Do Demonstration Effects Catalyse Private Investment in Infrastructure? Evidence from the African Water Sector

Demonstration effects play a perplexing role in the theories of change adopted by development banks and donors. Such effects are said to be important but cannot be measured or their mechanics fully explained. They are important because these organizations do not have enough funding to help developing countries fully cover the costs of achieving ambitious targets like the Sustainable Development Goals (SDGs), they must try to mobilize the balance of needed investment from the private sector. Some forms of direct mobilization are measurable, but demonstration effects are indirect and almost impossible to quantify. In theory, they occur when the success of a project supported by a development partner encourages replication by others using less concessional support. The importance of demonstration effects has grown as it has become clear that measurable types of mobilization account for far less private investment than is needed to achieve targets like the SDGs. Development partners repeatedly affirm this importance by routinely invoking these effects to justify subsidization of private investment projects. But proof of their existence—and importance—remains elusive. This paper uses a literature review and a case study of a notable public-private water sector investment project in Rwanda to evaluate the performance of demonstration effects in mobilizing private investment in infrastructure. Although the many development partners who supported this project confidently claimed that its demonstration effects were powerful and would prompt replication elsewhere, this investigation concludes that the project would most likely discourage replication by reasonably knowledgeable observers. Such conclusions suggest the need to better understand the nature of demonstration effects, why their existence is so widely taken for granted, as well as the wisdom of setting highly ambitious development targets like the SDGs which cannot be reached without significant levels of private investment.