30634 . privatesectr g 5 Private Infrastructure: 13 Access to Infrastructure: Let 25 Water Concessions: Who 43 Multiservice Infra tructure: LU Private Activity Fell by 30 Competing Firms offer a Wins, Who Loses, and What Privatizing Port Se rvices v Percent in 1999 Mix of Price and Quality To Do About It Lourdes Trujillo and Gustavo wu Ada Karna Izaguirre and Options Caroline van den Beig Nombela Fz- Geetha Rao Bill Baker and Sophie Tremolet 29 Does Reform of Energy 47 Port Concessions in Chile: w 9 Private Infrastructure: Are 17 Utility Reform: Regulating Sector Networks Improve Contract Design t Promote (A the Trends in Low-Income Quality Standards to Access for the Poor? Competition and Countries Different? Improve Access for the Poor Stephen Powell and Mary Investment Melissa Houskamp and Nicola Bill Baker and Sophie Trimolet Starks Juan Foxlev andJos Luis Tynan 2 1 Micro Infrastructure: 37 Scorecard for Subsidies Mardones Regulators Must Take Small Laszlo Lovei, Eugene Gurenko, Operators Seriously Michael Hanev, Philip O'Keefe, Bill Baker and Sophie Tremolet and Maria Shkaratan A 0= ~ ~ ~ ~ ~ ~~~~~~~~~~~~~~~~R t:d~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ a-c L9 oz~- _ CV t o 1 0 _ _A uJ~~~~~~~~t , 1 'E I i l I U i .1 I I I I 1w Dear Readers In this issue we include an annual update from the World Bank's Private Participation in Infrastructure Project Database showing that in 1990-99 the private sector undertook more than 1,900 infrastructure projects in developing countries for a total investment of about US$560 billion. The database also shows that over 80 percent of low-income countries have some form of private participation in at least one infrastructure sector. A special focus in this issue is the regulation of infrastructure service standards and how it can affect access to service for the poor. This is a fairly new topic for economic policymakers-so far most of the debate about improving access has centered on price, not quality. We hope to have more on this subject in later issues. Finally, as you can see we have a new layout. Over the coming months the Web site will also be revamped-in particular the site will have a better search capability. Suzanne Smith Managing Editor 2 5 Private Infrastructure: Private Activity Fell by 13 Access to Infrastructure: Let Competing 30 Percent in 1999 Firms offer a Mix of Price and Quality Ada Karna Izaguirre and Geetha Rao Options Bill Baker and Sophie Tremolet This Note, which draws on the Wlorld Bank's Private Participation in Infrastructure (PPI) Project Database, In many developing countnies, the regulation of infra- provides an overview of recent trends in infrastructure structure service standards is too rigid and makes serv- projects zwith private participation in developing coun- ices too expensive for the poor. The current wave of ties. Three main trends have emerged during the past liberalization of infrastructure is an opportunity to decade. Private activity in infrastructure grew dramat- address this problem. Debate on expanding access ically between 1 990 and 1997, but declinied because of under such refonn has so far centered on price, not thefinancial crises of 1 998-99. Most developing quality. This Note proposes a new regulato?y frame- countries have some pnvate activity in infrastructure, tuork where large- and small-scale providers compete to but Latin America and Fast Asia dominate supply a range of services at prices better .ti...,.. con- investment. su mer willingness to pay. 9 Private Infrastructure: Are the Trends in Low- 17 Utility Reform: Regulating Quality Standards Income Countries Different? to Improve Access for the Poor Melissa Houskamp and Nicola Tynan Bill Baker and Sophie Tremolet This Note, based on the World Bank's Private The current wave ofprivatization of infrastructure Participation in Infrastructure (PPI) Project Database, services is commonly accompanied by stricter enfor-ce- reviezws trends in infrastnrcture projects with private ment of quality standards, which pushes up costs, participation in low-income coutntries. Four main con- maintaining or worsening the exclusion of the poor. clusions arise. Surprisingly, the proportion of countries The poor could get easier access to service if the main with at least one project-81 percent-is higher among provider was permitted to deviate from this uniform low-income than middle-income countries. As in standard, offering poor consumers a service in which middle-income countries, most investment has been in an acceptable relaxation in quality led to a lower price. telecommun7zications or energy projects. However, in low-income countries, nlell over half 'the projects are 2I Micro Infrastructure: Regulators Must Take greenfield. And the scale of private participation in Small Operators Seriously low-income countries lags far behind that in middle- Bill Baker and Sophie Tremolet income countries. Small-scale providers of infrastnrcture services are proving to be more responsive than utilities to needs of poor consumers. Thev might be delivering water serv- ices by tanker, transport services by minivan, or elec- tricity through mini-grids or household solar panels. They make their services affoldbble to the poor by using cheaper technology orpermittingflexible payment. Regulators are customarily hostile to these alternative providers. The interests of 'the poor would be better served if regulators treated them as valid service providers and brought them under a regulatory umbrella. S. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~3 25 Water Concessions: Who Wins, Who Loses, 43 Multiservice Infrastructure: Privatizing Port and What To Do About It Services Caroline van den Berg Lourdes Trujillo and Gustavo Nombela WI later concessions create valute by boosting service cov- Ports have become in c7easingly capital inten.sive. erage and quality, and by improving the it . . of Economies oJ scale have led to larger, more specialized utility operations. W1ho wins, who loses, and by how ships. And competition between ports has started to much fr-om these concessions depends on how the con- grow. As a result, governments are -. .- . ':- i . tract is designed and regulated. This Note proposes a way ports are run and permnitting more private owner- simple exercise in modeling the distribution of benefits ship and service delivery. Because ports provide multi- before a contr-act is a warded as a way to avoid later ple services, if governments are to design an i tl 1t problems with skezwed distribution of benelits. legal and regulatory framework for private participa- tion it is important to study all these activities to eval- 29 Does Reform of Energy Sector Networks uate the best approach. Mor-eove7; because these Improve Access for the Poor? activities must take place in a small space, it is irmpor- Stephen Pozvell and Mary Starks tant to study how they are best coordinated. A central al of the retormn of 'electricity and gas net- 47 Port Concessions in Chile: Contract Design to zvorks, now occunrring in an increasing number of Promote Competition and Investment developed and developing countries, is to provide Juan Foxley andJose Luis Alardones in centives to reduce the costs of prod uc ing energy and g etting it to consu mers. iVcw technologies in electricity The objective of Chile's port reform is to encourage are drasticallV red ucinig costs. But transmission costs investment in better port equipment, in the hope that ar-e still a major hurdle to expaniding networks in iso- this will lead to mor f/ii I t senrice, in part by lated or .' i 7, populated ar-eas. As a result it is the attractin2g larger, more mnodern ships. Thefirstfour urban poor who stand the greatest chance of'benifiting major concessions, under which in tegrated terminals from network reform. For the nrral poor, alternatizle are ntn exclusively by private companies, started opera- solutions, including mini-grid and ofJ-grid services, tions in January 2000. The integrated approach to a nmay be required. port serices replaces a system offree entry of'multiple stevedoring companties. This Note reviews houn the con- 37 Scorecard for Subsidies: How Utilitv Subsidies cessions were designed: the criteria for the zvinining Perform in Transition Economies bids, the rules to prevent concessionaires' abusing their Laszlo Lovei, Eugene Gurenko, Michael Haney, monopoly power; the rules to encourage investment, Philip O'Keefe, and Maria Shkaratan and the provisions for redundant workers. During the early 1990s. it became clear that zwithout subsidies, many households in (Gentral anid Eastern Eu r-ope and the fornmer Soviet ITUnion wouldl have diffi- culty paying their utility bills. Governments started to experiment with various subsidy schemes. 7his Note describes the main ones and provides a i ..A '. .- for governmeents designiiig subsidies to decide which schemlle is likely to be the best fit for their country. Alanaging Editor Suzanne Smith The World Bank 1818 H Street Washangton DC 20433 Telephone: 001 202 458 7281 Fax: 001 202 522 3181 Email: ssmith7@uworldbank.org Design by Grundy & Northedge Cover Illustration by Ruth Ketler I'he entire rontents of Private Sector © 2000 World Bank. You are authorized to reproduce, duplicate, and disseminate all or part of this publication so long as you include the name of the publication and the name of the respective author. You many not, however, modify, alter, or otherwise change any part of thzs publication or sell, transfer, or otherwise disseminate any part of the publiration for profit. ... . .. ,. . , ..., 20- - Private Infrastructure Private Activity Fell by 30 Percent in 1999 5 Ada Karina Izaguirre and Geetha Rao This Note, which draws on the World Bank's Private Participation in Infrastructure (PPI) Project Database, provides an overview of recent trends in infrastructure projects with private participation in devel- oping countries. Three main trends have emerged during the past decade. Private activity in infrastructure grew dramatically between 1990 and 1997, but declined because of the financial crises of 1998-99. Most developing countries have some private activity in infrastructure, but Latin America and East Asia dominate investment. As liberalization and privatization policies have The PPI Project Database swept infrastructure activities in developing coun- tracks inftastructs4re projects tries throughout the 1990s, the private sector has newly owned or managed lt become an important financier and long-term private companies that operator. Analysis of projects in the PPI database - investmont in iafrtlue prets with reached fpnanciat closure in shows that during 1990-99 the private sector p-ticpalionit 1990-99 in energy (electric- undertook the operating or construction risk, or 1999 USS biHions ity and natural geiS trans- both, of more than 1,900 projects in developing 350 mission and distribution), countries, a total investment of almost US$580 bil- 300 telecommunications, trans- lion.1 Of this amount, more than two-thirds went port, and water. Sxe page 6 to facility construction, expansion, and modern- 250 for more infemation on the y ~~~~~~~~~~database. ization, and the remaining third went to the gov- 200 db ernment as sale proceeds (divestiture revenues, ISO license fees, or canon commitments).2 1oo Effects of the economic crises 50 Private activity boomed in 1990-97, rising from less 0 than US$16 billion to more than US$120 billion 1190 1991 1992 1993 1994 1995 1996 I997 1998 I9 (figure 1). It then declined by roughly 20 percent in 1998 and 30 percent in 1999. As the financial crises Sorce.World Bank 2000 and PPI Project Database. PRIVATE INFRASTRUCTURE PRIVATE ACTIVITY FELL BY 30 PERCENT IN 1999 Database cove e: Oivnw A priate coard.o bys an equity stae in a * Phegms dt have adid financial doswre an.d idy or indhrecy rge"w,ed be e. The pna We may ar may not imply hde pubfi private magemen of compNan, * Pref in elecuiy, natral gas (ransmLun and driu- *on), _ inmoW, traump.? and wa set but not Defnition of financal cjossre. For geeniel pj movable ame nnmoa stand-alone solid waste projcs, and ah for emrtims and mangeme contractn major cqiral smo proects wsc as win upd fiunam dw deieWd p eis of a Iet 6 * low and middLah-wme delopiOg covties in 19f, as Niing r of -xy bhidde ar det led to pro defd and dmdM by ddie Wodrank vide or m111* en4ngjerkct r X Asjm ant for 1 sipitan put ald the ^, a S* won '- Definition of ;ait. pwdpXL pite cn oa dith e Otbdt Fer wsio ad ORECt_ c- pany mus asstm opAing risk doing the operating period or tracvo, a le wemM or a u i ado OR [oh assuem deomn wd oWperating risk during di cont! nmat of manme or l Wm mst m ism Fr penod. A orin stae cmpany is owidur a priate divetiwr& die ai oder mar kw ay binding Miw entity. mites wacphwntd as of 6* bdy. DPanidbo eof p e u-k. A corpant eity oetaled Recoe4fog Mvtauew thw ns, piva rev- m opae Sinmnc im s h arsdea a pjc. W-e e, le f4, qd P pt e ~~~~~~ A ~ ~ ~ ~ ~ ~~A roe or mmwied b y ae rsa by t a t i; ; t tu f f T et, * b $ ' - t ~Aq~ .d * .w curbed the growth rate of developing economies, Latin AmericaandEastAsiawereworstaffected. their demand for infrastructure fell. The annual In Lafin America and the Caribbean investnent GDP growth rate ofdeveloping countries, excluding fell from a high of US$71 billion in 1998 to US$36 transitional economies, decreased from an average billion in 1999 (table 1). Activity in 1998 was sus- of 5.4 percent in 1990-97 to 1.6 percent in 1998 and tained by the Brazilian telecommunications priva- 3.5 percent in 1999 (World Bank 2000). Private cap- tization, which was severely afflicted by the crisis. In ital flows to developing countries also declined. Net 1999 the lack of any major privatization program long-term private flows to developing countries in and the delay of greenfield projects reduced activ- 1999 were only three-quarters of what they had been ity in the region. In East Asia and the Pacific private at the peak in 1997 (see figure 1). The surviving activity decreased from US$39 billion in 1997 to resources for private infrastructure were mainly less than US$10 billion in 1998 (see table 1) due to directed to projects with political risk insurance or the cancellation or postponement of many high- guarantees from multilateral development banks. profile projects in the crisis countries and reduced 1990 1991 1992 193 194 195 1"6 1997 1998 199 Total Telecommunircons 61 13 3 8.1 11.0 19.6 24.0 29.9 42. 54.3 39.1 249.0 Eeg 1.6 11 II 14.6 17.0 24.1 31 7 47 9 25.1 14.9 192.8 Tranpn 3.0 3.1 4.2 7.7 8.2 101 16.5 22.4 17.6 8.4 106.1 Water and smaon - 0.1 1.9 7.S 0.7 17 2.2 8.9 2.6 5.9 314 7 Region East Asia and Pawfc 2.6 4.1 8.9 16.2 17.1 234 33.4 388 95 14.1 168.6 Eunpeand enrlAsia 01 03 13 1.5 39 86 11.6 15.1 I1. 