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BUSINESS BRIEFING World

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Infrastructure and Poverty Briefing for the World Bank �

Infrastructure Forum, May 2-11, 2001

Includes exclusive CD-ROM

World Markets Series

BU S I N E S S B R I E F I NGWorld Inf ras t ruc tureand Deve lopment

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On the cover this will be overprinted with agrey tint too


BU S I N E S S B R I E F I NGWorld In f ras t ru c tu r e �and Deve lopment

THE WORLD BANK GROUP

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THE WORLD BANK GROUP


BU S I N E S S B R I E F I NGWor l d I n f r a s t r u c t u r e

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3

Pub l i s h e r Tina PriceEd i t o r Elizabeth CooperA s s i s t a n t E d i t o r Stuart WillesEd i t o r i a l A s s i s t a n t Jane VardyHe ad o f C omm i s s i o n i n g Nigel LloydHe ad o f D e s i g n Phil HendyBu s i n e s s B r i e f i n g D e s i g n Man a g e r Sam LearmonthA r t E d i t o r s Karen McDonald

Paul MitchellVioletta Pau

Paul ScottA s s o c i a t e P u b l i s h e r Adam CzarnockiP r o du c t D e v e l o pmen t Man a g e r Lisa DaviesP r o du c t D e v e l o pmen t E x e c u t i v e Paul NapperCop y C o - o r d i n a t o r Yulia BobrovaCD - ROM Pub l i s h e r Tim GreenP r o du c t i o n C o - o r d i n a t o r Julie LuckC i r c u l a t i o n Man a g e r Laurence WhiteS a l e s D i r e c t o r Simon OldfieldS a l e s M an a g e r Shahed SalahuddinR e g i o n a l M a r k e t i n g E x e c u t i v e s Karl Dyer

Louise JensenDenise King

Ashraf UddinHe ad o f S a l e s A dm i n i s t r a t i o n Ruth Richards

Pub l i s h i n g D i r e c t o r Ana BarcoCh i e f E x e c u t i v e Gino C Ussi

Special thanks to: Samia Benidir

BUSINESS BRIEF ING:World Infrastructure and Development

MAY 2001

All information obtained by the World Markets Research Centre Ltd and each of the contributors from various sources is as

current and accurate as possible. However, due to human or mechanical errors, the World Markets Research Centre Ltd and the

contributors cannot guarantee the accuracy, adequacy or completeness of any information, and cannot be held responsible for any errors

or omissions, or for the results obtained from the use thereof. Where opinion is expressed, it is that of the authors and does not necessarily

coincide with the editorial views of the World Markets Research Centre Ltd. Statistical and financial data in this publication has

been compiled on the basis of factual information and does not constitute any investment advertisement or investment advice.

Mountain High Maps Image(s) © Digital Wisdom, Inc.

2001 All rights reserved

Published by World Markets Research Centre Ltd –

a division of WMRC plc

CD-ROM duplicated by Sound Performance

Printed by Pheasant Communications Ltd

Reprographics by Progressive Print Solutions Ltd

Worldwide distribution by Aspect Marketing Services Ltd

12

J o h n F l o r a and J ama l S a g h i r , Director, Transport and Urban Development & 16Disaster Management, and Director, Energy and Water, The World Bank

Connect ing People to Resources – What Role for the Pr ivate Sector? 18P e t e r Wo i c k e , Managing Director, The World Bank Group

Fac ing the Pover ty Chal lenge – The Role of Infrastructure 22F r a n n i e A L é a u t i e r , Chief of Staff, Office of the President, The World Bank Group

Housing and the Poor – What Has Been Learned and What Can Be Done 26T h a k o o r P e r s a u d , Senior Economist, Finance, Private Sector and Infrastructure Department,

Latin America and the Caribbean Region, The World Bank

Uti l i ty Reform – Regulat ing Qual i ty Standards to Improve Access for the Poor 32B i l l B a k e r and S o ph i e T r émo l e t , Head of Water Economics Practice, and Consultant,

National Economic Research Associates (NERA)

In f rastructure Del iver y , Pover ty Al lev iat ion and Related Problems 35M i dd l e t o n N y o n i , City Treasurer, Bulawayo City Council

The Re-emergence of Infrastructure Finance in Emerging Markets 38Wi l l i am S t r e e t e r , Managing Director, Global Project Finance Group, Fitch

Improving Governance and Infrastructure in a Deve loping Wor ld Context – Publ ic-Pr ivate Par tnerships in South Afr ica 41And r é F o u r i e , Director, Effective Governance, National Business Initiative (NBI), South Africa

Mult i -ut i l i ty Pol icy – Promot ion, To lerance or Contro l? 45D i r k S omme r , Private Sector Development Specialist, The World Bank

Scorecard for Subs id ies – How Ut i l i ty Subs id ies Per form in Trans i t ion Economies 49L a s z l o L o v e i , E u g e n e G u r e n k o , M i c h a e l H a n e y , P h i l i p O ’ K e e f e and Ma r i a S h k a r a t a n , The World Bank

INFRASTRUCTURE AND CONVERGENCEINFRASTRUCTURE AND CONVERGENCE

INFRASTRUCTURE, POVERTY AND HUMAN DEVELOPMENTINFRASTRUCTURE, POVERTY AND HUMAN DEVELOPMENT

INTRODUCTIONINTRODUCTION

FOREWORDFOREWORD

ADVISORY PANEL ADVISORY PANEL

4

CONTENTSCONTENTS

K n o w l e d g e h a s H o r i z o n s . < <

> > L a n d h a s B o r d e r s .

( S h i m o n P e r e s )

As a global enterprise, we are also able tocombine our expertise in industry, technol-ogy, and financing. And because we knowthat many infrastructure projects would notcome about without private funding, wehave developed financing approaches thatinclude our partnership with multilateraldevelopment banks such as the World BankGroup. This, in addition to the fact that weare well-represented in more than 200 coun-tries worldwide, enables us to help bringgainful employment to many local areaswhere it would otherwise be scarce.

S i e m e n s E x p e r t i s ei n I n f r a s t r u c t u r e P r o j e c t s .The improvement of living conditions is aprimary objective of infrastructure projectsfrom Siemens. And the need to act is enor-mous: whether in guaranteeing the supplyof electrical power to developing areas or intapping regenerative sources of energy,whether in expanding major traffic arteriesor in modernizing telecommunication net-works – as a solution provider for traffic,power engineering and telecommunicationstechnologies, we look over the horizon todevelop projects that generate benefitstranscending national boundaries.

Power Transmission & Distributionw w w . e v . s i e m e n s . d e

Industrial Solutions & Servicesw w w . i s . s i e m e n s . d e

For more information, contact:

Global Electr ic i ty Investment Requirements to 2020 53Ma r i a A r g i r i and F a t i h B i r o l , Economic Analysis Division, International Energy Agency

(IEA), Organisation for Economic Co-operation and Development (OECD)

Key Chal lenges for the Energy Sector in Lat in America and the Car ibbean 58G i o v a n n i G i o v a n n e l l i , Investment Officer, Private Sector Department,

Inter-American Development Bank

Innovat ive Pr ivate Sector Par t ic ipat ion in Transpor t Infrastructure 63C e s a r Q u e i r o z , Lead Highway Engineer, Europe and Central Asia Region, The World Bank

Unintended Consequences – a Stor y of Publ ic Transpor t Finance 71P au l L M a r x , Senior Economist, Federal Transit Administration (FTA)

Concess ion or Sa le – An Innovat ive Par tnership Approach to Solv ing a South Afr ican Ci ty ’s Airpor t Problems 75D r J ame s L e i g l a n d and J o e l K o l k e r , Municipal Infrastructure Investment Unit (MIIU)

and Regional Urban Development Office for Sub-Sahara Africa, The United States Agency

for International Development (USAID)

Tr i - sector Par tnerships in Water and Sanitat ion 78K r i s t i n K om i v e s and L i n d a S t a l k e r P r o k op y , University of North Carolina, Chapel Hill

Water Concess ions – Who Wins , Who Loses and What To Do About I t 84C a r o l i n e v a n d e n B e r g , Residents Mission and Advisor, The World Bank

The Impact of Infrastructures on Co-evolut ion and Susta inable Deve lopment 88D r P a u l J e f f r e y and C l i v e T emp l e , School of Water Sciences, Cranfield University

In format ion and Communicat ions Technologies and Pover ty 91Ch a r l e s K e n n y , Information Infrastructure Economist, The World Bank

Are Poor Countr ies Los ing the Informat ion Revolut ion? 100F r a n c i s c o R o d r í g u e z and E r n e s t J W i l s o n I I I , University of Maryland

Rural Electr i f i cat ion in Bangladesh 105D r H a s n a J K h a n , Member, G8 Renewable Energy Task Force

New Lamps for Old - So lar Photo-vo l ta ics L ight Up Rura l Sr i Lanka 109J a y a n t h a N a g e nd r a n , Senior Vice President (A/L M), Manager, Administrative Unit,

ESD Project, DFCC Bank

Energy Infrastructure , Energy Markets and Pover ty in Lat in America and the Car ibbean 113P ab l o Mu l á s , Regional Co-ordinator for Latin America and the Caribbean, World Energy Council

The Renewable Energy Market and Oppor tuni t ies Created by New Regulat ions for the Braz i l ian Electr ic i ty Sector 116O s v a l d o S o l i a n o P e r e i r a , T e r e z a Mou s i n h o R e i s and T a n y a B r z e s k i A n d r a d e ,Professor and Doctoral Student, University of Salvador, and Doctoral Student, Federal University of Bahia

INFRASTRUCTURE AND INNOVATIONINFRASTRUCTURE AND INNOVATION

6

CONTENTSCONTENTS

MVSAT™ (Mobile Very Small Aperture Terminal)

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Del iver ing Electr ic i ty to the Rura l Poor – The Changing Paradigm 119M i c h a e l Webb , W i l l i am D e r b y s h i r e and Ma t t h ew B e l l , Former principal economist, The World Bank, and Director, Manager and Consultant,

Frontier Economics

The Right to Energy Supply – Electr ic i ty in Morocco 123D r i s s B e n h ima , Director General, Office National de l’Electricité (ONE)

Environmenta l and Soc ia l Dimens ions of Energy Reforms 125D r A l i B e b a , Former Chairman, Turkish Environmental Protection

and Packaging Waste (ÇEVKO)

In format ion Technology plus ET – A New Approach 127D r K l a u s R a v e , President, European Wind Energy Association (EWEA)

In f rastructures and Innovat ion: The Metropol i tan Bi lbao Exper ience 131A l f o n s o Ma r t i n e z C e a r r a , Director General of Bilbao Metropoli-30

Reducing Bus Acc idents and Susta in ing Publ ic Transpor t Ser v ices in the Deve loping Wor ld 136D Madhu B a bu , D A C Maund e r and T P e a r c e , Association of State Road

Transport Undertakings (ASTRU) and Transport Research Laboratory

Water-re lated Infrastructure Towards Recyc l ing Soc iety 139D r J a n u s z N i emc z y n ow i c z , Associate Professor, Department

of Water Resource Engineering, University of Lund

The Following papers can be found in the Reference Library of the CD-ROM accompanying this Business Briefing

The S ing le Buyer Model – A Dangerous Path Towards Compet i t ive Electr ic i ty MarketsL a z l o L o v e i , Energy Sector Unit, World Bank

Energy Infrastructure for a Dig i ta l Economy.Ka r l S t a h l k o p f and J o h n H D ou g l a s , Electric Power Research Institute

Promot ing Pr ivate Investment in Rura l Electr i f i cat ion – The Case of Chi leA l e j a n d r o J a d r e s i c , The World Bank

Distr ibuted Generat ion – A Solut ion for Our TimesT on y P r o ph e t , President and Chief Executive Officer, Honeywell Power Systems, Inc.

FACTS : A Powerfu l Means for Increas ing the Avai labi l i ty of Electr ic Power Ro l f G r ü nb a um , ABB Power Systems AB, Sweden

Susta inable Del iver y of Electr ic EnergyRob e r t o R ud e r v a l l and L e n a K j e l l i n , ABB Power Systems AB, Sweden

Mult i ser v ice Infrastructure – Privat i s ing Por t Ser v icesL o u r d e s T r u j i l l o and Gu s t a v o N ombe l a , Professor of Economics and Director, and

Professor of Economics, Department of Applied Economics, University of Las Palmas de Gran Canaria8

CONTENTSCONTENTS

Mult i -ut i l i ty Trends – Blurr ing Industr y Boundar iesD i r k S omme r , Private Sector Development Specialist, The World Bank

Road Financing and Management in the Bal t ic StatesE v a R od z i k and C e s a r Q u e i r o z , The World Bank

Urban Transpor t Patterns in a Global Sample of Ci t ies and their L inkages to Transpor t Infrastructure , Land Use ,Economics and the EnvironmentJ e f f K e nwo r t h y and F e l i x L a u b e , Institute for Sustainability and Technology Policy,

Murdoch University, Murdoch, Perth, WA, Australia

Urban Transpor t Networks for Soc ia l Cohes ionMa r c E l l e n b e r g , Deputy Director for Scientific and Technical Coordination, CERTU

In f rastructure Investment – Vita l for Qual i ty Publ ic Transpor tE r i c B r u u n , Systems Consulting Group, LLC and former Assistant Director of the

National Transit Institute at Rutgers University,

The Industr ia l Organisat ion of Publ ic Transpor t in Deve loping Countr iesB i n y am R e j a , The World Bank

Corrupt ion, Transpor t Infrastructure Stock and Economic Deve lopmentA l e x V i s s e r and C e s a r Q u e i r o z , Professor of Transportation Engineering, Department of Civil Engineering,

University of Pretoria and Lead Highway Engineer, Infrastructure Sector Unit, The World Bank

Subs id ies and Susta inable Rura l Energy Ser v ices – Can We Create Incent ives Without Distor t ing Markets?Dou g l a s F B a r n e s and J o n a t h a n H a l p e r n , The World Bank

Potable Water Pr ic ing and the Poor I a n Wa l k e r and J o n a t h a n H a l p e r n

Pric ing, Subs id ies and the Poor : Demand for ImprovedWater Ser v ices in Centra l AmericaI a n Wa l k e r and J o n a t h a n H a l p e r n

Independent Water Entrepreneurs in Lat in America – The Other Pr ivate Sector in Water Ser v icesT o v a Ma r i a S o l o

Women IT Entrepreneurs in ChinaKa t e Z h o u , Assistant Professor, Politics and political Economy of East Asia,

Department of Political Science, University of Hawaii

The ‘ Integr i ty Pact ’ o f Transparency Internat ional – The Concept and the Present Appl icat ionsM i c h a e l W i e h e n , A former Director, World Bank and member of the Board,

Transparency International

Business Infrastructure for Environmenta l Informat ionMan t h a M eh a l l i s , Director and Professor, Florida Atlantic University

10

CONTENTSCONTENTS

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12

Dr Johan Bastin is a Business Group Director at theEuropean Bank for Reconstruction and Development(EBRD), heading the Infrastructure Group (“theGroup”), which includes the Energy Efficiency,Municipal and Environmental Infrastructure, Power andEnergy and Transport teams. The Group is responsiblefor the development, appraisal and structuring of publicand private infrastructure financing in Central andEastern Europe, the Baltic States and the Commonwealthof Independent States. Dr Bastin joined the EBRD in

1993 and, before assuming his current position in June1999, was Director of the Municipal and EnvironmentalInfrastructure team, dealing with investment financing ofof municipal services and infrastructure, including waterand sewerage services, solid waste collection and disposal,urban transport and district heating. Since 1983, DrBastin has worked in infrastructure financing in emergingmarkets and transition economies. He holds degrees inurban planning; business administration; and publicadministration and finance. ■

D r J o h a n B a s t i nBusiness Group Director, European Bank for Reconstruction and Development (EBRD)

Margaret Catley-Carlson is Chair of the Global WaterPartnership (GWP). She chairs Group Suez Lyonnaisedes Eaux: Water Resource Management AdvisoryCommittee, is a Commissioner of the WorldCommission for Water in the 21st Century and serveson the Canadian Committee of the InternationalOcean Institute. Ms Catley-Carlson is a board memberand advisor to numerous other international andnational public and private groups in the fields ofagricultural development, health and population and

finance and development. She has an internationalcareer spanning 35 years, gaining experience in avariety of governance, public policy, regulatory,management, economic, health and developmentissues. She has worked with organisations, applyingscience and knowledge to the better management ofnational and international problems in freshwatergovernance, health, agriculture, informationmanagement, environmental protection, internationaldevelopment and development finance. ■

Ma r g a r e t C a t l e y - C a r l s o nChair, Global Water Partnership (GWP)

Jean-Pierre Charpentier has been with The World BankGroup since 1987 and is currently Senior EnergySpecialist within the Energy and Water Unit of itsCentral Infrastructure Department. His main fields ofactivity focus on the development of regional energymarkets and power sector restructuring. Prior to joiningThe World Bank, Mr Charpentier worked for theInternational Atomic Energy Agency (IAEA) in Viennasince 1977, where he was responsible for analysing

possible peaceful uses of nuclear energy for theorganisation’s member states. Up to this time, hisactivities were essentially in France, where he workedfor the Atomic Energy Commission and the Ministry ofIndustry, where he was engaged as Adviser for NuclearIssues until 1977. He was also Assistant Professor inMathematics Economics at the University of Paris. MrCharpentier has a double academic background inelectrical engineering and economics. ■

