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What Drives Infrastructure Spending in Cities of Developing

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DOI: 10.1080/00420980500150680

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Urban Studies, Vol. 42, No. 8, 1345– 1368, July 2005

What Drives Infrastructure Spending in Cities of

Developing Countries?

Ben C. Arimah
[Paper first received, June 2003; in final form, November 2004]

Summary. There exists a dearth of empirical studies on what determines infrastructure spending
in cities of developing countries. This in part can be attributed to the absence of quality data and the
tendency for researchers to gloss over variations in infrastructure expenditure in or across
developing world cities in the general belief that investment in infrastructure is generally low.
Using the United Nations Human Settlements Programme’s global urban indicators database,
this paper examines variations in infrastructure spending across cities in developing countries
with a view to identifying the factors that explain these differences. The empirical analysis
identifies substantial intercity variations in infrastructure spending both across and within the
regions of Africa, Asia, the Middle East, Latin America and the Caribbean, and the economies
in transition. Further analysis suggests that intercity variations in infrastructure spending are
accounted for by differences in the macroeconomic environment, urban growth rate, quality of
governance and financial capacity of municipal governments.

1. Introduction political and governance issues surrounding

how resources are mobilised and used. This
Finance is a major factor constraining the is somewhat surprising given that a significant
capacity of city governments in developing proportion of city governments’ expenditure
countries to provide adequate infrastructure. goes towards capital spending for providing
This can partly be attributed to low income local infrastructure designed to enhance the
levels and the poorly developed tax systems competitiveness, economic capacity and sus-
(Aryeetey-Attoh, 2003; Devas, 2003; Lohse, tainability of the city.
2003). While the issue of low investment in The paucity of such studies can in part be
urban infrastructure in developing countries ascribed to the absence of appropriate data at
is not entirely new, there is a dearth of the city level (Flood, 1997) and the tendency
empirical studies, particularly from a cross- for researchers to overlook or simply gloss
city perspective, on what determines public over variations in infrastructure spending
infrastructure spending in or across cities. across cities in developing countries. In par-
Devas (2003) observes that existing studies ticular, investment in infrastructure is gener-
on municipal finance tend to be highly techno- ally seen to be low and lags behind growth
cratic—focusing on the design of revenue in the cities’ economy and population, since
systems and intergovernmental fiscal relation- the relevant authorities are often short of
ships, with little attention being given to the funds and thus unable adequately to provide
Ben C. Arimah is in the Department of Geography and Geology, University of the West Indies, Mona, Kingston 7, Jamaica. Fax:
1 876 977 6029. E-mail: benedict.arimah@uwimona.edu.jm. The author would like to thank Abdullahi Abdulkadri, Steve
Onyeiwu and the anonymous referees for their constructive criticisms, comments and suggestions on earlier drafts of this paper.
They are, however, not responsible for any errors in the paper.
0042-0980 Print=1360-063X Online=05=081345 –24 # 2005 The Editors of Urban Studies
DOI: 10.1080=00420980500150680
1346 BEN C. ARIMAH
basic infrastructure (Randolph et al., 1996;
World Resources Institute, 1996; Nunan and
Satterthwaite, 2001; Arimah, 2003; Aryeetey-
Attoh, 2003). While this is often the case, it is
pertinent to note that marked variations do
exist in the extent to which infrastructure is
financed among developing world cities and
these differences are driven by several
factors that are not fully understood, since
very few attempts have been made to link
infrastructure spending with various determi-
nants at the city level.
With cities in developing countries being at
the forefront of socioeconomic transformation
(UN-Habitat and DFID, 2002), and given the
backlog and state of deficient infrastructure
characterising these cities, increasing the
level of investment in infrastructure should
be a major policy thrust. A snapshot of the
state of infrastructure in low-income cities
reveals that less than 50 per cent of house-
holds have water piped to their homes, of
which between one-third and a half operate
intermittently; less than one-third have
access to good quality sanitation; and
between one-third and two-thirds of solid
waste remains uncollected (World Resources
Institute, 1996; World Bank, 2002; UN-
Habitat, 2003). These problems are likely to
become more pronounced as the pace of
urbanisation increases. It is therefore necess-
ary for governments to ensure the adequate
provision and maintenance of infrastructure
in order to provide a self-sustaining urban
environment. One way by which this can be
achieved is through increased investment.
Indeed, the World Bank (1999, p. 132) notes
that “Cities need to invest in infrastructure if
they are to provide the basic services for econ-
omic growth”. This is mainly the case of
developing countries where the urban tran-
sition process has been phenomenal in the
past three decades. In particular, the high
rates of urban growth experienced in
Africa and Asia will require huge invest-
ments in infrastructure if cities in these
regions are to perform their various pro-
duction and service activities in a manner con-
sistent with the principles of sustainable
development.
This paper examines variations in infra-
structure spending across cities in developing
countries with a view to identifying the factors
that account for these differences. In so doing,
the study seeks to answer the following ques-
tions. What is the nature of infrastructure
spending and how does this vary between
cities in developing countries? How does the
macroeconomic environment affect infra-
structure spending in these cities? What is
the role of the quality of governance in deter-
mining investment in infrastructure at the city
level? To what extent does the state of
deficient infrastructure determine the level
of investment? How does the fiscal capacity
of city authorities influence infrastructure
spending? The answers to these questions
should improve our understanding of what
determines infrastructure spending in cities
of developing countries and offer insights
into the challenges that city governments
face in mobilising funds to provide basic
infrastructure and services.
The organisation of the rest of the paper is
as follows. The next section provides a discus-
sion on financing urban infrastructure in
developing countries. This is followed by a
description of the UN-Habitat’s Global
Urban Indicators Programme as this constitu-
tes the main database for the study. This
section also describes the nature of intercity
variations in infrastructure spending. The
fourth section presents the analytical frame-
work for exploring intercity variations
in infrastructure investment. The discussion
of the factors explaining intercity differences
in infrastructure spending is presented in
section 5. Last, section 6 summarises the con-
clusions and discusses some policy impli-
cations of the paper.
2. Financing Urban Infrastructure in
Developing Countries: An Overview
Providing infrastructure requires a one-time
financial source for initial capital investment
and a continuous flow of funds to cover the
cost of operation and maintenance (Fox
and Porca, 2001). In developing countries,
infrastructure is financed through public
 WHAT DRIVES INFRASTRUCTURE SPENDING?
expenditure, private-sector participation and
user fees (Azizi, 1995). Central governments
provide the bulk of infrastructure financing,
as 90 per cent of financial flows for infrastruc-
ture is channelled through government
agencies (World Bank, 1994). At the munici-
pal or local level, finance for infrastructure
comes from internally generated revenue
derived from a series of tax and non-tax
sources. Available evidence indicates that
local governments’ own-source revenue falls
below the expenditure required to provide
the most minimal level of infrastructure
(Bird, 1995; UNCHS, 1996; Bird and Vaillan-
court, 1998; Osei, 2002; Lohse, 2003). Conse-
quently, municipalities have to augment their
internally generated revenue with intergovern-
mental transfers or revenue sharing and, in few
cases, with borrowings from the capital
market. In many developing countries,
especially in Africa, capital markets are
poorly developed and access to these markets
is controlled by the central government.
The overreliance on central governments to
finance infrastructure in developing countries
has resulted in a number of inefficiencies.
For instance, governments’ investment over
the years has been grossly insufficient to
meet the infrastructure needs of the urban
population. This has been exacerbated by the
economic decline experienced since the mid
1980s. In the Philippines, for example,
public investment in infrastructure fell from
5 per cent of the GDP between 1979 and
1983 to less than 2 per cent during the rest
of the 1980s (World Bank, 1994). Similarly,
in Nigeria, Ogu (2000) notes that the funds
allocated to sewerage, drainage and refuse
services by state governments declined
eight-fold between the 1980s and early
1990s. Public investment in infrastructure
has also been characterised by the inability
to recover cost from service beneficiaries.
This is because user charges barely cover the
cost of service delivery, payment collection
systems are inefficient, rates of default are
high and service provision is characterised
by an elaborate system of subsidies
(Malpezzi, 1990; Choguill, 1996; Rizzo,
2002). All these have resulted in huge losses,
1347
severe rationing, inadequate maintenance
and backlog in the provision of infrastructure.
Since the late 1980s, the role of the private
sector in funding infrastructure has been on
the increase. The private sector accounts for
between 7 per cent and 15 per cent of infra-
structure investment in developing countries
(World Bank, 1994; Briscoe, 1999) and this
is expected to increase in the years ahead.
Apart from reducing the burden on public-
sector financing, private-sector participation
was meant to meet pent-up demand, as well
as ensure accountability, monitoring and
management in the provision of infrastructure
(World Bank, 1994). Indeed, the normative
view of private-sector participation is one
that is beneficial in that it increases pro-
ductivity, enhances political independence,
economic rationality, efficiency, dynamism
and innovation (Briscoe, 1999; Kayizzi-
Mugerwa, 2002; Post and Obirih-Opareh,
2003; Post et al., 2003).
There are various ways by which the private
sector finances urban infrastructure. The most
common is through the privatisation of
government-owned and managed utilities
and agencies. This involves a complete dives-
titure of ownership from the public to the
private sector (Gidman et al., 1995; Levy,
1996; Ta’i and Sood, 2000). The government
then ceases to be part of the service in ques-
tion, as the entity is sold off after an assess-
ment of its worth and prospects. This in turn
confers on the private sector full responsibility
for investment, operations and maintenance
among others. The private sector also provides
funding through various contractual and part-
nership agreements with the pubic sector.1
There are regional and sectoral variations in
the extent to which privatisation has taken
place in developing countries. There is a
greater proportion of private investment in
Latin America when compared with Asia
and Africa. Sectorally, private investment
has focused mainly in the areas of telecommu-
nication, electric power generation and
highway construction.
There are several equity issues associated
with transferring the responsibility for finan-
cing infrastructure from the public to the
1348 BEN C. ARIMAH
private sector. First, the ability of the private
sector to respond to the needs of low-income
households is limited given the profit-oriented
nature of the former. Without some form of tar-
getted subsidies, the poor will barely have
access to basic infrastructure. Secondly, finan-
cing certain kinds of infrastructure is a long-
term process when compared with other
sectors of the economy. Consequently, the
private sector may be unwilling to undertake
such risk, as the long gestation period may
adversely affect returns on investment. It is
partly for this reason that the public sector will
continue to be a major player in the provision
of infrastructure. Thirdly, the private sector
does not adequately cater for externalities
associated with infrastructures such as sewer-
age, dams and certain roads except when
government financing is involved (Fox, 1994).
Finally, user fees are increasingly becoming
an important source of financing infrastructure
in developing world cities. This relates to
the payment made only by beneficiaries for
the consumption of certain services, which
are provided on a self-financing basis. While
user fees can cover the full cost of providing
and operating infrastructure that are ‘private
goods’—water, telephone and roads—they
cannot be the only source of financing infra-
structure that are ‘pure public goods’ or have
significant externalities (Prakash, 1988; Fox,
1994). This implies that infrastructure such
as sewerage, solid waste disposal and mass
transit must be funded from other sources. In
order to serve as a self-sustaining means of
financing urban infrastructure, user charges
should be equal to the long-run marginal
cost of service delivery. Otherwise, the
service may have to be financed through taxa-
tion. Despite the importance of user fees,
many developing countries face profound
technical and institutional difficulties in asses-
sing, effecting and collecting payments.
3. Database and Intercity Variations in
Infrastructure Spending
3.1 The Global Urban Indicators Programme
The database for this study comes mainly
from the first phase of the UN-Habitat’s
(formerly UNCHS) Global Urban Indicators
Programme (1994 –96) that was launched in
1994. The main aim of the Urban Indicators
Programme (UIP) was to develop national
and local capacity in order to collect and use
policy-oriented indicators as part of a strategy
for the development of sustainable human
settlements (UNCHS, 1997). The first phase
of the programme obtained information on
an extensive set of 46 key indicators for 237
cities in 110 developed, developing and
formerly centrally planned countries. This
system of indicators was developed following
an extensive consultation process which
entailed an expert group meeting, a review
of existing literature and a testing process in
several countries. The indicators collected
cover the following modules: demographic
and economic, socioeconomic develop-
ment, infrastructure, transport, environmental
management, local government and housing.
Such rich array of indicators is particularly
useful for policy analysis at the city level
and international comparisons of the con-
dition of cities.
Data collection was undertaken by in-city
consultants who were given uniform instruc-
tions in workbooks that contained detailed
description and policy rationale for each indi-
cator. The consultants were expected to use
published data, expert focus groups,
impromptu surveys if necessary and other
estimation techniques (Flood, 1997, 2002;
Shi, 2000). The UIP covers a wide range of
city sizes. About 34 per cent of the sample
consists of cities with populations of less
than 300 000; 29 per cent are cities with
between 300 000 and 1 million inhabitants;
and 37 per cent with a population of more
than 1 million people. The base year for the
indicators is 1993. For developing countries,
the indicators were collected for 208 cities in
98 countries. Due to the absence of data on
infrastructure spending in several cities, this
study makes use of a sample of 113 cities.
These cities are listed in Table 1. The
sample comprises a diversity of cities drawn
from Africa, Asia, Latin America and the
Caribbean, the Middle East and economies
in transition.
 WHAT DRIVES INFRASTRUCTURE SPENDING? 1349

