Privatization and the Poor: Lessons from Latin America Vivien Foster, Senior Economist, LAC-FIPSI

Technocratic View 4 Substantial gains in enterprise performance (efficiency, quality), with variations across sectors 4 Welfare impacts –About half of the time prices increased for existing users –Access invariably improved 4 Welfare gains due to access offset losses from price increases 4 Short-term employment losses Public Perception 4 Recent opinion poll shows 63% of Latin Americans oppose privatization 4 Growing violent opposition to new privatization attempts –Cochabamba water –Ecuador electricity distribution –Peru electricity distribution –Paraguay telecom 4 Social opposition to mature privatizations in Argentina The privatization paradox

Source: WIDER, 2002 Example: gains in coverage

Is ‘private’ bad for the poor? 4 Upsides –Access to capital allows finance of network expansion and improvements in quality of service –Improvements in efficiency make money go further 4 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? 4 Upsides –Tariffs kept low –Tolerance of informality and non-payment –Operator free to pursue social (or political?) objectives 4 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 4 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 4 How these benefits are initially distributed among stakeholders is a political choice 4 How they continue to be distributed between customers and shareholders depends on regulation

Who captures the dividend?

Example: water in Paraná Source: Van Den Berg, 2000 (Net present value of the concesion)

How much did the state benefit? Source: Izaguirre and Rao, 2000

How can things be improved? 4 Build social dimension into transaction 4 Incorporate instruments to promote access –Require operator to provide universal access –Reduce the cost of connections –Safeguard alternative sources of supply 4 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 Source: PPIAF, 2001

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

Wider applicability? 4 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 4 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