J e a n - P i e r r e C h a r p e n t i e rSenior Energy Specialist and Infrastructure Forum 2001 Manager, Water & Energy Department, Private Sector and

Infrastructure Vice Presidency, The World Bank


In addition to the panel members below, the World Markets Research Centre would like to thank the Directorate General for Energy and Transport, European Commission, Brussels

Adv i sor y Pane l

13

Frannie A Léautier is the Chief of Staff for the Presidentof The World Bank Group. Prior to this, she was theDirector for The World Bank’s Infrastructure Groupand served as Sector Director for Infrastructure in SouthAsia from 1997 to 2000. Ms Léautier joined The WorldBank Group in 1992 and is recognised as a leadingexpert in infrastructure strategy formulation indeveloping countries. Prior to joining The World Bank,she taught at the Center for Construction Research and

Education, and the Department of Urban Planning atthe Massachusetts Institute of Technology (MIT). She isa recipient of a number of excellence awards, isAssociate Editor for the Journal of Infrastructure Systemsand a member of a number of international committeeson infrastructure development. She has completed theHarvard Executive Development Program and receivedher MSc in Transportation, and her PhD inInfrastructure Systems, from MIT. ■

F r a n n i e A L é a u t i e rChief of Staff, Office of the President, The World Bank Group

Geoff Haley is Chairman of the International ProjectFinance Association (IPFA), with extensive experience ofadvising on major projects in the construction and privatefinance sectors. He has also managed legal services formany projects worldwide. Mr Haley was admitted as asolicitor in 1971 and holds a Masters Degree in BusinessAdministration from Henley Management College. Priorto practising with SJ Berwin in 1989, he was LegalAdviser at Peterborough Development Corporation and,

later, Legal Advisor to Costain UK, General Manager ofCostain Ventures Ltd and Deputy Group Legal Advisor toCostain Group plc. He was a Partner for two years at theUS firm Arnold & Porter and joined KLegal as Consultantin September 2000. He has specialist expertise in large andcomplex projects in the fields of energy, wastemanagement, water treatment, transportation, privatepower generation, waste to energy schemes, urbanrenewal, property, healthcare and education. ■

Geo f f H a l e yChairman, International Project Finance Association (IPFA)

Declan Duff is Director of the International FinanceCorporation’s (IFC’s) Infrastructure Department, a groupproviding advice to, and investing in, a range ofinfrastructure projects (including roads, railways, ports,airports, pipelines and the like), and utilities (includingwater, waste treatment, gas distribution and logisticssystems). IFC is able to draw on a broad range of specialistskills to achieve the successful financing of infrastructure

projects. Mr. Duff and his department have developed areputation in the market for bringing challengingfinancing to closure. In the past 10 years IFC has financedinfrastructure projects worth US$40 billion. Mr. Duff ison the board of a number of infrastructure companies andfunds. Previously Mr. Duff was Vice President and headof business development for Europe, Africa and theMiddle East with Mellon Bank. ■

De c l a n J D u f fDirector, Infrastructure Department, International Finance Corporation (IFC)

Luis Dodero joined The World Bank Group’sMultilateral Investment Guarantee Agency (MIGA) inOctober 1989 as Vice President and General Counsel.He is an expert on investment and export creditinsurance, claims negotiation, settlement and recoveryand international commercial law. In 1971, Mr Doderojoined Compañia Española de Seguros de Crédito a laExportación, SA (CESCE), where he held the position ofDeputy General Manager and General Counsel. Prior tojoining CESCE, Mr Dodero was the Legal Advisor to theClaims Department of Compañia Española de Seguros deCrédito y Caución, which, prior to CESCE’s formation,was the credit insurance agency of Spain. He practised for

several years in his own law firm, and acted as the localSpanish associate of major English law firms. He is amember of the Spanish Court of Arbitration, the MadridBar Association and the International Bar Association,and is a frequent lecturer before international, national,private and legal venues. Among his many writings, hehas co-authored the Guidelines for the Protection of ForeignInvestment. Mr Dodero received his LL.M Degree fromMadrid University, after which he studied InternationalCommercial Law, obtaining diplomas from variousinstitutions in England, Spain and the US. He has alsocompleted the Harvard Executive Development Programfor managers of The World Bank. ■

L u i s D od e r oVice President and General Counsel, Multilateral Investment Guarantee Agency (MIGA), The World Bank Group

14

Kyu Sik Lee recently retired from The World Bank,after nearly 25 years of research, policy, operationaland evaluation work in the urban development andinfrastructure sectors. He conducted major impactevaluation studies of municipal and regionaldevelopment projects and major research and policywork on the impacts of infrastructure deficiencies onproductivity; and on employment (industrial) location

and spatial policies. He has published numerous books,journal articles and research reports. Prior to joiningThe World Bank in 1975, Mr Lee taught Economicsat New York University and Wayne State Universityand was on the staff of the Conference Board, NewYork, and the Korea Development Institute, Seoul.He holds a PhD in Economics from the University ofWisconsin at Madison. ■

Kyu S i k L e eConsultant, Urban Development

Dr Anthony Milburn is currently the ExecutiveDirector of International Water Association (IWA),formed from the merger of the International WaterServices Association (IWSA) and InternationalAssociation on Water Quality (IAWQ) in 1999. DrMilburn was Executive Director of IAWQ and thearchitect and leader of the merger process that formedIWA. Originally a civil engineer by profession, he holdsbachelor, master and doctoral degrees in Engineeringand a Diploma in Company Direction. He was amanager with the UK National Water CouncilTraining Division and produced a number of UK

national training schemes for the water and wastewaterindustry. He was consultant to The World Bank on themanpower aspects of the Brazilian national plan forwater and sanitation and, as adviser to the Governmentof Indonesia, produced a national manpowerdevelopment programme for the water supply sector.Dr Milburn is a fellow of the International WaterAcademy and the European Academy of Science andArts, a Governor of the World Water Council, fellowof the UK Institution of Civil Engineers and a fellow ofthe UK Chartered Institute of Water andEnvironmental Management. ■

D r A n t h o n y M i l b u r nExecutive Director, International Water Association (IWA)

Dr Klaus Rave has served as President of the EuropeanWind Energy Association (EWEA) since 1999, and asManaging Director of Investitionsbank Schleswig-Holstein since 1995. From 1988 to 1995, he was Headof Division in the Ministry of Finance and Energy, Stateof Schleswig-Holstein, responsible for energy affairs,and from 1981 to 1988, he was General Secretary of the

Social Democratic Party, Schleswig-Holstein. Dr Ravewas a Lecturer in German and International Law atSurrey University from 1978 to 1981, and studied legalpractice and his PhD at the Institute of InternationalLaw from 1974 to 1978. He was a student of Law atChristian-Albrechts-Universität, Kiel and TrinityCollege, Dublin, from 1968 to 1974. ■

D r K l a u s R a v ePresident, European Wind Energy Association (EWEA)

J Rodney Turner is Chairman of the InternationalProject Management Association (IPMA), Professor ofProject Management at Erasmus University, Rotterdamand Operations Director for the European ConstructionInstitute, Benelux Region. He is also a member of theassociate faculty at Henley Management College and avisiting fellow at the University of Technology, Sydney.Professor Turner is a director of EuroProjex, theEuropean Centre for Project Excellence. He worked forsix years for ICI as a mechanical engineer and projectmanager on design, construction and maintenance

projects, before joining Coopers & Lybrand as amanagement consultant. He worked for HenleyManagement College for eight years and joinedErasmus University in 1997. Professor Turner is theauthor of four books on project management, he editsThe International Journal of Project Management and haswritten articles for journals, conferences and magazines.He lectures on and teaches project managementworldwide. Professor Turner studied engineering atAuckland University and obtained his doctorate atOxford University. "

P r o f e s s o r J R o dn e y T u r n e rChairman, International Project Management Association (IPMA)


16

a report by

J o h n F l o r a and J ama l S a g h i r

Director, Transport and Urban Development & Disaster Management, and Director, Energy and Water,

The World Bank

As The World Bank Group and many of its partnershave been refining and scaling up their effort in thebattle for poverty reduction, access to infrastructureservices has increasingly been seen as central to alldimensions of that endeavour. The ‘infrastructure-poor’ are increasing, in spite of the large investmentflows – especially private flows – of the past decade:

• 1.2 billion are without access to safe water;• two billion lack sanitation;• two to three billion are without modern energy

services;• 40% to 50% of residents of large cities in the

developing world live in slums or squattersettlements without basic services;

• the digital divide is wide; and• there is a lack of access to employment, healthcare

and education services.

Today, no one can deny the impact of increasedaccess to infrastructure services on expandingeconomic opportunities, on improving health,education, living conditions and personal security,and on increasing inclusion and empowerment ofindividuals and communities. In fact, the poorthemselves perceive access to infrastructure as one oftheir priority requirements towards sound andsustainable development.

The challenge of poverty alleviation remains immense,making the infrastructure agenda anything butcomplete. While the poor are requesting increasedaccess to infrastructure services, and are willing to payfor them, and while large investment flows – publicand private – have been observed over the past decade,the poor still number billions and insufficient access toinfrastructure remains of dreadful consequence tothem.

In this context, it is essential that infrastructureprofessionals gain a solid understanding of the natureof the problems, a successful enabling environment fordevelopment be maintained and that all stakeholdersbe involved in the identification of the problems andthe design of the right solution. The latter requiressmart partnerships including the private sector, localand national governments, communities, non-

governmental organisations and other developmentpartners. It is in an attempt to facilitate a betterunderstanding of these challenges and possiblesynergistic approaches that the Infrastructure Forum(“the Forum”) was created. The World Bank Groupis launching this Forum with the aim of providing aunique opportunity to discuss and learn more aboutthe strategic importance of infrastructure in improvingpeople’s lives and the problems associated withpoverty. The Forum is aimed at emphasising cross-sectoral issues across infrastructure activities – notablytransport, energy, water and urban development – byoffering the opportunity for a variety of infrastructureprofessionals from all over the world to meet and sharetheir experiences and knowledge. The Forum is tofocus on three main themes:

• Infrastructure, poverty and humandevelopment: what is the role of infrastructure inpoverty reduction strategies? This includes therole of infrastructure in national poverty strategiesthrough urban and rural development, as well asthe role of the private sector in poverty reduction.

• Infrastructure and Convergence: how to buildsynergies across traditional sectors and throughprivate partnerships – including, for example,private sector experience with cross-sectoralproject development and implementation, as wellas communities’ experiences with holisticinfrastructure approaches.

• Infrastructure and Innovation: the role thatleading innovations can play in business practicesand exchange of information – includinginnovations in infrastructure technology, deliverymechanisms and the impact of advances inelectronic technology on business practices andthe exchange of information.

As a further contribution to the sharing and thinkingthat the Forum aims at promoting, this businessbriefing offers a series of articles and thoughts frominfrastructure sector players that we hope will provecomplementary to the Forum, both of which shouldbe invaluable tools in our committed work in makingaccess to infrastructure services a success story. ■

FOREWORDFOREWORD

John Flora is Director of thetransport and urban development

division in The World Bank’s vice-presidency for finance, private

sector and infrastructure. He hasover 35 years of experience inurban and transport planning,

design and operations. He has beenwith The World Bank for 18 years,most recently focusing on transportpolicy, private sector involvement in

provision of infrastructure andtransport services, urban transportpricing, financing, operations and

urban development.

Jamal Saghir is director for energyand water in The World Bank

Group’s Private Sector Developmentand Infrastructure Vice Presidency,

a position which also includesmanagement of the network

functions for the energy and watersectors Bank-wide. He joined The

World Bank in 1990 as a financialofficer in the Private Sector

Financial Operations Group of theCo-financing and Financial Advisory

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18

Peter Woicke is a ManagingDirector of The World Bank Group,guiding and ensuring coherence ofwork in the private sector acrossthe entire Group. In addition to

this, Mr Woicke became ExecutiveVice President of the International

Finance Corporation (IFC) on 1January 1999. Prior to joining IFC,he held numerous positions, overnearly 30 years, with JP Morgan,most recently, as Chairman of JPMorgan Securities Asia. He had adiverse range of responsibilities,

ranging from heading the bankingdivision of a Morgan affiliate inBeirut to leading their global oil

and gas group. For two years, MrWoicke was responsible for the

company’s information technologygroup of 6,000 staff.

a report by

P e t e r Wo i c k e

Managing Director, The World Bank Group

There are three main reasons why infrastructureneeds to be discussed:

1. Despite the centrality of infrastructure foreconomic and social life, the role of infrastructurein development finds itself in need of defence. Itis no longer enough to remain comfortable withgeneral assumptions. An effort must be made todemonstrate the actual linkages and to showprogress towards achieving economic and socialresults through infrastructure.

2. Trends in innovation and technology that haveshaped the conduct of numerous activities in dailylives, from the nature of travel and commun-ications to the simple act of ‘going to the market’,have enormous implications for infrastructure,only some of which have begun to beexperienced and explored.

3. Key drivers of innovation and change –entrepreneurs and leaders of companies seeking tomatch the opportunity offered by technology withthe demand for services and service improvements– are now, more than ever, seeking to expand theirmarkets while, at the same time, there is anexplosion in the demand for services that until nowwere being provided through what is called the‘traditional approach to infrastructure provision’.

Ro l e o f I n f r a s t r u c t u r e

The role of infrastructure in development is beingquestioned for two main reasons:

• widening inequalities; and

• the failure of traditional approaches toinfrastructure provision.

W i d e n i n g I n e q u a l i t i e s

Widening inequalities put to question the centralassumption of the importance of growth fordevelopment. For example, during the 1990s, Europe

was reunited after more than 50 years, but, 10 yearslater, the job of reconstruction has barely begun.

In eastern Europe in the 1990s, 23 million formerlymiddle-class citizens of the then Union of SovietSocialist Republics, or its satellites, were reduced toliving on the equivalent of US$1 or less a day. Another10 to 12 million eastern Europeans are now living onincomes equivalent to between US$1 and US$2 a day.Over the same period in western Europe, incomesincreased by more than US$1,700 billion equivalent.

The same, but more sharply defined, inequalities arepresent in other regions. In sub-Saharan Africa,southern Asia and Latin America, the numbers ofunderprivileged are steadily rising. Sub-regional,ethnic and gender-based inequality is also rising,while diseases such as malaria and HIV/AIDS putspecial groups at risk.

F a i l u r e o f T r a d i t i o n a l A p p r o a c h e s

t o I n f r a s t r u c t u r e P r o v i s i o n

In recent years, developing countries have investedabout 4% of national output in infrastructure – nearly20% of total investment, or about US$250 billionannually – yet the results have been disappointing,particularly in terms of the impact on theunderprivileged.1 The numbers of ‘infrastructure-poor’ people are vast in each region. Some onebillion do not have access to safe water, and spend upto 10% of their income trying to obtain it. More thantwo billion lack sanitation, with seriousconsequences on their health, and two to threebillion are without modern energy services, spendingup to one-third of their disposable income topurchase energy services. In sub-Saharan Africa, lessthan 8% of the population is connected to the powergrid system.

In human terms, these statistics are devastating. Indeveloping countries, water-related infections are theprimary cause of the high incidence of diarrhoealdiseases, which kill about two million children andcause 900 million episodes of illness each year.

Connect ing Peop le to Resources – What Ro le for the Pr iva te Sec tor ?


1. Public-Private Infrastructure Advisory Facility (PPIAF), Annual Report, 2000.


Another troubling aspect, because of its long-termconsequences for educational attainment, are thenumbers of children who cannot adequately preparefor school due to a lack of proper illumination. Thesechildren are further incapacitated by brain damage andlung diseases brought about by indoor air pollution, astheir households are reliant on traditional fuels.

Until marked improvement in the reduction ofinequality around the world can be shown, there willbe impatience about the slow results, or the total lackof results, of the large investments in infrastructure.

T r e n d s i n I n n o v a t i o n a n d T e c h n o l o g y

Infrastructure has long been recognised as having akey role in opening up markets and promotinginnovations, as it provides the basic building blocksneeded for economic and social life – a way tocommunicate ideas and a way to exchange goodsand services.

In the 18th century, the Scottish social philosopherand political economist Adam Smith recognisedtransport’s role as, for example, a means for enlargingmarkets, promoting innovations and generatingsurpluses for reinvestment. What has changed today isthat this role is shared between transport andcommunication, with the Internet playing a bridgingrole in connecting communities that may not evenhave a transport link with one another, as all theseconnections are now made in cyberspace. Thisprovides a great opportunity for the developingworld, where access to physical transport is seriouslylacking, but, as indicated by the statistics on the digitaldivide, it has not yet been possible to make thistechnology relevant to meet this communication gap.

Modern utility services can also make quantum leapsin a community’s living and health standards bysubstituting for expensive traditional supplies of basicservices. Tapping into innovative ways of generatingenergy, instead of waiting for communities to beconnected to the grid, has shown great potential. Anexample of this is the women in a village inBangladesh using solar-panel technology to makelamps for household illumination, while generatingincome for themselves.

P r i v a t e I n v e s t o r s C a n L e a d t h e Wa y

Private investors can lead the way in bringinginnovation and change to work at the global scale forbetter development results. There are a number ofconditions that need to be in place for innovation totake place, allowing entrepreneurs to create newtypes of services, that can then be made available toconsumers at cheaper prices and better quality. It isoften claimed that there are 10 key activities that thegovernment needs to undertake.

