Opponents – Who may be hurt by infrastructure reforms and their unanticipated consequences?

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

Infrastructure reforms may hurt certain groups for two main reasons. On the one hand, it is inherent to the process of reforms that they are likely to be winners and losers from such reforms. On the whole, however, such losses should prove temporary and infrastructure reforms are assumed to yield overall net gains over the long term. In some cases, however, infrastructure reforms may be designed or conducted “badly” and as such, could have unintended consequences. A key benefit from a strong regulatory process would be the ability to deal with such unforeseen consequences so as to resolve any upcoming issue with potential losers in order to avoid any subsequent confrontation. The rest of this question focuses on the opponents of infrastructure reforms.

Whilst infrastructure reforms may achieve gains in the long run, they are often unpopular in the short term especially as they can hurt various groups during this transitional period, such as:

  • Those who are targeted by the reforms. Political cronies in public utilities are likely to face cutbacks (following staff reductions) while privileged groups with strong political power who previously benefited from government’s subsidies may be sidetracked during the reform process.
  • Those who undertake reforms: Governments may be hurt, as reforms require political clout and may diminish the government’s prestige or lead to its removal. For example in Bolivia, the government signed in 1999 a 40-year concession contract with Aguas del Tunari. Five months after the concession was granted, the population of Cochabamba rioted against water tariffs increase. Chief among the protesters were the small-scale service providers who saw that they could lose out from reforms. The protests came close to toppling the government, and the decision was finally made to reverse the privatization and water provision was reverted to the municipal company.
  • Those who are supposed to benefit from reforms:
    • Operators: Concerns over renationalization, renegotiations or disappointing returns have contributed to weaken investors’ appetite for infrastructure projects in developing countries. A recent sharp decline in global stock markets and drying up of debt finance have further hindered service providers in their operations and investments. Besides, pricing reforms and the establishment of regulatory frameworks undertaken by the government to attract private sector participation may be slow or uncertain while high investments are required upfront, therefore postponing cost-recovery. Once an infrastructure project has proven successful, the government may not want to continue paying a high-risk premium that attracted the operator in the first place. Over the life of the investment, the balance of power shifts towards the government, and leaves the operator vulnerable to arbitrary political decisions.
    • Consumers: The discontent of certain investors is matched by that of consumers, who do not necessarily understand the overall benefits from moving towards cost-recovery tariffs and may suffer from the rebalancing of existing cross-subsidies (for example, the abolition of connection charges may create issues of fairness, as those who had to pay for their connections prior to the reforms may feel unfairly treated). In addition, poor consumers may not actually benefit from subsidies or service expansion (especially in remote rural areas).

Depending on their political weight, those who are negatively impacted by the reforms may be strong enough to derail the reform process. In order to avoid such negative consequences, it would be necessary to organize a stakeholder consultation process as well as an information campaign to provide more information on the long-term benefits of reform rather than focusing on the short term negative impacts.

 

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Reforming Power Markets in Developing Countries: What Have We Learned?
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Has private participation in water and sewerage improved coverage? Empirical evidence from Latin America
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