8.1 62.5 Latin ia d de (an t isan 13.2 12.6 15.8 18.5 18.9 19.4 28.8 51.1 71.0 363 285.6 isddleEastandNnahA rica 00 - 0.0 3.4 03 0.1 0.4 5.3 35 24 153 South Asa 0.1 Di 0.1 1.3 4.0 7 6 6.1 71 2 3 4.0 33 5 Sui-Sahtna Almia 0.1 - 0.1 0.0 07 08 2.1 4.5 2.4 2.9 13.6 Toai 16.3 17.8 26.1 40.9 45.5 599 823 1219 1002 685 579.3 None. Note: O.D mean' ero or leso ohan hah the unit shown. Daot may not sum to totals bemuse of rounding. Source: PPi Projett Dooabose. activity in China. However, there was a significant Approaches to private activity in infrastructure recovery to US$14 billion in 1999. have differed among the leading regions. Latin While all infrastructure sectors have been America and Europe and Central Asia have mainly affected, the impact has been worst in energy and carried out divestitures as part of broader sector transport, in which private activity in 1999 was about reforms aimed at creating competitive market one-third that in 1997 (see table 1). In contrast, pri- structures. In these regions, divestitures accounted vate activity in telecommunications and water has for more than half of the regional activity (figure started to recover. If the US$19 billion proceeds 2). East Asia focused on asset creation through from Brazil's Telebras privatization were excluded, greenfield projects to keep pace with demand private activity in telecommunications would have growth, but with limited attention to reform of been 10 percent higher in 1999 than 1998. This underlying sectors. Greenfield projects repre- recovery is driven by a strong demand in mobile sented more than half of investment commitments services and equipmentsupplierswho arefinancing in that region in 1990-99. The downsides of the a significant portion of the network expansion. Asia approach (unresolved sector deficiencies, Private activity in the water sector also grew to US$6 demand risk left with the government, contin- billion in 1999 from US$2.6 billion in 1998. gency liabilities created by take-or-pay agreements or traffic guarantees), which were exacerbated by Regional trends the financial crisis in the region, have made gov- Latin America and the Caribbean and East Asia led ernments rethink their strategy. In 1999, for the the growth in private infrastructure activity in the first time, private activity in divestitures exceeded 1990s. Latin America and the Caribbean accounted that in greenfield projects in the region. for almost half of the investment commitments in infrastructure projects with private participation, Country trends while East Asia captured 30 percent and Europe During 1990-99, 121 developing countries had and Central Asia, in third place, captured about 10 some private activity in at least one infrastructure percent. Investment in those regions was mainly sector, and 20 had private activity in all four. Fifty concentrated in telecommunications and energy, of these countries were lower-income, 48 lower- which together accounted for 75 percent of private middle income, and 23 upper-middle income. activity in Latin America, 67 percent in East Asia, However, the upper-middle income countries and 92 percent in Europe and Central Asia. attracted most of the private activity (60 percent), PRIVATE INFRASTRUCTURE PRIVATE ACTIVITY FELL BY 30 PERCENT IN 1999 Investment in infrastructure projects with place in more competitive environments as coun- private participation by type of project and tries reform their regulatory systems, create com- region, 1990-99 petitive market structures, and privatize their state ( Diesitures *Greenlield 3 Oprtions and enterprises. The combined effects of lower growth 2 projects managemnt with rates and efficiency gains from competitive market capitl expenditure structures may reduce new investment require- 1999 USS billions ments in Asia by between 25 and 30 percent in 0 100 200 300 1998-2005 compared with pre-crisis estimates (Asia 8 Latin America Development Bank 1999). Third, private activity in 8 and the Cadbbsean East Asia and Paeific Latin America, which will concentrate on green- field projects and additional investments in priva- Europe and Central Asia tized companies, will occur in more competitive South kia m markets as countries improve their regulatory sys- Middk East tems, reduce entry barriers, and finish privatizing and North Ifrica |state enterprises. Fourth, infrastructure financiers Sub-Sahsaran Africa U will be more cautious and focus more on project Source: PPI Project Database. quality and long-term project risks than they did during the 1990s. Overall, the financial crises have followed by lower-middle income countries (20 allowed governments and private sponsors to refo- percent). Of the low-income countries, China, cus on the fundamentals. This should lead to more India, and Indonesia have attracted most of the efficient and self-sustainable infrastructure sectors, private investment. reduced political and regulatory risk, and less expo- Investment in infrastructure projects with pri- sure to the consequences of government planning vate participation has been concentrated in a few errors and state enterprise inefficiency. countries, but it is spreading. The top 10 countries accounted for 97 percent of all private activity in infrastructure sectors in 1990, but they accounted for 70 percent by 1999. This decrease indicates Notes that more developing countries are starting to 1. All dollar amounts are in 1999 US dollars. PPI embrace private participation. Since the mid- Project Database figures for project investments refer to 1990s, more than 50 developing countries have total investment, not private investment alone. had new private activity in at least one sector each 2. This figure excludes license fees that are calcu- year and more than 10 have had new activity in lated as a percentage of revenues (revenue-sharing three to four sectors each year. arrangements). These arrangements have been widely used in East Asia for telecommunications projects. Looking ahead Private infrastructure activity in developing References economies will revive as they recover from the eco- Asia Development Bank. 1999. Private Sector nomic crises of the late 1990s and the fundamental Participation and Infrastructure Investment in Asia: 7he reasons for long-term private activity-increasing Impact of the Currency Crisis. Asia Development Bank, demand for infrastructure, sector inefficiencies, Manila. and public budget constraints-continue. Private World Bank. 2000. Global Development Finance 2000. activity in the coming decade, however, will differ Washington, D.C. from the pre-crisis activity in four ways. First, new capacity requirements will be smaller: itis predicted Ada Karna Izaguirre (aizaguirre@worldbank.org) and that growth in developing countries (excluding Geetha Rao (grao@worldbank.org), Private Provision of Public transition economies) will be slower in 2002-08 Services Group, World Bank. than was predicted before the crises (World Bank k 2000). Second, private activity in East Asia, particu- larly in energy and telecommunications, will take Private Infrastructure Are the Trends in Low-income Countries Different? 9 Melissa Houskamp atnd Nicola Tynan This Note, based on the World Bank's Private Participation in Infrastructure (PPI) Project Database, reviews trends in infrastruc- ture projects with private participation in low-income countries. Four main conclusions arise. Surprisingly, the proportion of countries with at least one project-81 percent-is higher among low-income than middle-income countries. As in middle-income countries, most investment has been in telecommunications or energy projects. However, in low-income countries, well over half the projects are greenfield. And the scale of private participation in low-income coun- tries lags far behind that in middle-income countries (figure 1). Since 1990, a growing number of low-income Cumulative investment in infrastructure with The PP! Project Database developing countries have encouraged private U private participation in developing countries, tracks inftastruotureprojects operators in infrastructure.' This applies even to 1990 99 newly owned or mnanaged by those lowest-income countries (such as Angola, 1 * Energy *Telecom * Trsport * Water Pnivate companiis that Nepal, Tajikistan, and Zambia) with a per-capita l .H. reachedfinancidl closure in GNP of less than US$365 (US$1 per day). More Incomw kvel 0 s5 100 ISO 200 1 990-99 in energy (electric- than 80 percent of these lowest income ity and natural gas trans- countries implemented at least one project with LOw mission and distbution), private participation between 1990 and 1999, a I telecommunications, trans- proportion higher than for either the lower- or port, and water. Seepage 6 upper-middle income groups (table 1). Lwer-middle farmareinforrndionanthe * * * * ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~database. Developing countries, in the aggregate, have experienced a great deal of private participation Upper-middl in infrastructure in recent years.2 But do low- income countries share the same experiences and trends? Source: PPI Project Database. PRIVATE INFRASTRUCTURE ARE THE TRENDS IN LOW-INCOME COUNTRIES DIFFERENT? ; ;ll .P I mg ;4 i ;. I I ;O - ; i [-i. II i ; ii I i 1 - t W~~~~~~~~~~~ddht -no -~ NW Ca" a te Nobh South AN raw 11111fit Adli Mrk Asi - Aia lOW 76 lee ,4" Ig 67 1" UB Laweie.mia 6J 71 a Ii 61 log 77 - Upw4i -- 818 so so 7 1 Ni WA 76 1 O N .... AM hom4 group I6 77 -6 79 73 75 78 N/A Not applicable. Source: PPI Project Database. Growth across all income groups greenfield projects (primarily generation) in the Between 1990 and 1999, the proportion of low- energy sector offer higher returns than non- income countries with at least one private infra- network projects in other sectors (Komives, structure project grew from nearly 20 percent to Whittington, and Wu 2000). more than 80 percent-50 countries (table 1), In low-income countries, only 21 percent of exceeding the percentage of lower-middle-income projects involve operations and management con- countries (77 percent). Investment in projects tractswithmajorcapitalexpenditure-asmallpro- with private participation in low-income countries portion compared to upper-middle-income rose almost every year during the 1990s and countries-and more than half such projects are peaked in 1997 at US$33.6 billion, almost as much in China. There are also fewer divestitures and as the US$35.1 billion invested in lower-middle operations and management projects in low- income country projects that year. income countries, though twice as many low- After 1997, investments fell, mainly because of income as upper-middle-income countries have at the financial crisis in East Asia. Although invest- least one operations and management project. ment in projects with private participation in upper-middle income countries continued to rise Fastest growing sectors in 1998, partly lifted by the major telecommunica- In low-income and middle-income countries, pri- tions privatization in Brazil, by 1999 investment vate participation is concentrated in telecommu- was below its peak for all income groups (figure 2). nications and energy. If all developing countries with at least one project are taken as a group, Greenfield projects predominate telecommunications receives a higher percentage The average project size is in many cases smaller in of total investment than energy. In low-income low-income countries (table 2). Greenfield proj- countries, however, the percentage invested in ects predominate in developing countries, partic- energy is higher (46 percent) than telecommuni- ularly in lowest-income countries. They account cations, and in lowest-income countries it is higher for 65 percent of projects in low-income countries again at 50 percent (see figure 1). compared with 37 percent for developing coun- Investment in the energy sector in low-income tries as a whole, mainly because low-income coun- countries increased rapidly during the 1990s, tries have so little infrastructure in place. exceeding that in lower-middle-income countries Greenfield projects are common in the but not in upper-middle-income countries. Only telecommunications sector, especially for new nine lowest-income countries have energy projects wireless technologies, and the energy sector, with private participation, even though energy where non-sovereign guarantees encourage pri- receives 50 percent of investment in this income vate investment in new infrastructure. Recent stud- group. The number of low-income countries imple- ies show that the energy sector has the highest menting private telecommunications projects rose percentage of households connected to a formal from 3 in 1990 to 40 (65 percent of this group) in network. Because some networks already exist, 1999. Of the 29 lowest-income countries, 19 had pri- .. :......... . .... 2 80 19 s9 fl$ billions iUpper-middle income 80 - - - ~~~~~~~~~~~~~~~~~~~~~~Lower-middle incme 10 60 /All low-income 60 ~~~~~~~~~~~~~~~~~~~~~~~~~countrIe 40 v countries exduding 40 ~~~~~~~~~~~~~~~~~~~~China and India I 30 Lowwi-come countres exduding China, India, 20 -=Indonesia, and Pakistan 10 1990 1991 1992 1993 1994 1995 196 197 198 1999 Source: PPI Projenc Database. vate telecommunications projects by 1999. Most of In the transport sector, 20 low-income coun- these projects use low-orbit satellites and wireless tries (32 percent) implemented over 190 projects technology. with total investment of US$23 billion between Private water and sanitation projects have been 1990 and 1999. Eighteen were in lowest-income rare in low-income countries: 30 such projects were countries with a total investment of US$594 mil- implemented in six countries (four in Africa, two lion. China, with 116 projects, accounts for 75 per- of which are in the lowest-income group) in cent of private transport investment in low-income 1990-99 with a total investment of US$1.8 billion countries (US$17.2 billion). (only 2 percent of projects with private participa- tion in low-income countries). Most of the earliest Four countries dominate private water projects were operations and man- Countries in Latin American and the Caribbean agement contracts involving little or no investment invested nearly U$300 billion in projects with pri- risk on the part of the private operator. (Private vate participation from 1990 to 1999. Only three of operators play a significant role in small-scale water the countries involved were low-income and none and sanitation projects in a number of developing were lowest-income. By contrast, Sub-Saharan countries, but because they do not operate under Africa has the largest number of low-income formal government contracts and they are small countries (78 percent are low-income and 43 per- they are not included in the PPI Project Database.) cent are lowest-income) and received only 2 C7) la~~~~~~~~~~~~~~~~~~tb Udde 2 &a biat Aa ad Aid Eas ad hSubSdem aDd Centa adth No Seut A vow AbNf PacHk Ada Cadhhlln Aica Ada relo Im 61.71 23J.1ll UL 373 113.84 312.5 21619 LaW-le 46933 391.l 64.2 1I6.43 491.J 12U7 135.n 1wer-o" 144.7 m11934 29W2 SI9 II1I2 H/A 463.25 Mh ihrme gro I 16A7 357.4 133.J4 416.29 403.86 297.6 306.86 N/A Not aplicable. Nohe: The average in each category is the invesntnt in that category divided by the nuniber of projects Source: PPI Project Datbase. PRIVATE INFRASTRUCTURE ARE THE TRENDS IN LOW-INCOME COUNTRIES DIFFERENT? percent of investment. Nevertheless, three-quarters being reported for projects in many developing of low-income countries in Sub-Saharan Africa have countries. implemented at least one project since 1990 (see table 1). About two-thirds of investment in low-income countries went to the two largest countries in the Notes group, China and India. Figure 2 compares the 1. Income groups are defined in World Bank 2000 in