The ingenuity of private investors in the face of oftendaunting conditions for doing business is to beadmired. Focus on the ingenuity that makes itpossible to buy a can of soft drink in the remotestparts of the developing world should be shifted ontoalso making it easy to get a drink of clean water. Forexample, an innovative financing tool for a small-scale company from the West, in partnership with asmall-scale company in a developing country, can becombined to provide innovations in new ways offiltering water.

Conducting business in the emerging markets’infrastructure sectors is not that much more difficultthan making other investments:

• The developing world does not lackentrepreneurship and there are many localpartners who could provide internationalinvestors with the required ‘local knowledge’.

• It is not necessarily more burdensome in terms ofbusiness permits, clearances, environmentallicences, etc., to start a utility than to open a retailbusiness. In fact, it may be less cumbersome ininfrastructure because of special and recentlyenacted enabling legislation.

• There are few technology issues in many cases –the largest single ingredient in any soft drink, forexample, is clean drinking water.

• Projects that raise the productivity of wholecommunities are more likely to be directlyaffordable and to have wholehearted public support,perhaps, than retail or commercial ventures. 19

Greater efficiency and productivity in the provision of public

services are essential to fostering growth and closing inequality.

Of course, governments also must do more. Theyneed to focus beyond just addressing the backlog inthe availability of adequate physical assets. Greaterefficiency and productivity in the provision of publicservices are essential to fostering growth and closinginequality. As well as roads to drive on, communitiesneed improvements in how governments are run andin the reach of public services.

In India, for example, it takes about 10 years toobtain a court date in a simple commercial suit. Suchbottlenecks hamper change and deter development.Strengthened administrative capacities andimprovements in institutional support and oversightare needed to sustain the gains from expanded fixedinvestment. Governments also need to reach out toimprove the quality of people’s lives. Enhancedquality of life and enriched human resources willhelp to cement improvements as each newgeneration carries the gains forward. Governmentsalso need to slim down. Communities needimproved macroeconomic and fiscal management inorder to avoid crowding private investors out of thincapital markets by government spending andborrowing activities. Governments need to retirefrom providing services that the private sector canand will deliver.

In short, governments need to exploit all avenues forraising productivity and encouraging productive useof assets now lying idle. Two prongs of this approachcan be seen as especially important to promoting theproductivity of physical infrastructure:

• the human and social systems that support thedevelopment of literacy, good health practices andskills needed for personal development; and

• the institutional systems of licences, permissions,permits, regulations and administrative and reviewfunctions that provide essential services to firmsand create the business environment.

Lastly, the international community must do more.Of the US$800 billion in private capital market-flows to developing countries during the 1990s, onlyaround US$130 billion was for infrastructure

projects, and a little over one-third of that wasprivate loans or bonds that financed public-sectorprojects. Allowing for direct equity contributions, asmuch as US$120 billion to US$130 billion may beneeded in international financing for privateinfrastructure over the course of the decade,compared with estimated ‘needs’ in developingcountries of US$250 billion a year.2 In the 21stcentury, the bulk of international capital flows willbe between western Europe and North America.

However, the international markets are not the onlyplayers in financing infrastructure. There are strongsynergies between long-term finance needs ofinfrastructure projects and the development of localsavings instruments, but most of the long-term creditavailable in many countries is absorbed bygovernment deficits. Improved public-sectormanagement is key to making more of the domesticsavings pool available for productive investment, butprivate investors must also be willing to work withfledgling financial institutions, and it is one of theprincipal roles of the multilateral banks to promotefinancial markets development.

The international community has also acceptedambitious targets for reducing inequality over thenext 15 years.3 Meeting these goals will require morethan just money and ‘development projects’. Theyrequire creating opportunity for poor people to takeadvantage of the resources they have.

It is argued that the poor have vast wealth, but they areunable to capitalise on it because it is not part of thesystem of wealth that is recognised by institutional ortraditional practices. Thus, they are unable to capturethe value of that wealth in access to financial and realresources. The value of looking at how property rightsare exercised is identified as much as at how wealth iscreated in attempting to raise living standards.4 Theyrequire making public services more accountable andmore responsive to the needs of all in society andparticularly the poor.

Voices of the Poor: A Study To Inform The WorldDevelopment Report 2000/01 on Poverty andDevelopment5 shows, for the first time, that ‘having a

20


2. Sixty-two per cent of US$130 billion is US$80.6 billion. At a debt/equity ratio of 70/30, total investment is US$115billion. At a ratio of 60/40 it is US$134 billion.

3. The World Bank (2000), The World Development Report 2000/2001: Attacking Poverty. By 2015, reduceextreme poverty by half; ensure universal primary education; eliminate gender disparity in education; reduce infant and childmortality by two-thirds; reduce maternal mortality by three-quarters; ensure universal access to reproductive health services.

4. Hernando de Soto (2000), The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else.5. Voices of the Poor consists of three books, published by The World Bank, that bring together the experiences of over

60,000 poor women and men. The first, Can Anyone Hear Us?, gathers the voices of over 40,000 poor women and menin 50 countries from The World Bank’s participatory poverty assessments. The second book, Crying Out for Change,draws material from a new 23-country comparative study. The final book, From Many Lands, offers regional patterns andcountry case studies.


seat at the table’ is important, and that participatorydecision systems are more likely to result in the typesof improvement that are most effective in raisingliving standards. They require reducing vulnerabilityso that unexpected events do not tumble families andcommunities back into the poverty they haveworked so painstakingly to overcome.

‘Safety nets’ were first heard of in the context of thedismantling of the Soviet state enterprises during theearly 1990s and, later, during the ravages of the Asianfinancial crisis. Protection against vulnerability is alsoimportant at the family level – protection againstillness or accidents – or for the community, like all-weather connections that defy periodic interruptionsto economic and social activities from storms orfloods. Protection against catastrophic risk is alsocritical, as disasters are a downward trigger intopoverty in the absence of insurance and other risk-management instruments.

S umma r y

The changing emphasis of the role of infrastructureemphasises that infrastructure is central to reachingthe social targets that have been set, as it provides thebasic building blocks needed for economic and sociallife by providing:

• a way to communicate ideas and a way toexchange goods and services that enhancesinnovation and also allow increased inclusion andempowerment of individuals and communitiesthrough information connectivity and reducedgeographic isolation;

• expanding economic opportunities and thepossibilities for creating more competitiveenterprises and services, and widening options forearning income; and

• improving health, quality of education, livingconditions and personal security throughimproved hygiene, illumination of homes andneighbourhoods and safe and reliable transport.

This centrality, which was recognised as early as the

18th century in Adam Smith’s writings, is even truerwith the changes in technology and innovationfaced today.

More importantly, infrastructure extends beyondphysical structures and municipal services to includesocial and institutional norms that help to define thebusiness environment.

The author identifies four aspects of infrastructurethat are necessary to make lasting changes foreconomic and social conditions:

• physical infrastructure, to provide the basic fixedcapital for private and commercial activities;

• guaranteed service flows from the physicalinfrastructure, ensuring that providers areresponding to effective demand and are doing soefficiently – a form of social infrastructure;

• business (or commercial) infrastructure thatcreates a supportive environment for commercialactivities and investments; and

• financial infrastructure that mobilises domesticand international investment resources.

Finally, in order to meet the social goals that havebeen set, renewed efforts by the following areneeded:

• project developers, to seek long-term market-building investments, making best use of localskills and resources;

• governments, to open their economies widely tothe financial discipline and ingenuity of theprivate sector;

• international financiers, to see value in theemerging markets and appropriate risk-rewardopportunities; and

• multilaterals, to help share risks and focus onimprovements that will provide long-termsolutions to reducing inequalities. ■ 21

... infrastructure extends beyond physical structures and

municipal services to include social and institutional norms

that help to define the business environment.

22

Frannie A Léautier is the Chief ofStaff for the President of The

World Bank Group. Prior to this,Ms Léautier was the Director forThe World Bank’s InfrastructureGroup, comprised of the mergedpractices of transport, water and

sanitation, urban development andenergy. She joined The World BankGroup in 1992 and has worked asa transport economist in the LatinAmerica and Caribbean and SouthAsia Regions, and as a researcheconomist in the Development

Economics Department. She servedas Sector Director for Infrastructurein South Asia from 1997 to 2000.

Ms Léautier is recognised as aleading expert in infrastructure

strategy formulation in developingcountries. Prior to joining TheWorld Bank, she taught at theCenter for Construction Research

and Education, and the Departmentof Urban Planning, at theMassachusetts Institute of

Technology (MIT). She is a recipientof a number of excellence awards,including Best Manager, from TheWorld Bank Staff Association and

an IFC/PSI Senior ManagementPerformance Award. She is AssociateEditor for Journal of Infrastructure

Systems and a member of anumber of international committeeson infrastructure development. She

has also completed the HarvardExecutive Development Program. Ms

Léautier received her MSc inTransportation, and her PhD in

Infrastructure Systems, from MIT.

a report by

F r a n n i e A L é a u t i e r

Chief of Staff, Office of the President, The World Bank Group

T h e C h a l l e n g e o f P o v e r t y

The Global Development Community is facing agrave challenge that can be summarised as how theenvironments and lives of the urban and rural poorcan be transformed, helping them to buildcommunities and improve their living conditions,strengthen their ability to integrate into a rapidlyglobalising world and, at the same time, maintaininga sense of community and place. Not only does thischallenge need to be met, but it must be to scale andwithin our lifetime. Despite major gains over the past25 years, there are still around 1.5 billion extremelypoor people, and this number is increasing daily.Inequality is rising in many countries. There are 125million children out of school – 80 million of whichare girls. There are five million infant deaths per yearand 22 million people have AIDS in sub-SaharanAfrica alone.

This problem is played out in grim reality in theurban centres around the world. Today, over 300million people live a life of degradation in urbanslums without access to most basic services. On adaily basis, slum residents face multiple threats totheir health and security. They are excluded from thecity’s prosperity and have little voice in the publicdecisions that control their destiny. Conditions inslums are becoming worse and the slum populationin the developing world will double by 2025.

T h e R o l e o f I n f r a s t r u c t u r e

What this has to do with infrastructure has provokedmuch debate in recent years. It has to do with

whether infrastructure has a role in povertyreduction. Evidence from various sources rangingfrom surveys of poor people, theoretical work,empirical studies and project results has uncovered anumber of powerful linkages.

A survey of over 40,000 poor men and women in50 countries on their view of developmentindicates that they consider infrastructure asimportant as health and education.1 When TheWorld Bank Group develops Country AssistanceStrategies along with its clients, they rankinfrastructure as an extremely important element inthe process of their development.

Economic theory has identified that physical capitaland infrastructure capital are complementary to andcan be substituted with human capital and socialcapital at different stages of development.2–4 Othershave emphasised that, when knowledge economiesare considered, there is a lock-in effect of history, andthat the starting point matters.5 Economies richlyendowed with infrastructure and other physicalcapital are better able to garner the benefits fromknowledge embedded in people and technology.6

Furthermore, countries already endowed with richinfrastructure, as a result of past investment, are betterable to benefit from opportunities presented byglobalisation and locational advantages or geography.7

Empirical work has demonstrated further inroads onthe nature of the linkages between infrastructure,economic growth, inequality and poverty. It hasbeen shown that growth is good for the poor, inparticular, it has been found that:

Fac ing the Pover ty Cha l l enge – The Ro le o f In f ras t ruc ture


1. Deepa Narayan, et al. (2000), Voices of the Poor: Can Anyone Hear Us?, Oxford University Press.2. Philippe Aghion, Eve Caroli and Cecilia Garcia-Penalosa (1999), “Inequality and Economic Growth: The Perspective of

the New Growth Theories”, Journal of Economic Literature, December 1999, pp. 1,615–1,660.3. Philippe Aghion and Jeffrey G Williamson (1998), Growth, Inequality, and Globalization: Theory, History, and

Policy, Cambridge University Press, Cambridge, UK.4. O Galor and O Moav (1999), “From Physical to Human Capital Accumulation: Inequality in the Process of

Development”, Working Paper, http://econ.pstc.brown.edu/faculty/galor/working/pdfs/gmii.pdf5. Gene M Grossman and Elhanan Helpman (1991), Innovation and Growth in the Global Economy, MIT Press,

Cambridge.6. Gautam Ray, T R Lakshmanan and William Anderson William, “Increasing Returns to Scale Inherent in Affluent Post-

Industrial Economies: A Theoretical Inquiry”, forthcoming in Growth and Change.


“The income of the poor rises one-for-one with theoverall growth of the economy. This generalrelationship between income of the bottom fifth of thepopulation and per capita GDP holds in a sample of80 countries covering four decades. Although there isa fair amount of variation around this generalrelationship, a number of popular views about thepoverty-growth relationship are not true. The effect ofgrowth on income of the poor is no different in poorcountries than in rich ones.”8

It is further argued that trade and openness benefitsthe poor to the same extent that it benefits thewhole economy, and therefore, by extension of theargument, that globalisation is good for the poor.

Other analyses indicate that globalisation reducesthe number of absolute poor and also decreasesincome inequality. They also indicate that thecomplementary role of infrastructure to humancapital is critical for balanced growth.9,10 Moredetailed empirical work argues that there is animpact of infrastructure on productivity, but itdepends on industry type, location and startingpoint of infrastructure endowment.11 Others showthat there is an impact of infrastructure onproductivity and growth in the manufacturingsector, and slight positive impact of infrastructureon income distribution.12

However, there are also a number of empiricalfindings that caution against this positive impact ofinfrastructure on poverty reduction and on economicgrowth. The first cautionary result is that the benefitsof infrastructure depend on the level of wealth acountry has achieved. Middle-income countries getvery high returns from infrastructure compared withlow-income countries, where priorities arenumerous, and infrastructure is only one of manyneeded inputs to development.10

The second reason is that the cost of infrastructure ishigh in low-income countries, which are also thecountries that need to have the infrastructure. Costsare high because of the need to import technologyand know-how, as well as the network effects, since

fewer people can afford to connect to the networksof water, electricity and roads, making the cost perunit of stock much higher when compared with thatof higher-income countries.

23

High poverty impact areas

Income Capability Security Empowerment

Improve energyservice qualityand pricing

GrowthJob creationProductivity

Productivity

Expand access tomodern energy

Improve energyservice quality and

pricing

Synergies(Health/Water)Productivity

Resilience tosupply shocks

Increase fiscalspace and improve

targeting

GrowthAccess

Price stabilitySafety nets

Improve sectorgovernance and

irregulation

AccountabilityChoiceEquity

Minimiseenvironmental

impact of energy

HealthProductivity

Environmentalsustainability

Figure 1: Energy Links to Poverty Reduction

Income Income

• Water and sanitation on related illnesses

• Stunting from diarrhoea-caused malnutrition

• Reduced life expectancy

• Reduced school attendance by children due to ill health, lack of available sanitation, or water collection duties

• Burdens borne disproportionately by women, limiting their entry into the cash economy

• High proportion of budget used on water

• Reduced income earning potentials due to poor health, time spent on collecting water or lack of opportunity for businesses requiring water inputs

• High consumption risk due to seasonal or other factors

Health

Education

Lack ofWater Sanitationand Hygiene Gender and

social inclusion

Income/consumption

Figure 2: Linkages between Poverty, Water and Sanitation

7. Paul Krugman (1998), “The Role of Geography in Development”, paper presented at the Annual World Bank Conferenceon Development Economics, 1998.

8. David Dollar and Aart Kray (2000), “Growth is Good for the Poor”, mimeo, The World Bank.9. A T Kearney (2001), “Measuring Globalization”, Foreign Policy, A T Kearney, Inc., The Carnegie Endowment for

International Peace.10.David Canning and Esra Bennathan (2000), “The Social Rate of Return on infrastructure investment”, Policy Research

Working Paper # 2390, The World Bank.11.Naoyuki Yoshino and Masaki Nakahigashi (2000), “The Role of Infrastructure in Economic Development”, paper

presented for the Global Development Network Conference, Tokyo, Japan, December 2000.12.Eujine Kim (2000), “The Impact of Transportation Infrastructure Investments on Growth and Equity: Applications of the

Translog Cost Function and Recursive CGE Model of Korea”, paper presented for the Global Development NetworkConference, Tokyo, Japan, December 2000.

The World Bank’s own work has shown that thereare positive impacts of infrastructure ondevelopment. For example, evaluation results of the1990 Poverty Reduction Strategy outlined in the 1990World Development Report show the following:

• poverty and growth are negatively correlated froma regression over 10 years in 63 countries

• overall long-term growth over a 10-year periodis significantly larger than that of shorterperiods; and

• reduction in poverty can come from growth or animprovement in the social sectors, or both.

Other results, taken at the project level, are also quitestriking. For example, transport projects in Moroccoand Bhutan have shown that there is a positive linkbetween transport and the enrolment of girls inprimary school, a completely unintended effect.

I n f r a s t r u c t u r e a n d P o v e r t y

The discovery of these positive but unintendedconsequences, coupled with the urgency of findingscalable solutions to reduce poverty at the global scale,has resulted in a rethinking of the linkages betweeninfrastructure and poverty. New thinking at TheWorld Bank in the context of the work that is beingdone to help countries prepare Poverty ReductionStrategies13 has resulted in a typology that linksinfrastructure services to impacts on poverty reduction.

