On the care and feeding of a gift horse: the recurrent cost problem as the result of biased project design

African Studies Center Working Paper No. 69INTRODUCTION: Recently, the distinction between the "capital cost" and the "recurrent cost" of a development project has received substantial attention among practitioners of development economics as a result of a growing perception that there exists a "recurrent cost problem" in many developing countries. According to Peter Heller of the International Monetary Fund, a principal symptom of the problem is that "throughout the developing world the productivity of public investments and programs that are already in place has been seriously jeopardized by the failure of governments to provide adequately for their operation and maintenance over time" (Heller, 1979, p. 38). The recurrent cost problem is a cause for concern, not only because of the premature deterioration of past projects, but also because it "cast[s] a disturbing shadow on the economic viability of future investment programs" (ibid.). The purpose of this paper is to apply some standard tools of microeconomic analysis to the recurrent cost problem in an attempt to understand more completely the causes of the problem and to suggest some policy initiatives that could help to resolve it. In contrast to the prevailing attitude of the literature on the recurrent cost problem, reviewed in the next section, I argue that recipient nations may often be maximizing their own welfares when they reduce the flow of recurrent inputs below that prescribed by the project design. It is useful to identify two distinct scenarios, either of which could lead the recipient to an optimal reduction of recurrent input flow to a project. In the first scenario, the project is designed correctly to maximize the recipient's welfare subject to all relevant constraints and given all information regarding technology and future prices that is available to project designers. We may describe such a design as ex ante correct. When the design is correct in this sense, reduction of recurrent input flow to the project could be optimal from the recipient nation's perspective only if some unanticipated event occurs to invalidate the original project design. Elsewhere I have presented a detailed typology of such "surprises" that could lead to the donor's perception of a "recurrent cost problem" and have argued that the donor should eliminate the possibility that one of these surprises is the cause of any perceived input shortfalls before considering other less innocuous explanations (Over, 1981, pp. 17-53). [TRUNCATED