trends in investment in 1990-99 for the whole terms of 1998 GNP per capita: low-income, US$760 or 12 group and for the group excluding China and less; lower-middle income, from US$761 to US$3,030; India. The difference is particularly striking in upper-middle income, from US$3,031 to US$9,360; and 1997, when investment continued in China but fell high income, US$9,361 or more. in other East Asian countries because of the finan- This Note defines another group-lowest-income cial crisis. Investment in China and India fell countries-as those whose 1998 per-capita GNP was less sharply during 1998, but started to rise again in than US$365. They are:Angola, Bangladesh, BurkinaFaso, 1999. Two other low-income countries, Indonesia Burundi, Cambodia, Central African Republic, Chad, and Pakistan, also exhibit levels and types of invest- Democratic Republic of the Congo, Eritrea, Ethiopia, ment similar to middle-income countries. These Kenya, Kyrgyz Republic, Lao People's Democratic four countries are among the ten developing Republic, Madagascar, Malawi, Mali, Mozambique, Nepal, countries, of all income groups, with the highest Niger, Nigeria, Rwanda, Sierra Leone, Tajikistan, investment in projects with private participation in Tanzania, Togo, Uganda, Vietnam, Yemen Republic, and 1990-99. Zambia. For a full breakdown of all countries by income group classification, see World Bank (2000), pages 290-91. Conclusion 2. Refer to http://www.worldbank.org/html/fpd/ Most low-income countries (81 percent) have notes/formorepublicationsonthePrivateParticipation some form of private participation in at least one in Infrastructure Project Database. sector, and the proportion is even higher among lowest-income countries. The general pattern of References activity in terms of sector and project type in low- Komives, Kristin, Dale Whittington, and Xun Wu. income countries is similar to that in middle- 2000. "Infrastructure Coverage and the Poor: A Global income countries. More than 75 percent of Perspective." Paper presented at a conference on investment in projects with private participation in Infrastructure for Development: Private Participation developing countries has been in telecommunica- and the Poor, 30 May-2 June 2000, London. tions or energy projects, and this concentration is www.ppiaf.org even more marked in low-income countries. World Bank. 2000. Entering the 21st Centu?y: World Greenfield projects are common in all developing Development Report 1999-2000. New York: Oxford countries, but clearly outnumber other types in University Press. low-income countries. Much scope remains for extending private participation to transmission, Melissa Houskamp (houskamp-melissa@jpmorgan.com), JP. distribution, and retailing. Morgan, Newv York, and Nicola Tynan (ntynan@gmu.edu), Four low-income countries stand out as being George Mason University, Virginia. most like developing countries in the aggregate. China, India, Indonesia, and Pakistan all have projects with private participation in at least three infrastructure sectors (India and Pakistan do not have projects in water and sanitation) and together account for 91 percent of investment in low-income countries. Countries that have experi- mented with private participation in one infra- structure sector now need to allow greater private entry to reap the efficiency and service rewards S ~ ~~~~~ IS Access to Infrastructure Let Competing Firms Offer a Mix of Price and Quality Options 1 3 Bill Baker and Sophie Trimolet In many developing countries, the regulation of infrastructure service standards is rigid and makes services too expensive for the poor. The current wave of liberalization of infrastructure is an opportunity to address this problem. Debate on expanding access under such reform has so far centered on price, not quality. This Note proposes a new regulatory framework where large- and small-scale providers compete to supply a range of services at prices that better reflect consumer willingness to pay. Bill Baker is head of National Economic v_________ Health and safety Research Associates' water Production phase i Hmpact on emaployee economics practicO. Sophie Product/service characteristics: Tro~molet is a consiultant at physical/chemicallbiological Environmental impact NERA. Bill has applied his continuity reliability experience of the pwivatiza- flexibilitq tion and regulation of the frequency (transport) Health and safety J.K watersectorin coun- aesthetics K w eimpact no ustomersc u tries snch as Peru,, Brazil, Responsiveness: Product/service Environmental impat and Argentina. Sothie has speed in making connections dwarked in the wat'r, electric- speed in solving service problems itY, and health seqors, with speed and qualiq of complaints handling assignments rangng \from < , | \ / theprivatization df electic Billing: Customer ttilities In West Africa to accuracy relatons tariff studiesfor uater com- timeliness relationsA flexibility in payment methods Panies in Peru ana \/~~~~~~~~~~~~~~~~~~Agnia ACCESS TO INFRASTRUCTURE LET COMPETING FIRMS OFFER A MIX OF PRICE AND QUALITY OPTIONS One size does not fit all The regulation of infrastructure services stan- dards has many dimensions. For some, such as GWa ta Wd tS sret hlures With a range the effects the services have on public health or the environment (the right-hand side of figure * I fiN. t reate marhet 1), standards can be publicly defined relatively objectively. For example, consumers do not * expect drinking water to make them sick. Bus cfAr ihdeiron t cmers. * ^ s.OpCg by Priam prwidus such 4 passengers do not expect to be injured. el epiqrn tiauh brand nama or For requirements above the minimum, or for *.,Of .rodn'era or , V d, rs' fr mn,associations. other service dimensions such as customer rela- ; s Se h goods or tions (the left-hand side of figure 1), quality is more a matter of consumer choice. Offering dif- : ' IwWWei_t dbild deend on de market ferent levels of quality for these services is equiv- x* g the knmensa' associated alent to changing the economic value of the att' be ftad by emorag com- service, and could therefore be expected to i*8i M*S The gwant of a lice to elicit a different willingness to pay from each o n cuaertin minimum qual- customer or group of customers. ,lp u nmetines can be reduced Such flexibility in the setting of quality stan- * nbAsWg ior- dards is rare. Consumers are often unaware of pi lens may publish qual- 4 a -a 9n to dir cstomers the potential for service quality differentiation 4 I e ii ,, l suppirS liabe and utilities unwilling or unable to explore it. gr w c1e*y m_ se cmt be effeive, but Standards are typically set by governments with -* istyt ad tne-comuming, and centralized infrastructure provision in mind, r gb*&iile cuns, it is seldom rlevnt to rhe poor often using developed countries' standards. iiw4piog toiuni They are usually above what would be accept- able to the poor and socially optimal. They rarely take into consideration affordability or tribution networks, for which installing pipe the costs and benefits of different quality stan- networks in parallel inevitably raises costs. A dards. By increasing the price of service, they monopolist might choose to give customers invariably limit access for the poor. lower service standards or to make savings on Why does well-intentioned regulation have system maintenance, which would affect supply this effect and what can be done? reliability in the long run. This can be harmful for customers who do not have alternative When regulation of quality is justified sources of supply at realistic cost. Regulation can bejustified, in principle, by mar- Imperfect information can also justify regu- ket failures such as market power, the imperfect lation. Consumers cannot know the quality of sharing of information, and the existence of most infrastructure services until they have broadly beneficial effects such as reducing dis- received them. This problem is critical when ease and pollution. The fact that most infra- health and safety are at stake. For example, structure services are jointly provided and consumers cannot easily determine whether consumed over a network leads to risks for the the water they are consuming is contaminated. quality of the good or service delivered. For So there is a case for government efforts to pro- example, some infrastructure services have nat- vide information about the quality of the serv- ural monopoly characteristics, due to ices to consumers or to impose standards on economies of scale (one network is more eco- suppliers. nomic than two) and scope (coordination is Regulation in the event of such market failures often cheaper within one organization than is justified (see box 1 for mechanisms), but only using a transfer price between two organiza- if it can achieve a better outcome than the mar- tions). It is typically the case of water or gas dis- ket alone, with all its imperfections. Adapting quality regulation to serve the poor scale and scope in production. Where there are The drawback of supplying poorer areas is that alternatives to the main provider, providing dif- they are more expensive to serve because they ferent price or quality, governments generally are often less accessible, their low consumption regard them as temporary. There are good rea- does not cover the cost of connection, and the sons for preferring network supply in the long risk of fraud or non-payment is higher. run, but alternative providers, given the chance, Regulators need to recognize these realities can grow, evolve, and compete with the main and to allow for the delivery of various price and provider to drive down prices or improve qual- quality bundles. If a private provider wants to ity. Yet governments often ban new entrants or serve the poor and remain profitable, it must alternative providers from the market by grant- diversify its pricing or supply arrangements, or ing exclusive concessions to private operators. both. This can involve charging higher prices to Further, when a regulator is set up, as is usual the poor to reflect the real supply costs (which when a utility passes into private hands, it gen- might not be politically acceptable) or finding erally concentrates on the main provider, paying alternatives, such as group supplies or lower qual- little attention to alternative providers. ity levels, to reduce costs. While data on poor con- Table 1 shows how the current regulatory sumers is scant, studies suggest that they are approach can be adapted to facilitate service willing to pay a higher percentage of their quality differentiation and thus to improve income for infrastructure services than the access for the poor. As a first step, in the legal rich-a measure of their desire for service. and regulatory framework countries should set Figure 2 suggests how, by using a low-cost quality standards according to their own cir- solution with reduced quality, the provider cumstances, taking into account the costs and could adapt to poor consumers' willingness to benefits of the target level of quality, and pay. Both the high and low cost options include enforce these standards properly, instead of set- "regulatory" costs, such as monitoring. The fig- ting unachievable objectives at developed coun- ure assumes these costs could be lowered for the tries' levels that will not be met. Quality low-cost option through the use of self-moni- standards should be reviewed to see whether a toring by the provider. (If the price were still too lower minimum requirement would be accept- high for poor consumers, a subsidy might be able to the poor and would allow the fulfillment needed, as shown in figure 2.) of social objectives. Providers should be free to In almost every country traditional utilities compete on quality above the minimum stan- provide a standardized product, aiming for rela- dards in order to meet the needs of other mar- tively high quality, and exploiting economies of ket segments, especially for business needs. 2 Prce Profit margin Monitoring costs Profit margin Costs of safety f . Monitoring costs standards (self-monitoring) --lfinimum safety Base prodLuKio I' standards c0ts Reduced production costs Price of network Rich consumers' Poor consumers' Price of electricity electricity from willingness to pay willingness to pay from alternative main provider provider ACCESS TO INFRASTRUCTURE LET COMPETING FIRMS OFFER A MIX OF PRICE AND QUALITY OPTIONS iq decion Conmon approach Recommended approach Legl framework Quality stndards set on basis of developed Assess which qulity aspecs could be improved by countries reguation (market fdures) and whether minimum standards can be defined. above which private providers can compete. Privatizatmon of main utility harket structure Exdusivity granted to main operator for Analpe current market structure and vervires by 16 natural monopoly atnties. ahernauve providers. Competition mntroduced fur activmes with no Formally alow competition in all areas-consider natural monopoly (elctricity generation, qualiy expliitly in the definiton of rules for market teeconuruncattons. enaty. Lml of qualq standards Uniform quality standard, limts access by Exammne whether quality oblectries and payment the poor, options can be differentated by servKe area-l so. reflec in contrac obligations Set on bass of developed counmes' exLapls Set 0n basis of wingness to pay and costs ol supply (relatively high lenve). alternatves (induding low-cost provisonl. Develop methods for identilying group preferences. Regulation of alternative M iformal ttats. Realistic quality objectives. can be lower than main providers provider Neglect (M regulation) or dampdown and Focus regulaton on correcting market failures repressitm. d they cannot fulfil stamnrd information gathering and publicaton, output quality rules standards simple to monitor. Regulatory institutiens Regulatory agency is set up in paral vnith Set up agencies expert in regulating services for the privatution. mosty dealing wih the main poor (expenence of low-cosr alternatives. commuimqy private opertor. conanc for encouraging community level regulationf Design regulatory stitumons with a siew to Self-moniLoring, pubication of qualiry performance. minimie regulation costs community and NGO regulation. compensation schemes Lincied institutional capaoty to enforce, for consumen. Regulatory instruments Input stdards. Output or outcome sutndards leave flexibility to private operators. lItle consideraon of qualiry signalling by Quality signalling recognized as subsntute or private providers, complement to government intervention, diffusion of informain Poor enfoicement Tighten enforcement of minimum standards. When private participation is being intro- tender for these licenses, so long as the process duced exclusivity clauses should be avoided. promotes competition, not exclusivity. Alternative providers should be allowed to evolve, through a gradual tightening in service standards for example, with some incentives for them to enter the formal sector and upgrade Bill Baker (bilL.baker@nera.com) and Sophie Tremolet their service in the long run. Governments (sophie.tremolet@nera.com), National Economic Research should allow the main provider to offer differ- Associates (NERA), Lonidon. ent quality levels to different customer