Using the energy sector as an example, one can findthat improving the quantity, quality and reliability ofenergy services to a community or a city can lead toeconomic growth, job creation and increasedproductivity. These benefits map into higher income

24


Table 1: Burden of Disease Attributable to Lack of Water and Sanitation

Disease Burden of disease Distribution of % burden of

(000 disability-adjusted disease attribution to poor

life years (DALYs)) water and sanitation

Rural Urban Low Median High

Diarrhoeal diseases 1,024 184 80% 90% 100%

Polio 76 21 0% 50% 100%

Hepatitis 137 15 30% 40% 50%

Filariasis 28 12 0% 50% 100%

Trachoma 18 6 25% 60% 100%

Intestinal helminths 117 34 75% 90% 100%

Protein energy malnutrition 312 62 0% 25% 50%

H. pylori (peptic ulcers) 70 24 20% 60% 100%

Other digestive disorders 70 48 0% 20% 40%

Distribution of percentage of burden of disease by sector, attributable to poor water and sanitation

(percentiles)

10th 50th 90th

Andhra Pradesh 8.2% 8.7% 9.2%

Rural households 8.6% 9.1% 9.6%

Urban households 6.8% 7.2% 7.6%

Table 2: Differing Strategies and Ability to

Attract Private Capital

Change in... private investment decentralisation

as a % of fixed as a % of

investment spending

1980–1997 1980–1997

Australia 8.3 -3.0

Brazil -1.1 1.2

Canada -1.1 -9.3

Costa Rica 18.6 -0.2

Dominian Republic 14.6 1.0

Guatamala 16.6 0.2

India 17.1 2.2

Kenya 7.1 -0.9

Malaysia 10.3 -1.1

Mexico 24.5 8.3

The Netherlands 1.2 -2.9

New Zealand 18.0 1.5

Paraguay -3.1 0.7

Peru 9.1 14.6

South Africa 22.0 29.1

Thailand -0.5 2.1

United Kingdom 17.0 -2.0

United States -0.6 4.4

Source: World Development Indicators (1999).

Source: World Bank estimates, based on Andhra Pradesh Burden of Disease study (1996).

13.http://www.worldbank.org/poverty/strategies/


for the poor and enhances their capabilities (seeFigure 1).

Expanded access to modern energy services can helpsmall-scale enterprises that cannot afford back-upgenerators for unreliable/unavailable electricity. Thisis also critical for poor households, as poor powerquality reduces the lifetime of electricity appliances,and the poor cannot afford repair costs. With respectto the health dimension of capability, it has beenobserved that no access to modern fuels leads to low

labour participation rates for women, high indoor airpollution and a high rate of child mortality.

Considering the ability of the poor to participate in thebenefits of globalisation and the knowledge economy,it is expected that access to electricity improves accessto information and opportunities to study, whichconsequently results in higher educationalachievements. Similar linkages can be made withrespect to water and sanitation, as well as transport andother infrastructure services (see Figure 2).

Emp i r i c a l E v i d e n c e o f E x p a nd e d L i n k a g e s

The new thinking at The World Bank is bolstered byempirical results. For example, a provocatively titledstudy conducted in 2000 found that environmentalhealth is, to a large extent, a child and maternalhealth issue. In particular, the prevalence of healthrisks caused by the lack of access to infrastructureservices makes environmental health a poverty-related issue. This study found that the distribution ofthe burden of environmental health cannot be simplyexplained by income levels or the level of a particularservice. Thus, environmental health adds anotherimportant dimension to the multi-faceted nature ofpoverty, and needs to be integrated better intopoverty-reduction strategies.14

Traditional environmental risks at household andcommunity levels, such as the lack of access toprotected water and sanitation, and indoor airpollution due to the use of biomass fuels, areresponsible for the majority of illnesses and

premature deaths related to environmental causes(see Table 1).

According to the study, the death of youngchildren under the age of five, primarily in ruralareas, is the largest component of the burden ofdisease due to unhealthy household environments.The next most vulnerable group includes ruralwomen who are particularly affected by exposureto smoke from dirty cooking fuels, and by unsafewater and poor sanitation.13

T h e C r i t i c a l R o l e o f t h e P r i v a t e S e c t o r

The importance of infrastructure in povertyreduction, and the high costs facing developingcountries for providing this infrastructure, as well asthe time lags in meeting the infrastructure servicegaps, is great, and the challenge is to find new waysof delivering these services.

Among the key players in providing innovativeinfrastructure solutions are the private sector andcommunities. The private sector, by providing much-needed financing, can result in reducing the fiscalburden to the government so that the governmentcan focus on providing other critical services such ashealthcare and education. When the private sector isinvolved in providing and managing infrastructure,there can also be more competition, which leads toimproved technology development and selection,drives costs down and reduces corruption.

The private sector is also adept at taking andmanaging risks, but countries differ in their strategiesand abilities to attract private capital and hence needhelp with structuring privatisation, as well as financialinstruments that can help them bridge the gapsbetween what the market has to offer and what thecountries are seeking (see Table 2).

Therein lies the critical role of multilateralinstitutions, such as The World Bank, that can helpprovide the knowledge and advisory services,capacity building and the financial instruments tomeet the needs of developing countries. ■

2514.Gordon Hughes (2000), “Why Babies Die in India”, mimeo, The World Bank.

... improving the quantity, quality and reliability of energy

services to a community or a city can lead to economic

growth, job creation and increased productivity.

26

Thakoor Persaud is a SeniorEconomist in the Finance, Private

Sector and InfrastructureDepartment, Latin America andCaribbean Region of The WorldBank. He has managed housing,

urban upgrading, municipal finance,decentralisation and urban transport

projects in several countries. He co-ordinated the country studies

used in the Latin America-Caribbeancomponent of The World

Bank/Habitat Housing IndicatorsPaper and has worked on several

World Bank emergencyreconstruction operations. Mr

Persaud has a PhD in economicsfrom Texas Tech University.

a report by

T h a k o o r P e r s a u d

Senior Economist, Finance, Private Sector and Infrastructure Department,

Latin America and the Caribbean Region, The World Bank

As indicated by several publications on this topic,poverty appears easier to recognise than to define.Most recent definitions have focused on feelings ofinsecurity, powerlessness and marginalisation,together with insufficiency of assets, savings andincome, and low purchasing power and lack of accessto basic necessities.

While some see insecurity, powerlessness,marginalisation and similar features as separatepoverty indicators, it may be that these areconsequences of the low income and purchasingpower of the poor, and that they would be mostlikely easier to address through a focus on incomeimprovement rather than as separate issues. In asimilar vein, increasing assent associating povertywith such issues as human rights, women’s rightsand indigenous rights, while important, couldcomplicate the debate and weaken focus on the keyarea of income insufficiency. A more importantarea of focus for these groups could be incomedistribution issues. There are indications thatgreater distributional inequality is generallyassociated with higher levels dissatisfaction,violence and polarisation.

Whe r e t h e P o o r L i v e a n d Why T h e y L i v e T h e r e

Poor people live in the areas in which they perceivethat they can maximise the overall benefits of themoney they spend at their income level and on theirpreferred consumption ‘baskets’, e.g., food, shelterand municipal services. There may be a related issueregarding the degree to which the poor select thearea in which they live and to what degree this isdecided for them as a result of their poverty andcircumstances. It should be noted that, at some point,and to a certain degree, all income groups face sometype of constraint, although those constraints facingthe poor may be relatively much more.

The poor receive poor services due to lowpurchasing power (demand side) and poor quality ofgoods and services offered (supply side). While non-poor areas may have relatively better goods andservices available, in most less-developed countries

(LDCs), there is generally an overall low quality. Inmany cases, supply factors better explain the poorquality of goods and services.

Po v e r t y A l l e v i a t i o n

As the most recent World Development Report shows,poverty alleviation is high on the agenda of TheWorld Bank, donors and governments. Many effortsare being made to address poverty issues. However,indications are that there is need for a clearer visionon the type of intervention needed, the real cost andbenefit of such intervention, its sustainability, whereit should be focused and how it is to beimplemented. Apart from deciding whether thefocus should be on demand or supply issues andconstraints (or both), there is also the element of thetimeframe, where at least three time-horizon periodscan be identified: short-term, medium-term andlong-term.

Equity, transparency, sustainability and replicabilityshould be among the key features of any viablepoverty reduction initiative. For the long term, afocus on the demand side to increase income leveland distribution may be the most logical anddesirable option. Along with growth, this means,among other things, a focus on the maindeterminants of earning capacity, e.g., education andskills, employment opportunities, health, age, sex,assets. On the supply side, the long-term focusshould be to help improve product and servicequality, production efficiency and related actionsaimed at providing more quality output at lowercost, with improved reliability and choices.

With increased income on a sustainable basis,households will generally improve their purchasingpower (by moving to different areas offering betterbaskets, for example, stay and spend more, buy betterquality products, etc.) with greater empowermentand less feeling of insecurity and helplessness,assuming that parallel institutional and relatedchanges occur.

Short-term and medium-term approaches of donors/lenders and governments have generally focused on

Hous ing and the Poor – What Has Been Learned and What Can Be Done


28


ways of augmenting the purchasing power of selecttarget groups for specific consumption items (bothpublic and private goods) that are deemed to bepriority ones – for example, in nutrition and healthprogrammes, social safety nets and social investmentfunds. Strategies for interlinking and transitioningamong short-term, medium-term and long-termapproaches, with all of the necessary complementaryactions for sustained income enhancement initiatives,have generally not been clear at many levels amongdonors, lenders, borrowers and other players.

Hou s i n g

At any given income level, families make decisionson what to spend on food, shelter, transport,education, utilities, health, clothing and othernecessities. For the poor, food, shelter and transportgenerally account for most of their householdexpenditures. From the point of view of residents,housing is important because, apart from the size ofexpenditures, there are many associated socioculturaland economic factors.

Among these factors are the uniqueness of housing forprotection, as a centre of family and community life,health and social wellbeing, a source of employmentand a store of value. The latter two characteristicshave been very important during periods of highinflation and uncertainty. In the absence of easy accessto the formal banking system, housing has been usedas a store of wealth and to help finance otherhousehold and income-earning activities.

The social security role of housing for many owners,particularly the poor, is also an important one. Froma more macroeconomic point of view, housingcomprises one of the most important categories of anation’s stock of wealth. It can also be a keycomponent of the construction sector, generatingdirect and indirect employment at various levels.Overall, while it can be viewed as a private good,housing generates high positive externalities.

It is worth repeating that the best way to encourageimprovement in consumption level for the poor is toimprove their income on the demand side and toensure that the supply of basic items is beingprovided efficiently under competitive conditions.

The private formal housing market in most LDCs isthin and suffers from many institutional, financial,legal, normative and related constraints. Consumersthat enter such formal markets are generally amongthe upper-income groups with access to credit orhaving their own resources to finance theirpurchases. Due to previously mentioned constraints,the cost of the solutions they buy is usually muchhigher and the quality generally lesser than similarsolutions provided under less constrained conditions.Partly as a result of supply-side, as well as purchasing

power constraints on formal housing, privateinformal housing usually accounts for a majority ofthe solutions built. These usually include some high-quality units, along with a large number of low-cost,poorly constructed units located in vulnerable orless-desirable zones. One typical characteristic ofmost informal units is the gradual improvement andmodifications they undergo over time, reflecting theconcept of housing as a socioeconomic process ratherthan a finished product.

Wha t H a s B e e n L e a r n e d

So far, most interventions in public housingprogrammes have generally had the impact ofaugmenting shelter consumption with little or noassociated linkages to changes on the income side.Additionally, to a large degree, these programmesdo not address several key supply constraints thatkeep most private-sector housing suppliers andfinanciers away from the market and preventefficient market-supply conditions, e.g., possiblequality improvement and lower prices. In severalways, by focusing on new housing programmes andignoring or neglecting such issues as reform of theland titling and mortgage finance systems, publicprogrammes prevent most existing homeowners,especially the poor, from enjoying the fullcommercial benefit of their assets.

Moreover, these public programmes providecompleted units that invariably cost more thancomparable units built by the private sector. In termsof economic impact and cost efficiency, whiletraditional public housing programmes have generallycreated some employment, these are usually minimaland temporary and they do not have the strong

The importance of self-help and microemployment activities

to help improve income levels and finance a continuation of

the consolidation process is also a key element.

Hous ing and the Poor – What Have We Learned and What Can We Do?

29

multiplier effect that is usually associated with suchactivities. For most beneficiaries, the ratio of the newunit cost to beneficiary income compared with theratio of their prior unit cost (ownership or rental) totheir income generally shows the former to be muchhigher. This has been a significant explanatory factorfor many high-turnover problems observed in publichousing programmes.

After decades of efforts, most governments nowadmit that the goal of adequately providing for allqualified needy groups through traditional housingprogrammes is not sustainable for several reasons.Among the chief reasons are the large and growingnumber of applicants, the high programme cost andits adverse impact on the budget. Consequently,many have sought new approaches for addressingshelter needs. Unfortunately, even with theexperience of past problems, there are still apparentlyseveral misconceptions about what is needed todevelop a viable shelter programme and, while mostof the old-style national housing banks and publichousing programmes have disappeared, they arebeing replaced by similarly unworkable upfrontsubsidy entities and programmes.

By incorporating various forms of saving incentives,the new approach of explicit subsidies tries to avoidexclusive focus on the large and selective increase ofhousing consumption on the demand side alone.However, while they are now packaged as income-augmenting programmes that have some relation tothe savings of recipients, beneficiaries are stillrequired to spend the subsidy received on land andbuilding, and not on any other high-priority areasthe beneficiary may have.

A problem with most of the past housing investmentprogrammes has been their efforts to selectivelychange household expenditure patterns withoutconsidering that they are derived from specificincome and preference levels. Other things beingequal, such interventions invariably lead toconsumers trying to rebalance their basket of goodsover time, the end result being efforts to sell or tradepart of the housing windfall, generally at steepdiscounts, in order to re-establish their overallconsumption-preference ratios. This is oneexplanation for the relatively high turnover ofownership (informal sales and rental) in many publichousing operations, notwithstanding efforts by theauthorities to block such sales by insisting on firstbuyback options or no-sale clauses.

In several instances, selectively increasing housingconsumption with no sustained income increase canpush a family into a worse economic condition if, for

example, the recipient cannot or does not wish to sellthe unit but, at the same time, cannot afford theincremental operation and maintenance costs. A relatedissue here is that, when beneficiaries acquire unitsunder public or private sector formal programmes,many of them may face several additional expensesthey were not formerly incurring, either because theyhad no previous service connections or because suchconnections were clandestine. Even titling, which isdesirable and beneficial in many ways, can add new taxliability for owners after municipalities update theircadastre and tax-collection system.

An important lesson is that, if the absolute povertylevel encompasses, for example, the lowest 20% ofhouseholds, who cannot afford to satisfy theirnutrition needs even if they use all of their incomefor food, any programme aimed at improving theirhousing position has to be either provided free ofcharge or with an additional income source for themto meet the incremental housing costs. Failing suchactions, they would have to consume less in order tomeet additional housing costs.

A common error in many public housingprogrammes has been the way in which, perhaps forpolitical expediency, social welfare issues have beenintertwined with public-sector housing programmes.This has invariably resulted in great difficulty intrying to reconcile cost recovery, replicability andsustainability goals on one hand with that of assistingthe poorest strata of the population on the other.This also makes it almost impossible to resolve‘willingness to pay’ and ‘ability to pay’ issues, and itcreates several targeting problems and distortions. Inorder to demonstrate their commitment to the poor,many countries have had constitutional or other legalrequirements mandating high and uniform normsand quality standards in shelter programmes, servicequality, access, etc., for public entities, withoutapparently analysing several associated affordabilityand investment cost issues. Even in cases where nosuch constitutional mandates exist, policymakersgenerally insist on such high and uniform norms and standards.

Wha t C a n B e D on e ?

The experience of the last three decades shows that anew approach is needed to help address housingpolicy issues. Many of the elements of the requirednew approach are already incorporated in the policypaper, HOUSING: Enabling Markets to Work,1 (“thepolicy paper”) where the primary focus is onaddressing supply-side constraints through proposalsfor improving the institutional, administrative, legal,financial and related framework.

1. The World Bank (1993), HOUSING: Enabling Markets to Work, a World Bank Policy Paper, Washington, DC.

30


Whatever form the new approach takes, it shouldtake the assumption that housing and other basicneeds deficiencies are largely an income and povertyproblem – people do not have adequate housingunits, food, services, etc., because they are poor. Thelong-term solution to these problems is to assist allaffected families in improving their income level,rather than trying to selectively and temporarily assistonly some members from an equally disadvantagedgroup, leaving the majority with no assistance. Apartfrom equity and sustainability issues associated withsuch actions, there is also the problem of trying toprevent such favoured groups from attempting totransform all or part of their ‘windfall’ to financeother priority needs.

In order to develop a workable new approach,borrowers, lenders and donors have to explicitlyidentify and address social welfare issues, separatingthese from other housing policy issues. It should beclarified that this is not a call for ignoring vulnerablelow-income groups; rather, it is a proposal for cleareridentification of such groups along with transparentand viable social welfare assistance policies andprogrammes for addressing the needs of thesevulnerable groups on a consistent, equitable andsustainable basis. Perhaps because this is such apolitically and socially complicated and costly issue toaddress most governments seem unwilling or unableto take the necessary action.

