Privatization and the Poor: Lessons from Latin America

Vivien Foster, Senior Economist,

LAC-FIPSI

Technocratic View Substantial gains in enterprise

performance (efficiency, quality), with variations across sectors

Welfare impacts– About half of the time prices

increased for existing users– Access invariably improved

Welfare gains due to access offset losses from price increases

Short-term employment losses

Public Perception Recent opinion poll shows 63% of

Latin Americans oppose privatization

Growing violent opposition to new privatization attempts– Cochabamba water– Ecuador electricity distribution– Peru electricity distribution– Paraguay telecom

Social opposition to mature privatizations in Argentina

The privatization paradox

0%

5%

10%

15%

20%

25%

30%

35%

1 2 3 4 5

Income quintile

Per

cent

age

of n

ew w

ater

co

nnec

tions

Argentina

Bolivia

Chile

Source: WIDER, 2002

Example: gains in coverage

Is ‘private’ bad for the poor?

Upsides– Access to capital allows finance of network expansion

and improvements in quality of service– Improvements in efficiency make money go further

Downsides– Tariffs often have to increase to allow cost recovery– Informality and non-payment are no longer tolerated– Profit-oriented companies may have no incentive to

meet social obligations

Is ‘public’ good for the poor? Upsides

– Tariffs kept low– Tolerance of informality and non-payment– Operator free to pursue social (or political?) objectives

Downsides– Shortage of investment finance retards network expansion and

service quality improvement– Subsidies tend to be very regressively distributed– Un-served poor pay much higher prices for low quality substitutes

to network services– Informality can be harmful to health and lead to exclusion from

the economic system

The privatization dividend

The reform process generates a sustantial ‘dividend’– Efficiency gains:

equivalent to 1% of GDP for Argentina– New sources of investment finance:

US$290 billons 1990/9 for Latin America How these benefits are initially distributed among

stakeholders is a political choice How they continue to be distributed between

customers and shareholders depends on regulation

Who captures the dividend?

consumers

Government

expand coverage to excluded households

reduce tariffs to existing households

- -

laborforce

protect jobs

investors

maximize returns

Example: water in Paraná

-40 -20 0 20 40

Gobierno

Usuarios

Usuarios pobres

Usuarios ricos

Sociedad

Accionistas

RevisadoOriginal

Source: Van Den Berg, 2000

(Net present value of the concesion)

How much did the state benefit?

0 50 100 150 200 250 300 350

America Latina y el Caribe

Asia Oriental y el Pacifico

Europa y Asia Central

Sur de Asia

Medio Oriente y Norte de Africa

Africa Sub-Saharana

(US$ 1999 billion)Ingresos fiscales

Inversiones

Source: Izaguirre and Rao, 2000

How can things be improved? Build social dimension into transaction Incorporate instruments to promote access

– Require operator to provide universal access– Reduce the cost of connections– Safeguard alternative sources of supply

Take measures to safeguard affordability– Incorporate (cross-)subsidies– Provide lower cost-quality options– Adapt the billing process to fit household circumstances

Bolivia: make access the target

0

10

20

30

40

50

60

70

80

90

100

1989 1994 1999

Por

cent

aje

de h

ogar

es p

obre

s co

n ac

ceso

Agua

Alcantarillado

Electricidad

Telefono

Source: PPIAF, 2001

00.05

0.10.15

0.20.25

0.30.35

Probability that apoor households isconnected to the

electricity service

1993/961997/00

Guatemala: use proceeds to finance

The net sale revenue from the electricity distribution companies (DEORSA and DEOCSA) of US$110 million was allocated to a trust fund to support an aggressive program of rural electrification.

Source: GUAPA, 2001

1:2-41:2-3-1:6Ratio subsidy: private investment

78%37%45%60%Percentage of subsidy estimate required

$4,400$9,500$4,600$3,600Subsidy per village

1,5984,4207,4156,059Villages served

1.3m1.6m3.7m2.2mPopulation served

GuatemalaPeruColombiaChile

Telecom: provide incentive to serve

Source: Izaguirre, 2001

Chile: cushion tariff increases

0

100000

200000

300000

400000

500000

600000

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

Availablesubsidies

Distributedsubsidies

Total budget for 2000 was US$42.5mCompared with pre-reform subsidy of US$107m

Wider applicability? General principles continue to apply

– Need to incorporate social considerations explicitly into privatization process

– Need to be more proactive in setting social objectives and communicating outcomes

Pattern of impacts likely to differ across regions reflecting different starting points

– ECA—Virtual universal access means price increase effect likely to dominate

– Africa—Very low levels of access means marginal improvements may not go to poorest