groups. For areas not reached by the main provider at the time of privatization, the government should consider granting licenses to alternative providers (for example, independent power dis- tributors in rural areas) to accelerate access for poor. The main provider could be allowed to Utility Reform Regulating Quality Standards to Improve Access for the Poor Bill Baker and Sophie Trnmolet Privatization of infrastructure services is often followed by stricter enforcement of quality standards, which pushes up costs, maintaining or worsening the exclusion of the poor. The poor could get easier access to service if the main provider was permitted to deviate from this uniform standard, offering poor consumers a service in which an acceptable relaxation in quality led to a lower price. This Note reviews the legal basis of quality standards, the technical challenges for quality diversification, and early results from efforts by utilities to diversify services. An important reason for reforming or privatizing continuity), and customer relations (flexibility public providers of infrastructure services is the in payment methods). These quality targets for need to improve the efficiency and quality of private provision can be set through a variety of service. But when private participation is intro- legal instruments. The choice of instrument duced to a sector, the tendency of governments is depends on the frequency with which the stan- to focus on the service provided by the main util- dard will need to be changed and the number ity. Private participation also goes hand in hand of parties involved in agreeing changes to the with setting up independent regulatory agen- standard, among other things. cies. These agencies have better capacity for Health, security and environmental require- monitoring and enforcing quality arrangements ments (such as the regulation of drinking water than the government bodies previously in quality standards, or the quality of sewage dis- charge. As a result, governments tend to become charges) have a significant impact on mortality tougher on standards and the costs of quality and morbidity, and on the utility's costs, and usually go up (even if the quality standard itself should preferably have foundations in primary has not been modified). legislation. The process for modifying laws is Such quality standards, defined in law or the usually more complex and difficult than for sec- private provider's contract, can cover produc- ondary legislation or bilateral contracts. If con- tion (resource management), product and serv- sumers and third parties see laws protecting ice delivery (chemical and biological, their interests, they will be more likely to accept UTILITY REFORM REGULATING QUALITY STANDARDS TO IMPROVE ACCE SS FOR THE POOR the private participation as legitimate. If the Second, investment designs are often based provider is satisfied that these rules are not on developed countries' standards. Quality stan- going to be modified overnight and that it dards are often driven by engineering specifica- would be duly consulted in the process for mod- tions, such as standards for the installation of ifying them, this can lower its perception of risk electrical wiring in houses or the minimum and ultimately reduce the cost of service depth for pipes underneath roads. Usually, through a lower cost of capital. these engineering norms were designed in For standards requiring greater flexibility, developed countries and, in the absence of any- 8 regulations (founded in laws), that can be more thing more relevant, exported as is to the regu- easily amended by the regulatory agency might latory handbooks in developing countries. The be more appropriate. Less fundamental aspects expectations of the elite in developing countries of quality, which may need to be changed fre- also push towards the adoption of developed quently (for instance, when pricing conditions countries' standards of service. While lower-cost are reviewed), are better expressed in contrac- alternatives do exist in developed countries, they tual clauses (for example, customer service stan- are no longer the norm so they are not neces- dards, such as the delays for responding to an sarily considered when setting standards in enquiry by mail or by phone). developing countries. For example, in-house septic tanks are still often in use in rural areas in Why quality standards are often set high France or the United States There are three main reasons why quality stan- Third, large private utility providers tend to dards tend to be set high for main utility providers focus on high-margin customers, and often have in developing countries. First, such providers no financial incentive to develop low-cost provi- have often inherited operating structures and tar- sion. They have generally entered the market iffs from large-scale operations not used to con- through international tender processes, to carry sidering low-cost options or alternative provisions out large-scale investments. In some utility mar- at the community level. The culture in such big kets, however, the optimal scale of production organizations is often to derive "professional has declined and even main providers now con- pride" from top quality uniform service, not from sider small-scale low-cost alternatives much bold innovations in low cost alternatives. more seriously. 1 Pl ,f.ant A \ (4') Main network Secondary nerwork A Poor communities led from the main network B Poor communities \ /9 / s Nudmber of reform sieps .0 i.; v - T C fountli nol in survey02 | R 1 04 t_~~t 30 6 C. (ounriies now in survey Thnreq as produced by tre Hup Des.p Urn l 01 toe Wield B nk rhe noodaresone1, l,u deneonJation and a09 odiei neems.aoun. utewn a n d oi niap In m r.pl on de prrt a, The Irrld Bank &reap ar7 ,sdprrw.r GP dir Iea stratms Di 01 ire0n rl Or sorv 'r,iornCflio1 a, ir.Optulp Dl %uh bOus,1dims The World Bank sureeyed power nform In 115 countnes to see which of the following six refornm steps had been taken: * Corpornbtation. *Lws permitting divestture and unbundling. Regulafbons. * Vertical and hontontal unbundling. * Laws penmittng concetsions or greenfield investment * Pnnvtiation of existing atssets. Note that * The score does not indicate the quality of reform or the sequence of steps token. * For simplicity, success in one region counts os success for the country. * Sectors under pfivate ownership for 10 years are not considered part of the current reform movement and are omitted fmm the survey. Source: Bacon 1999. mixed in Eastern Europe and South and East Asia proportions vary in different systems. In particular, (also see Izaguirre 2000 for private participation in the start-up costs of a grid are high and fixed, energy by country). which means that grids have big economies of scale, in terms of both the number of households Generating and selling electricity: the costs connected and the amount of energy transmitted. The provision of electricity through a grid involves Thus for grid systems in developing countries, one four functions: might expect transmission and distribution costs * Generation: converting primary energy into elec- to be a greater proportion of the total. tricity. There are two key points here. First, physical * Transmission: the high-voltage, long-distance factors make the fixed costs of transmission and transport of electricity. distribution particularly high for grid extensions * Distribution: the low-voltage transport of elec- to remote rural populations. The population den- tricity from the high-voltage system to the user. sity in rural areas is typically low, which means that * Supply: the selling of electricity to users-meter- the fixed costs are shared among relatively few ing, billing, and so on. people. This Note's main concern is with reform of the Second, the poor tend to have very low demand transmission and distribution systems-"the for electricity, which means that the average cost grid"-but it also discusses the innovations in elec- per unit consumed will be high because the fixed tricity generation that made reform possible. costs are divided among few units. Furthermore, Box 1 summarizes the cost characteristics of the for the rural poor, this demand tends to be con- four functions. It has been estimated that in centrated at peak times (mainly in the evenings as England and Wales generation accounts for about people switch on lights). Since the fixed costs of 65 percent of the total cost of electricity, transmis- transmission and distribution depend in part on sion 10 percent, distribution 20 percent, and sup- peak demand, this demand pattern results in still ply 5 percent (Newbery and Green 1996). These higher costs for poor rural populations. Generation Distribution The cOStS comprise fixed capital costs and varable operational As for transmission. the high fixed land low variable) costs depend costs cluding fel. Becuse each type of plant has a dfferent primarily on the physical coverage of the system (both distance balance between fixed and vanable costs, for each type the opti- and terrainl and the level of local peak demand. However. mal sie-giving the maximum economies of scale-is different. because the operatng function is much simpler (it does not involve generator dispatchl, the economies of scale are not as Transnmssiorn greaL A country that supports only one transmission system can Transnmssion costs cover building and maintaining the rnsmission support a number of inon-ovedappingl distribution systems. 31 system and operatmg it Idispatching plant and manaining voltage and frequency within predetermined imitsl. The cost of building Supply and maintaining the system depends on physical factors sucb as Maity supply costs, such as bad debts and the costs ol payment its size and the terain. The cost of extending it depends on the cofection, vary with the number of costmen. These costs are dis expected peak demand but once the grid is btnit the cost is proportionately high for low-income households, which are more sunk and so does not vary with the number of usen or the vol- likely to expenence payment difficulties and suffer disconnection. ume o electrity transmitted. The bigh fixed COsts make it But some supply costs are fixed: once supply has been extended unprofitable for more than one transmissin system to compete in to a vilage, the extra cost of reading another meter in that vil- an area. Futhemoe the tedinicalities of minute-to-minute bal- lage is low. Supply costs vary with the distance of customers from ancing of supply and dendid together with the high cost of sys- the nearest demaw center. The more remote and dispersed the tem fiure mea that the natural monopoly extends over the customers, the more expensive it is to administer meter reading whole integrated system and biR collection centrally These points are illustrated in table 1, which of transmission and distribution. The fundamental gives indicative figures for the relative distribution cost characteristics of grid provision do not favor costs of connecting different numbers of rural the provision of access to rural and poor popula- households at different distances from the trans- tions. Can reform make any difference? mission system. The central column shows the unit costs of distribution. The right-hand column Buying electricity: why it is getting cheaper shows the unit costs including generation and The recent wave of electricity reform was facili- high-voltage transmission. tated by innovations in technology. As the demand for electricity increases, the fixed costs can be spread. In developing countries, Generation however, it takes time for demand to grow once Until the 1980s the electricity industry was viewed access is provided: people have to wire their houses as a unified natural monopoly that produced and and buy electrical appliances before they start to delivered electricity. For decades economies of buy electricity. Demand for electricity entails both scale had increased in electricity generation, rein- a switch (not necessarily complete) from other forcing the view that it was a natural monopoly. fuels for cooking, heating, and lighting and new In the 1980s improvements in turbine tech- demand for electrical appliances such as televi- nology were imported from the space program sions. Over time, as incomes rise, loads will and materials science and the price of gas fell (in increase, and load factors will also rise as people part because of gas market liberalization in devel- buy appliances with constant loads such as refrig- oped economies). This had a radical effect on the erators. However, this progression is difficult to economics of generation: the fixed cost of predict and therefore the returns to investment in installing a combined-cycle gas turbine (CCGT) extension ofelectricitygrids to rural and poorpeo- plant in the early 1990s in the United Kingdom ple are uncertain. was around US$600-650 per kilowatt, compared To summarize, providing access to electricity for with US$750-800 for oil-fired plant, low-income households-in particular the exten- US$900-1,200 for coal plant, and US$2,250 for sion of the grid to rural areas-depends critically nuclear. Falling gas prices reduced the variable on the balance between the fixed and variable costs costs as well.2 DOES REFORM OF ENERGY SECTOR NETWORKS IMPROVE ACCESS FOR THE POOR? 1.i .