The focus on supply-side constraints and proposalsfor improving institutional, administrative, legal,financial and related frameworks should be a keymedium and long-term strategy in any new housingpolicy initiative since, as explained in the policypaper, it affects all household income groups invarious ways and provides the only sustainable pathfor sector development. For example, for the upper-income deciles, legal reform of foreclosure laws,mortgage lending conditions, rent control andrelated laws could encourage more private-sectorparticipation. Some form of concessionary assistanceto create and develop private-sector interest, e.g.,greater mortgage financing for middle-incomegroups could be done as long as there are clear andmeasurable goals, clear timeframes and exit strategies.For low-income groups, simplified land titlingprocedures and systems, revised building codes andsimilar actions could help reduce land andconstruction costs and increase access.

The policy paper does not argue against assistance,including subsidies, for targeted groups if these canbe justified and sustained; however, because theprimary emphasis has been on policy and relatedsector intervention, it is sometimes felt that animportant component on project-level interventionhas not been given enough attention. For the

poorest and most vulnerable groups (those amongthe lowest two to three deciles in incomedistribution), social welfare mechanisms should beput in place as their first line of support. Themacroeconomic/budgetary implications of this mayrequire such assistance to be offered only to thosehouseholds most in need, while more creative low-cost options (such as incentives for room rentals bythe relatively wealthier residents and community-based mutual assistance groups) are considered.

The largest asset base of most poor is their unskilledlabour. By the process of elimination, if the poorhave few other assets and low short-term prospectsfor obtaining additional resources (income or grants),they would have to begin using their labour or‘sweat’ equity if they want to improve their housingor other consumption item. It may be argued thatthe poor are already using their labour to earn aliving (mostly in the informal sector), and anyadditional demand from them would be unrealistic.If this is so, and there are no sustainable ways ofaugmenting their income or purchasing capacity,then the situation becomes bleak. There is ampleevidence, however, that with appropriately leveragedassistance from such groups as non-governmentalorganisations (NGOs) and congressional budgetoffices, most residents, except for specific vulnerablegroups, are willing to put some sweat equity intoimproving their own living conditions.

With the exception of those countries withsignificant open homelessness, most people havehousing units, although these may suffer fromseveral deficiencies, e.g., poor quality material andworkmanship, unclear or no titles, location indistant areas, poor access to basic services,overcrowding and vulnerability to disasters.Beginning with the premise that people livesomewhere, although the area or unit in which theylive may not be ideal, the proposal is to focus not onan abstract ideal of ‘dignified’ housing costing amultiple of their income or the value of theircurrent dwelling but on looking more realistically atwhat households now have, and to undertake toimprove their existing units, or helping them toacquire new space, ensuring that these would in nocase be worse than what they currently have.

For the significant number who live in overcrowdedunits or in hazardous areas, the goal should be to helpthem to find basic starter units that do not drasticallydistort housing as a share of their expenditures andwould provide them with an opportunity toconsolidate their units at the pace that their budgetswould allow. Similarly, for basic services such aswater, while the long-term goal may be to provideeach family with in-house service, the short-termstrategy, from an affordability and sustainability

Hous ing and the Poor – What Have We Learned and What Can We Do?

31

standpoint, may be no more than ensuring that thewater currently provided by private vendors is clean,reliable and reasonably priced. We need to workmore with such non-traditional suppliers as watervendors and help them to improve their service andmove into the formal sector over time.

Apart from the most vulnerable groups, the needs ofwhich should be addressed under appropriatelyformulated social programmes, the goal of providing ashelter solution and level of service commensuratewith a person’s income is important for many reasons.First, it reduces the temptation for that person to try todispose of the asset to rebalance expenditures since thevalue of the improvement is not substantial in theshort term. Second, it is an extremely low-costapproach that does not have many of the ‘lumpy’outlays as those for new housing and infrastructureinvestments under public programmes. Third, it canbe done with sweat equity being a core input,leveraged in line with family needs and customs anddepending on the circumstances of the beneficiary.Also, its impact on the national budget should besignificantly smaller than new investmentprogrammes. It is also a sustainable alternative.

With the above framework, dialogue on theenabling environment between The World Bankand individual countries can continue. At the sametime, for the relatively poor, i.e. those above theextreme poverty line, who need shelter assistance,the options would primarily be among urbanupgrading, urbanised lots and core units. Thoseabove the fifth decile in household income levelmay need some assistance to encourage private-sector mortgage and related services. Assistance forhome improvement would also be important formany income groups.

Even with this proposed approach, subsidies will notbe eliminated. Instead, such subsidies would be usedto reinforce some of the key policy reform measures.For example, given the importance of title for homeconsolidation, it may be extremely cost effective tooffer to subsidise, for example, 70% to 80% of thetitle cost for qualified poor residents. Parenthetically,this assumes that the government would also beensuring that the titling system is reformedappropriately so that it facilitates ease of titling,system updates, reliability, etc.

Similarly, if there is a programme promotingurbanised lots or core units, it is expected that therewould have been a review of the appropriate buildingnorms and standards, codes, etc., so that overdesign,review and approval and related bottlenecks areeliminated and the system encourages codecompliance. Several variations of matching grants andsubsidies can be offered as incentives to leverage such

activities as community participation, homeimprovement, maintenance, private mortgagefinancing and related initiatives. In this way, thenational authorities can determine on an annual basiswhat resources they have for subsidies and can thenset priority areas for the period in question. In thoseinstances where there are public lands or assets that arenot being used, instead of using these directly inshelter programmes, the assets could be sold and theproceeds used to complement the subsidyprogramme, providing greater siting flexibility.

The importance of a broad-based developmentapproach is important in any effort to aid the poor.This means that, apart from providing incentivesand helping the poor to improve their shelterfacilities, there should be strong efforts to facilitatea variety of self-employment and microenterpriseopportunities, education, health and relatedcommunity services. The role of the communitiesand NGOs in these initiatives should be an integralone, with almost equal emphasis being placed onmaintenance and sustainability factors as in theinitial capital investment.

As noted in this article, there has been an inherentinternal inconsistency in most of the attempts beingmade so far by donors, lenders, governments andother actors to address shelter problems in LDCs in asustainable and replicable manner. In focusing onincreased shelter consumption without commen-surate changes on the income side, expenditurepatterns are distorted, the budget burden increasesand demand for new units grows. In many countries,social welfare issues have been intertwined withpublic-sector housing programmes, the result beinggreat difficulty in reconciling cost recovery,replicability and sustainability goals on the one handwith that of assisting the poorest strata of thepopulation on the other. Under such conditions, itbecomes almost impossible to sort out willingness-to-pay and ability-to-pay issues and it creates severaltargeting problems and distortions.

By adopting policies aimed at improving the existinghousing stock, along with selective low-costintervention such as land titling, home improvement,serviced sites, appropriate technology services andcore units, and addressing supply-side constraintsthrough proposals for improving the institutional,administrative, legal, financial and relatedframework, a more viable path could emerge. Theimportance of self-help and microemploymentactivities to help improve income levels and financea continuation of the consolidation process is also akey element. Judicious use of subsidies and similarincentives to encourage and leverage desirableprivate sector participation is another importantelement in the process. ■

32

Bill Baker is Head of the NationalEconomic Research Associates’

(NERA’s) Water Economics Practice.He has applied his experience of

the privatisation and regulation ofthe UK water sector in countries

such as Peru, Brazil and Argentina.

Sophie Trémolet is a Consultant atNERA, and has worked in the

water, electricity and health sectors,with assignments ranging from theprivatisation of electric utilities in

West Africa to tariff studies forwater companies in Peru and

Argentina.

a report by

B i l l B a k e r and S o ph i e T r émo l e t

Head of Water Economics Practice, and Consultant, National Economic Research Associates (NERA)

Privatisation of infrastructure services is oftenfollowed by stricter enforcement of quality standards,which pushes up costs, with no positive effect on theexclusion of the poor. The poor could get easieraccess to service if the main provider was permittedto deviate from this uniform standard, offeringpoorer consumers a service in which an acceptablerelaxation in quality led to a lower price. This articlereviews the legal and technical challenges for qualitydiversification by utilities, and early results fromefforts by some to diversify.

An important reason for reforming or privatisingpublic providers of infrastructure services is the needto improve the efficiency and quality of service.When private participation is introduced, thetendency of governments is to focus on the serviceprovided by the main utility and set high qualitystandards for the sector as a whole.

Private participation also goes hand-in-hand withsetting up independent regulatory agencies. Theseagencies have better capacity for monitoring andenforcing quality arrangements than the governmentbodies previously in charge. As a result, governmentstend to become tougher on standards followingutility privatisation and the costs of quality usually goup (even if the quality standards set by law have notbeen modified).

Quality standards, defined in law or the privateprovider’s contract, can cover production (resourcemanagement), product and service delivery (chemicaland biological, continuity) and customer relations(flexibility in payment methods). These quality targetsfor private provision can be set through a variety oflegal instruments. The choice of instrument dependson the frequency with which the standard will needto be changed and the number of parties involved inagreeing changes to the standard, among other things.

Health, security and environmental requirements(such as the regulation of drinking-water qualitystandards, or the quality of sewage discharges) have asignificant impact on mortality and morbidity and onthe utility’s costs, and should preferably havefoundations in primary legislation. The process for

modifying laws is usually more complex and difficultthan for secondary legislation or bilateral contracts. Ifconsumers and third parties see laws protecting theirinterests, they will be more likely to accept theprivate participation as legitimate. If the provider issatisfied that these rules are not going to be modifiedovernight and that it would be duly consulted in theprocess for modifying them, this can lower itsperception of risk and ultimately reduce the cost ofservice through a lower cost of capital.

For standards requiring greater flexibility, regulations(founded in laws) that can be more easily amendedby the regulatory agency might be more appropriate.Less fundamental aspects of quality, which may needto be changed frequently (for instance, when pricingconditions are reviewed), are better expressed incontractual clauses (for example, customer servicestandards, such as the delays for responding to anenquiry by mail or by telephone).

H i g h Qu a l i t y S t a n d a r d s

There are three main reasons why quality standardstend to be set high for main utility providers indeveloping countries. First, such providers haveoften inherited operating structures and tariffs fromlarge-scale operations not used to considering low-cost options or alternative provisions at thecommunity level. The culture in such largeorganisations is often to derive ‘professional pride’from top-quality uniform service, not from boldinnovations in low-cost alternatives.

Second, investment designs are often based ondeveloped countries’ standards. Quality standards areoften driven by engineering specifications, such asstandards for the installation of electrical wiring inhouses or the minimum depth for pipes beneathroads. Usually, these engineering norms weredesigned in developed countries and, in the absenceof anything more relevant, exported unchanged tothe regulatory handbooks in developing countries.The expectations of the elite in developing countriesalso push towards the adoption of developedcountries’ standards of service. While lower-costalternatives do exist in developed countries, they are

Ut i l i t y Re form – Regu la t ing Qua l i ty S tandards to Improve Acces s for the Poor


Ut i l i t y Re form – Regu la t ing Qua l i ty S tandards to Improve Acces s for the Poor

no longer the norm and are not necessarilyconsidered when setting standards in developingcountries. For example, in-house septic tanks areoften still in use in rural areas in France and the US.

Third, large private utility providers tend to focus onhigh-margin customers and often have no financialincentive to develop low-cost provisions. They havegenerally entered the market through internationaltender processes to carry out large-scale investments.In some utility markets, however, the optimal scaleof production has declined and even main providersnow consider small-scale low-cost alternatives farmore seriously.

P r a c t i c a l C h a l l e n g e s f o r D i v e r s i f i c a t i o n

High standards of quality result in higher costs,limiting access to the service for the poor.1 Regulatorscould make services more accessible, if they allowdiversification of quality, making it legal to offer poorconsumers a service in which acceptable reductions inquality reduced the price. One way to achieve thisdiversity is to end the main provider’s monopoly,permitting alternative providers to meet the needs ofpoorer consumers at a lower price. Another is topermit the main provider to diversify its quality,especially since network supply often remains cheaperin the long term than decentralised supply. Electricitysupplied through a network, for example, ispotentially of much higher quality than electricityfrom solar panels or diesel generators. Networks’economies of scale and scope make their prices likelyto be lower in the long run.

However, there will sometimes be technical limits toquality diversification. For infrastructure services thattend to be jointly consumed (such as water or gridelectricity), it can be technically difficult to vary thequality of service for different social groups or serviceareas. Figure 1 illustrates a main production plantfeeding into the network for the whole of the urbancentre. Some poor areas (A) are fed from this mainnetwork, so quality characteristics such as voltageconsistency or drinking-water quality cannot bedifferentiated easily for these peripheries. Onlycharacteristics such as reliable hours of service,payment methods or customer services could bedifferentiated for these areas. For other areas (B) thatare supplied by other plants (which might belong tothe main provider or alternative providers), quality ofsupply could be more extensively varied.

Another difficulty is that cost differences driven byquality differences might be difficult to reflect in

tariff terms. If quality differentiation affects the levelof initial capital costs, it can be relatively easy torelate quality differences to tariffs by varying theconnection charge. However, if quality variationslead to differences in marginal production costs, thesemight be more difficult to reflect by varying thevolumetric charge. In some cases, variations in thequality of service provided through the network arelikely to have a relatively small impact on operatingcosts, and the administrative cost of reflecting thesecost differences in tariffs might be higher than thesavings. For example, if lower quality meansrestricted supply hours, sophisticated meters wouldneed to be installed so that consumers could becharged different prices at different times of the day.

In addition to this, identifying the target group forlower-quality, lower-cost service might provedifficult. There is little socio-economic data inmost customer registers. Poor customers maysometimes live in well-defined areas as in Figure 1,but they are often mixed with rich customerswithin the same administrative unit. As in theallocation of subsidies, the important issue thenbecomes delivering the lower price (and theassociated lower quality) to the element of thepopulation that is most in need.

S ome E f f o r t s t o D i v e r s i f y Q u a l i t y

Despite these difficulties, some main providers havevaried service quality in an attempt to make theirservices more affordable for poor customers. Thisdiversification has taken several forms – the provisionof more flexible customer-service arrangements orthe use of low-cost technologies to reduce the cost ofservice, at the expense of quality. Consumers havealso agreed to receive the service during a reducednumber of hours each day in exchange for a

33

Plant

Plant

Urban CentrePlant

A

A

A

A

B

B B

B

B

Main network

Poor communities fed from the same network

Poor communities fed from other plants

Secondary network

Figure 1: Varying Potential for Diversification of Infrastructure Service

1. B Baker and S Trémolet (2000), “Regulating Quality: Let Competing Firms offer a Mix of Price and Quality Options”,Viewpoint, No. 221, The World Bank, http://www.worldbank.org/html/fpd/notes/221/221Baker-10-24.pdf

discounted price. In the UK, for example, electricityand gas utilities have for some years offeredprepayment cards to their customers. This means thatsupply can be interrupted if the payment is not made.Continuity of service suffers but it allows customersto monitor and control their expenses even thoughthe costs may be high.

In some cases, diversification of quality has requiredentering into agreements with alternative providers orcommunity organisations that tend to be morespecialised in the delivery of low-cost services. Forexample, Aguas Argentinas, the concessionaire ofwater and sanitation services in Buenos Aires, workedin partnership with a low-income community, a non-governmental organisation and local governmentwhen taking over the low-cost system in the BarrioSan Jorge. In this district, the community hadexperimentally developed a double system of waterprovision – one system connected to the existingnetwork to provide small volumes of potable water,and another that can draw on groundwater sources,too salty for drinking but sufficient for washing andbathing. The sewerage system was based on acombination of cesspits within each household and asmall-bore pipe network. Aguas Argentinas took overthe operation, maintenance, and repair of the systemand the residents pay a fixed rate for these services.

The company has since introduced the low-costsewerage system to other poor areas of the city. Thedouble water system, however, proved too expensiveto develop and did not go beyond the experimentalstage. To increase the network expansion rate, AguasArgentinas also takes over networks built by comm-unities at lower costs (but respecting the minimumquality standards) in exchange for which customersreceive a discount on the price of the service.

Interesting cases of collaboration between the mainproviders and small-scale entrepreneurs have emerged

in the telecoms sector through the development ofpublic telephone booths. In Senegal, for example, smallprivate operators run telecentres and rent lines fromSociété Nationale des Télécommunications du Sénégal(SONATEL), the national operator, which wasprivatised in 1998. These telecentres have grown veryquickly, and produce about four times more revenueper line than individual lines run by SONATEL.

