reason is that community based organizations bring a wealth of pertinent information to the decision process that has the effect of significantly lowering the transaction costs of service delivery. Attempts to use either market incentives alone or regulation alone or even in combination with one another are not capable of capturing that vital information. The information and know-how that the community based organizations bring to the development of municipal services both reduces transaction costs and permits for far more flexible service delivery plans than would be possible in the more rigid two party models of the privatization era. In these examples nonprofit organizations have worked within market models of provision, with payment required for water or use of sanitation facilities and communitymanagement focusing on cost recovery. The advantages of this approach are that a larger scale can be achieved, maintenance is easier, and less reliance is needed on external funding. The advantages over private provision are that profit maximization is not the key mission (although full cost recovery may be). Instead, there is a commitment to reaching the unserved, and the local organization has to be accountable to local users. One recommendation that flows from this is that we should devote more attention to the role of local nonprofit organizations in systems

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managed by private utilities or as private utility managers themselves.

II.6 Community Contracting Whenever feasible, local improvement projects must be open and accessible to lowincome communities, cooperatives, and slum dweller organizations as partners or contractors. This may require that contracts be small enough to be managed by community-based contractors. Such arrangements will generate much needed income, improve skills, create a sense of ownership and civic pride, internalize profit margins, and improve transparency in the use of municipal resources. A successful tool in community-driven approaches is the use of community contracts, in which a community group enters into a contractual agreement with local government in order to undertake work that leads to improvements in local living conditions. The use of one or more contractual agreements facilitates progress toward a clear goal-oriented division of tasks (Snoer 1995). Both parties may be assisted in the process by a development project or NGO. Combining community contracts with labor-based approaches yields many advantages in terms of community empowerment, job creation and income generation, and capacity-building and partnership development. Such arrangements also create a sense of ownership and civic pride, internalize profit margins, and improve transparency in the use of municipal resources. Comparative studies have shown that community contracting is cost-effective and that using local resource-based methods can generate savings (Tournée and van Esch 2001). Two features distinguish the contract approach from conventional community-based activities. The first is a process of negotiations to arrive at a mutually beneficial agreement or contract. The second is the formalization of the partnership through a contract defining responsibilities and obligations of all partners. Negotiations with the target community are critical to the process. For the community to engage meaningfully in negotiations, it has to marshal all information necessary (including technical options, type and amount of community contribution, wages, use of contractors, implementation modalities, supervision, maintenance) to make informed decisions. The introduction of a negotiation process in formerly unorganized and disadvantaged communities provides them with the opportunity to discuss not only their economic and social interests but also their individual and collective rights and duties. These negotiations between public

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administrations and community groups provide the basis for a more equal form of partnership, strengthening the collective capacities of the poor to act as partners in development and enhancing the accountability of public administrations. For community contracting to be applied on a large scale, community organizations need legal standing, enabling them to interact effectively with external parties. Official registration is usually necessary for organizations to receive public funds and thus to enter into a contract with public authorities. Sri Lanka was one of the first countries to adopt community contracts as a standard procedure in urban upgrading. To be eligible to participate, community organizations had to have democratically elected representatives, a constitution, and documentary proof of active socioeconomic development work for the community for at least one year, and a bank account in the name of the organization. From the point of view of the community groups, there are many advantages to having formal status. Formal status increases these groups’ credibility in voicing concerns and needs and improves their access to financial services, assistance from government departments, and contracts with private and public entities, all of which increase their empowerment. The development of strong community organizations will often lead to additional local initiatives and to follow-up joint action with the municipality or local ward, sustaining the organizations’ role in local development. However, there are many examples where community organizations have been hindered by bureaucratic obstacles, and in many countries community organizations may need external assistance in registering themselves. In projects of community interest, especially where the community is expected to be responsible for operation and maintenance, it makes sense to opt for the most participatory procedures possible, putting the community in the driver’s seat of its own project. Private sector involvement should then reflect community priorities and needs, giving preference to businesses from the area and to temporary laborers from the community. Private enterprises may be contracted directly by the community organization for works requiring particular technical skills. Evidence shows that using local community contractors, who tend to be cheaper, more flexible, and more aware of the community’s problems, makes sense (de Silva 2000). Funds for upgrading are best utilized by the communities themselves, since this results in lower costs, better quality work, and quicker implementation. Allowing communities to use the funds themselves also binds communities together and empowers them. Community contracting may

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also be used to develop small businesses and cooperatives within the area. Community-driven development in urban upgrading is a gradual process; communities and other stakeholders need time to learn to participate and collaborate in development projects. Scaling up and replicating interventions that adopt community-driven approaches are more likely to succeed if the rules for effective collaboration are defined within an enabling institutional framework, which will often include strengthening of governance structures at various levels (World Bank 2004c).