--.:- ,.U* cut by "coemt Totaliunit cast 31*i> ~k~*~qwakdb 45 SS 34ksSt Wth.s, 54 betpl-s 20 30 -Aihm&i~ Es M IitA I - 15 25 32 - , ,**i,^; . ~~~~~~~~~~~~~~~~~~7 17 32 1I Note: These costs are indiranve averages for most developing csuntses with relatively fli terraen. A few countries are now adopting new, fewer-cost network designs. Source: Wofd Bank 1996, page 50. Combined-cycle gas generating units of 50-100 competition was not fully functioning. Trading megawatts could by the 1990s be built and run arrangements intended to eliminate such behav- economically-at one-tenth the size of the thermal ior are planned. plants (1,000 megawatts or more) of the 1980s (fig- Some developing countries have also had ure 1). This meant two things. First, generation difficulties in harnessing the full benefits of IPPs. A could be a competitive activity even in relatively key question in generation reform is how to set up small electricity systems. Second, developers other a bulk power market that delivers the benefits of than the state monopoly utility began to want to reduced costs while still attracting private investors. build power plant-large industrial users as well as Offering long-term power purchase agreements to independent power producers (IPPs). IPPs attracts investors, but the greater the security Competition and private participation have (in terms of guaranteed purchase volumes and had further effects on costs. Rather than buying prices) offered by the contract, the less sharp the equipment from a favored national supplier, as incentive for cost reduction and the less scope for state-owned monopoly generators had done, new the power purchasing agency to adjust its purchas- entrants import it if that means lower cost. In turn, ing to achieve least-cost dispatch.4 this has increased competition between equip- To ensure that the full benefits of competitive ment manufacturers, and thermal efficiency has generation reach customers, it is necessary to increased, further pushing unit costs down. The introduce competition in supply. If supply is pro- thermal efficiency of CCGT stations is now nearly vided through the local monopoly distribution 60 percent (compared with 30 percent or more for company, customers cannot shop around for other thermal stations ), and the cost of installing cheaper electricity. The monopoly distribution the latest CCGT technology is now about company can shop around, but has no incentive to US$375-450 per kilowatt.3 do so as it can pass on generation costs to its cap- Thus generation market reform should cut tive customers. However, competitive suppliers costs and reduce prices for customers. Following will need to purchase power as cheaply as possible, the introduction of competition in generation and thus ensuring that lower generation costs are the establishment of a bulk power market in passed to retail customers. Argentina, bulk electricity prices have fallen fairly consistently (figure 2). Transmission and distribution In other cases there have been difficulties, how- Having recognized that the electricity industry ever. In England and Wales, for example, antici- comprises a number of distinct functions, govern- pated reductions in bulk electricity prices failed to ments have begun to separate transmission, distri- materialize after competition was introduced and bution, and supply. the bulk power market established, even though While transmission and distribution have in primary fuel prices were falling (figure 3). This has many cases been separated, and distribution split been blamed on the manipulation of bulk power among a number of companies, both functions prices by the larger generators. In other words, retain their natural monopoly characteristics in U.S. dollars per megawatt Thermal plants 1930 33 Combined-cyde gas generation 1980 50 200 600 Megawatts Source: Hunt and Shutnleworth 1996. any one area because of their high fixed costs. not be freely passed to consumers. Therefore, However, the introduction of private participation where these monopolies are privately owned, reg- through competitive tendering for concessions (to ulation is necessary. identify the least-cost provider) has captured many Incentive-based regulation, such as the CPI-X benefits in terms of lower costs. price cap methodology, involves a balance Increased competition in the equipment mar- between giving utilities the incentive to reduce kets has reduced the price of many of the fixed cost costs and ensuring that cost reductions are passed components. Installation has also proved cheaper to the consumer. The utility keeps some of the sav- when done by private contractors rather than util- ings, but must pass the rest to the consumer.6 In ity employees.5 the United Kingdom incentive-based regulation More generally, the private sector is simply has been broadly successful in reducing prices to more efficient as a consequence of its profit seek- domestic consumers, even though bulk prices ing. For example, when private distribution began have not fallen (figure 4). in Buenos Aires there was a dramatic reduction in theft. Since theft was particularly prevalent in slum Supply areas, this reduction in theft cut the difference The potential for competition in supply, which, between the cost of supplying these areas and the with relatively low fixed costs, is not a natural electricity tariff and enabled the distributor to sup- monopoly, has been recognized and is being acted ply slum areas with reduced subsidies (Albouy and on in many countries (partial opening of the mar- Nadifi 1999). ket to supply competition is a requirement of the Equipment costs can also be reduced by relax- European Union directive on the single market for ing equipment specifications and adopting inter- electricity, for example). As a result of competi- national standards. In the United Kingdom, for tion, in the United Kingdom the cost of meters has example, over the past five years the cost of elec- fallen by 39 percent over the past five years. tric plant in real terms has fallen by 10-15 percent However, competition in supply is so far con- (Fairbairn 2000). fined largely to more developed markets, where However, transmission and distribution companies can offer a number of supply services remain local or national monopolies. This means, (such as electricity and gas) together and can dif- first, that incentives to reduce costs are not as ferentiate themselves by service quality and brand. sharp as they would be under competition In developing countries the costs of supply can be (although the profit motive supplies some incen- reduced in other ways, notably through increased tive), and second, that savings that are made will local involvement. Employing someone to read DOES REFORM OF ENERGY SECTOR NETWORKS IMPROVE ACCESS FOR THE POOR? U.S. doNlars per megawatt-hour 2 60 40 3 4 30 20 August August August August August August August August 1992 1993 1994 1995 1996 1997 1998 1999 Source: CAMMESA 2000. meters in a village is cheaper if that person does ing how the benefits of electricity reform (in not have to travel a long distance from the nearest terms of lower costs) are distributed among dif- town. Local participation in bill collection and ferent customer classes. If electricity reform is to maintenance can also be effective. For example, in benefit the poor, tariff policy must be designed Bangladesh locally managed cooperatives buy with their needs in mind. power from the grid and distribute it locally. They Second, the fixed costs of transmission and dis- have a better record on billing, maintenance, and tribution equipment have not fallen enough to reducing losses than that of the main power utility make it profitable to extend the grid to all areas. in charge of urban distribution (World Bank Given the huge difference between cost of supply 1996). and (socially or politically) acceptable tariffs for some rural populations, extensions of the grid to Does cheaper mean better? these people must be subsidized if they are to hap- Cheaper generation has reduced the total cost of pen at all. There are two ways in which this can providing electricity. That should mean lower happen: within the utility by cross-subsidy from prices for the poor who are already served by a profitable customers (under an obligation to grid. Reductions in the fixed costs of transmission extend service) or with subsidies from outside the and distribution equipment, and innovations to utility, for example, from a rural electrification reduce the costs of supplying remote areas, fund. improve the prospects that grids will be extended to rural areas. Conclusion However, there are two important caveats. Reform of grid-based electricity provision will not First, for the poor to benefit, lower production revolutionize access by the poor. The cost struc- costs must be passed on as lower prices. In many ture of grid provision, so unfavorable to extend- developing countries tariffs have risen following ing access to rural populations, is not reform as subsidies have been withdrawn fundamentally altered by electricity reform. (despite cost reductions). In many respects this However, reform unambiguously moves the over- benefits the poor,7 but it does make access to all level of costs in the right direction. At the mar- electricity less affordable. One solution is to gin, cost reductions imply both increased direct electricity subsidies much more precisely affordability of grid services and increased viabil- to the poor, for example, through the introduc- ity of grid extensions. As long as the introduction tion of lifeline tariffs.' More generally, the of competition and profit-seeking private partici- design of the tariff system is crucial in determin- pation is combined with regulation and tariff 3 Pds per megawatt-hour 3 30 25 20 15 3 5 10 3 1991 1992 1993 1994 1995 1996 1991 1998 1999 200P Note: The years refer to fiscal years, ending in March. a. Average for Aprl to October 1999. Source: Electrcity Pool of England and Wales 2000 4 Pence per kilowart-hour (1989-90 prices; 6 - 4 2 199f 1991 1992 199I 1994 1995 1996 1997 1998 1999 Note The years refer to fiscal years, ending in March. Source: U.K. Department of Trade, Statstical Office 1999. design that is sensitive to the needs of the poor, 2. Although the widespread adoption of CCGT as electricity reform is a positive step. the new technology of choice was linked to the fall in the price of gas, the technology can run on diesel. This dis- cussion therefore also applies to countries with no access to gas. Notes 3. The cost estimates are from Richard Fairbairn of 1. Reform of grid-based energy services has concen- PB Power Ltd. trated on the generation and distribution of electricity. 4. For a more detailed discussion of this issue see Electricity networks are far more extensive than gas net- Bacon 1995. works in most parts of the developing world and reform 5. This is one reason why employment in the elec- of gas networks has been less widespread. This Note tricity industry has fallen dramatically following reform. therefore discusses electricity reform, although many of This is a controversial social effect of reform and one that the important points apply to both industries, given the has direct implications for the poor. However, the sub- parallels in terms of network economics. ject is beyond the scope of this Note. DOES REFORM OF ENERGY SECTOR NETWORKS IMPROVE ACCESS FOR THE POOR? 6. CPI-X achieves this by fixing allowed prices for a Newbery, David M., and Richard Green. 1996. 'The given period, during which the utility can retain the prof- English Electricity Industry." In Richard J. Gilbert and its arising from any cost reduction. At the end of this Edward P. Kahn, eds., International Comparisons of period the price cap is reviewed to ensure that over the Electricity Regulation. Cambridge: Cambridge University long term the benefits are passed to consumers. Press. 7. Since energv subsidies are a larger proportion of Tuntivate, Voravate Tig, and Douglas F. Barnes. 1997. GDP in many developing countries and benefit the 'Thailand's Approach to Rural Electrification: How Was well-off more than the poor (because the well-off use It Successful?" World Bank, Energy Sector Management 3 6 more energy, particularly electricity), reductions in Assistance Programme, Washington, D.C. subsidies will tend to benefit the poor in fiscal terms, U.K Department of Trade and Industry, Statistical particularly if the funds are redirected toward social Office. 1999. Digest of UK Energy Statistics. London. policies. For further discussion of energy subsidies see World Bank. 1996. Rural Energy and Development: World Bank 1996 and International Energy Agency Improving Energy Supplies for Two Billion People. 1999. Washington, D.C. 8. Lifeline tariffs essentially involve subsidizing elec- tricity only at the very low levels of consumption typical Stephen Powell (stephen.powell@nera.com) and Mary Starks of poor households. The subsidies apply to very small (mary.starks@nera.com), National Economic Research amounts of electricity and do not cost too much. This Associates, London. policy has been successful in Thailand; see Tuntivate and Barnes 1997. This Note originally appeared as a chapter in Energy Sector Management Assistance Programme (ESMAP), Energy and References Development Report 2000: Energy Services for the World's Poor Albouy, Yves, and Nadia Nadifi. 1999. "Impact of (Washington, D.C: World Bank, Power Sector Reform on the Poor: A Review of Issues and 2000). For more information on C CNA A D the Literature." World Bank, Energy, Mining, and ESMAPgo to www.esmap.arg. LJIV 1 Telecommunications Department, Washington, D.C. Bacon, Robert. 1995. "Competitive Contracting for Privately Generated Power." Viewpoint 47. World Bank, Finance, Private Sector, and Infrastructure Network, Washington, D.C. - . 1999. "Global Energy Sector Reform in Developing Countries: A Scorecard." World Bank, Energy Sector Management Assistance Programme, Washington, D.C. CAMMESA (Companlia administradora del mercado mayorista electrico sociedad an6nima). 2000. www.cammesa.com. Electricity Pool of England and Wales. 2000. www.elecpool.com. January. Fairbairn, Richard. 2000. "Analysis of Electrical Trade Price Indices." PB Power Ltd. Hunt, Sally, and Graham Shuttleworth. 1996. Competition and Choice in Electricity. Chichester, England: John Wiley and Sons. International Energy Agency. 1999. Looking at Energy Subsidies: Getting the Prices Right-World Energy Outlook 1999 Insights. Paris. Izaguirre, Ada Karina. 2000. "Private Participation in Energy." Viewpoint 208. World Bank, Private Sector and Infrastructure Network, Washington, D.C. Scorecard for Subsidies How Utility Subsidies Perform in Transition Economies 3 7 Laszlo Lovei, Eugene Gurenko, Michael Haney, Philip OKeefe, and Maria Shkaratan Unlike the poor in many developing countries, those in Central and Eastern Europe and the former Soviet Union are highly connected to network utilities. During the early 1990s, it became clear that with- out subsidies, many households would have difficulty paying their utility bills. Governments started to experiment with various subsidy schemes. This Note describes the main ones, scores their performance, and provides a methodology for governments designing subsidies to decide which scheme is likely to be the best fit for their country. The scoring system * The extent to which the poor are being reached Laszlo Lovei i4 Lead The performance of a subsidy can be measured in (that is, coverage). Specialist in the Energy several dimensions. Key is its success reaching the * The share of the subsidy that goes to the poor Sector Unit of the World poor, and the amount of purchasing power it trans- (that is, targeting). Bank's Europei and fers to them. However, the evaluation of any subsidy * Predictability of the benefit for the poor. Central Asia Itegion. mechanism should go beyond the amount of sup- * The extent of pricing distortions and other Before joining!the Bank, port provided to the poor. Subsidies have a cost that unintended side-effects. Laszlo worked 'in the needs to be financed from somewhere. For a given * Administration cost and difficulty. National Planning level of purchasing power to be transferred to the Not all criteria are of the same importance. A Office of Hunkary. poor, this cost depends on the targeting efficiency of financially strapped government may assign top pri- Eiuancial Eco omist), the subsidy mechanism. Some subsidy mechanisms ority to reducing the leakage of the subsidy to the Michael Haney 1:o -, are highly unpredictable (which tends to invite cor- non-poor. Another with limited administrative Specialist), Phtlip ruption in countries with poor governance). Some capacity may value simplicity more. Few mecha- O'Keefe (Seniot Human subsidies distort price signals and other incentives nisms perform well on all the criteria-for instance, ResourcesEconiomist), resulting in the waste of resources. Certain types of high coverage is usually associated with low target- and Maria Shkaratan subsidies demand sophisticated institutions or tech- ing. Furthermore, not all subsidy mechanisms are (Research Analyst) also nology to administer