Con c l u s i o n

To increase access for the poor, the regulator ofservice quality should allow the main provider todiversify the quality of service, and should also allowalternative providers to operate. It should be left tothe consumer to decide whether to accept the lower-quality service from the main provider. Whenregulating service quality for the main provider(privatised or not), governments should allow thedelivery of different quality levels to differentcustomer groups, to be identified on objective criteriaand enforced. This would help with the problem ofundersupply or oversupply of quality. This possibilityshould be explicitly allowed in the contract, so thatpenalties are not unduly paid for sub-standard quality.Flexible payment options should also be explicitlyallowed, such as the capacity to spread payment of theconnection charge over a number of years. Mainutility providers should also be encouraged to workwith alternative providers in order to combine serviceoptions. If individual choice is difficult and costly toorganise (for example, for service characteristics thatare jointly consumed), ways of identifying grouppreferences should be defined in order to vary servicequality at the level of well-identified groups. Severalmethods for measuring group taste can be considered– the transfer of experiences from other locations,deliberate experiments (for instance, voluntarilyvarying the quality of service in a number of locationsand measuring relative customer satisfaction), groupand community consultations and survey studies. n

34


Ch e a p e r i s N o t A lw a y s B e t t e r

According to a report by ESMAP (the Energy Sector Management Assistance Programme), managedby The World Bank, the costs of labour and materials for building a three-phase line can be cut frombetween US$8,000 and US$10,000 per kilometre, to US$5,000 per kilometre (and to US$4,000 perkilometre for single-phase lines) by using higher voltage and higher-quality poles to reduce life-cyclecosts, and properly sizing and placing transformers.2 Single-phase lines are often sufficient to carry thetype of loads used in rural areas, and are more suited to business uses than alternatives to network supply,such as solar or diesel generation. However, the study emphasises that not all construction savings arenecessarily efficient: “An initially inexpensive line that needs frequent maintenance, overhauling, andupgrading can require considerably greater investment during its lifespan than a line that has beenadequately designed from the outset.”

2. ESMAP (Energy Sector Management Assistance Programme) (2000), “Reducing the Cost of Grid Extension for RuralElectrification”, Report 227/00, The World Bank, Washington, DC.

35

Middleton Nyoni has been CityTreasurer of Bulawayo City Council,Zimbabwe, since 1995, havingworked for the council for 11 yearsprior to that. He is Chairman of theTreasurer’s Forum of the UrbanCouncils Association of Zimbabwe anda member of the Working Group onExpanding Municipal Finance in thatcountry. He holds several professionalmemberships and is the author ofpapers on financing localgovernment. He has a BSc inBusiness Administration (Accounting)from the University of NorthernColorado, US, and an MBA from theNational University of Science andTechnology, Zimbabwe.

a report by

M i dd l e t o n N y on i

City Treasurer, Bulawayo City Council

In f ras t ruc ture De l i ver y , Pover ty A l l ev ia t ion and Re la ted Prob lems


I n f r a s t r u c t u r e D e f i n e d

‘Infrastructure’ is defined by Webster’s New CollegiateDictionary as “the underlying foundation or basicframework (as of a system or organisation)”.Elsewhere, it has been defined as “the system whichsupports the operation of an organisation”. Indeveloped countries, the term could well relate to air,road and rail networks, water supply systems,communications networks, education and healthdelivery systems and more. However, in theZimbabwean local government’s vocabulary, moreoften than not, the term ‘infrastructure’ refers towater storage, delivery, purification and reticulationsystems, sewage treatment and disposal networks,road networks, public lighting and refuse removal anddisposal systems. All other above-grounddevelopment or construction is usually referred to as‘superstructure’, for example buildings such asschools, houses, clinics and community halls.

The rather restricted definition of infrastructure alsoresults from the fact that, in Zimbabwe, urban localauthorities are not responsible for rail, air andcommunications networks. However, given theinseparable benefits in the alleviation of povertyarising from superstructure, it has been consideredappropriate to treat it as an extension ofinfrastructure. For the purposes of this article,therefore, any reference to infrastructure shall bedeemed to include superstructure as explained above.

I n f r a s t r u c t u r e B e n e f i t s

It goes without saying that the construction, orputting in place, of infrastructure is a source ofemployment. In Zimbabwe, the contribution ofinfrastructure delivery to employment is sosignificant that it has meaningfully supported theconstruction industry.

According to June 2000 figures, an average of some67,600 employees with earnings of US$689.6 millionwere employed in the construction industry inDecember 1999. Some of the jobs included thedigging of trenches, laying of pipes and clearing andconstruction of roads, as well as actual building. Further

jobs have been created for the actual operation of theassets constructed. These have included the operationof water and sewerage works and pump-stations, therunning of schools, clinics and community centres andthe operation of workshops for the maintenance ofroadworks and public lighting. Employment duringand after the construction period leads to povertyalleviation for those directly involved.

R o a d N e t w o r k

The existence of a good road network not onlyfacilitates the smooth movement of people andgoods, but also creates opportunities for business.For the small enterprising businessperson, thepresence of roads has led to thriving transportationbusinesses. These range from commuter omnibusesto street vendors’ barrows, which have gainedpopularity as a cheap means of moving vegetablesand other small items in the informal business sector.A sizeable number of people depend on theseactivities for their livelihood.

W a t e r D e l i v e r y S y s t e m

The delivery of clean water has assisted in the controlof waterborne diseases and the conveyancing ofsewer to disposal sites. In addition, for most residents,the presence of water means cultivation of a smallvegetable patch from which survival is possible. Theneed for abundant water supplies is one reason whythe City of Bulawayo (“the City”) has alwaysdirected its efforts at increasing the amount of wateravailable for its residents. In fact, the City also runs asocial welfare programme whereby it allocates someopen spaces serviced by standpipes for vegetablegardening by the underprivileged members of thecommunity. Through these programmes, some ofthe beneficiaries have managed to ward off extremepoverty by catering for their basic requirements.

S c h o o l s , C l i n i c s a n d o t h e r

C o m m u n i t y C e n t r e s

The provision of primary education at urban localauthority schools provides an important base forfurther education for some, and basic literacy for

36


those who leave school prematurely in order to takeup jobs or start their own small businesses.

An effective primary healthcare system offered by thelocal authority clinics provides benefits in thatclogging of the referral hospitals that should deal withmore serious cases has been alleviated.

P r o b l em s A r i s i n g f r om I n f r a s t r u c t u r e F a i l u r e a n d B a c k l o g s

A good understanding of infrastructure deliverycould well be facilitated by consideration of theforces that drive its provision. The basic reason forinfrastructure delivery is need. For the City, deliveryof infrastructure has been demand-driven withguided implementation. This demand has arisen fromtwo sources:

• the rural-to-urban migration as people drift intothe City in search of jobs or some otheropportunity of making a living; and

• the increase in the population at the rate of 4% perannum.

Unfortunately for the City, the infrastructure in placeis not only old, but is also inadequate to take thepressure from the additional load. Worst affected arethe water and sewerage systems, where the frequencyof water and sewer faults has been a cause for concern.The faults have inconvenienced some sections of theCity either by depriving them of water supplies whilethe problem is being attended to, or by being a sourceof intolerable smells and a possible health hazard. Byway of illustration, throughout 1999, burst water pipesnumbered 535, while 15,298 choked sewers requiredattention. Other problems resulting from theinfrastructure backlog are outlined below.

H o u s i n g N e e d s

Due mainly to the rural-to-urban migration, thewaiting list of those in need of accommodation hasincreased to about 27,000. Most of these arepresently lodging in other people’s premises. In fact,lodgers only in the high-density areas are estimated atslightly more than 10% of the population in thoseareas, which is approximately 690,000. Apart fromthe City’s inability to provide serviced stands andhouses at a fast pace, the unpalatable economicsituation has put paid to a lot of these people’s hopesof ever owning accommodation of their own.

F i n a n c i n g L o c a l G o v e r nmen t i n a n U n c e r t a i n E n v i r o nmen t

While the local authority is grappling with theproblems outlined above, it is doing so in a most

uncertain economic environment. Theenvironment is characterised by high inflation, anunpredictable interest-rate regime and seriousforeign currency shortages.

The latter has led to periodic shortages of fuel, theprice of which has been increased several timeswithin a short period. The increases in the prices ofinputs, coupled with the prohibitive interest ratesruling to December 2000, have brought about therestructuring of a number of companies that havebeen forced to reduce both their production andworkforce. Companies have either relocated fromthe City, liquidated or are on the verge ofliquidation, which would leave scores of peopleunemployed. The obvious result is an increase in thenumbers of the urban underprivileged. The City hasalso witnessed an increase in debtors as increasingnumbers of consumers are experiencing difficulties inpaying for services.

F i n a n c i n g R e c u r r e n t O p e r a t i o n s

Due to the shortage of money, the City has had to relyfrequently on overdraft facilities and credit linesoffered by its financial partners. This has only beenpossible because of the its 1999 credit rating of BBB-.However, the City has also embarked on arestructuring programme that should result in thestreamlining of operations in order to cut down oncosts. While not intended to contribute tounemployment, it is inevitable that some redundancyand separation packages will have to be offered if therestructuring process is to succeed.

C a p i t a l F i n a n c e

The City’s success in raising capital finance throughstock issues has relied on the implied guaranteerelated to the prescribed assets regime. Contrary toexpectations that the prescribed assets –investments in government or quasi-governmentsecurities – were going to be phased out, theregime is still in place with insurance companiesrequired to hold 45% of their investment portfoliosin prescribed assets, while pension funds have tomaintain a ratio of 30%. With the centralgovernment’s limitations in providing localauthorities with adequate consessionary loans at itscurrent rate of 18%, it is highly unlikely that theCity’s capital finance requirements will be metfrom this source.1

It is worth noting that the City’s capital budget for2001 stands at US$1,282 billion. As governmentmoves to convert part of its short-term liabilities tolong-term loans, a cash saturation from treasury billmaturities, together with other measures, have seenshort-term interest rates tumbling from between

In f ras t ruc ture De l i ver y , Pover ty A l l ev ia t ion and Re la ted Prob lems

37

70% and 80% to all-time lows of less than 20%.These rapid unprecedented changes have created anopportunity for the City to raise capital funding forits infrastructure. Currently, the City is in theprocess of raising some US$400 million for partfinancing of, among other projects, those outlined inTable 1.

Should efforts to raise the US$400 million besuccessful, it is logical for the City to attempt to raisea further amount to finance its infrastructure backlog,provided the interest rates remain favourable.

Dono r - f u n d e d P r o j e c t s

There is little doubt that the financial assistanceprovided in the past by donor agencies such asUSAID (The United States Agency for InternationalDevelopment) and The World Bank has been greatlyappreciated. Such assistance has largely been directedat funding the servicing of stands, with somefinancing for the provision of clinics, schools andcommunity halls. In the case of Bulawayo, thesefunds have been put to good use as the intendedprojects are there for all to see.

One shortcoming has been the lack of provision offunds to the local authority for the construction ofhouses with preference for the delivery of housing bythe private sector. While the private sector has playeda part in the provision of houses, these have tendedto be unaffordable for the intended beneficiaries. Theresult is that the houses have, in a number of cases,been taken up by those who can afford them and, inturn, rent out portions of the houses to thoseoriginally intended as beneficiaries.

Yet another scenario is one where the serviced standsare allocated to the intended beneficiaries who, becauseof a lack of financial ability to construct the housesthemselves, enter into agreements with those who canafford them, who then construct the houses and leasethem out to the originally-intended beneficiaries.Either way, the intended beneficiaries end up as lodgerswho have to pay more than would otherwise beexpected. In some instances, the prohibitive buildingcosts discourage the beneficiaries to the extent that theyleave the allocated serviced stands undeveloped foryears. The obvious result is that good money continuesto be ploughed into the ground through the provisionof unproductive services. This state of affairs calls forconsideration to be given to allocating a sizeableportion of available funding for the construction ofhouses through force account, particularly whereviable building brigades are in place.

Another problem is the lack of flexibility in as far asit relates to implementation of projects where theyare least needed. A case in point is the location ofprojects such as public lighting and clinics. What hastended to happen is that the implementationmonitoring process has insisted on the location ofsome of these projects being carried out in areas inwhich it was believed they would be needed at theinception of the programme more than five yearsago, despite changes in circumstances on the groundand advice to the contrary.

A difficulty that local authorities have had to livewith is the disbursement mechanism, which, ontermination of the programme, has tended to leavelocal authorities with significant liabilities arisingfrom delayed settlement of contractor claims andconsequent interest charges. For future programmes,it might be worthwhile, on the basis of merit, toconsider disbursements directly to the localauthorities. This should not only improve thepayment of contractors, but would speed up thedelivery of projects, especially in volatile economies.

All things considered, the donor-fundedprogrammes have been successful in putting themuch-needed infrastructure in place. Given thebacklog that the City of Bulawayo has to deliver, itis unfortunate that this kind of assistance has beencurtailed when it is most needed. Poverty alleviationcertainly deserves better. ■

Au t h o r ’ s N o t e

Reference to the City of Bulawayo throughout this paperis meant for purely illustrative purposes, and does notseek to project the official position of the Bulawayo CityCouncil. Similarly, any reference to the country,Zimbabwe, is meant to achieve the same illustrativeintention. This paper represents the author’s personalviews that are the result of his close association with theCity of Bulawayo.

US$ millions

Roadworks 204.2

Water services 216.7

Sewerage works 134.5

Housing 100.0

Primary schools 70.0

Libraries 15.0

Clinics 11.2

Total 751.6

1. Nyoni Middleton (2000), “Financing Urban Local Authority Projects in Zimbabwe with Reference toBulawayo”, presented at the Global Conference on Capital Markets Development at the Subnational Level, 15–18February 2000, New York.

Table 1: Financing Required for Infrastructure

Projects

38

William Streeter joined Fitch’sPublic Finance Department in

October of 1997 and is currently aManaging Director in the GlobalProject Finance Group. His major

areas of global responsibilityinclude public infrastructure finance,

with a specialisation intransportation finance. He is also asenior member of the Fitch rating

committee. From 1985 until hisrecent assignment, Mr Streeter

worked at Moody’s Investors Serviceas Manager of Canadian ratings,

Senior Vice President in the revenuespecialties group and Senior Analyst

for Mid-Western ratings. Prior tothat, he was a budget analyst at

the City of San Antonio. Mr Streeterhas a graduate degree in City and

Regional Planning from the KennedySchool of Government, Harvard

University, and an undergraduatedegree in Political Science from the

University of Houston.

a report by

Wi l l i am S t r e e t e r

Managing Director, Global Project Finance Group, Fitch

I n t r o d u c t i o n

The unremitting concentration of population andeconomic activity into large urban centresthroughout most emerging market countries in LatinAmerica and Asia has overwhelmed both thecapacity and pace of investment in basic publicinfrastructure systems, whether it is for water,sewerage or transportation. The drive towardsprivatisation and concession-based project financingin the mid-1990s was seen by many governments asa way to jump start infrastructure investments. Thefeeling was that project finance could infuse newcapital and better management practices into theirpoorly maintained and over-utilised infrastructuresystems. The initial efforts of the mid-1990s werepromising, but they soured with the contagion effectfrom the Asian financial crisis of 1997. While thisexplains the sudden interruption of new capital, itdoes not fully explain why infrastructure financenever really recovered. Evidence from the last decadepoints to difficulties caused by the governmentsector’s rush to privatise basic public services, in mostcases, without a proper transition period. Thisresulted in the inevitable ‘clash of cultures’ betweenpublic policy goals, public expectations and theprivate sector’s desire for a reasonable rate of return.

Project finance can undoubtedly assist indeveloping a country’s infrastructure. Nevertheless,traditional project finance techniques, whichproved efficient for developing industrial, energyand telephone capacity, may not work as well fortraditional public infrastructure. The key differenceis the political nature of these basic infrastructureservices. Only in areas such as those with electricityor telephone services, where there is a broad publicacceptance for a corporate role in a public servicecan the traditional project finance model providealternative capital for development.

Sustainable private investment in the publicinfrastructure arena may best be achieved throughstrong public-private partnerships. The key elementsinclude an adequate foundation for private sectorparticipation, and a clear articulation of public andprivate sector goals and expectations, not only in

project documentation, but also through local publicsupport. It is also tempting to introduce the cliché of‘putting your best foot forward’ as a metaphor forselecting economically viable projects to finance. Ininfrastructure finance, a favourable impression iscreated with investors if a country’s first few projectsdemonstrate strong economic viability. If these rulesare followed, some capital market observers may bedisappointed by the supply of projects to be financed,but never by the quality.

Con t i n u i n g Imp ed imen t s

While the government sector can improve theclimate for infrastructure finance, there are still majorimpediments to a creating a sustainable supply offinance-ready projects. The recent Asian financialcrisis exposed the fact that global investors still paintall emerging market countries with the sameunfortunate brush, when it comes to political oreconomic volatility. Nevertheless, the sluggishrecovery of infrastructure finance since then suggestsdeeper, problematic roots. Some of the moresignificant impediments include the following.

• The absence of dependable revenue streamsto back debt securities. Capital markets counton dependable revenue streams in order to make‘full and timely payment’ of debt service. Stateand local revenues, outside of federal transfers,rarely make a dependable revenue stream forinfrastructure debt in emerging markets. This ispartly because local government depends onfederal transfers as the main source of revenues.The relative newness of decentralisedgovernment services is another factor. Localenterprises, such as water or transit authorities,are often plagued with poor revenue collections,reflecting their relative inexperience inoperating as a business, but also the weak publicacceptance for paying user fees. Toll roads canfare better, but still face difficult ramp-up risksduring initial years of operation. Among thepublic infrastructure sectors, airports probablyfare the best, but even this sector faces thechallenges of airline route rationalisation andmore pronounced economic cycles.

The Re-emergence o f In f ras t ruc ture Finance in Emerg ing Market s


J i h o m o r a v s k á p l y n á r e n s k á , a . s . ( J M P )

1. Company historyThis South Moravia Gasworks dates back to the middle of the last century. On 22 January 1848 the streets of the cityof the Brno were first illuminated with gas lighting which was produced by the gasworks that had been establishedin the years 1846 – 1847. Since that time the Company has undergone a broad range of important technologicalchanges, from its own production of gas lighting at the beginning of its existence to the distribution and sale ofnatural gas today.

