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Recurrent Cost Problems in Less Developed Countries
May 1982
>> This Is USAID >> USAID Policy Papers >> Recurrent Cost Problems in Less Developed Countries
Executive Summary III. Causes of Recurrent Cost Problems
V. Solutions to Recurrent Cost Problems
VI. Conclusions and Recommendations
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[Download original document] II. Definitional Questions
Before we begin to consider the difficulties involved in identifying, analyzing and solving a recurrent cost problem it would be well to define precisely and clearly the meaning of two key terms: "recurrent costs" and "recurrent cost problems."
Recurrent Costs are simply those costs of development activities which recur. Thus while the capital cost of any given project, be it a school, a road or a dam, is usually incurred over a short time period, from one to five years, the recurrent costs associated with that asset teachers' salaries, road maintenance, equipment repair - will be maintained over the lifetime of the asset, from twenty to fifty years or more. Thus capital costs are concentrated in the initial period of any development project; recurrent costs are spread out throughout the project's life, and may, in fact, increase in real terms toward the end of the capital asset's life as maintenance becomes more expensive.
If a government were trying to maximize output given a budget constraint, it would normally allocate resources between fixed and variable inputs such that the present value of the marginal product of an extra dollar spent on the fixed input is equal to the present value of the marginal product of an extra dollar spent on the variable input (see Appendix A for proof of this proposition).1 Therefore if an extra dollar spent on road maintenance will generate two dollars of additional output while an extra dollar spent on road construction will generate $1.50 of additional output (which would be the present value of the discounted stream of returns), then clearly the government could do better by shifting resources into maintenance and away from new construction.
A Recurrent Cost Problem is a situation in which the government faces such budget stringency that it is unable to finance the recurrent costs of existing development projects when the stream of returns to the recurrent factor of production is much higher than that of new development projects. The last phrase of the preceding sentence is crucial in defining a recurrent cost problem. Failures to fund school supplies or road maintenance or petrol for extension workers may be a rational response to the discovery that these projects are no longer economically viable, either due to poor design or to a change in circumstances such as relative prices. In such cases these scarce resources might be better used to fund recurrent expenditures in other sectors or locales, or in financing brand new capital projects. When, however, the stream of returns to road maintenance is on the order of two to five times that of new construction and yet road maintenance is not being undertaken while new investments are being made, as was found in a World Bank study in the Sahel, then there is undoubtedly a recurrent cost problem.
1In order to economize linguistically we will call the present value of the marginal product of an extra dollar spent on an input the stream of returns associated with that input.
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