them while others are simple. applicable or perform equally well across the full work in the Baink's Thus the following criteria are used to score the range of utility services. Lack of water meters, for Europe and Central Asia subsidy schemes: example, may pose a problem for lifeline tariffs. It Region. SCORECARD FOR SUBSIDIES HOW SUBSIDIES PERFORM IN TRANSITION ECONOMIES Administration Pricing cost and Aggregate Coverage Targeting Predictability distortion difficulty score' No disconnection I I O -2 0 2 Across-the-board price subsidy I to 2 0 2 -2 0 2 to 4 Lifeine tariff vnth 2 blocid I to 2 0 2 -i 0 3 to 5 ljleline tari with 3 blodu I to 2 1 -2 0 5 to 7 3 8 LIfeline anff wtth loatg bloWcks I to 2 1 2 -I -1 4 to 6 Pncing discount for pnvileged consumers I 1 2 -1 -I 4 Burden imit based on actusa utnliq expenditure I 0 1 -2 -2 -I Burden limit based on utily expenditure norms I I I 0 -2 3 Otter earnarked cash transfer I 2 1 -I -2 4 Non-earmarked cash transfer 1 2 1 0 -2 5 a. (alculated with double weights to first two critena. Source: World Bank stauf calculations. is therefore impossible to rank subsidy mechanisms * Across-the-board Price Subsidy. At the beginning of independently of time, place and sector. the 1990s, it was commonly believed in all tran- It also matters who has to cover the cost of the sition countries that real wages would start grow- subsidy. The discussion of each subsidy mecha- ing in the near future. Many governments nism below includes a brief assessment of their postponed the realignment of utility prices and financial impact on those who will have to pay: tax- costs, hoping to minimize the associated social payers, non-household consumers (businesses), costs and political repercussions. Most countries and the supplier utilities. The methodology leaves in Central and Eastern Europe have abandoned important issues open. It does not cover the across-the-board price subsidies by now, but gov- interaction between various utility subsidy ernments in the former Soviet Union have not, mechanisms-for example, the combined effect although residential tariffs have been brought of a lifeline tariff and a burden limit-or between closer to costs than they were in the early 1990s. utility subsidies and other sector-specific * Lifeline Tanff Restricting the price subsidy to subsidies-for example, housing and food subsi- the initial block of consumption (called the dies. Furthermore, it does not provide practical basic need level) offers a less costly alternative guidance how to make the selected subsidy mech- to across-the-board price subsidies while pre- anisms perform better, or how to adapt these to serving their politically attractive universal pro- changes in utility ownership and regulation. These tection feature. Not surprisingly, many issues represent an agenda for further research. governments in the region introduced lifeline tariffs for utility services with metered or rela- The variety of subsidies tively easily estimated consumption, such as There are seven main types of utility subsidies in electricity and gas. This option will also apply to Central and Eastern Europe and the former Soviet water as water metering expands. Union: U PriceDiscountforPrivileged Consumers. The Soviet * No Disconnection. In several countries in the Union operated a system of utility price dis- region, utilities are pressured by governments counts between 25 and 100 percent, not to not to disconnect households who do not pay reduce poverty, but to reward certain occupa- their bills. Non-payment by residential (and tions (police, firemen, judges, and so on), and many other) consumers has remained particu- to compensate for birth defects, hard labor, larly widespread in the Balkans and the former war, or man-made catastrophes like Chernobyl. Soviet Union. Afraid of popular discontent, few newly inde- 'I -S~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ The scores assigned to each subsidy mechanism were determined (non-earmarked cash transfer and the burden limit based on util- the following way: ity expenditure nornms scored zero. Mechanisms that diston the . Coverage ratios below 33 percent scored zero, between 33 effecive pnce for most households (across-the-board price subsidy percent and 66 percent scored one, and higher than 66 percent and three-block lifeline tanffl. or greatly distort this pnce for the scored two. A number of subsidy mechanisms scored 'one so two," beneficianes (no-disconnection and the burden limit based on since the share of the poor who are connected (and can be actual utility expenditures) scored two. The remaining subsidy reached) vanes greaty from one utihty to another. mechanisms scored one. . Targeting ratios below that attainabk by random selecton F For administration cost and difficulty, subsidy 39 scored zero. above that rato scored one, and above Ewce that mechanisms thai can be administered by the utilities with little rayo scored two extra effon ino-disconnecion, across-the-board pnce subsidy, . For predictability, no-disconnecion, the most unpredicable and two-block and three-block lifeline tariffs) scored zero. mechanism, scored zero. Mechanisms dtat provide benefits with Mechanisms that require significant extra effort lJ-oating- life- high certaminry (across-the-board price subsidy. twoblock and line and pnvilged discountsi scored one. Subsidy mechanisms floaong'-block lifeline tariffs, and pnrviged discounts) scored needing a network of offices to administer the income tests two. The remaining subsidy mechanisms scored one. scored rwo. . For pricing distortion, the two subsidy mechanisms thar . Scores for the last two cnitena were gren a negaove sign to do not affect the effective prKe of the last unit of consumption failitate the calculation of aggregate scores. pendent republics dared to overhaul this svs- * Non-earmarked Cash Transfers. General social tem (the Baltic states are the most notable assistance payments can also help households exception). A few parliaments even extended to pay their utility bills, even though the money the privileges. As a result, some level of privi- is not designated for that purpose. In countries lege is enjoyed by one third or more of the pop- where utilities do cut off non-payers, surveys ulation in several former Soviet states. have indicated that households place a high * Burden Limit. An alternative to limiting prices is priority on paying their utility bills (right after to help selected households to pay their bills- paying for food and rent). However, for politi- limiting the burden on household budgets. The cians these payments may lack the appeal of burden limit typically varies from 15 to 30 per- introducing specific relief from utility bills at cent of income. In Ukraine, for example, the the same time as utility prices increase. burden limit was set at 20 percent in 1998. The subsidv is calculated on the basis of actual utility Findings bills, and household income must be verified by The performance of these subsidy mechanisms was employers, the social security office, or the tax analyzed using household survey data and infor- authority. In a few cities in Russia and the Kyrgyz mation provided by various government agencies Republic, the calculation of the subsidy is based in Central and Eastern Europe and the former on utility expenditure norms as opposed to Soviet Union. Table 1 sets out the scores for each actual utility bills in order to reduce the leakage type of subsidy by the performance criteria. Box 1 of the subsidy to the non-poor. describes how the scores were calculated. * Other Earmarked Cash Transfers. An alternative All the subsidy mechanisms reached at least way to reduce the burden is to provide a subsidy one-third of the poor. Two mechanisms-across- calibrated to ensure a certain level of income the-board price subsidy and lifeline tariff- after paying for rent and utilities. The Bulgarian reached more than two-thirds of the poor, but only government and most Latvian municipalities for electricity and water, since at least one-third of operate such schemes. The Energy Fund in the poor do not have access to gas, district heating, Hungary that operated in 1997-98 was another and sewerage in most countries in the region. earmarked cash transfer scheme. It applied a Targeting ratios for the across-the-board price complex formula to calculate the size of the sub- subsidy, two-block lifeline tariff, and burden limits sidy to individual households in order to remain based on actual utility expenditures were below within its total endowment. that attainable by random selection. For no- SCORECARD FOR SUBSIDIES HOW SUBSIDIES PERFORM IN TRANSITION ECONOMIES disconnection, the two-block "floating" lifeline tar- * Determine the weights that they assign to each iff, and burden limits based on utility expenditure of the five criteria (if neither metering nor esti- norms they were somewhat better than random mation of actual consumption is feasible, zero selection. For the three-block lifeline tariff and weight should be assigned to the price distor- income-tested (earmarked or non-earmarked) tion criterion). cash transfers they were at least twice that pro- * Calculate the aggregate scores for each subsidy duced by random selection. mechanism and for each type of utility service. Across-the-board price subsidies, two-block life- * Identify the mechanisms with the highest 4 0 line tariff and price discounts for privileged con- aggregate scores for each type of utility service. sumers provided highly predictable support to the To illustrate how this can be done, table 1 poor. Burden limit, most earmarked and non-ear- includes aggregate scores calculated with double marked cash transfers, and three-block lifeline tariff weights assigned to the first two (typically most (with a "penalized" third block) had medium pre- important) evaluation criteria. For utilities with dictability. No-disconnection and certain non-ear- high connection ratios among the poor (for exam- marked cash transfers were highly unpredictable. ple, electricity and water), the three-block and No-disconnection and the burden limit based "floating"-block lifeline tariffs occupy the first and on actual utility expenditures created large price the second place. For utilities with lower connec- distortions (by making the effective price of the tion ratios among the poor (for example, district household's last unit of consumption zero). heat, gas and sewerage), the first place is shared Across-the-board price subsidy, and the three- between non-earmarked cash transfers and the block lifeline tariff created significant price distor- three-block lifeline tariff. When no reliable esti- tions for all (or almost all) households. Two-block mate exists for actual consumption (or the billing and "floating"-block lifeline tariffs and privileged system suffers from major deficiencies), lifeline discounts created significant price distortions for tariffs drop out, the criterion of pricing distortions the minority of households connected. Non-ear- become meaningless, and the top score goes to marked cash transfers and the "normative" burden cash transfers and privileged consumer discounts limit created no utility price distortions. or the across-the-board price subsidy, depending No-disconnection, across-the-board price sub- on the connection rate of the poor. sidy, and lifeline tariffs (with the exception of life- lines with "floating" blocks) were very simple to Funding administer. Price discounts for privileged con- In principle, the cost of the subsidies can be covered sumers and the "floating" lifeline tariff posed sig- by the utilities themselves (through decapitaliza- nificant administrative challenges since the tion), non-household consumers (by setting the utilities needed to match meter readings with cer- prices they pay above cost), or the budget (from tain household characteristics. Burden limits and general taxation). The first option, however, should other income-tested cash transfers would have be used as a short-term buffer only, because it rap- overloaded the administrative capacity of utilities, idly depletes the working capital of the utilities, and required specialized networks of local offices. undermines their services, and ultimately reverses the poverty alleviation impact of the subsidy. How to use the scoring The second option may also become unsustain- To find the subsidy mechanism that suits their cir- able if demand from industrial consumers is highly cumstances best, decisionmakers need to elastic with respect to price (for example, in the dis- * Obtain information on the proportion of the trict heating sector). In this case, the surcharge sim- poor connected to each type of utility (this will ply drives down demand and fails to raise the help to narrow the coverage scores of across- revenue needed for the subsidy. Even when the the-board subsidies and lifeline tariffs). short-term price elasticity of industrial demand for * See whether reliable estimation and billing of a specific utility service is relatively low (as in the actual household consumption is possible (this case of electricity), the cost of distorting the price will show whether lifeline tariffs can be mean- of an essential input is likely to be higher than rais- ingfully considered). ing revenue through the general tax regime. Thus financing of the subsidy from the budget seems to be the best option in most utility sectors and countries. The higher the targeting efficiency of the subsidy mechanism, the lower this burden is going to be. For a given amount of purchasing power to be transferred to the poor, the three- block lifeline tariff and the income-tested cash transfer schemes require the least money. In fact, three-block lifeline tariffs can be designed so that the "penalty" at high consumption level (in the third block) covers the subsidy at low consumption level (in the first block). Across-the-board subsidies cost so much that most governments have phased them out. While at first sight no-disconnection appears to have no impact on the budget, in reality it tends to be so costly for utilities that the budget not only receives lower revenues from corporate taxes, but over time has to finance maintenance and rehabilita- tion costs and assume responsibility for the accu- mulated debt in order to prevent the utility collapsing. There is a further penalty for the exchequer-when utilities have been sold in such circumstances (for example, in Armenia, Georgia, Kazakhstan, and Moldova), the proceeds have been much lower than in countries where non-pay- ers are routinely disconnected, such as Hungary. This Note is based on a longer paper: \! .. U tility, Services for the Poor-Policies and Practices in Central atnd Eastern Europe and the Former Soviet Union," by the same authors, published by the WVorld Bank in September 2000, for the Annual Mfeetin,gs of the 14'orld Bank and International Monetary Fund in Prague. U~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ .11 ..... .. ..... . .... ...... ... .. Multiservice Infrastructure Privatizing Port Services 43 Lourdes Trujillo anid Gustavo Nombela Ports have become increasingly capital intensive. Economies of scale have led to larger, more specialized ships. And competition between ports has started to grow. As a result, governments are reorganizing the way ports are run and permitting more private ownership and service delivery. Because ports provide multiple services, if governments are to design an efficient legal and regulatory framework for private participa- tion it is important to study all these activities to evaluate the best approach. Moreover, because these activities must take place in a small space, it is important to study how they are coordinated. More competition better facilities and connections. Therefore, mod- Lourdes Trujillo is Professor In recent decades there have been profound ern ports must be extremely competitive to be able of Economics and Director changes in maritime transport. Ports, once labor- to offer optimal combinations of time and price of theDepartment of intensive, have become more capital-intensive, for those firms demanding their services. Applied Economics at the making much port labor redundant. The devel- Somewhat less widely understood is the potential University of Lcs Palmas de opment of containerized transport has dramati- for intraport competition. Seaports offer many serv- Gran Canana. Gustavo cally reduced the cost of cargo handling, but it has ices to ships. The potential for competition in pro- Nombela is Proftssar of also required much investment in equipment viding these services depends largely on the assets Economics at the same uni- (gantry cranes, specialized terminals, improved required to provide them, the space available in the versity and spent 1 999 as a pavement, and so on). The economies of scale port, and the volume of traffic. A defining physical visitingfellow at the World obtained by the transport of large quantities of characteristic of ports is that space is limited. Partly Bank Institute. 