2. Current Company ProfileThe joint stock company Jihomoravská plynárenská is a gas distribution company, delivering natural gas and renderingancillary services to customers of all categories in the region of South Moravia. It is the largest gas distribution company in the Czech Republic, with a 24 % share of the country’s natural gas market.

• maximal pipeline system operations, safety and absolute reliability of natural gas deliveries

• expanding the distribution network, with new customers hooking up to the gas infrastructure, a process connectedwith the extensive gasification of the South Moravia region, continues

• one indicator of the solidity and commercial success of JMP is its economic prosperity, expressed in increasedCompany value

3. Company StrategyThe premium position of JMP in the future will be influenced by anticipated changes arising from amendments (the NewEnergy Act) to full adherence to EU standards (application of the EU directives on natural gas market liberalisation).

4. Company VisionJMP has started a new mission to be closer and friendlier to customers. Massive support for data processing and billing,establishing a call-centre and the launch of E-business will be new phenomena. Another great opportunity is in usingour extremely extensive pipeline grid for co-installation of fiber optic cables to reach a new dimension in business.

5. OpportunitiesThis represents an excellent investment opportunity and chance for co-operation, and we are open to discussion onall aspects of our business.

Interested companies can contact us:

Jihomoravská plynárenská, a. s.Plynárenská 1657 02 BrnoCzech Republictel: 00420 5 4554 8111fax: 00420 5 57 85 71e-mail: [email protected]: http://www.jmpbrno.cz

40


• The inability of governments to satisfy internalpolitical considerations that are often associatedwith privatisation. The rush to ‘privatise now andworry about the consequences later’ has defined theefforts of many governments to date, and isresponsible for the general public backlash againstprivatisation. This is especially true in the watersector throughout Latin America, where projectcontractual covenants, government budgetarycapabilities and public expectations all followindependent paths. There is not enough precedencewhere corporatisation precedes privatisation, andwhere public consultations provide sufficientawareness of not only the benefits but also of thecost of private sector participation.

• The short-term project debt maturities result inremarketing risk. Most emerging markets do notenjoy fully developed yield curves, so bonded debtbeyond three to 10 years is not possible.Infrastructure projects require long lead times inorder to develop a sufficient revenue base to retiredebt. While many projects may have economicprofiles well suited to long-term debt, marketrealities result in periodic debt remarketing risk.The litany of debt remarketing circumstances thatcan face infrastructure projects in emerging marketscan be alarming – a volatile macroeconomicenvironment, politically motivated lawsuits,contradictory government mandates from varyingministries, etc. The cost of capital under suchcircumstances can be prohibitive.

• The lack of sustainable project supply can deterinvestors. In many cases, the small size of acountry, or the limited number of large urbancentres prevents a sustainable supply of projectsfrom being able to come to market. Institutionalinvestors like to know that the current transactionwill not be the only transaction, and that othersimilar transactions will follow. One of the thingsthat makes toll roads in Chile or in São Paolointeresting for investors is the continuing supply ofdebt offerings made possible from a basket ofoperating projects. In other cases, there may be alarge number of projects, but the proposedfinancings are simply too small to attractinstitutional buyers. Large international investors,for instance, seem to have a transaction threshold inexcess of US$100 million.

Max im i s i n g C h a n c e s f o r a S u c c e s s f u l I n f r a s t r u c t u r e P r o j e c t

There are never guarantees for a successfulinfrastructure project. This is true even if agovernment guarantees revenue or debt payment,since the resilience of their representations may notlast through changes of administration, or times of

financial crisis. Nevertheless, experience suggestssome important ways to maximise a project’s chancesfor survival, as follows.

• Implement sufficient legal and regulatoryreforms to induce private sector participation.This entails not only concession law, which manyemerging market countries are getting good at,but also the necessary financial, taxation andbankruptcy law reforms.

• Select projects that best fit the national, stateor local priorities for economic development.Placing the project within the broader scope of aregion’s economic future helps to galvanise bothpublic and private support.

• Select projects with strong economic value.The best projects, in terms of economic value,often serve an already developed area, so thatrevenue growth does not depend uponspeculative future development. If demand for theservice is high, this increases the potential to raiserates if and when necessary.

• Select project partners with a strongcommitment and experience. This ofteninvolves a consortium of foreign partners with vastexperience in constructing or operating projectswithin a particular sector, and equally suited localpartners. The foreign partner may bring newcapabilities and capital to the project, but the localpartner best understands how to navigate througha country’s legal and regulatory system.

• Provide an adequate period of corporat-isation prior to privatisation, in order to gaininterim efficiencies in the delivery of publicservices. If the public enterprise has time tooperate as a publicly-owned business, includingproductivity gains and rate increases for capitalimprovements, this can facilitate its transition tothe private sector.

• Endow projects with sufficient financialprotections to mitigate risk. Project finance isrisky by definition, but there are predictablefinancial pitfalls that can be mitigated. Endowing aproject with sufficient liquidity during its initialoperating period (either through reserves upfront,subordinate lines of credit or revenue guarantees)can mitigate operating ramp-up risk. Debtstructure should also minimise (as much as possiblewithin a local market) debt remarketing risk, giventhe often fluid nature of economic, political andlegal supports for a project. Finally, foreigncurrency debt should be avoided where projectrevenues are earned solely in a local currency, orwhere project revenues are highly volatile.

41

a report by

And r é F o u r i e

Director, Effective Governance, National Business Initiative (NBI), South Africa

Improv ing Governance and In f ras t ruc ture in a Deve lop ing Wor ld Context – Pub l i c -Pr i va te Par tner sh ips in South A f r i ca


André Fourie is the Director ofEffective Governance of the NationalBusiness Initiative (NBI). Mr Fouriehas managed major developmentprogrammes in the areas of localgovernment, financial management,local economic development andintegrated development planning. Heinitiated the NBI’s Public PrivatePartnership (PPP) programme in1998, lectured and trained widelyon the subject and launched anumber of publications; culminatingin the setting up of a PPPresource centre in 2001.

I n t r o d u c t i o n

Public authorities in developing countries are facedwith increased demands for improved services,infrastructural challenges, fiscal constraints and scarceresources. There is a global trend to use public-private partnerships (PPPs) to improve the deliveryof services, utilising the expertise, investment andmanagement capacity of the private sector to developinfrastructure, as well as to improve and extendservices to all residents.

In South Africa, the rationale behind such PPPs isthat, although public authorities are responsible forensuring that basic services are delivered, they needto actually deliver the services themselves. By sharingrisk and reward with private operators, enhancedservices are possible on a more cost-effective basis.Other rationales include the traditional inefficienciesin public provision, the opportunity for economicpricing and cost recovery, the deepening of privatecapital markets and major advances in technology.

However, there are a number of implications fordemocratic governance and public accountability. Anumber of critics have expressed reservations thatPPPs will alienate communities, increase prices,marginalise the underprivileged, lead to corruptionand undermine democratic accountability. Thisarticle addresses concerns that, although PPPs clearlyenhance efficiency and improve access to finance,such arrangements could undermine localgovernance and accountability.

Pub l i c - P r i v a t e P a r t n e r s h i p s i n S o u t h A f r i c a

This article defines PPPs within the full continuumof infrastructure options (ranging from relativelybasic service contracts to very complex concessionarrangements). In South Africa, opportunities forprivate sector participation in infrastructure andservice delivery at national level includes thetransport sector (toll roads, high-speed rail),healthcare, schools, information technology, eco-tourism, fleet management and prisons. At locallevel, a number of PPP projects have been initiated,

including water, urban transport, parking facilities,refuse collection, parks and recreation grounds andemergency services.

The South African Treasury has developed anexplicit policy regime for enabling PPPs. Keyrequirements include demonstrable value for money(lower net cost of private provision), clearaffordability within budget parameters (includingwhole-life costing), procurement through atransparent and competitive process, substantial risktransfer to the private sector, appropriate contractualarrangements spelling out public and private sectorresponsibilities and a schedule of outcome-basedfinancial rewards. The state maintains ultimateaccountability and becomes a contract managerrather than service provider. There are also strictrequirements for monitoring private sectorperformance and ensuring compliance.

At local government level, a complementary set ofpolicies and guidelines facilitate private sectorparticipation in municipal infrastructure services.The council retains responsibility for ensuring thatservice is provided to the relevant residents andcommunities. The council must control the settingand adjustment of customer tariffs, monitorimplementation of the agreement and manage theperformance of the service provider. The MunicipalService Partnerships policy framework stipulates thatdecisions regarding the form and duration of PPPcontracts will be left to the discretion of municipalcouncils (subject to certain guidelines and minimumstandards) with a strong focus on performancemonitoring, community participation and theelimination of corruption.

Good G o v e r n a n c e

Good governance is a primary element necessary forsustained welfare gains and the reduction of poverty.The levels of development in societies and the effectof economic growth are positively correlated withthe quality of governance. This fundamental lessonrelates to both the capability of the state and theaccountability and transparency of other institutionsin society, including the private sector.

42


Despite the fact that there is no exact definition ofgovernance that is useful to apply in all countries andconditions, there is increasing evidence of consensusaround the core elements. At the macroeconomic orstate level, key aspects that must be in place includedemocracy, peace, law and order, rule of law, secureproperty rights, transparent adjudication andapplication of the law, political stability, a sound legalframework, the enforceability of contracts and notolerance of corruption.

Given the wide scope of the governance concept, itis useful to identify the core dimensions, whichinclude the political, institutional, civic and corporategovernance contexts. The political/public policylevel requires policy effectiveness, prioritisation,equity, accountability, honesty, legitimacy, oversightmechanisms, monitoring, regulation, leadership andan ethical approach. Civic requirements include socialrelevance and priorities, community and stakeholderparticipation in the governance and decision-makingprocess, sustainability of interventions, empowermentof minorities and a focus on the underprivileged.

At institutional or programme level, issues such asaffordability, policy linkages, impartiality,performance management, cost recovery, humanresource development and financial management areimportant governance elements. In the current globaldevelopment context there is a growing focus onmarket-oriented development, reducing stateinterference (more steering and less rowing) andfacilitating a conducive business climate.

The importance of good corporate governance isbeing increasingly recognised as vital for the worldeconomy, corporate competitiveness and sustainabledevelopment. Indeed, it is attracting similarattention as the governance of countries. Forinstitutions, it is all about the overall strategicdirection, standards of behaviour, oversight ofallocation of financial and human resources andbalancing the interests of various stakeholders, aswell as the sustainability of the enterprise.

Corporate governance defines the relationshipbetween an institution and its owners, alsorecognising accountability to a wider group of

stakeholders. The board must remain in control of thecompany, monitor the executive, ensure cleardivision of responsibility, determine executive paypackages and bring independent judgement onstrategy, risks, resources and ethics. Controls andreporting functions are very important on the viabilityof business, ensuring a direct relationship with theauditors, and for the board to accept responsibility forthe accounts. These standards are becoming moreacceptable within the public domain.

Imp r o v emen t s i n G o v e r n a n c e a n d A c c o u n t a b i l i t y

The traditional inefficiencies of public provision andfinancing is a key motivation for private provision ofinfrastructure, focusing on potential savings byaddressing leakage, overstaffing, dated technology,improper maintenance, etc. Other benefits includethe tendency for inefficient pricing and under-recovery of costs so typical of public delivery indeveloping countries.

Official South African literature is filled with examplesof standards and criteria to be applied to private sectorproviders of public services. For infrastructure services,the general principles for sustainable PPP arrangementsand standards demanded of private providers includefinancing (limited tariff increases, clear investmentrequirements, financial scrutiny and access toaccounts); operational performance (cost effectiveness,performance indicators, equipment specification,standard of services, response times); service standards(equitable coverage, environmental management,customer orientation, health and safety, environmentalmanagement); and oversight (transparency,competitiveness and monitoring of service levels).Particular attention is also paid to mitigation of labourdisplacement and sufficient stakeholder participation(especially workers and communities).

Table 1 summarises the likely governance impact ofPPPs in South Africa, and can be applied to mostdeveloping contexts. At the country level, PPPsclearly create an additional demand for goodgovernance, a sound macroeconomic framework andsound legal and contractual administration. Thepolicy management implications appear to strengthen

The levels of development in societies and the effect of

economic growth are positively correlated with the

quality of governance.

Pub l i c -Pr i va te Par tner sh ips in South A f r i ca

43

the governance process by focusing policy-makers onstrategic management rather than operations. Giventhe high process and output standards expected fromPPPs in South Africa, it is arguable that compliancewith such conditions will greatly enhance thegovernance of South African public authorities. Thelevel of community consultation, transparency andend-user involvement will provide for enhancedgovernance relations. Some of the visible governanceimprovements at project and institutional levels are:

• incentives and discipline for cost-effectivedelivery;

• demand-based staffing, investment and operatingcost;

• improved revenue management and customercare;

• commercial orientation and value for money;

Governance Dimension Likely PPP Governance Governance

Impact Contribution of PPPs Risk of PPPs

Macroeconomic/state level

Democracy, peace ✔ Creates demand

and political stability for democracy

Legal certainty regarding ✔ Creates demand for

rule of law, property rights, legal architecture

enforceability of contracts

No tolerance of corruption ? Competition and Private sector bribes and

transparency to false allegations by losing

reduce corruption bidders

The political/public policy level

Policy effectiveness, ✔ Concessions require clear Affordable, rather

prioritisation, legitimacy prioritisation than required, projects

Oversight, monitoring ✔ Explicit mechanisms Regulatory capture, skill

and regulation needed, outputs contracted & information asymmetry

Honesty and ethics ? Highlights issue Neither sector has

inherent advantage

Equity ? Exposes inequity of Can marginalise

public provision the poor

Accountability ✔ Clear performance Could undermine

requirements political control

Civic requirements

Social relevance stakeholder ✔ Demand for priorities Could lose citizen

participation and customer focus perspective

Empowerment, minorities, ? Explicit targets, Could be excluded

poverty impact requirements

Project impact

Policy linkages, ✔✔ more explicit Project focus rather

outcome focus budget choices and than policy outcome

policy outcomes

Human resource development ✔ Demand-based staffing, New public skills required

training targets (non-traditional)

Cost recovery, ✔✔ Economic viability, ring Financial focus only,

financial management, fencing, revenue affordability concerns

economic pricing collection, deepen capital

market, rational

investment & costs

Performance, expansion, ✔✔ Visibly better delivery Unrealistic

maintenance and performance, expectations

rational risk sharing

Corporate governance ✔✔ Clear standards and Inappropriate

requirements, standards

corporatisation encouraged

✔ = positive impact expected, ✔✔ =very positive impact likely, ? = neutral or +/-

Table 1: The Likely Governance Impact of Public-Private Partnerships in South Africa

44


• lower public spending, reduce public borrowingand improve credit rating;

• operational improvements in construction costs,project schedules and operating efficiencies;

• benchmarking and ring-fencing promoted todetermine true costs;

• involvement of private sector and experiencedfinanciers provide clear signal of project feasibility;and

• risks are identified, quantified and allocated to the

party best placed to carry, mitigate and managethe risk.

Go v e r n a n c e G a i n s N o t A u t oma t i c

It is clear that infrastructure PPPs have the potentialto dramatically strengthen governance, publicmanagement, institutional capacity and policyimplementation. Table 1 highlights the fact that suchgovernance gains will not be automatic. Just as aprivate monopoly is unlikely to be more productiveor more efficient than a public monopoly, it isimportant to ensure appropriate competition,regulation and incentives for private participation.

The following are key elements in ensuring that thegovernance gains of private infrastructure provisionare secured.

• Transparent procurement, continued govern-ment responsibility, a proper contractualrelationship and effective monitoring must beimplemented.

• Value-for-money calculations are critical tocalculating true, whole-life costs (includingmaintenance and capital charges) and to comparesuch cost and envisaged benefits againstalternative service providers (public and privateprovision).

• Regulation is needed to protect the public interest

regarding the abuse of market power and toensure that the desired quality and quantity ofservices are provided.

• Competition for contracts and benchmarking ofservice standards and cost efficiencies can exertconsiderable pressure on the private sector toprovide effective services at reasonable costs.

• Continuous service delivery improvements arepossible if competitive forces are not limited towinning the contract, but are also utilised duringthe contract period. This is particularly usefulduring a 20 to 30-year concession.

Con c l u s i o n

This article argues that, through transparent procure-ment processes, effective contractual arrangements andeffective regulation, it is possible for PPPs to enhanceaccountability within a sound governance framework.

Given the levels of accountability demanded of PPPsand the insistence of output specifications andcontracted levels of service and customer satisfaction,it is clear that accountability in most publicauthorities will be greatly improved by PPPs ifconceptualised and implemented within a sounddevelopment policy framework. The expectedincrease in private sector accounting standards, assetmanagement, credit control and control procedureswill provide a platform for higher governmentaccountability. Indeed, it can be argued that mostdepartments and municipalities would do well tostudy the expectations of private sector delivery, andactually implement some of the performancedimensions in current public management practice.

Private sector service delivery is not automaticallymore efficient than public delivery. It is theintroduction of competition that provides theincentive for efficient operation and the potential forprofit that encourages entrepreneurship andinnovation. Using private finance, management andresources for the public good will thus be optimallybeneficial within an effective contractual andregulatory environment. ■

The expected increase in private sector accounting standards,

asset management, credit control and control procedures will

provide a platform for higher government accountability.