Table 1. Cities used in the study

Region Cities
Africa Accra, Addis Ababa, Antananarivo, Assiout, Banjul, Basse, Beira, Blantyre,
Brazzaville, Bujumbura, Bulawayo, Cairo, Conakry, Cotonou, Dar es
Salaam, Djibouti, Douala, Freetown, Farafenni, Gaborone, Gharbeya,
Harare, Kakamenga, Khartoum, Labe, Libreville, Lilongwe, Livingstone,
Luanda, Lusaka, Mombassa, Mzuzu, Nairobi, Nakuru, Nampula,
N’djamena, Niamey, Nouakchott, Nyeri, Onitsha, Porto Novo, Rabat,
Sao Tome, Tenth of Ramadan, Tunis, Zomba
Asia Bangalore, Bhiwandi, Cebu, Chengdu Chennai (Madras), Chittagong,
Colombo, Davao, Delhi, Dhaka, Foshan, Gulbarga, Hanoi, Hefei,
Hubli-Dharbad, Jakarta, Lahore, Lucknow, Mumbai (Bombay), Mysore,
Qingdao, Shanghai, Tumkur, Varanasi, Zhang
Latin America and the Asuncion, Bogotá, Brasilia, Cajamarca, Cienfuegos, Cochabamba, Curitiba,
Caribbean (LAC) Guayaquil, Kingston, La Paz, Lima, Quito, Recife, Rio de Janeiro, San
Miguel, San Salvador Santa Ana, Santiago, Santa Cruz de la Sierra
Middle East Amman, Sana’a
Transitional Almaty, Baku, Bucharest, Budapest, Chisinau, Koper, Kostroma, Ljubljana,
Maribor, Moscow, Nis, Nizhny Novgorod, Novgorod, Prague, Riga,
Ryazan, Sofia, Tallin, Warsaw, Yereven, Zagreb

