Privatization and the Poor: Lessons from Latin America

1
Privatization and the Poor Lessons from Latin
America

• Vivien Foster,
• Senior Economist,
• LAC-FIPSI

2
The privatization paradox

• 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

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Example gains in coverage
Source WIDER, 2002
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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

5
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

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The privatization dividend

• The reform process generates a sustantial
  dividend
• Efficiency gains
  equivalent to 1 of GDP for
  Argentina
• New sources of investment finance
  US290 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

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Who captures the dividend?
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Example water in Paraná
(Net present value of the concesion)
Source Van Den Berg, 2000
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How much did the state benefit?
Source Izaguirre and Rao, 2000
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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

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Bolivia make access the target
Source PPIAF, 2001
12
Guatemala use proceeds to finance
The net sale revenue from the electricity
distribution companies (DEORSA and DEOCSA) of
US110 million was allocated to a trust fund to
support an aggressive program of rural
electrification.
Source GUAPA, 2001
13
Telecom provide incentive to serve
Source Izaguirre, 2001
14
Chile cushion tariff increases
Total budget for 2000 was US42.5m Compared with
pre-reform subsidy of US107m
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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
• ECAVirtual universal access means price increase
  effect likely to dominate
• AfricaVery low levels of access means marginal
  improvements may not go to poorest