Dirk Sommer is a Private SectorDevelopment Specialist at TheWorld Bank. He has workedprimarily in the water sector incountries such as Cambodia, Nepal,Nigeria and South Africa.

a report by

D i r k S omme r

Private Sector Development Specialist, The World Bank

Mul t i -u t i l i t y Po l i cy – Promot ion , To le rance or Contro l ?


Some utilities have responded to recent changes intechnology and market liberalisation by turningthemselves into ‘multi-utilities’ that bundletraditionally distinct services. “Multi-utility Trends –Blurring Industry Boundaries”, which can be found inthe Reference Library of the CD-ROM accompanyingthis Business Briefing, reviews recent trends inhorizontal integration of utilities, while this articlelooks at the policy and regulatory implications of thosetrends for developing countries. The question facingpolicy-makers is whether the emergence of multi-utilities should be encouraged as a means of improvingaccess and quality of utility services, or subjected tocloser control to guard against potential dangers arisingfrom less competition, greater regulatory complexityand more concentrated political power in the utilities.

For the past 20 years, governments have sought tolower costs, improve service quality and expand accessto utility services such as electricity, telecoms, waterand sanitation. Their strategy has been to liberalisemarkets and encourage private-sector participation. Totake advantage of the opening provided by govern-ments and new opportunities created by technologicaldevelopments, the private sector has adopted newcorporate strategies. One strategic response has been toexpand from supplying a single utility service to amulti-utility format in which the firm offers two ormore traditionally distinct utility services.

Po t e n t i a l B e n e f i t s

• Lower costs, increased convenience – utilitiesthat bundle two or more services can often cutcosts through economies of scale and scope,involving rights of way, physical assets, customerservice functions, project development expertiseand administrative costs. A recent review of theBritish gas and electricity industries found, forexample, that utilities dealing in both forms ofenergy could achieve cost savings of up to 10%,compared with those supplying gas alone.

The magnitude of savings will vary, and the extentto which savings are shared with consumers oraccrued to shareholders will depend on theeffectiveness of competition and regulation. In some

cases, consumers may benefit from the convenienceof dealing with a single service provider.

• Critical mass – remote communities are often toosmall to attract the attention of private investors ina single utility service. Bundling several servicestogether in a multi-utility may help to providecritical mass and thereby reduce the costs ofinvestigating opportunities, developing projects,participating in bidding processes and establishinga local presence. Several countries andmunicipalities have adopted such a strategy whenprivatising their existing assets (e.g., Cape Verde,Comoros, Gabon, Morocco) or extending servicesto rural areas (e.g., La Rioja, Argentina). Bundlingalso holds promise for extending services to thepoor in rural or peri-urban areas.

• Removing barriers to competitive entry –competitive supply is feasible in a growing numberof utility services that were once considered to benatural monopolies. In developing countries,networks are often undeveloped. New entrantsmay be discouraged if large investments arerequired to build out network infrastructure. Theopportunity to leverage existing distributionnetworks, customer bases and other assets put inplace to provide one utility service may reducebarriers to entry for companies intending toprovide additional utility services in the samemarket. Several countries have used this strategy toenhance competition in telecoms services, andsimilar advantages may arise in other markets.

• Lower payment risks – government-ownedutilities in many developing countries have lowpayment-collection rates – arising from corruption,inept management, poor service or theft – thatcontribute to a culture of non-payment anddiscourage new entrants. The threat of servicecuts is often required to induce consumers to paytheir bills, but in the case of some utility services– notably water and sewerage services – it istechnically difficult and costly to disconnectconsumers. Firms that offer several services mayhave greater leverage. Non-payment of waterbills, for example, may be reduced by a credible 45

46


threat to withhold other, less essential, servicesthat are easy to disconnect. Reducing commercialrisks will cut costs and prices and increase firms’interest in expanding services.

• Lower political risks – the price of utility servicestends to be politically sensitive, and investments,once made, are specific and immobile. As a result,investors are vulnerable to opportunistic action bygovernments. Firms will not invest in a country ifthey believe that their investment will becompromised by direct expropriation or by asuccession of small regulatory actions that amountto expropriation. A firm that supplies more thanone service may perceive that it has greaterinfluence with local political authorities and thus isless vulnerable to such risks.

Po t e n t i a l D i s a d v a n t a g e s

• Decreased competition between substituteservices – some utility services, notably power andgas, compete for the same customers in many areas.The potential for inter-fuel competition can reducemarket power and thus facilitate regulators’ tasks.Where such competition exists, the integration ofelectricity and gas distribution in one firm mayincrease the need for supervision, the extent towhich will depend on the potential for competitionfrom other service providers and the regulatorycapacity of the government in question.

• Other competition blockers – multi-utilities maygive rise to other policy concerns related tocompetition. For example, an incumbent multi-utility providing telecoms and electrical power maybe able to leverage its position in the power marketto enhance its market power in telecoms, therebydeterring competitive entry. The increased marketpower may flow from its knowledge of existingcustomers, its established brand name or its abilityto bundle services. In addition, the multi-utilitymay be able to allocate common costs within thefirm in a way that gives it an unfair competitiveadvantage in the contestable business.

The risks presented by such anticompetitivestrategic behaviour have led to regulatory disputesin the US and the UK. For example, the transfer oftelecoms assets to an unregulated subsidiary atprices alleged to be below market value triggered ahigh-profile US court case (Boston Edison/RCNCorporation v. Cablevision Corporation).Allegations of unfair allocation of costs inconnection with dual-fuel offers brought against aBritish gas supplier led to an investigation by theregulator. Where such risks arise, additionaldemands are placed on regulators to investigateallegations and determine remedies. The resulting

cases tend to be complex and may constitute asignificant problem in countries with limitedregulatory experience and capacity.

• More complex tariff regulation – effective tariffregulation requires the regulator to have access toreliable information about a utility’s costs and to beable to compare those costs with industry bench-marks. Multi-utility structures have the potential togreatly complicate that process. Several of thepotential advantages of multi-utilities hinge on theuse of common assets to provide more than oneservice. Allocating the value of those assets amongservices for purposes of setting and regulating pricesis complicated under the best of circumstances andcan present opportunities for firms to frustrate theregulatory process. Problems may also arise indetermining a fair return on investments duringprice reviews. It may be difficult, for example, todetermine the appropriate cost of capital for firmsthat provide multiple services but rely onundistinguishable financing sources.

• Competing regulators – multi-utilities posechallenges to co-ordinated oversight by regulators,which, in many countries, remain organised alongindustry-specific lines and located at differentlevels of government. For example, a firm offeringelectricity, telecoms and water services may fallwithin the regulatory jurisdictions of three separateregulators at two or more levels of government.

Overlapping authority and unco-ordinatedregulation complicate regulators’ tasks and createopportunities for firms to manipulate the regulatoryprocess. Such conditions can also increase thecompliance costs of regulated firms, especiallywhere regulatory requirements or approaches areinconsistent. Poorly defined responsibilities amongregulators may also cause delays in tariff adjustmentsand lengthy processes for approval of changes inservices. Multi-utilities formed as a result ofacquisitions and mergers often fall within the juris-diction of several industry regulators as well as theauthorities responsible for regulating competition.

• Political power – multi-utilities may have moreleverage in disputes with governments, but from thegovernment’s perspective the accretion of politicalpower may not be a welcome development. Theadditional influence such firms may have – throughtheir roles as tax-payers, employers and contractors– can create instability in emerging democracies.

When C h o i c e s Mu s t b e Mad e

Governments and regulators may need to considerthe public policy implications of emerging multi-utilities at several junctures:

Key Personnel

Services

Registrations

Typical Projects

General Description

Intercontinental Consultants and Technocrats Pvt. Ltd. A-11, Green Park, New Delhi - 110 016

The company offers services in various disciplines of Civil Engineering ranging from Planning, Topographic Survey, Traffic studies, Feasibility Studies, Preliminary and Detailed Engineering, Computer Aided Designs, Privatisation Schemes under BOOT/BOLT to Construction Supervision, Training and Institutional Strengthening

including Expressways, Widening and Strengthening of Existing Roads and Construction Supervision

including Interchanges, Flyovers, Overbridges, Special Inspection and Rehabilitation Services and Bridge Management Systems

including Airport Master Plans, Pavement Designs, Geometrics, Layouts, Airport Terminals and Support Services, Airport Lighting and Power Supply Systems, Communication and Navigation Equipment

Studies including Eco-tourism, Cultural & Heritage Tourism, Adventure Tourism, Environmental Planning and Landscaping

including Preparation of Regional Plans, Master Plans, Development of Townships, Infrastructure Corr idors, Wayside Amenities, Public Utilities, Water Supply, Sanitation, Public Health Services and Power Supply

including Project Identification, Feasibility Studies, Economic Viability, Identification of Funding Sources, Construction Agencies, Detailed Engineering and Construction Supervision

including Layout and design of services, buildings, access roads, infrastructure improvement studies and civil engineering structures

Highways

Bridges

Airports

Tourism Development

Urban/Infrastructure Development

Build, Operate & Transfer Projects

Ports and Support Services

Intercontinental Consultants and Technocrats Pvt. Ltd. (ICT), an ISO-9001 Company, is a leading international Consulting Organisation specialising in Highways, Structures, Airports, Urban and Rural Infrastructure Development, Water Supply, Traffic and Transportation Studies, Ports and Tourism projects including Institutional Strengthening, Socio-Economic and Environmental Studies. ICT has a dedicated team of over 900 professional staff with state-of-the-art knowledge of international standards in the fields of Planning, Feasibility Studies, Detailed Engineering, Techno-economic Studies, Cost Appraisal, Financial Analysis, Project Management, Construction Supervision, etc. ICT with its deep commitment to quality, client’s satisfaction, and high standards of professionalism continuously endeavours to serve the cause of infrastructure development.

The ADB’s fact sheets published in April 2000 ranks ICT as the No.1 firm from India in respect of Loan Projects and No.3 firm in respect in Technical Assistance Projects in the Transportation and Communications Sector Value of Services

(Provisional)

Highways !

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Detailed project report for strengthening & four-laning of National Highways 5, 8 & 9 (ADB Projects), IndiaFeasibility study, detailed design of 800 km of roads of the NCR, IndiaConstruction Supervision of ADB/World Bank Projects in IndiaRoad master plan and feasibility study and preliminary engineering of road network in Mongolia - (ADB Technical Assistance)Rural Infrastructure Project - Consultancy services for Technical Assistance for Project Management, Nepal (IDA funded)Bangalore - Mysore Infrastructure Corridor (BOT Project), IndiaDarhan-Erdenet Road project Mongolia (KFAED funded) Consultancy Services for Construction Supervision of Awasharba - Gewane Section of Modjo - Awash - Mille Road Rehabilitation Project (IDA funded)Rural Access Roads Project, Lao PDR (ADB TA Project)Third Road Rehabilitation and Maintenance Project, Bangladesh (IDA funded)

DPR-Construction of 13 bridges in Kohalpur-Mahakali highway, NepalFeasibility studies for repairs and rehabilitation of Gia Bay and Vinh Tuy bridges, Vietnam

Domestic Civil Aviation Study, Nepal (ADB Project)

Second Tourism Infrastructure Dev. Project, Nepal (ADB Project)

Non-Motorised Transport study, Africa (African Development Bank Project)

Bridges

Airports

Tourism

Infrastructure

Runway Rehabilitation, Hulule Airport, Maldives

CHAIRMAN-CUM-MANAGING DIRECTOR

Mr. K.K.Kapila

SENIOR EXECUTIVES

Mr. N.C.SaxenaExecutive Director

Mr. A.D. Narain

Executive Director

Mr. B.I. Singal

Executive Director

Mrs. Poonam KapilaDirector (Finance)

Maj. Gen. J.M.Rai, (Retd.)Director (Tech.)

Mr. L.K. SharmaAdditional Director (Highways)

Mr. P.R.KalraAdditional Director (Bridges)

Lt. Gen. S.P. Mehta (Retd.)Additional Director (Survey)

Dr. P.N. KachrooAssociate Director (Traffic & Transportation)

Mr. D. VasudevanAssociate Director (Information Technology)

Mr. A.K.KaulAssociate Director (Highways)

Mr. K.S. RagahavanAssociate Director (Highways)

Mr. S.P. RastogiAssociate Director (Bridges)

Mr. Om ParkashAssociate Director (Business Development)

Maj. Gen. S.K.Khetarpal, (Retd.)Associate Director (Project Management)Mr. R. Balakrishnan Associate Director (Finance)Mr. S.K. KhatriAssociate Director (Highways)Mr. H.R. SharmaAssociate Director (Highways)Brig. S.K. Puri (Retd.)Associate Director (Highways)Mr. R.K. ManchandaGeneral Manager (Airports)Mr. L.C.MahajanChief Transport EconomistMr. Prabhakar BegdeGeneral Manager (Infrastructure)

World Bank, Asian Development Bank, African Development Bank, The United Nations Development Programme, Government of India, Kuwait Fund for Arab Economic Development, World Tourism Organisation

Telephone : 91-11-686 3000, 696 4757, 656 9418• Fax: 91-11- 685 5252• E-mail: [email protected] • Internet: http://www.ictonline.com Member : Association of Consulting Engineers (India), Indian Roads Congress, The International Association for Bridge & Structural Engineering

Bangladesh

Bhutan Burkina Faso Egypt Ethiopia

Lao PDR TanzaniaMaldives Mongolia Nepal Vietnam

400 7001300

0

200

400

600

800

1000

1200

1400

US

$in

Millio

n

1998-1999 1999-2000 2000-2001

Financial Year

Value of Works

• before privatisation, to determine whether anintegrated utility should be restructured intoseveral distinct utilities;

• in bidding, to determine whether restrictionsshould be imposed bidders for about-to-be-privatised assets;

• in mergers and acquisitions, to determine whetherto allow post-privatisation mergers and acquisitionsthat would result in multi-utility structures; and

• in new entry situations, where incumbents in onesector seek to provide services in another.

The response by policy-makers, competitionauthorities and sector regulators will depend on anevaluation of the pros and cons in each industry andcountry and may well shift over time with changes incompetition and other factors. In some cases, thearguments for multi-utility approaches may be sooverwhelming that governments will elect topromote such arrangements. In other cases, somedegree of restriction may be deemed necessary orappropriate. In the latter situation, three main policyand regulatory controls are available:

• Cross-ownership restrictions – restrictions oncross-ownership between utilities may betemporary or permanent. To protect nascentcompetition in the gas retail markets, Britishregulators imposed temporary restrictions onelectricity suppliers offering dual-fuel services inareas not yet open to retail competition inelectricity. The Republic of Korea chose to allowits power utility to provide leased-line telecomsservices in competition with the incumbenttelephone company only until 2002, by whichtime broader market competition was expected tohave developed.

Governments in several Organisation forEconomic Co-operation and Development(OECD) countries have required telephonecompanies to divest their holdings in cabletelevision companies and imposed cross-ownershiprestrictions. In the US, the Telecommunications Act of1996 repealed provisions that had prevented localtelephone companies from providing new cableservice within their telephone markets. The samelegislation imposed new limitations on jointventures by local telephone companies and cable-television operators serving the same market. Suchcompanies may not acquire more than a 10%financial or management interest in each other orcombine to provide telecoms or video services inthe same area. Chile banned significant cross-ownership between water utilities and providers ofother utility services in overlapping areas.

• Account separation and ‘ring fencing’ – thepotential of firms to manipulate costs and engagein anticompetitive conduct or to frustrate effectivetariff regulation may be addressed by mandatingthat the costs of each regulated business must beaccounted for separately, a practice known as ringfencing. For example, detailed rules may bedesigned to govern the allocation of joint costs,and restrictions may be imposed on transferpricing between business lines. Rules of this kindhave been developed in the US and the UK, anda similar approach was adopted when a singleconcession for several utilities was awarded inGabon. Designing and administering such rulescan be difficult, however, particularly in countrieswith limited experience in regulating utilities.

• Co-ordination among sector regulators may beaddressed in several ways. One approach is tocreate multi-sectoral regulatory bodies, whichhave a long history at the state level in Australia,Canada and the US, and are increasingly commonin developing countries. Indeed, the growingintegration of the British gas and electrical powerindustries recently led to the merger of twopreviously separate regulators. Similarly, theaccelerating convergence of the telecoms andcable television sectors has led in South Africa, forexample, to the consolidation of responsibility forregulating both industries.

In the absence of full integration betweenregulatory bodies, it may be feasible for theregulators responsible for overseeing an integratedutility to agree on common approaches to keyregulatory issues and to facilitate co-ordinationmore generally through joint working groups, anapproach being followed by the sector regulatorsin Brazil and the UK.

Con c l u s i o n

The emergence of multi-utilities has important policyand regulatory implications for developing countries.The potential advantages of multi-utilities includelower costs, improved customer service, enhancedcompetition and expanded private investment,particularly in smaller or remote communities and inmarkets perceived to exhibit high risks. At the sametime, offsetting costs emerge in some situations thatinclude negative impacts on competition, regulatorycomplications and the concentration of politicalpower. The costs and benefits of multi-utilitystrategies will need to be considered individually. Inmany instances, it may be possible to achieve balancethrough carefully calibrated regulatory responses, butthe feasibility of those responses must be tested againstthe regulatory experience and capacity of the countryin question. ■48


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