A major criticism of the UIP is the overre-
presentation of cities from developing
countries, particularly from Africa. About
three-quarters of cities in the UIP are from
developing countries; and 40 per cent of
cities in the entire database are drawn from
Africa. Indeed, the UIP possibly represents
for the first time in any international survey
a situation in which Africa is oversampled
(Flood, 1997). The implication of this is that
the results of the UIP may be more indicative
of the urban concerns of developing countries.
The overrepresentation of cities in developing
countries can partly be attributed to the
limited participation of developed countries
in the UIP.2 Another criticism of the indi-
cators database is that it only provides a snap-
shot of current urban conditions and reports
little or nothing about the trends in these con-
ditions (May et al., 2000). This makes it diffi-
cult for the study at hand to investigate the
dynamic aspects of infrastructure spending.
In spite of these criticisms, Flood (1993,
1997) argues that the urban indicators have
several advantages. These relate to objectiv-
ity, impartiality and reliability. The indicators
are objective in the sense that they are measur-
able and impartial in that they have been
defined prior to the anticipation of a desired
outcome. The reliability of the indicators can
in part be established by the fact that previous
studies using the housing and urban indicators
database (Angel, 2000; Flood, 1997, 2002;
Arimah, 2000, 2003; Shi, 2000) have obtained
plausible and consistent results.
3.2 Measures of Infrastructure Spending
Two measures of infrastructure spending are
utilised in this paper. The first is infrastructure
expenditure per capita. This is defined by the
UIP as the ratio of total expenditures by all
levels of government on infrastructure servi-
ces during the current year (1993) to the urban
population. The indicator is designed to mea-
sure typical or normal expenditure on infra-
structure at the city level in any given year
by various levels of government (central,
state/provincial and local/municipal) includ-
ing parastatal agencies and private utilities
(UNCHS and World Bank, 1995; Angel,
2000). It covers the cost of providing new
infrastructure and operating and maintaining
existing services. The indicator consists of
three data components: capital expenditure
(construction costs); recurrent expenditure
1350 BEN C. ARIMAH
(operations, maintenance, etc.); and, capital
servicing (debt service and depreciation) on
physical infrastructure which includes urban
roads, railways, sewerage, drainage, water
supply, electricity and garbage collection,
but not social infrastructure such as education
and health.
The data used in generating this indicator
were obtained from the expenditure accounts
of municipal, state/provincial and central gov-
ernments, as well as those of major public
agencies. In cases where expenditure accounts
were not officially published, data collectors
had to sort through scores of files and unpub-
lished records to obtain these figures. For
some cities, data on infrastructure expenditure
were available for different time-periods and
thus had to be adjusted to 1993 values, using
extrapolation where necessary, or currency
tables (Flood, 1997). In obtaining this indi-
cator, unusually high capital expenditures
during the last year for which figures are avail-
able were not included in the estimate. Rather,
only 10 per cent of this investment was
included as recurrent expenditure based on
the assumption of a depreciation rate of 10
per cent per annum. This was done to avoid
a situation where a large capital investment
project budgeted for in 1993 would distort
the indicator (UNCHS and World Bank,
1995). Furthermore, only real out-of-pocket
costs and real transfers were counted as
expenditure. For instance, if debts owed to
central or state governments arising from
capital servicing are not actually paid, or
depreciation payments not actually transferred
to a sinking fund, they were not regarded as
expenditure.
Data collectors were also guided by the
notion that the provision of new infrastructure
is often targeted towards certain areas of the
city, thereby making it possible to identify
capital projects and obtain expenditure for
such infrastructure. Besides, in many cities,
despite the increased role of the private
sector, the provision of certain services still
falls within the domain of public utility
agencies. Consequently, obtaining measures
of expenditure for such services did not pose
major difficulties.
There are, however, several data collection
problems that may affect the accuracy of this
indicator. First, the inputs for generating this
indicator come from numerous data sources
often scattered between many government
agencies. Each aspect of infrastructure—
water, electricity, transport, etc.—is usually
handled by a different authority and thus
data collection is likely to require substantial
contacts which may not have been possible
if data collectors were not comprehensive in
their coverage (UNCHS, 2000a). Secondly,
the indicator does not take cognisance of
the different arrangements in the provision
of urban infrastructure or assignment of
expenditure responsibilities across countries,
especially those with a federal system.3 For
instance, a class of infrastructure may be
local in one country, but central in another,
provincial in yet another and delivered by an
enterprise in another. As aptly noted by the
UNCHS (2000a), there is the need to
develop a methodology to ensure comparabil-
ity across cities with differences in the assign-
ment of expenditure responsibilities. Thirdly,
the scope of infrastructure used in obtaining
this indicator may differ remarkably across
cities. Furthermore, governments in develop-
ing countries may not provide financial infor-
mation on infrastructure in comparable ways.
All these imply that the meaning and
interpretation of this indicator may vary
from one city to another. For these reasons,
and given that no such indicator had pre-
viously been obtained for cities in developing
countries, this indicator is used advisedly as a
general proxy for per capita spending on infra-
structure at the city level.
A second measure of infrastructure spend-
ing—local government capital expenditure—
is introduced because it avoids some of the
problems associated with the former. This is
defined as capital expenditure per person by
all local governments within the metropolitan
area, averaged over the past three years. A
three-year average is used because capital
investment may be spread over time in an
unequal manner. Data on capital expenditure
were obtained from the expenditure accounts
of municipal governments. Local government
 WHAT DRIVES INFRASTRUCTURE SPENDING?
capital expenditure is indicative of the degree
of responsiveness of municipal authorities to
the infrastructure needs of residents, indus-
tries and services (UNCHS, 2000a). A key
advantage of this measure is that it pertains
to expenditure made by the level of govern-
ment with direct jurisdiction over the city. In
using this indicator, we note the following
weaknesses. First, it relates to a wider range
of investment projects which include
schools, hospitals, housing, etc—all of
which fall outside the realm of basic infra-
structure. Secondly, the indicator excludes
the amount spent on operations and mainten-
ance. This can be sizeable if the role of city
governments pertains more to ensuring that
the stock of existing infrastructure is in good
working condition. Thirdly, the measure
does not include expenditure on urban ser-
vices that have been privatised—thereby
underestimating the value of this indicator in
cities where the private sector plays a key
role in delivering infrastructure.
3.3 Intercity Variations in Infrastructure
Spending
Intercity variations in infrastructure spending
are summarised in Table 2. The table clearly
shows low levels of infrastructure spending
for Africa and Asia. This is followed by the
Middle East and the economies in transition
where infrastructure expenditure per capita is
$70 and $82 respectively. The Latin America
and Caribbean (LAC) region has the highest
level of investment in infrastructure, which
averazges $113 per capita for infrastructure
expenditure, and $61 per capita for local gov-
ernment capital expenditure. Table 2 further
shows that infrastructure spending in African
cities is higher than those in Asia. At first,
this is a bit surprising, but can be explained
by the inclusion of North African cities such
as Tenth of Ramadan, Tunis and Rabat in the
African sample rather than that of the Middle
East. For instance, infrastructure expenditure
per capita for African cities would have been
$21.72—about $1 less than the Asian
average of $22.76 if these cities were included
in the Middle East sample. Variations in
1351
infrastructure spending across the regions
reflect differences in the level of development,
extent of urbanisation, urban development
policies and other factors that are not readily
apparent.
Within each region, there are remarkable
intercity differences in infrastructure spend-
ing. This is illustrated with the African
sample using infrastructure expenditure per
capita. As shown in Table 2, the only
African cities with high levels of investment
are Gaborone and Tenth of Ramadan with
$220 and $424 respectively.4 Infrastructure
spending in these cities reflects several
factors. For Gaborone, it indicates the level
of prosperity in Botswana. Over the years,
Botswana has been transformed from one of
the poorest countries in the world on the attain-
ment of independence in 1966, to a middle-
income country with a real GDP per capita of
$7800 in 2002 (CIA, 2002). This has been
due to diamond mining which accounts for
80 per cent of export earnings, coupled with
financial discipline and sound macroeconomic
management. Revenue accruing from dia-
monds has been heavily invested in the pro-
vision of infrastructure, particularly in the
capital city—Gaborone. With respect to
Tenth of Ramadan—a relatively unknown
city in Egypt, expenditure on infrastructure
mirrors the implementation of an urban devel-
opment policy of new cities. Tenth of Ramadan
exists as part of a system of new cities initiated
by the Egyptian authorities in the 1970s
designed to relieve population pressure on the
Nile valley, stop the encroachment on scarce
agricultural land and overcome industrial pol-
lution by relocating industrial activities to
new areas (Egypt State Information Service,
1996). Consequently, these cities were well
planned with adequate funding for the necess-
ary infrastructure provided by both the public
and private sectors.
The African cities with moderate levels of
infrastructure spending include Bujumbura,
Douala, Freetown, Harare, Nairobi, Tunis
and Zomba. Infrastructure expenditure per
capita within this category of cities varies
between $44 and $79. With the exception of
Zomba, virtually all cities in this group are
 Table 2. Variations in infrastructure spending, 1993 (US$) 1352

Local Cities with high Cities with moderate

government levels of levels of Cities with low levels
Infrastructure capital infrastructure infrastructure of infrastructure
expenditure expenditure expenditure per expenditure per expenditure per
Region per capita per persona capita capitab capitab
Africa 32.20 16.84 Gaborone, Tenth Bujumbura Douala, Addis Ababa, Beira,
of Ramadan Freetown, Harare, Brazzaville, Dar es
Nairobi, Tunis, Salaam, Farafenni,
Zomba Gharbeya,
Khartoum, Labe,
Libreville,
Lilongwe, Lusaka,
Nakuru, Niamey,
Porto Novo
Asia 22.76 7.13 Shanghai Bangalore, Cebu, Chittagong,
Chengdu, Gulbarga, Hanoi,
Colombo, Davao, Jakarta, Lahore,
Delhi, Dhaka, Lucknow, Mysore
Foshan, Mumbai,
BEN C. ARIMAH

