Suman Bery: Brave new world

Latin America's experience with infrastructure privatisation deserves study

Last week the UNDP-supported Centre for Infrastructure and Regulation of the NCAER undertook a novel dialogue on the experience of Latin American countries in infrastructure reform.

The dialogue was facilitated by the World Bank Institute (WBI) in Washington, DC utilising the infrastructure of the Global Development Learning Network (GDLN). The GDLN is one of Mr James Wolfensohn's major initiatives at the World Bank.

It consists of a network of video studios across the developing world and is designed to use broad-band technology to facilitate training and dialogue on development issues while minimising physical travel.

In the present case, the hook-up was between the New Delhi office of the World Bank, the WBI studios in Washington, and the World Bank office in Buenos Aires. At the Delhi end the NCAER had assembled an audience of approximately 50 participants for two three-hour sessions on consecutive days. Fortunately, the technology worked well, and there were relatively few interruptions.

The lead presentations were made by academics and officials with long experience in infrastructure reform in Latin America, followed by Indian discussants. The first day was given over to country experiences (Mexico, Argentina, Peru).

The second day revolved around a single theme: Latin America's experience with contract renegotiations in infrastructure, as revealed by the experience over the last decade. The experience of Brazil was not well-represented, and the discussion therefore focused entirely on Spanish America.

The presentations were frank, revealing and sobering. A decade ago, protagonists of infrastructure reform were filled with crusading zeal. This time, the presentations were free of any triumphalism. There was little attempt to oversell the success of the reforms, or to hide the difficulties and disappointments, even though the underlying sentiment was supportive.

Four themes emerged from the discussion: the goals of greater private involvement; the problem of political support; the blend of regulation and competition; and the importance of contract renegotiation.

The case for moving from the dominant public supplier model to greater private involvement is straightforward: private utilities are expected to be more efficient in the delivery of services, partly because they are less subject to political interference.

In addition, private utilities, particularly if they are cross-border, are typically expected to tap a wider range of financing sources than national governments, although in practice domestic debt markets are often tapped by international operators (as exemplified by India's own experience with the Dabhol project).

The discussion made clear that when inducting the private sector into the infrastructure sector governments face a clear trade-off between revenue maximisation and the promotion of competition. This issue emerged perhaps most clearly in Argentina in the early 1990s.

The economy had plunged into hyperinflation, fiscal pressure was acute, and the disorder in the various infrastructure sectors extreme. There was the additional circumstance that the Peronist party (led by Carlos Menem) had returned to power.

As with the Congress party in India, it was the Peronists who had been responsible for the initial nationalisation wave following the war, and only Peronists were seen capable of making the case for denationalisation.

These macroeconomic and political circumstances made it possible to move quickly across a number of sectors, and compelled revenue maximisation to be the primordial goal. Yet this combination of speed and lucre laid the seeds for future discontent.

The resulting market structure was not competitive in most sectors, the distribution of risk between the operators and the state was unbalanced, and regulatory capacity (and power) inadequate to deal with powerful international players. There were also concerns with inadequate transparency in the award of concessions.

As a result of these imperfections a backlash has set in, intensified by the more recent crisis of January 2002, despite visible improvements in productivity and efficiency in most of the affected sectors.

This cycle of enthusiasm followed by disillusion is not unique to Argentina. The story with toll roads in Mexico is similar, and there is a backlash in both power and telecoms brewing in Brazil as well. It would seem that sustained political support for private involvement in infrastructure depends crucially on its perceived success in lowering prices and widening access.

This in turn requires a commitment to a competitive market structure which is not often evident (including, perhaps particularly, in India), despite the lip service duly paid to it.

If competition is the core goal of greater private involvement, what is the role of economic (as versus safety, or consumer rights) regulation? In principle, it should be to prevent abuse of market power given the importance of economies of scale in many infrastructure industries, and to stimulate competitive entry.

Abuse of market power is usually curbed through the tariff-setting function of the regulatory authorities. Here, too, the message of the workshop was a sobering one: lack of agreed standards in regulatory accounting can make nonsense of many rate-of-return rules.

More broadly, with inexperienced and often politically weak regulators, operating in countries where the relevant jurisprudence is still in its infancy, the informational and power asymmetry between the regulator and the regulated firms is acute. The solution is, where possible, to permit free entry and allow the market to determine prices, although last mile issues will often arise.

Perhaps the most compelling material of the conference was that presented, on renegotiation of concessions. We, who have been through our telecom wars may feel that these are an expression of a peculiarly Indian disputatiousness, but as Mozart might say, Così fan tutte: everyone is doing it.

As documented in a recent book (Granting and Renegotiating Infrastructure Concessions: Doing it Right, J Luis Guash, World Bank Institute, Washington, DC, 2004) which draws upon a database of 1,300 concessions awarded since the 1980s in the Latin America and Caribbean regions, renegotiation of concessions is the norm rather than the exception, particularly if the initial concession was awarded through competitive bidding.

Renegotiation was less common in electricity and telecom, more common in transport and water, and renegotiation happens relatively quickly: around two years into the concession period. More surprisingly, the renegotiation is more typically operator initiated (about two-thirds of the time), and most often has to do with investment obligations and tariff issues.

The consequences of such frequent renegotiations are obvious. If initiated by the selected concessionaire they act severely to undermine the credibility of the initial bidding process, while if initiated by government they add to the perception of regulatory risk and increase financing costs. Avoiding such harmful renegotiation is not easy: it takes both sound concession design and firm, experienced regulation.

What are the implications of all this for India? We are at the beginning of an unavoidable, but difficult journey. It is our good fortune that we are not undertaking this process in the midst of an economic crisis.

From our experiences over the last decade we can already see that the process of private sector induction is, and will remain, highly political, and that there will be many false starts. While competition is at the heart of the matter, there are few obvious constituencies for competition, while the risk of private monopolies complementing or replacing public monopolies is always and everywhere present.

The stimulation of competition is even harder if there is an established state incumbent as remains the case across the board in India. The academic community, civil society, the courts and the media therefore have a crucial role to play to make sure that the potential benefits are in fact realised, and the course sustained.

sbery@ncaer.org

(The author is director general, NCAER. The views expressed are personal)