Beneficiaries – Who are the main beneficiaries of infrastructure reforms?

[Response by Sophie Trémolet and Diane Binder, August 2009]

The main potential beneficiaries of infrastructure reforms are as follows:

Consumers – infrastructure reforms aim to protect consumers from private sector abuses and political interferences. In economic theory, benefit to consumers is generally measured as net consumer surplus, which is the difference between the gross value that the consumer receives when consuming the service (willingness to pay) and the amount the customer pays. Consumers’ welfare is maximized when consumers get the best combination of quality and price. However, abuses happen when service providers are in a monopoly position: the absence of substitutes encourages operators to overcharge or supply a service that does not meet quality requirements.

The establishment of a regulator can reduce problems of market power, by implementing tasks such as: setting overall tariff levels and structures to ensure that delivery of services is done at an affordable level while ensuring the long-term viability and efficiency of the operator; defining levels of service that meet customers’ needs and that can be provided at a financially sustainable and affordable costs; acting as a secondary complaint resolution mechanism, disseminating information and raising public awareness. Poor people specifically may benefit from reforms that encourage service expansion (particularly for those who were not previously connected) and from pro-poor policies¹, such as direct subsidies² or light touch regulation of alternative service providers.

Operators – reforms are usually implemented to protect the private sector from politically-driven decisions. Service providers, before investing, need that the government establishes clear and prospectively stable rules for setting prices, subsidies and tax policies. Regulation allows addressing this requirement, therefore encouraging investments and helping governments to achieve their objectives. Regulation also protects the operators from the risk of losing out when the government changes the rules of the game. This gives service providers the ability and incentives to make good investment decisions, by ensuring that they can get a reasonable return on assets if they perform well. Regulation ensures that operators compete on a leveled playing field, have a similar access to information and benefit from streamlined subsidies based on actual demand rather than on political arrangements. This can be particularly beneficial to new entrants (which also drives innovation) whilst it may affect incumbent operators negatively.

Governments – reforms allow governments to make informed decisions and increase their revenues. By reducing information asymmetry³, reforms allow the government to access private information held by operators about market demand and costs incurred for service delivery. The government can thus adjust its social objectives, tariff setting policies and regulation to the need of both operators and consumers. In addition, reforms generate revenues for governments from licenses and concessions.

The environment – By setting minimum quality standards and encouraging operators to choose optimal investments for environmental protection, infrastructure reforms may also benefit the environment.

Infrastructure reforms are more likely to translate into benefits if proper sequencing of reforms is followed and adequate institutional safeguards are in place, such as restructuring the industry before introducing privatization, and putting in place regulation first so that potential buyers can be assured and consumers protected. Successful reforms require careful planning.

Resources

Understanding Regulation: Theory, Strategy, and Practice
New York: Oxford University Press, 1999.
Baldwin, Robert, and Martin Cave

Using management and lease / affermage contracts for water supply: How effective are they in improving service delivery?
Gridlines, PPIAF, Note n°12, Sept. 2006.
K. Ringskog, M.E. Hammond, A. Locussol

Reforming Infrastructure: Privatization, Regulation and Competition
A World Bank Policy Research Report, 2004.
I. Kessides

Handbook for Evaluating Infrastructure Regulatory Systems
Washington, DC: The World Bank Group, 2006.
Brown, Ashley C., Jon Stern, and Bernard Tenenbaum

Designing Direct Subsidies for the Poor – A Water and Sanitation Case Study
Note no. 211 in Public Policy for the Private Sector. Washington, D.C.: World Bank Group, June 2000.
Vivien Foster, Andres Gómez-Lobo, and Jonathan Halpern

Impact on Market Structure on Service Option for the Poor
Presented at Infrastructure for development: Private Solutions and the Poor, 31 May – 2 June 2000, London, UK.
D. Ehrhardt

Wanted! Good Regulators for Good Regulation: An Evaluation of Human and Financial Resource Constraints for Utility Regulation for the World Bank.
S. Trémolet & N. Shah

Managing the Regulatory Process: Design, Concepts, Issues, and the Latin America and Caribbean Story
Washington, D.C.: The World Bank Group, 1999.
Guasch, J. Luis, and Pablo Spiller

Approaches to Private Participation in Water Services: A Toolkit
PPIAF, the World Bank Group, 2006.
PPIAF and The World Bank

Footnotes

1. Poor customers raise specific challenges for service provision and regulation: they are often served by a wide spectrum of operators, which are often informal; and they are more likely not to be connected to networks. Policies and regulatory frameworks can thus be designed and implemented in a way that is more conducive to expanding access and improving service to poor customers (Trémolet & Hunt, 2006).
2. The efficiency of targeting subsidies onto the poor is however debated in question “Do higher income customers benefit more from subsidies than do poor customers?”
3. Second Approach and Financial Analysis on financial analysis focus on obtaining and using information.