Zhang
LAC 112.74 60.51 Brasilia, Bogotá, Curitiba, Guayaquil, Asuncion, Cajamarca,
Cienfuegos, Recife, San Cochabamba,
Rio de Janeiro, Miguel, San Kingston
Santiago Salvador Santa
Ana, La Paz, Lima,
Quito
Middle East 69.50 33.00 Amman Sana’a

Transitional 82.33 40.50 Budapest, Koper, Bucharest, Ljubljana, Almaty, Baku, Sofia,
Kostroma, Nis, Novgorod, Warsaw, Yerevan
Moscow, Ryazan, Tallin,
Nizhny, Prague Zagreb
a
The average values for local government capital expenditure per person are based on a smaller number of cities.
b
These categories do not include all the cities with moderate and low infrastructure expenditure, but a selection of such cities.
 WHAT DRIVES INFRASTRUCTURE SPENDING?
national capitals or major cities. Cities with
low levels of infrastructure spending can be
defined as those with a per capita expenditure
of less than $10. These include Addis Ababa,
Brazzaville, Dar es Salaam, Farafenni,
Gharbeya, Labe, Lusaka, Nakuru and Porto
Novo. This category covers a wide range of
cities as it comprises national capitals, as well
as large, medium and small size cities.
Indeed, over 54 per cent of cities in the
African sample spend less than $10 per capita
on infrastructure. For the Asian sample, the
corresponding proportion is 44 per cent. Such
low levels of infrastructure spending in part
account for the inadequacies and poor state of
infrastructure in African and Asian cities.
4. Analytical Framework and Model
Specification
The theoretical framework for this paper is an
adaptation of the four-sector general equili-
brium model developed by Randolph et al.
(1996), which perceives the economy as con-
sisting of urban households, urban producers,
rural households and the government. Given
that the purpose of the paper is to explore
the determinants of intercity variations in
infrastructure spending, we focus on the
government sector. Government is assumed
to have various policy instruments, which
include: expenditures on infrastructure (I),
training (T) and a consumption-oriented
public good (G); and tax rates on wages (tw),
domestic consumption (tx) and both residen-
tial and non-residential space (ts). The govern-
ment chooses a set of policy instruments,
subject to the restriction that total government
spending (I þ T þ G) less total endogenous
revenues from wage, consumption and prop-
erty taxes, and exogenous revenues from
other miscellaneous sources (M) and external
assistance (E) not exceed a given deficit
level (D). Thus, government is assumed to
Maximise V(I; T; G; tw ; ts ; tx )
þ C½Nu (tW wI
þ tx px x
þ ts psr s
r )
þ Nf ts psn s
n þ M þ D þ E  I  T  G
(1)
1353
where V is the government’s objective func-
tion; C is a Lagrange multiplier; M is miscella-
neous revenues from sources other than wage,
sales and property taxes; D represents the
current deficit; E is the level of external assist-
ance; while I
, x
, s
r , s
n are derived from the
household and producer choice problems. The
exogenous variables in the objective function
are defined as: px (domestic product price); w
(efficiency wage); psn (price of nonresidential
urban space); psr (price of residential urban
space); Nf (number of urban firms); and Nu
(number of urban households).
While several reduced-form equations can
be derived from the four-sector equilibrium
model, our interest lies in infrastructure
spending. The reduced-form equation for
infrastructure spending at the city level can
be expressed as
I ¼ I(M; S; D; DI; G; F)
where, M is the macroeconomic environment
of the country in which the city is located; S
is the status of the city; D represents the demo-
graphic component of the city; DI is the state
of deficient infrastructure; G stands for the
quality of governance; and F is the financial
capacity of city governments. Formally, the
equation can be written
INFRSPNi ¼f (MACROi ;CAPi ;DEMi ;
DEFi ;GOVERNi ;REVENUEi )
(2)
where, INFRSPNi denotes the two measures
of infrastructure spending in city i; MACROi
is a row vector indicative of the micro-
economic environment in city i; CAPi is a
dummy variable which indicates whether
city i is the national capital; DEMi is a row
vector that describes that city’s demographics;
DEFi is a measure of the state of deficient
infrastructure in city i; GOVERNi is a
measure of the quality of governance in the
country in which the city is located; and,
REVENUEi is a row vector of variables
indicative of the financial resources of city i.
Detailed definitions of these variables and
their summary statistics are presented in
Tables 3 and 4 respectively.5
1354 BEN C. ARIMAH

Table 3. Definition of variables used in the empirical analysis

Variable Definition Source

Dependent variables
Infrastructure Ratio of total expenditure by all levels of Urban Indicators
expenditure per governments on infrastructure services during the Database
capita current year (1993) and urban population (US$)
Local government Capital expenditure per person, by all local Urban Indicators
capital expenditure governments in the metropolitan area, averaged Database
per person over the past 3 years (US$)
Independent variables
GDP per capita Real gross domestic product per capita of country in UNDP (1996)
which the city is located (PPP$), 1993
Debt burden Equals 1, if city is located in a heavily indebted
countrya
Debt service ratio Total debt service of country (in which city is UNDP (2002)
located) as a percentage of GDP, 1990
Foreign direct Net inflow of direct foreign investment to country in World Bank
investment which city is located as percentage of GDP, 1990 (2004)
Capital city Equals 1, if city is national capitala
City population Population of the urban agglomeration Urban Indicators
Database
Urban growth Annual rate of population growth of the city Urban Indicators
(percentage) Database
Deficient Percentage of households without water connection Urban Indicators
infrastructure Database
Control of corruption Aggregate measure of the control of corruption in Kaufmann et al.
the country in which city is located, 1997/98 (2002)
Revenue per capita Total revenue per person accruing to the Urban Indicators
metropolitan area from all sources (US$) Database
Revenue from local Percentage of the metropolitan area’s revenue Urban Indicators
taxes derived from local taxes Database
Revenue from user Percentage of the metropolitan area’s revenue Urban Indicators
fees derived user fees Database
Revenue from capital Percentage of the metropolitan area’s revenue Urban Indicators
market borrowed from the capital market Database
a
Otherwise equals zero.

4.1 Specification of Explanatory Variables income levels. An increase in GDP per

Six groups of variables are used in exploring
intercity variations in infrastructure spending.
These variables stem from the implications
of the four-sector general equilibrium model
as demonstrated by Randolph et al. (1996,
p. 4), previous research and intuitive percep-
tion concerning factors that affect infra-
structure spending.
The first set of variables is the macro-
economic environment. This is operationa-
lised by real GDP per capita, external debt
burden of the country in which the city is
located and the inflow of foreign direct invest-
ment.6 The GDP per capita is indicative of
capita raises taxable income, which in turn
increases the revenue accruing to government.
Increases in GDP per capita can also lead to
increased spending on infrastructure through
the wealth effect. As the residents become
more affluent, demand for infrastructure also
increases, which correspondingly elicits a
supply response in the form of higher spend-
ing on infrastructure. The external debt
burden of developing countries can place
severe budgetary constraints on their ability
to finance urban infrastructure. Two variables
are used to examine the effects of the external
debt burden on infrastructure spending. The
first is a dummy variable indicative of cities
 Table 4. Summary statistics for variables used in the empirical analysis

Africa Asia LAC Transitional Entire sample

Standard Standard Standard Standard Standard
Variable Mean deviation Mean deviation Mean deviation Mean deviation Mean deviation
Infrastructure 32.20 69.87 22.76 21.80 112.74 160.96 82.33 111.13 53.63 98.26
expenditure
per capita
Local 16.84 34.85 7.13 7.23 60.15 73.90 40.50 44.39 28.17 48.16
government
capital
expenditure
per capita
GDP per capita 1 712 1 231 1 795 685 4 013 1 736 4 998 2 173 2 751 1 985
Debt burden 0.74 0.44 0.04 0.20 0.16 0.37 0.00 0.00 0.35 0.48
Debt service 6.59 3.75 3.33 2.00 5.84 3.97 6.54 4.54 5.79 3.92
ratio
Foreign direct 1.07 1.69 0.58 0.65 0.78 0.84 0.46 0.58 0.77 1.28
investment
Capital city 0.57 0.50 0.20 0.41 0.47 0.51 0.62 0.50 0.49 0.50
City population 889 673 2 131 500 4 008 320 4 041 992 1 864 315 2 008 548 1 320 810 1 800 341 1 827 947 2 834 506
Urban growth 4.75 1.62 2.43 1.58 2.41 1.49 0.13 1.32 3.01 2.35
Deficient 53.57 27.41 35.32 27.69 22.37 18.50 3.71 3.58 34.75 29.95
infrastructure
Control of 20.48 20.42 20.33 0.14 20.23 0.45 20.18 0.70 20.35 0.46
WHAT DRIVES INFRASTRUCTURE SPENDING?