3oth containers and bulk cargoes have led to the build- this is because many of the activities must take place authors have published ing of larger and more specialized ships that around the ship. But it is also because port infra- extensively on transport restructuring and regula- require substantial port investments in new infra- structure is expensive to build, and much of it can tion and have advised got, structure and equipment. Moreover, the develop- only be expanded in discrete units. etiments in Lavin Amevica ment of integrated and intermodal transport on port reforms. chains has reduced transport costs so much that it Multiservice operations is often preferable for a shipper to use a distant For the purposes of analysis, it is useful to divide port instead of a closer one, if the distant port has port activities into infrastructure, services pro- MULTISERVICE INFRASTRUCTURE PRIVATIZING PORT SERVICES .L rtt ~~~~~~~ Maritime access infrastructure - ,- *Sea dtkrte (break eois Oa %- *Signaling (IgOl. buoyd - Port Port infrastructure Port superstructure area * Berths, docks, basins * Cranes, pipes 44 Storage areas * Terminals, sheds 4 4 * Internal connections (roads, other) 3-n. r~~~~~u% al-y r~~~~~~~~~~~I1 W.qio (hor Suc:Estache and de Rus 2000. vided using the infrastructure, and coordination for a ship to enter and exit a port safely. In some between the activities at the port. ports pilots are public employees, and in others they are private agents licensed by the port author- Many kinds of infrastructure ity. Towage is the operation of maneuvering a ship A port obviously needs good access by sea (chan- using tugs. Like pilotage, it can be provided by pri- nels, locks, aids to navigation, and so on) and by vate firms or operators hired by the port authority. land (roads, railways, and canals). The port also Cargo handling includes all activities related to has internal infrastructure, such as docks and stor- the movement of cargo to and from ships and across age yards, and internal superstructure. The super- port facilities. The historic distiDction berween structure can be classified into fixed assets built on stevedoring-moving goods within a ship-and the infrastructure, such as sheds, fuel tanks, and loading-moving goods onto a ship from the of fice buildings, and fixed and mobile equipment quay-has been eroded by modern cargo handling such as cranes and van carriers. techniques like containerization. Because the tech- In general, the port authority is responsible for nique used depends on the type of cargo, it is effi- the port, and the state or municipal government is cient to use specialized equipment. This has led to responsible for the land access infrastructure. the formation of terminals that specialize in partic- They divide responsibilityfor the maritime access ular cargoes. Because cargo handling charges infrastructure, with the port authority responsible account for between 70 percent and 90 percent of for breakwaters, lights, s and the govern- the cost of moving goods through a port, regulators ment responsible for the rest. concered with costaefficiency of the port must pay cargo handling particular attention. Many kinds of services A further range of sertvices is provided by agents Many services are provided by different operators. who handle the documentation for port users- First, there is a group of services related to the health clearances, import and export require- berthing, which include pilotage, towing and tying. ments, and customs duties. These agents are They can be provided by the port authority or pri- known as consignees, and are hired by shipping vate firms. Pilotage covers the operations required companies to arrange in advance the administra- tion and all matters related to the use of port facil- * Build (or Rehabilitate), Operate, and Transfer. ities by a ship. A modern port must minimize red Private operators build or rehabilitate facilities, tape for port users. Delays cost money. which are eventually transferred to public own- Finally, there are ancillary services, including ership. Also known as a concession. supplies to ships such as fuel and water, cleaning, * Joint ventures. Operators create a new inde- and refuse collection. pendent company. This type of agreement arises when two or more parties with common Coordination interestsjoin forces (for example, one firm sup- With many activities being performed in a limited plies technology and know-how, while another 4 5 space, there is a need for a coordinator responsible supplies market knowledge). for the proper use of common facilities, for safety, * Leasing. The port authority leases port assets to and for the design of the port. In most ports, this is private operators for a given period. In contrast the role of the port authority. It is generally a pub- with a concession, the private operators do not lic institution, with representation of local interests, usually make investments, and therefore they but in some ports the authority is purely private. only assume commercial risks. The common forms of organization are known * Licensing. Private operators provide services as landlord, tool, and services ports. requiring basic equipment, which they own. * Landlord port. The port authority owns and The port authority owns the port infrastructure manages the port infrastnicture. Private firms and superstructure and charges the private provide all other services and own the port operators for their use. Stevedoring companies, superstructure. pilots, tug operators or consignees can work * Tool port. The port authority owns both infra- under this type of agreement. structure and superstructure. Private firms pro- * Management contract. The port authority vide services by renting port assets, through remains the owner of the port, but the port is concessions or licenses. run by a private firm which can provide a more * Services por. The port authority is responsible commercial approach to operations. Both for the port as a whole, owning the infrastruc- investment and commercial risks are faced by ture and superstructure and hiring employees the public sector, since managers do not invest to provide services. their own capital in the port. In landlord and tool ports, the port authority is usually public and the port operators are private Shared or exclusive use firms. Services ports are more likely to be privately A basic consideration in choosing the best form of owned, with one private firm operating the port as privatization is whether the service to be privatized a single unit. The role of port authorities should requires the exclusive use of the port's fixed assets. be confined to the provision of infrastructure and Activities in which the fixed assets can be shared the coordination of port services. However, in include services such as pilotage, towing, consignee many countries where there is no regulatory insti- services and ancillary services to ships and crew. tution for seaports, port authorities perform many Under a system of licenses, several operators can be other tasks, such as investment planning and authorized to provide these services. The prices financing, or regulation of the tariffs that private they charge and the quality of their services can be operators charge to port users. regulated. In cases where competition is possible, for example between consignees or pilots, strict reg- Privatization options ulation of prices would not be necessary unless col- The options for privatizing port services depend lusive practices were detected. In ports where space on the size of the port and the services involved, limits the number of operators, prices and condi- and include: tions of service need to be regulated to prevent mar- * Full privatization. All assets and liabilities are ket domination by a few firms who may try to exploit transferred to the private sector. their position to extract rents from port users. * Build, Operate, and Own. Parts of the port are Because space is so scarce in ports, exclusivity in sold to private operators to be developed. the use of some fixed assets may be necessary. Such MULTISERVICE INFRASTRUCTURE PRIVATIZING PORT SERVICES compete with each other. When a company serves all ships using a given berth, the port authority can 1 4 L# - - make it responsible for collecting port tariffs- ' - * _ (,, ,1U;t;X!) ^ ~S;, , charges for the use of the port-as well as the oper- ator's own charges. At this volume of traffic, it is also possible to provide incentfives for private oper- Note it Twent Foot 'quinaleon nt 15,3 1 tators to finance projects for infrastructure Note: TEU is a Twenty Foot Equnient UnmL This is a unit of measurement equivalent to one 20-foot shipping container, enhancement or construction. Source: Kent and Hochotein (1998). 4 6 Finally, in a region where container traffic is above 300,000 TEUs a year, the market size allows assets and associated services include terminals for for the existence of several ports that can compete cargo handling, storage areas, repairing docks and for traffic. Such inter-port competition again fuel suppliers. It is more complicated to introduce reduces the need for control over private opera- private participation in these services, since opera- tors' prices. However, even in this optimal case, tors need to use assets that are considered to be attention is still needed for the proper drafting of optimally owned by the port authority. Therefore, concession contracts, since private operators must concession contracts need to be written carefully in be compelled to fulfill their obligations not only order to reconcile private operators' interests with on service conditions and charges, but also on port authorities' objectives. At the same time, con- equipment maintenance, safety, quality of serv- tracts must include incentives for private operators ices, and all other matters which are costly for the to maintain or enhance assets as required. concessionaire, and could be underprovided. The number of operators for these services is by definition extremely limited, although it depends on port size. Similarly, the need for regulation of charges and quality depends on the type of port References and how many alternative ports are nearby. In a Drewry Shipping Consultants. 1998. World Container port in a highly competitive environment, the reg- Terminals: Global Growth and Private Profit. London. ulator need not be too concerned about over- Estache, Antonio, and Gines de Rus, eds. 2000. charging, because operators that overcharge risk Privatization and Regulation of Transport Infrastructure: losing customers. Guidelines for Policymakers and Regulators. World Bank Institute, Washington, D.C. Rule of thumb for competition Kent and Hochstein. 1998. "Port Reform and The privatization strategy should maximize the Privatization in Conditions of Limited Competition: The potential for competition. There is no universal rule Experience of Colombia, Costa Rica and Nicaragua." for the degree of competition and regulation desir- Journal of Maritime Policy Management 25 (4): 313-33. able in a port with a particular volume of traffic, but for container ports there is acceptance of some This Note is based on a chapter in Estache and de Rus 2000. thresholds (box 1). A port handling fewer than 30,000 TEUs a year is too small to have several ter- Lourdes Trujillo, (email: lourdes@empresariales.ulpgc.es) and minals and operators. The best solution is to have a Gustavo Nombela (email: gnombela@empresaniales.ulpgc.es) single operator and to regulate its charges. Universidad de Las Palmas de Gran Canaria, Spain. In a port handling between 30,000 and 100,000 TEUs a year, it is feasible to have several operators, possibly sharing a single terminal. There would be intraterminal competition, with stevedoring compa- nies competing to provide cargo handling services. A port handling more than 100,000 TEUs a year is big enough to have a number of terminals oper- ated by several companies that can use separate berths and can manage them better. The terminals Port Concessions in Chile Contract Design to Promote Competition and Investment Juan Foxtey and Jose Luis Mardones The objective of Chile's port reform is to encourage investment in better port equipment, in the hope that this will lead to more effi- cient service, in part by attracting larger, more modern ships. The first four major concessions, under which integrated terminals are run exclusively by private companies, started operations in January 2000. The integrated approach to port services replaces a system of free entry of multiple stevedoring companies. This Note reviews how the concessions were designed: the criteria for the winning bids, the rules to prevent concessionaires' abusing their monopoly power, the rules to encourage investment, and the provisions for redundant workers. The old multioperator system and its limits not permit an efficient use of limited backup Juan Foxley is an The new concessions replace a system established space in Chilean ports. This problem was exac- international consultant, in 1981, when the government tried to introduce erbated by the considerable growth of trade in member of the bodrd of more efficient labor practices and competition in the 1980s and 1990s. l'alparaiso Port Company, stevedoring. Private stevedore firms were gradu- Emporchi tried to correct the shortage of and its representative at the ally allowed to perform all transfer services in investment by tendering a non-exclusive