II.7 Urban Transportation: A Special Case of Network Infrastructure Urban transportation is a crucial determinant of the size and shape of an urban region. It can be classified as network infrastructure because by definition it moves people and goods over a network of streets and roads or exclusive rights-of-way as rail based transport. Good systems of urban transportation can contribute immensely to the solution of a wide range of urban problems. Decisions about the placement and timing of transport infrastructure investments and the quality of services can provide a rational and orderly way to expand the spatial boundaries of the dense and teaming urban settlements of so many places in the developing world. Transport systems, by expanding the options for residential location and commerce and industry hold out the promise of permitting these cities to adapt easily to the population growth they are expected to receive from a combination of natural rates of population increase and in-migration from the domestic countryside and other countries. At the same time choices about transport modes can contribute enormously to the improvement of the local and global environment. Transport systems that encourage pedestrian access, non-motorized transport and public transport foster cleaner air and mitigate global warming. Good system of urban transport enhance the ability of all urban services, but especially those related to public safety (police and fire protection) and health (access to medical care facilities) to function optimally. In all of this a special emphasis should be placed upon meeting the access and safety needs of the poor. Although urban transport has characteristics of network infrastructure, from the point of view of the end user it looks a great deal like an ordinary private good or service. Individual riders can purchase trips on transport vehicles in a manner that is identical to their choices about cinema tickets and fruits and vegetables. However because of the power of transport to impact land use and environment the external impacts of these market based decisions are typically far

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greater than the impacts on the individual traveler. Transportation is thus a quasi public good. (Sclar 2005) That is to say it exhibits the characteristics of both a private good and a public good. Further complicating its status as a quasi public good is the reality that it does not easily, if ever, cover its full costs via charges on users. Thus the ways in which urban transportation is subsidized is as important in determining its impact on urban life as the physical characteristics of the system. The need for perennial subsidy derives from the fact that its fixed infrastructure costs for construction and maintenance of roads and rail beds as well as the more variable costs of purchase and maintenance of rolling stock can never be fully covered by charges to the base of users. Travelers would simply stop traveling at those high costs and the ability of the area to capture the external benefits of good circulation would become lost. Typically users are only charged a fare or toll that approximates the low marginal cost of their use. Thus regardless of how the service is organized, there is an abiding need for public subsidy. Urban public transport systems in the developed world and the developing world typically markedly differ along two axes; market structure and system organization. Systems in the developed world are usually characterized by monopoly operations and clearly delineated and coordinated route systems. In developing countries the systems tend to be a form of paratransit with highly competitive individual owner drivers in a fleet of small buses or vans running a mix of uncoordinated routes. (Őrn 2005) These are supplemented by a fleet of taxis that also compete for urban customers. To the extent that urban transport is supposed to relieve congestion on streets, it often has the opposite effect in cities in developing countries. In cities in developed countries the challenge at present is to lower the barriers of monopoly operation and encourage forms of competition to inject efficiency into these systems. In that sense much of the policy debate looks much like the privatization debate of the last century. In the developing world the challenge is to bring order to a system that is competition but in which the competition is destructive of the ability of the cities to develop sustainable land use and transport in an effective, efficient and environmentally sustainable manner. Slum dwellers and the urban poor in general in these developing cities typically walk, bike, or use collective modes of transit. Sometimes even bicycles are out of reach. Lack of capital to buy shelter equipped with running water, sewerage, and pavement, in a location near jobs and public services, translates into a perpetual mobility burden. Safe, convenient, and reliable mobility is necessary for routine activities of daily living, such as traveling to work or