corruption
Revenue per 24.19 43.45 96.80 192.68 180.05 310.17 243.52 186.57 111.39 196.84
capita
Revenue from 36.88 27.12 52.20 20.14 33.68 10.20 57.00 24.71 43.08 25.47
local taxes
Revenue from 12.17 12.06 10.84 8.81 12.59 13.99 15.05 21.14 13.66 13.94
user fees
Revenue from 4.92 11.70 5.65 6.45 6.99 7.66 1.27 2.55 4.70 8.84
capital market
1355
1356 BEN C. ARIMAH
located in heavily indebted countries. Follow-
ing the IMF and World Bank’s Heavily
Indebted Poor Countries (HIPC) Initiative, a
country is heavily indebted if the external
debt burden of that country after traditional
debt relief mechanism is above 150 per cent
of present value of debt to exports (IMF and
World Bank, 2001). The second variable is
the debt service ratio, which is the amount a
country spends in servicing its debt as a per-
centage of GDP. Both debt variables are
hypothesised to be negatively associated
with infrastructure spending. The last variable
in this category is foreign direct investment
(FDI). This is measured by the net inflow of
FDI as a percentage of the country’s GDP.
FDI represents transfer of capital from devel-
oped to developing countries and has been
shown to contribute to urban economic
growth, since cities are the major recipients
(Lin and Song, 2002). It is therefore hypo-
thesised that FDI will have a positive effect
on infrastructure spending at the city level.7
Being the national capital can determine the
extent of investment in infrastructure. Apart
from generating more revenue,8 capital cities
in developing countries dominate the system
of settlements and perform major administra-
tive, commercial, diplomatic, financial and
industrial functions. In order to perform these
functions efficiently, the infrastructure of
capital cities needs to be adequately financed.
The demographic component of the city is
captured by population and urban growth,
which respectively measure the size of the
city and pace at which the urban population
is increasing. Basic intuition suggests that
the infrastructure requirements and hence
spending of a large/fast-growing city and a
small/slow-growing city cannot be identical.
Furthermore, Randolph et al. (1996) note
that, if agglomeration economies increase
returns on infrastructure spending, higher
levels of urbanisation will imply higher
levels of service provision. Being demand-
related, both demographic variables are
posited to be associated with higher levels of
infrastructure spending.
Ideally, the state of deficient infrastructure
should in part determine the level of
infrastructure spending. If the current stock
of infrastructure is inadequate, city authorities
may want to rectify this by increasing expen-
diture on infrastructure. To determine if the
inadequate state of infrastructure is taken
into consideration when financing infrastruc-
ture, a proxy measure for deficient infrastruc-
ture—the percentage of households without
water connection—is used. This variable is
hypothesised to be positively related to infra-
structure spending.
The quality of governance can affect public
expenditure on infrastructure in different
ways. Obtaining suitable and comparable
measures of governance for a diversity of
113 cities drawn from several regions poses
a major challenge. Insights are, however,
offered by the work of Kaufmann et al.
(1999a, 1999b, 2002) who, in seeking to
obtain empirical measures of governance for
over 160 countries, define 6 clusters of gov-
ernance: voice and accountability; political
stability; government effectiveness; regulat-
ory quality; rule of law; and control of corrup-
tion. For each cluster, a large number of
indicators obtained from various sources
were combined into aggregate measures of
governance using an observable components
model, thereby providing estimates for each
of the 6 governance clusters. The units of
governance range from 22.5 to þ2.5, with
higher values corresponding to better out-
comes.9 An advantage of this approach is
that it provides more precise measures of gov-
ernance than single indicators (Globerman
and Shapiro, 2002). One major disadvantage
is that these measures are highly correlated,
thereby making it difficult to use more than
one of them in a single equation. Question
marks can also be raised when inherently
qualitative constructs of governance are quan-
tified as described above.
This paper uses the control of corruption
cluster to assess the impact of the quality of
governance on infrastructure spending. This
is because corruption has long been known
to be widespread in the infrastructure sector
(Wade, 1982; Tanzi and Davoodi, 1997;
Davis, 2004). Previous studies (Tanzi, 1998;
Tanzi and Davoodi, 1997; Wei, 1999) have
 WHAT DRIVES INFRASTRUCTURE SPENDING?
described how corruption can affect infra-
structure spending. First, it can increase the
expenditure on new infrastructure since such
capital projects can be easily manipulated by
politicians and high-level officials to obtain
bribes or ‘commissions’. Secondly, corruption
can divert expenditure away from the oper-
ation and maintenance of existing infra-
structure. This is brought about by higher
spending on new infrastructure, which
reduces the budgetary allocation for operation
and maintenance.10 Finally, in extreme cases,
the maintenance of existing infrastructure
may deliberately be neglected so that such
infrastructure rapidly falls into disrepair to
the point where it has to be rebuilt, thereby
providing the opportunity for highly placed
officials to extract kickbacks from the enter-
prise that will rebuild the project.11 We
hypothesise that the control of corruption
will be associated with an increase in infra-
structure spending.
The final set of variables is the financial
capacity of the municipal government(s)
responsible for administering the city. The
ability of city authorities to finance infrastruc-
ture depends in part on their internally gener-
ated revenue. Variables used in this regard are
local revenue per capita and percentage of the
metropolitan area’s revenue derived from
local taxes, user fees and borrowings from
the capital market. The higher these sources
of revenue, the greater will be the ability of
city authorities to finance infrastructure.
5. Factors Explaining Intercity Variations
in Infrastructure Spending
Prior to estimating the OLS regression
models, the correlation matrix showing the
bivariate relationships between all variables
is presented in Table 5. The correlation coeffi-
cients suggest that the results of the
regressions models are unlikely to be affected
by multicollinearity, as there are no pair-wise
correlations in excess of 0.80 between the
independent variables—a situation which,
according to Hauser (1978), indicates the pre-
sence of multicollinearity. The results of the
OLS models used in explaining intercity
1357
variations in infrastructure expenditure per
capita and local government capital expendi-
ture per person are shown in Tables 6 and 7
respectively. An inspection of both tables
shows that the models with infrastructure
expenditure per capita as the dependent vari-
able perform better, as indicated by the
number of significant variables.12
In estimating the regression models, the fol-
lowing computational strategy was adopted.
For each measure of infrastructure spending,
preliminary regression models with all the
13 independent variables were estimated for
the entire sample and different regions. The
initial results produced several insignificant
variables with very low t-values. In order to
obtain models of the best fit, variables with
extremely low t-values and some with the
‘wrong’ signs were discarded in subsequent
runs. To allow for comparison with the final
models, the preliminary regression models
with all the explanatory variables are pre-
sented in the Appendix (Tables A1 and A2).
The functional form used is the double-log
specification in which we take the natural log-
arithm of the dependent variables and all the
independent variables except those measured
on a binary scale and in percentages. The
advantage of the double-log specification is
that it ensures the efficiency of the parameter
estimates by reducing the occurrence of
heteroscedasticity. It also enables us to inter-
pret the estimated coefficients as elasticity
measures.
5.1 Macroeconomic Environment
The macroeconomic environment as indicated
by real GDP per capita and debt service ratio
is particularly important in explaining inter-
city differences in infrastructure expenditure
per capita. Income has a beneficial effect as
shown by the positive and significant coeffi-
cient of GDP per capita. Specifically, the
model for the entire sample in Table 6
shows that a 1 per cent increase in per capita
GDP will bring about an increase of 0.35 per
cent in infrastructure expenditure per capita.
This conforms to a priori expectation in that
it suggests that as income increases, so will
 1358