con- National Ports Concession state-owned ports, a system known as the multi- cession to install cranes in one of the main Committee. JoseLuis operator model. Until then, Emporchi, the state ports. The tender was won by ajoint venture of Alardones is a management port company, had been the sole cargo handler the three largest stevedore companies, but this consultant. In 1998 and on land, while stevedores performed cargo oper- companv was never profitable. The joint ven- 1999, he was executive pres- ident of the Natioinal Ports ations aboard ships and the number of workers ture partners claimed that the multioperator Concession Committee; in was restricted by licensing. The changes increased system made it easy for small and informal steve- 1998, chairman of the throughput considerably, even with limited doring companies to undercut prices by break- board of Valparafso Port investments in infrastructure. ing labor and safety regulations. Compan and member of the However, the division of cargo among several Dissatisfied with the performance of the non- board of Talcahuano-San stevedore companies limited their incentive to exclusive concession, the governmentintroduced Vicente Port Company. invest in modern transfer equipment, and did the present reforms. An exclusive concession for PORT CONCESSIONS IN CHILE CONTRACT DESIGN TO PROMOTE COMPETITION AND INVESTMENT each of the main container terminals makes a sin- fixed minimum tariffs for five years at non- gle company or consortium responsible for oper- concessioned state-owned terminals; it stipu- ating and maintaining it, and for all investments lated that the bids for the main terminals must in equipment and infrastructure-the mono- be simultaneous; and the bidding documents operator system. By the time this reform was intro- were made similar in all the concessions, rather duced, the majority of the nearly 40 ports in Chile than using a trial-and-error approach of starting were owned by the private sector, but Emporchi with one concession and evaluating its results. still handled most of the container and general For the initial round of concessioning the 4 8 cargo traffic. The private ports handled almost all government selected four terminals in the three the dry and liquid bulk cargoes. main ports. They were a container terminal in The intention of the new concession system Valparaiso that accounts for 75 percent of the is to promote investment in modern transfer movement in the port, a container terminal in equipment and in new berths when needed, and San Antonio (60 percent), a break bulk terminal to bring the management of the terminals up to also in San Antonio (8 percent) and the whole date. It is also intended to reduce port costs to of San Vicente port. These terminals accounted clients and enhance service quality, particularly for half the cargo managed by Emporchi, and by reducing waiting and service times. More effi- the concessions were awarded in August 1999. cient ports should attract larger and more mod- (Some smaller ports have also been tendered ern ships, transferring a reduction of freight with mixed results and others will eventually charges to final clients in the medium term. benefit from some form of private involvement). The process Bidding mechanism The government faced a number of challenges. It Policymakers faced a number of trade-offs in the had to obtain approval by the legislature, one of the design of the bidding process. One was between conditions being that agreement must be reached lower tariffs and higher quality service. Another with labor unions and interested stevedore especially tricky one was the distribution of companies. It had to form ten new state port com- expected productivity gains. Should exporters, panies as successors to Emporchi, rapidly but with importers, shipping agents, and shipping com- no service disruptions. Finally, it sought to attract panies be the main beneficiaries when tariffs fall international interest to the bidding process. and service standards improve? Should the gov- The new state port companies, one for each ernment instead try to maximize its revenues main state-owned port, own the port infrastruc- from concessions? The outcome was a compro- ture, run maritime and land access, and enforce mise. Bidders would be asked to offer the lowest the concession contracts. By law they are not maximum tariffs. If they bid at a certain pre-set allowed to handle cargo or berthing. They share floor value, they should include an offer for a tie- revenues with the concessionaire-a minimum breaking payment to determine the winner. The annual rental and some revenue sharing on the main features of bidding were the following: upside. It is not expected that the supervisory * Bidders should first offer tariffs as low as they and revenue-sharing roles will be in serious con- judged profitable, but the authority set a floor flict since the minimum rent from the conces- in order to discourage overoptimistic bids sionaire was such that a fair market return was from aggressive but probably inefficient par- assured to the port company. ticipants gambling that the government The design of the reform was influenced by would renegotiate charges after the conces- recent port reform experience in Latin sion was awarded. Those tariffs were defined America. Investors were particularly sensitive as a single bidding number (adjustable by the about terminals in Buenos Aires that found U.S. producer price index),but it represented themselves competing with Exolgan, a port in a a weighted average of four key charges, thus neighboring municipality governed by much giving concessionaires room to accommodate more favorable rules. The Chilean government their own particular pricing practices. Rules took several steps to reduce investors' fears: it stipulated that all tariffs be posted openly and discrimination among port clients is forbid- fixed annual rental payment. It indicates that den, although premium services and dis- tariffs could have been lower or that port assets counts by volume are permitted. There was were undervalued. still some risk in this tariff regime that opera- tors might cross-subsidize regulated tariffs Competition with non-regulated charges, in which case the The outcome of the bidding would approxi- bidders might focus more on the rental pay- mate a duopoly for the two main concession- ment in the bidding process. Regulators aires. The Antitrust Commission therefore expected that competition in non-regulated restricted horizontal integration between con- 49 markets would impede that outcome. cessionaires or between private port owners and * A bidder offering the floor tariff should also concessionaires in the same region. In particu- offer an upfront tie-breaking payment. This lar, a firm or its related companies cannot hold would act as a compensation mechanism if more than 15 percent of a concessionaire if they annual rental payments were underesti- hold more than 15 percent in another terminal mated by the authorities. or in a private port in the same region. * Annual rental payments were fixed in There are also limits on vertical integration. advance, to prevent implicit subsidies to con- No more than 40 percent of a concessionaire may cessionaires affecting the competitive posi- be owned by a "relevant" port player, defined as a tion of private ports. The rent must equal or shipping company, exporter, or importer operat- exceed a minimum rate equivalent to those ing more than 25 percent of transfers at the con- of Central Bank bonds of equivalent matu- cessioned terminal or more than 15 percent of rity, applied to the accounting value of assets transfers at the ports in the region in the previous in the concession, but concession contracts year. This is to prevent discrimination in favor of established an increasing rent to the state the related company, which would displace com- port company as tonnage rises. This means petitors and monopolize the related markets. the state port company is to some extent a This vertical integration restriction is reinforced partner of the concessionaire, sharing part of with several anti-discrimination rules, and with its commercial risk and being rewarded for tariff ceilings and service quality standards that. Contracts established annual rents pro- described below. The restrictions are temporary portional to actual tons transferred in the and can be lifted by the Antitrust Commission if previous year, with a floor in the downside the competitive situation changes. and with revenue sharing by the authority in The local shipping and stevedore companies the upside. argued in court that the bidding process dis- As it turned out, most tariff bids stuck to the criminated against them in favor of foreign ship- pre-determined floor value, so the tie-breaking ping companies which, because they had no mechanism was triggered. The upfront pay- history in the country, were not affected by the ments (in six annual installments) to the first rules against integration. They also argued that three state port companies in this process were the market had no potential for monopolistic nearly US$300 million, three times higher than behavior. The state port companies and the expected by the government. The tie-breaking Antitrust Commission replied that there are high device also boosted average returns to the state entry barriers in the port industry in Chile port companies on concessioned assets. For because of the scarcity of naturally protected bays example, for the San Antonio container termi- and sheltered waters, and therefore potential nal, returns on concessioned assets for the state exists for collusion between operators of ports in port company were 49.6 percent, well above the the same region and of monopolization of activ- 11.5 percent obtained when no tie-breaking was ities downstream. The Supreme Court ruled that expected. This is a high return given risk-free the Antitrust Commission and the state port com- rates of about 6 percent and the fact that down- panies had used their powers properly, but the side risk for gross income for the state port com- court case delayed the concessioning process by pany was limited by the pre-established floor of six months. PORT CONCESSIONS IN CHILE CONTRACT DESIGN TO PROMOTE COMPETITION AND INVESTMENT Incentives to invest that private companies, not state companies, Instead of stipulating how much the concession- employed these workers. After several labor stop- aire must invest, the concessions encourage invest- pages the government agreed to set up a safety ment simply by imposing penalties for slow service. net for workers who might be laid off after the Transfer velocities and ships' waiting times are concessions. Voluntary early retirement was pro- specified in the contract. The intention is that the vided for older workers, and 700 have already concessionaire will invest in the facilities itjudges availed of it. The safety net, if fully used, will cost necessary to avoid penalties. There are also rules US$30 million, about 10 percent of the upfront 5 0 for progressive improvement in these service stan- payments by winning bidders. dards during the life of the contract. The lesson is that there is no such thing as a The concessions are also designed to avoid private conflict when a national interest-in this any disincentives on the part of the concession- case, the country's foreign trade-is involved. aire to invest as the end of the contract The dynamics of conflict resolution and deci- approaches, since a departing concessionaire sion-making make it difficult to avoid political would be able to take only its more liquid and costs, which could be mitigated by making provi- mobile assets. The concessionaire will be com- sion for safety-nets in the early stages of conflict. pensated for the part of fixed assets not depre- ciated. To increase investors' confidence that Conclusion they will get fair market values, any disputes are While it is too soon to assess Chile's port reforms, to be referred to an independent arbiter. Also, there are some positive signs in terms of lower the initial concession period of 15 or 20 years tariffs and more efficient service. A crucial factor (depending on the port) may be extended to in getting both lower tariffs and a reasonable the maximum permitted by the law of 30 years, return to the treasury was the deliberate effort to if some investments in infrastructure (specified keep a high level of competitive tension among in the concession contract) are operative some prospective bidders. Five of the major world years before the initial period ends. operators participated in the bidding consortia Although basic maximum charges on vessels (Hutchison, P&O, Stevedoring Services of and cargo transfer are fixed in the concession America, HHLA and ICTSI, among others). contract, the concessionaire is also allowed to Competition was enhanced through simultane- charge special tariffs provided they are for addi- ous bidding, hiring an internationally respected tional value added (for example, extra charges investment bank whose fee was partly tied to the for prompt dispatch). Allowing premium serv- number of qualified bidders, and using sealed ices encourages the concessionaire to invest bids to avoid collusion among bidders. according to the evolution of both the technical Other reforms are needed to complete the progress in port operations and the demands of modemization of the ports. The issuing of mar- customers of different levels of sophistication. itime permits to build a new port should be trans- The contract stresses that premium services ferred from the administrative sphere to another must never preclude the supply of some basic format that can guarantee stability to investors in services by the concessionaire; otherwise tariff new private ports. Tariffs for navigation aid sys- ceilings would be effectively eluded. tems are too high and over-finance this service. Pilotage is monopolistic (reserved to former navy Labor unrest officers) and charges are also too high. There were several stoppages arising from labor unrest but with no additional delays to the concessions. The 5,000 employees of the stevedoring companies, some permanent, others Juan Foxley , i. C and Jose Luis Mardones temporary, demanded a return to the pre-1981 (mnardones@vtr.net). labor licensing system, and compensation for any workers laid off by the concessionaires. The government rejected both demands, arguing i ~ . .... . . . - - - - - - 1 - - - - - - - - 1 - - - - - - - 7 - - - -L. privatesector is an open forum to encourage dissemination of public policy innovations for private-sector led and market-based solutions for development. The views published are those of the authors and should not be attributed to the World Bank or any other affiliated organizations. Nor do any of the conclusions represent official policy of the World Bank or of its Executive Directors or the countries they represent. To order additional copies contact Suzanne Smith, managing editor, Room 19-216, The World Bank, 1818 H Street, NW, Washington, D.C. 20433. Telephone: 00 1 202 458 728 1 Fax: 001 202 522 3181 Email: ssmith7@worldbank.org Printed on recycled paper Papers in this volume are available online: www.worldbank.org/htmllfpd/notesI