Second Generation Issues in the Reform of Public Services Conference
(10/99, En, Es) See also Infrastructure and Financial Markets
Inter-American Development Bank
Washington, D.C.
October 4 - 5, 1999
During the last decade, some Latin American and Caribbean countries have accumulated extensive experience in the privatization of infrastructure services and in the institutional and regulatory reforms essential to foster a suitable environment for private investment. For example, Chile and Argentina have undertaken remarkable reforms that allowed them to transfer publicly-owned utilities to the private sector either by selling the assets or through concession agreements. They have also successfully introduced some degree of competition in the provision of services. Because of the reforms, these countries were able to attract private participation to sectors like telecommunications, transportation, energy, and potable water and sewerage. This has resulted, in most cases, in significant efficiency improvements as well as increased coverage.
The reform process has been widespread in the region. Different schemes have been attempted under diverse economic, legal and institutional circumstances with varying degrees of success. With the support of the Bank, most countries have undertaken an initial wave of reform. Within the countries, as well as the Bank, a consensus exists regarding the main problems associated with launching a reform process and the trade-offs involved in selecting different policies and solutions. There is, however, much less agreement on how to approach the next set of challenges (second-generation issues) for countries facing the consolidation of initial reforms. As more experience is gained, a new set of issues is emerging, especially in those countries where the reform process began earliest. In general, these issues are related to post-privatization disputes and renegotiations between governments and the private sector and to the mechanisms necessary to promote competition in the reformed industries.
The Inter-American Development Bank has traditionally financed projects in these sectors (through its public and private sector arms) and has been instrumental in the implementation of reform in the region. The Bank's policy on public utilities is to promote the provision of services that contribute to the long-term economic development of the region and to the well-being of its people by adopting a sector structure and regulatory policy that seek to achieve economic efficiency, to ensure the long-term sustainability of the services, to safeguard the quality of the services and to promote accessibility by all citizens.
In order to achieve these objectives, it becomes necessary to review the experience that has been gained so far and to find efficient ways of addressing the new issues that are emerging. With this in mind, the Infrastructure and Financial Markets Division is organizing a workshop entitled "Second Generation Issues in the Privatization of Public Services." Based on a series of examples from Latin American and Caribbean countries, workshop participants will discuss and analyze the problems encountered as well as the solutions chosen during the transition to competition and private participation in public service provision. The analysis will focus on post-privatization disputes and renegotiations between governments and the private sector, and on the regulations implemented to promote competition in network industries.
THE WORKSHOP
Module I: Post-Privatization Disputes and Renegotiations
In general (but not always), the sectors involved in the reforms have been characterized to some degree by economies of scale and scope, which in turn has required the direct regulation of the private firms. Given the lack of a regulatory tradition and the weakness of legal and institutional frameworks in the reforming countries, a number of specific instruments (laws, contracts) had to be used to establish the way in which tariffs, quality, investment, exclusivity, etc., would be determined and evolve over time. Yet, some degree of discretion was also permitted to allow the newly created regulatory bodies to adjust to unforeseen developments such as changes in technology or demand. In addition, the economic context in which the initial reforms were carried out did not allow the time needed to refine terms, and many "loopholes" remained. Naturally, those unforeseen events have occurred, and the use of discretion by regulatory agencies has been called for. In some cases, this led to renegotiations and disputes regarding the method for adjusting tariffs, the extent of exclusivity, the character of investment and expansion, etc. In many cases, the demands made during the dispute process were beyond the authority of the regulatory agencies to fulfill, causing the intervention of public officials.
The Infrastructure and Financial Markets Division commissioned a series of studies to analyze post-privatization disputes and renegotiations between the government and the private sector, and to assess how these disputes were resolved in three countries (Argentina, Chile, and Colombia). The studies evaluate a set of contractual adjustments, resulting from renegotiations and disputes that have taken place since the beginning of the reform process. They also focus on the origin of the disputes, the procedures used to settle them, and the consequences of the solutions with regard to economic efficiency, financial equilibrium and transfers among different agents.
The institutional, legal and regulatory issues addressed in these studies are also analyzed in a set of papers written by experts from the private sector, academia, the banking community and the international multilateral institutions.
Module II: Promoting Competition in the Provision of Public Services: Access Arrangements to Network Industries
The wave of infrastructure privatization in LAC has been characterized not only by the change to private operators, but also by the introduction of competition in areas that, in the past (because of existing technology, managerial arrangements, and levels of demand), were considered to be natural monopolies. Deregulation efforts have successfully expanded the scope of competition in a number of sectors with network characteristics. Industries like electricity, natural gas, telecommunications and even transport have been (or are being) restructured and competition is being introduced (or at least proposed) to varying degrees, depending on the particular characteristics of the markets; i.e., competition in generation of electricity or production of natural gas, retail competition in electricity, competition in non-local telephony, or competition among different train operators using the same existing rail system. In most of these cases, the competing activities still need to use the existing network to provide the service. That is, for competition to be effective, access to the natural monopoly part of the industry is required. Regulating access to the network therefore becomes crucial for competition to be harnessed for the efficient functioning of these industries. Policymakers must create proper conditions for entry into the competitive segment while, at the same time, not inducing excessive entry, expropriating previous investments or discouraging future investment in the monopolized part of the industry and not generating inefficient bypass. The need for access pricing rules that are easy to implement is especially urgent in developing and transition economies because of severe measurement problems and lack of technical expertise.
Regulation of access is also of particular importance for reform processes that consider different international players that need to access the same network, i.e., regional interconnection of electricity (Central America), or regional markets for gas delivered by pipeline, or even regional markets for telecommunications.
The workshop presents a sample of experiences regarding access arrangements to networks in the electricity, natural gas, potable water and telecommunications sectors as well as the role of governments and regulatory authorities vis-à-vis the private sector. The studies analyze the legislation and regulatory actions (as they apply to access in each case), the conflicts of interest involved, the effects of existing legislation, the specific ways in which prices and terms of access are determined, and how disputes over access are resolved, identifying pitfalls in the existing arrangements as well as possible solutions.
Finally, principles and results of the theoretical and analytic work on access pricing are translated into a set of tractable rules and procedures. An operationally useful approach to the definition and implementation of access and interconnection rules in network industries is presented providing practical guidance to policymakers in the region on how to ensure access of competitors to essential (bottleneck) network facilities on terms that are consistent with efficient competition and afford the owners of such facilities a fair opportunity to recover their prudently incurred costs.
We expect that the discussions among the workshop participants from the region, the private sector, and the financial institutions, coupled with the analytical work that will be presented, will allow us to define critical areas where further research and analysis will help in determining useful Guidelines for the Bank's support to the region's member countries.
Last updated: 05/08/07