Table 5. Correlation coefficients of variables used in the empirical analysis

LN(infrastructure expenditure 1
per capita)
LN(local government capital 0.595 1
expenditure per person)
LN(GDP per capita) 0.530 0.622 1
Debt burden 20.376 20.413 20.640 1
Debt service ratio 20.052 20.038 0.229 0.135 1
Foreign direct investment 20.105 20.224 0.101 20.020 0.069 1
Capital city 0.057 0.015 0.043 0.112 0.165 0.201 1
LN(city population) 0.155 0.295 0.226 20.407 20.221 20.055 0.307 1
Urban growth 20.297 20.318 20.532 0.563 0.092 20.216 20.01 20.307 1
Deficient infrastructure 20.462 20.567 20.706 0.659 20.063 20.111 20.024 20.313 0.606 1
BEN C. ARIMAH

Control of corruption 0.423 0.310 0.385 20.298 0.186 0.001 0.010 20.033 20.271 20.341 1
LN(revenue per capita) 0.573 0.861 0.680 20.573 20.064 20.061 0.076 0.303 20.494 20.591 0.302 1
Revenue from local taxes 0.112 20.108 0.157 20.135 0.010 0.034 0.086 0.081 20.160 20.071 0.071 0.091 1
Revenue from user fees 0.084 20.255 20.069 0.024 0.015 0.161 20.169 20.126 20.026 20.071 20.053 20.050 20.111 1
Revenue from capital market 0.168 0.187 20.106 20.027 20.038 20.079 20.021 20.108 20.035 0.009 0.164 0.089 20.228 20.069 1

Note: LN ¼ natural logarithm.

 Table 6. Regression models explaining infrastructure expenditure per capita

Region
Africa Asia LAC Transitional Entire sample
Variable (n ¼ 46) (n ¼ 25) (n ¼ 19) (n ¼ 21) (n ¼ 113)
LN(GDP per capita) 0.332 (1.96)

— 20.224 (0.73) — 0.349 (2.70)

Debt burden — 20.789 (2.53)
— — —
Debt service ratio 20.276 (1.91)

20.257 (1.28) 0.146 (0.71) 0.145 (0.84) 20.174 (2.20)


Foreign direct investment — 0.556 (1.97)

— — —
Capital city 0.089 (0.57) 0.362 (1.74)

— — —
LN(city population) — 0.187 (1.19) 0.175 (0.85) 0.255 (1.36)


—
Urban growth 0.166 (1.17) 20.163 (0.95) 0.149 (0.80) 0.329 (1.81)

0.176 (1.87)


Deficient infrastructure — — 20.423 (1.88)

20.511 (2.51)

20.068 (0.62)
Control of corruption 0.320 (2.16)

0.489 (2.44)
0.258 (1.39)


— 0.239 (3.03)

LN(revenue per capita) 0.066 (0.41) 0.334 (1.75)
0.803 (3.02)
0.770 (4.71)
0.286 (2.71)

Revenue from local taxes 0.064 (0.42) 0.229 (1.23) — 0.452 (2.44)

0.098 (1.31)



Revenue from user fees 0.052 (0.36) 0.280 (1.50)
0.435 (2.07)

0.644 (2.93)
0.161 (2.21)


Revenue from capital market 0.247 (1.60)


0.161 (0.81) — 0.186 (1.16) 0.180 (2.34)

Constant 22.672 (0.99) 20.046 (0.03) 4.687 (0.54) 27.610 (2.02)

23.191 (1.59)



F-ratio 2.522 4.762 4.729 4.362 10.951
WHAT DRIVES INFRASTRUCTURE SPENDING?

R2 0.387 0.773 0.791 0.744 0.489

Adjusted R2 0.223 0.611 0.624 0.574 0.444
Notes: Dependent variable ¼ LN(infrastructure expenditure per capita).
significant at the 0.01 level and above (one-tail test);

significant at the 0.05 level (one-tail test);


significant at
the 0.1 level (one-tail test). Absolute t-values are in parentheses. — ¼ not included in the model. LN ¼ natural logarithm.
1359
 1360

Table 7. Regression models explaining local government capital expenditure per person

Region
Africa Asia LAC Transitional Entire sample
Variable (n ¼ 32) (n ¼ 18) (n ¼ 18) (n ¼ 12) (n ¼ 81)
LN(GDP per capita) 20.143 (0.93) 1.462 (3.58)
0.887 (3.50)
0.493 (0.36) —
Debt service ratio 20.055 (0.51) 23.226 (2.90)
20.482 (3.40)
20.005 (0.01) 20.040 (0.68)
Capital city — — — 0.161 (0.35) —
Foreign direct investment — 1.754 (1.77)

— —
LN(city population) 0.226 (1.49)


— 0.140 (0.77) 0.499 (0.82) 0.091 (1.43)



Urban growth — 0.436 (2.43)

0.298 (1.88)

0.668 (1.67)


0.159 (2.24)


Deficient infrastructure 20.088 (0.55) 20.285 (1.48)


0.464 (2.05)

20.442 (1.36)


20.126 (1.50)



Control of corruption 0.228 (2.06)

0.499 (2.40)

20.193 (1.13) 20.259 (0.38) 0.075 (1.19)
LN(revenue per capita) 0.798 (6.05)
1.445 (6.88)
— 0.215 (0.23) 0.798 (11.15)

BEN C. ARIMAH

Revenue from local taxes — 0.249 (1.26) — 20.663 (1.14) —

Revenue from capital market — 0.307 (1.69)


0.741 (4.60)
0.530 (1.95)

0.090 (1.58)



Constant 21.143 (0.27) 231.368 (3.05)
239.563 (4.03)
222.054 (0.47) 22.442 (1.80)


F-ratio 14.633 7.155 6.590 2.906 36.200
R2 0.778 0.889 0.822 0.926 0.776
Adjusted R2 0.725 0.765 0.697 0.609 0.755
Notes: Dependent variable ¼ LN(infrastructure expenditure per capita).
significant at the 0.01 level and above (one-tail test);

significant at the 0.05 level (one-tail test);