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shopping areas, as well as during crises, such as accessing emergency obstetric services during childbirth. A significant proportion of maternal deaths and injuries result from transport delays to appropriate levels of care. Travel time burdens also limit the ability of children to get an education. Because slum dwellers are usually pedestrians, they are more often the victims of road traffic accidents, which globally claim more than 1.2 million lives a year (Hook and Howe 2004). In low-income countries victims are primarily elderly and young pedestrians and cyclists from low-income families. Because roads are rarely designed to facilitate safe cycling, the poor are forced to use more expensive or slower modes, such as paratransit or walking. Studies indicate that the urban poor in Indonesia are more dependent on motorized vehicles for trips of up to 3 kilometers than are residents of Germany (Hook and Howe 2004). Historically, the majority of donor efforts to alleviate poverty through transport sector interventions have focused on road construction. But from a poverty alleviation perspective, this is rarely the priority. Because most slum dwellers do not own motor vehicles, most have to walk to the nearest bus or paratransit line. Free access to road space constitutes a hidden subsidy to the wealthy at the expense of the poor. In an urban setting, investment in roads without prioritizing access for public transit and nonmotorized vehicles will do little to improve the lives of slum dwellers and the urban poor—and may make their conditions worse, since new urban road projects frequently lead to the forced relocation of large numbers of slum dwellers. Paving roads in slum areas without implementing proper traffic calming also tends to increase vehicle speeds and compromise road safety. Streets in slum areas are used primarily for walking, as public space for residents, and as play space for children. They should be designed accordingly. Interventions to alleviate the mobility burden of the urban poor should focus on interventions that can directly reduce their commuting time and cost burden at the lowest cost per beneficiary. Reducing commuting time increases the time that can be spent earning income, attending school, or caring for children. Reducing commuting costs also directly increases disposable income. The best way to ensure that the benefits of new road investments or road rehabilitation are not captured by upper-income beneficiaries is to use public investment to build bus lanes, bicycle lanes, and sidewalks. Revenue for these investments should come from road users, in the form of congestion charges, which have been demonstrated to increase bus speeds and decrease

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bus operating costs, benefiting lower income commuters (Hook and Howe 2004). Investments in mass transit systems can also benefit the poor. The difficulty is determining the conditions under which public investment in collective transport can stimulate urban development and how the public sector can stimulate private investment in the sector. Metro systems and elevated light rail are self-financing only where population density is extremely high and incomes are moderately high (Hook and Howe 2004). They are likely to impose a permanent financial burden on municipal and national governments at the expense of other priorities while doing little to address the problems of congestion and basic mobility. Except in extremely high-density cities, virtually all of the benefits of metro systems can be achieved at lower cost through bus-based mass transit systems, sometimes called bus rapid transit. In Latin America, even in fairly low-income countries, all bus rapid transit systems cover their operating expenses entirely from passenger revenues at the same fare level as normal buses, and in most of the systems private bus operators cover the cost of buses (Hook and Howe 2004). The construction and maintenance of infrastructure is generally paid for by public funds. In Bogota, Colombia, 37 percent of bus rapid transit passengers are classified as poor, 47 percent as moderate income, 13 percent as middle income, and only 3 percent as wealthy. On average TransMilenio passengers save $134 and 325 hours a year over their previous travel cost and travel time. These benefits are weighted in favor of the poor, who live in the peripheral areas and are well served by the single fare policy. The introduction of bus rapid transit systems has also been used to regulate private bus operators and formalize labor practices. By creating the conditions to ensure long-term profitability in the bus sector, municipalities are in a position to demand higher quality service, higher levels of investment in modern vehicles, and reasonable labor practices from private bus operators. In such situations public investment can create a stable, profitable environment for sustainable private investment in the transit sector. Transport can also constitute an important source of employment for slum dwellers in other ways, including road construction, bus operation, cycle rick-shaw operation, boda-boda operation, and truck driving. But pro-poor regulations and policies are important. The deregulated nature of bus and paratransit operations, for instance, means that bus operators are often exploited by bus owners, and bus owners are exploited by bus enterprises, or government officials (like the police). Working 12–16 hours a day with no benefits is typical for bus drivers. Given the need for public investments to subsidize the networked infrastructure that private

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operators need, governments have a legitimate right to expect decent wages and working conditions in the transit industry. A good way to both improve the economic situation of those involved in the urban transit industry in developing countries is to involve them in the creation and operation of bus rapid transit as owners and drivers. This creates a private but regulated system that captures the efficiencies of the market and the orderly benefits of regulation. The BRT systems of Curitiba Brazil and Bogota Columbia exemplify many of the best characteristics of such systems. Involvement by the public sector or development institutions in vehicle supply interventions should also be considered. Per dollar of public investment, the economic and poverty alleviation benefits of subsidizing bicycle ownership (or the provision of piped water) are likely to be far higher than subsidizing road infrastructure in slum areas. A project to modernize the Indian cycle rickshaw reduced the weight and improved the quality of the vehicles. Increasing the popularity of this mode directly improved the income of more than 100,000 cycle rickshaw operators by roughly 20 percent a year (Hook and Howe 2004). Buyers’ cooperatives of independent bicycle dealers are also showing promise in bringing down the cost and improving the quality of bicycles in Africa (Hook and Howe 2004). Ultimately, it is private investment in the vehicle sectors of very poor countries that will reduce local vehicle costs. The Economics of Contracting: Some Lessons to Consider III.1 Introduction III.2 Market Structure III.3 Uncertainty III.4 Risk Shifting III.5 Final Observations

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