significant at
the 0.1 level (one-tail test). Absolute t-values are in parentheses. — ¼ not included in the model. LN ¼ natural logarithm.
 WHAT DRIVES INFRASTRUCTURE SPENDING?
infrastructure spending albeit less proportion-
ately. Similar findings have been obtained by
Randolph et al. (1996) and more recently by
Nunan and Satterthwaite (2001) in their com-
parative analysis of cities in developing
countries, which show that the extent and
quality of infrastructure are in part determined
by wealth.
The indebtedness of developing countries
has a pernicious effect on their ability to
finance infrastructure at the city level. Specifi-
cally, the coefficient for the debt service ratio
implies that a unit increase in external debt
service will occasion a reduction in expendi-
ture on urban infrastructure. The debt service
ratio has the greatest effect on infrastructure
expenditure per capita in African cities,
while its impact is most felt in Asian and
LAC cities in the case of local government
capita expenditure. All these corroborate the
observation that the high levels of external
debt servicing by developing countries have
severely limited the resources for investment
in productive areas required to spur economic
growth (UNDP, 1999). Elsewhere, Devas
(2003) argues that heavy debt obligations in
future years may pre-empt the financial
resources that could be used to address the
infrastructure needs of the poor. The fore-
going provides a clear indication of the chal-
lenges posed by the external debt burden for
the development and sustainability of cities
in developing countries
5.2 Demographic Component
Local government capital expenditure
increases with city size. Table 7 shows that a
1 per cent increase in the city’s population is
associated with an increase of 0.09 per cent
in infrastructure spending. This implies that
the financial resources for the infrastructure
needs of large cities are better met than
those of small and medium-sized cities. This
finding is indicative of the fact that many
countries direct their resources to larger
urban centres (WRI, 1996). It therefore
seems that having a large population confers
certain advantages on the city. In this
respect, Razin and Obirih-Opareh (2000)
1361
note that large cities are usually the most fis-
cally sound, while small municipalities lack
economies of scale and are financially weak.
Such uneven access to local public resources
due to differences in size or urbanisation
gives rise to the problem of horizontal imbal-
ance (UNCHS, 1996), which in part contrib-
utes to widening disparities between
municipalities.
Urban growth has a positive impact on
infrastructure spending. Other things being
equal, a unit increase in urban population
growth rate is associated with increases in
both infrastructure expenditure and local gov-
ernment capital expenditure. These findings
underscore the need for developing countries
adequately to finance the infrastructure
needs of their rapidly growing urban centres.
Too often, there is a divergence between the
infrastructure requirements of fast-growing
cities and the ability of city authorities to
provide the requisite financial resources.
This in turn has led to problems of livability
which include the proliferation of slum and
squatter settlements, breakdown of waste col-
lection and disposal arrangements, air and
water pollution, inadequate water and electri-
city supply and traffic congestion. Given the
increased demand for services created by the
rapid growth of cities, a major challenge
facing developing countries is how to
mobilise the much-needed financial resources
for investment in urban infrastructure.
5.3 Deficient Infrastructure
The regression coefficient for the entire
sample model in Table 7 suggests that local
government capital expenditure per person
decreases with a unit increase in the pro-
portion of households without water connec-
tion. Although anomalous, this finding
reflects the true situation in many developing
countries, where cities with deficient or
inadequate infrastructure services do not
have the financial resources to improve
them. With the exception of the LAC region,
the negative association between deficient
infrastructure and local government capital
expenditure is replicated for cities in the
1362 BEN C. ARIMAH
three other regions. This situation has serious
implications for achieving sustainable urban
development, given that deficient infrastruc-
ture poses major threats to health, urban pro-
ductivity and environmental quality with the
poor being most affected.
5.4 Quality of Governance—Control of
Corruption
Table 6 suggests that infrastructure expendi-
ture per capita is enhanced by the control of
corruption. In other words, less corrupt
countries spend more in financing and main-
taining infrastructure in their respective
cities. This finding agrees with results
obtained by Tanzi and Davoodi (1997) who
show that corruption reduces the expenditure
available for operation and maintenance,
thereby resulting in the deterioration of infra-
structure. A closer inspection of the regression
models for the regional samples in Table 6
shows that control of corruption has the great-
est impact in the African and Asian samples.
An inference that can be drawn is that
efforts at fighting corruption are likely to
have the most beneficial effects on infrastruc-
ture spending in African and Asian cities.
Such thinking is not out of place, especially
when viewed in light of the evidence provided
by Transparency International (2003) to the
effect that African and Asian countries have
the highest levels of corruption globally.
5.5 Financial Capacity of City Governments
Municipal government revenue has a signifi-
cant and positive impact on both measures
of infrastructure spending. Controlling for
other variables, a 1 per cent increase in local
revenue per capita will occasion increases of
0.29 per cent and 0.80 per cent in infrastruc-
ture expenditure per capita and local govern-
ment capital expenditure respectively. Local
government revenue, which is indicative of
the income that municipalities are able to
raise from their residents, businesses, indus-
tries and higher levels of government, deter-
mines the level of effectiveness of city
governments (UNCHS, 2000b). The ben-
eficial impact of municipal revenue is an
indication that, if city governments were
able to mobilise sufficient revenue, they
would respond not only to their local infra-
structure needs, but to other responsibilities
assigned to them. This can be enhanced by a
greater degree of fiscal autonomy than is cur-
rently the case.
Equally important is the source of revenue.
For instance, an increase in the proportion of
revenue derived from local taxes significantly
increases infrastructure expenditure per
capita. Given that property tax is the most
widespread form of local taxation (UNCHS,
1996; Devas, 2003), this finding makes a
case for exploiting its potential as a means
of expanding the revenue base of city govern-
ments. In developing countries, property tax
generates very little revenue, as it accounts
for just 1.3 per cent of total public-sector tax
revenues and less than 20 per cent of munici-
pal government revenue (Dillinger, 1992).
This state of affairs can be attributed to: the
poor administration and low coverage of prop-
erty tax which precludes a large proportion of
properties; the deliberate imposition of low
tax rates on properties by central govern-
ments; and the highly visible nature of prop-
erty tax, which makes it politically sensitive.
Holding other factors constant, a unit
increase in the proportion of revenue derived
from user fees is associated with an increase
in infrastructure expenditure per capita. User
fees can be a major source of financing
certain local infrastructure since they offer a
number of advantages. First, they provide
the financial sustainability required for ade-
quate maintenance of infrastructure (Fox,
1994). Generating funds for regular mainten-
ance is crucial in developing countries, as
the maintenance of existing infrastructure is
highly inadequate or non-existent. Secondly,
user charges
ration receipt of services to those users who
place the greatest value on them, provide a
market test determining the level of infra-
structure to deliver, and achieve equity in
the sense that those who receive the ser-
vices pay for them (Fox and Porca, 2001,
p. 122).
 WHAT DRIVES INFRASTRUCTURE SPENDING?
Thirdly, user charges help to eliminate the
problem of waste.
Access to capital markets is the last signifi-
cant revenue-related variable. The coefficients
reveal that an increase in the proportion of the
revenue obtained from the capital market will
occasion increases in both infrastructure
expenditure and local governmental capital
expenditure. This implies that municipalities
with access to capital markets are better
placed to finance their infrastructure require-
ments. This concurs with the observation
that borrowing provides municipalities with
additional resources for capital expenditure
(Devas, 2003). While it is understandable
that central governments may restrict local
governments’ access to the capital market
even when real interest rates are negative in
order to prevent local bankruptcy due to inju-
dicious borrowing (UNCHS, 1996; Razin
and Obirih-Operah, 2000), exceptions can be
made for the larger, urban-based municipali-
ties based on some measure of credit worthi-
ness. With the development of capital
markets in Asia and Latin America, and the
recent issuance of municipal bonds by
the city of Johannesburg in South Africa,13
the scope for municipal borrowing in develop-
ing countries is set to increase. Central gov-
ernments will therefore need to strengthen
the administrative, institutional and technical
capacity of city governments and relax some
of the conditions that limit their access to
capital markets.
6. Concluding Remarks
In developing countries, there exists a paucity
of empirical studies on what determines
public infrastructure spending at the city
level. This in part can be attributed to the
absence of quality data and the fact that
researchers tend to overlook variations in
infrastructure spending in or across cities in
developing countries in the general assump-
tion that investment in infrastructure is low.
Using the UN-Habitat’s Global Urban Indi-
cators database, this paper examines vari-
ations in infrastructure spending across cities
in developing countries with a view to
1363
determine what factors explain these differ-
ences. The general pattern of intercity vari-
ations for different regions revealed that
investment in infrastructure is low in Africa
and Asia, moderate in the Middle East and
in economies in transition, and comparatively
high in the LAC region. Distinct patterns of
intercity variations also exist within each of
these regions. Further analysis indicated that
variations in infrastructure spending across
cities are accounted for by differences in: the
macroeconomic environment; urban growth
rate; quality of governance; and the financial
capacity of city governments.
A crucial question that arises at this junc-
ture is: how can some of the findings of this
study inform policy? This paper has shown
that improving the quality of governance, par-
ticularly by means of the control of corrup-
tion, will lead to an increase in infrastructure
spending. This finding is too important to be
ignored by policy-makers in developing
countries. The policy imperative here is for
governments to adopt the norms of good gov-
ernance. In this respect, the ‘global campaign
for good urban governance’ launched by
UN-Habitat in 1999 holds good promise for
developing countries. The campaign is an
enabling tool
designed to promoted accountable and
transparent urban governance which
responds to and benefits all sectors of
society, particularly the urban poor, and
which strives to eradicate all forms of
exclusion (UNCHS, 2000b, p. 198).
While the campaign on good urban govern-
ance offers opportunities to developing
countries in general, it is likely to have its
greatest effect in achieving sustainable urban
development in Africa and Asia. This notion
is in line with the results obtained in this
paper which show that the effect of the
quality of governance on investment in infra-
structure is most pronounced in African and
Asian cities.
Findings from this study have also shown
that, given adequate financial resources,
municipal governments can play a more effec-
tive role in financing local infrastructure.
1364 BEN C. ARIMAH
Specifically, our results clearly indicate that
an increase in local government revenue and
the proportion of revenue derived from local
taxes, user fees and the capital market will
increase infrastructure spending. All these
imply that, with greater financial capacity,
municipalities can serve as agents of socio-
economic and physical transformation at the
city level. Although decentralisation policies
of various forms are being implemented in
most developing countries, strong centralist
attitudes still exist as many municipalities
are heavily controlled. While the responsibil-
ities of city governments have increased fol-
lowing reforms in recent years, many of
them do not have access to the requisite
sources of revenue. This of course creates a
mismatch between responsibilities and finan-
cial resources. What is therefore required is
the political will on the part of central govern-
ments to strengthen the financial capacity of
municipal governments. This in turn will
enable municipalities to enlarge their tax-
base, improve revenue collection performance
and even identify new sources of revenue.
Notes
1. This includes contracting, franchise, conces-
sions and open competition. Cointreau-
Levine (1994) and Batley (1996) provide
detailed descriptions of the different forms
of partnership agreements.
2. Flood (1997) identified several reasons for
the limited participation of developed
countries in the UIP. First, developed
countries were unwilling to commit their
own resources for an internal indicators col-
lection, given that they received little or no
support from the UN system for such a
programme. Secondly, there was the percep-
tion among developed countries that the UIP
was useful for only developing countries.
Finally, the UIP was seen as the ultimate
‘top– down’ programme which sought to
impose a single set of indicators for all
cities in the world, contrary to the spirit of
local indicators development.
3. The author is grateful to one of the anon-
ymous reviewers for pointing this out.
4. Gaborone also has the highest level of local
government capital expenditure per person
($181) among African cities.
5. There were a few variables missing for
several cities. These were replaced by the
mean values for the region in which the
city in question is located.
6. It is assumed that these variables which are
measured at the national level are also appli-
cable at the city level. This is in line with the
belief that the fortunes of cities are closely
linked to those of the countries in which
they are located.
7. We note that there may be a two-way causa-
tion between FDI and infrastructure spending.
This is because governments may invest more
in infrastructure in order to attract FDI. The
existence of a two-way causality between
the two variables may generate endogeneity
problems that may lead to a bias in our
regression results. However, it has not been
possible to test for the two-way causality
between both variables due to the nature of
our data, which is cross-sectional rather than
pooled panel data.
8. Exceptions do exist when the administrative
capital is different from the commercial
capital. Examples include: Abuja and Lagos
in Nigeria; Brasilia and Rio de Janeiro in
Brazil; and Pretoria and Johannesburg in
South Africa.
9. Details of the method of estimating
measures of the various components of
governance are presented in Kaufmann
et al. (1999a, 1999b). The six measures of
governance can be found at http://www.
worldbank.org/wbi/governance/datasets.htm#
dataset.
10. Tanzi (1998) notes that expenditure for oper-
ation and maintenance of existing infrastruc-
ture is not easily amenable to corrupt
practices as in the case of new infrastructure
or capital projects.
11. While the variable control of corruption per-
tains to the national level, we implicitly
assume that it is also applicable to the city,
given the absence of any well-defined
measure of corruption or its control at the
city level.
12. In addition, more cities have information on
infrastructure expenditure per capita than on
local government capital expenditure per
person.
13. In March 2004, Johannesburg became the
first African city to issue municipal bonds.
Proceeds from the bonds will go towards
funding capital expenditure and refinancing
the city’s debts.
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Appendix
Table A1. Regression models explaining infrastructure expenditure per capita (full specification)

Africa Asia LAC Transitional Entire sample

Variable (n ¼ 46) (n ¼ 25) (n ¼ 19) (n ¼ 21) (n ¼ 113)
LN(GDP per capita) 0.443 (1.93)

20.669 (1.05) 0.110 (0.16) 20.045 (0.10) 0.440 (3.22)

Debt burden 20.013 (0.06) 20.154 (1.74)

20.171 (0.21) — 0.174 (1.52)



Debt service ratio 20.325 (2.08)

20.137 (0.34) 0.913 (1.02) 0.293 (1.20) 20.207 (2.47)

Foreign direct investment 20.231 (1.58)


1.189 (1.30) 21.142 (1.36)


20.134 (0.51) 20.125 (1.60)



Capital city 0.228 (1.17) 0.573 (1.86)

20.046 (0.12) 20.005 (0.02) 0.032 (0.40)
LN(city population) 20.226 (1.07) 0.126 (0.68) 0.282 (0.50) 0.212 (0.85) 0.038 (0.43)
Urban growth 0.071 (0.46) 20.136 (0.41) 0.067 (0.23) 0.310 (1.19) 0.123 (1.26)
Deficient infrastructure 0.022 (012) 20.079 (0.20) 20.118 (0.18) 20.584 (1.96)

20.108 (0.94)
Control of corruption 0.350 (2.23)

0.439 (1.77)

0.584 (1.17) 20.306 (0.88) 0.247 (3.09)

LN(revenue per capita) 20.007 (0.37) 0.271 (1.24) 0.292 (0.34) 0.781 (2.24)

0.248 (2.28)


Revenue from local taxes 20.017 (0.10) 0.250 (1.20) 20.094 (0.37) 0.438 (1.81)

0.105 (1.42)



Revenue from user fees 0.052 (0.34) 0.331 (1.37)


0.137 (0.31) 0.653 (2.17)

0.185 (2.50)

Revenue from capital market 0.156 (0.90) 0.203 (0.87) 0.367 (0.60) 0.095 (0.39) 0.194 (2.49)

Constant 20.623 (0.14) 13.196 (1.02) 25.889 (0.29) 28.179 (0.68) 24.947 (1.92)


F-ratio 1.959 3.262 2.916 2.424 8.058
WHAT DRIVES INFRASTRUCTURE SPENDING?

R2 0.443 0.794 0.883 0.784 0.514

Adjusted R2 0.217 0.551 0.580 0.461 0.450
Notes: Dependent variable ¼ LN(infrastructure expenditure per capita).
significant at the 0.01 level and above (one-tail test);

significant at the 0.05 level (one-tail test);


significant at
the 0.1 level (one-tail test). Absolute t-values are in parentheses. — ¼ not included in the model. LN ¼ natural logarithm.
1367
 1368

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Table A2. Regression models explaining local government capital expenditure per person (full specification)

Africa Asia LAC Transitional Entire sample

Variable (n ¼ 32) (n ¼ 18) (n ¼ 18) (n ¼ 12) (n ¼ 81)
LN(GDP per capita) 20.061 (0.31) 1.618 (2.84)
0.744 (2.92)
0.841 (0.55) 20.006 (0.05)
Debt burden 0.321 (1.70)

— 0.909 (2.74)
— 0.190 (2.28)


Debt service ratio 20.096 (0.80) 23.979 (3.13)
21.92 (3.80)
20.407 (0.62) 20.055 (0.86)
Foreign direct investment 20.072 (0.57) 2.340 (2.15)

1.313 (2.92)
— 0.000 (0.01)
Capital city 20.054 (0.32) 20.152 (0.56) 20.466 (2.83)
20.144 (0.25) 20.083 (1.33)



LN(city population) 0.175 (0.90) 20.009 (0.04) 0.987 (3.05)
0.246 (0.33) 0.144 (1.95)


Urban growth 20.047 (0.33) 0.326 (1.59)


0.314 (2.47)

0.232 (0.40) 0.143 (2.01)


Deficient infrastructure 20.223 (1.16) 20.647 (1.70)

0.041 (0.16) 20.569 (1.32) 20.219 (2.23)


Control of corruption 0.322 (2.37)

0.354 (1.51)


20.773 (3.45) 20.259 (0.38) 0.092 (1.48)



LN(revenue per capita) 0.857 (6.60)
1.610 (5.52)
20.204 (0.61) 0.215 (0.23) 0.810 (9.04)

Revenue from local taxes 20.254 (1.58)


0.058 (0.23) 20.534 (2.92) 20.633 (1.14) 20.133 (2.38)


BEN C. ARIMAH

Revenue from user fees 20.119 (1.04) 20.390 (1.56)


0.337 (1.58)


— 20.097 (1.68)


Revenue from capital market 20.155 (1.33)


0.139 (0.55) 0.933 (3.33)
— 0.054 (0.94)
Constant 20.318 (0.06) 232.601 (2.50)

248.098 (3.96)
222.964 (0.47) 22.180 (0.77)
F-ratio 8.367 5.449 22.004 2.906 22.278
R2 0.858 0.929 0.986 0.929 0.812
Adjusted R2 0.755 0.758 0.941 0.609 0.779
Notes: Dependent variable ¼ LN(local government capital expenditure per person).
significant at the 0.01 level and above (one-tail test);

significant at the 0.05 level (one-tail test);




significant at the 0.1 level (one-tail test). Absolute t-values are in parentheses. — ¼ not included in the model. LN ¼ natural logarithm.