Joint Conference of the Inter-American Development Bank and the World Bank

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Joint Conference of the Inter-American
Development Bank and the World Bank POLITICAL
ECONOMY OF SERVICE DELIVERY Private Utility
Supply in a Hostile EnvironmentLessons from
Experience of Water/Sanitation and Electricity
Distribution Utilities in Three LAC Countries

• Luigi Manzetti
• Washington, June 3, 2005
•  

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Presentation

• Cases
• Difficult Environments for Service Delivery
• Lessons
• Final Considerations

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Cases

• AES Corporation-EdeEste (Dominican
  Republic-electricity distribution)
• Interagua Cía. Ltda. (Ecuador-water/ sanitation)
• Unión Fenosa (Colombia-electricity distribution)
• AAA-Sociedad de Acueducto, Alcantarillado y Aseo
  de Baranquilla S.A. (Colombia-water and
  sanitation)

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Difficult environments

• The Colombian Caribbean coast
• Low income and indigent population
• Culture of nonpayment and fraud no limited to the
  poor
• Political clientelism and corruption
• Large number of refugees fleeing from guerrilla
  warfare resulting in rapidly growing slums
• Existence of red areas, of difficult
  management, not always under control of state
  security
• With the exception of security concerns most
  issues are shared in the Dominican Republic and
  Ecuador

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Poverty and Indigence Levels in Colombia by City,
2003
Source AAA
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General lessons

1. Utility reform must provide quick and tangible
   benefits for users
2. Companies and government must create the
   conditions so that the poor can pay
3. Companies must make poor communities feel that
   they are part of the solution
4. Companies must understand the environment and
   behavior of the poor in order to turn them into
   customers
5. Politics matter. Private utilities can only
   survive in poor institutional and economic
   environments if politicians are willing to
   cooperate

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Lesson 1 Utility reform must provide quick and
tangible benefits for users

• Successful examples (AAA and Interagua)
• Improved appreciably both the quality and the
  availability of service within a relatively short
  period of time
• Also succeeded in improving customer service and
  enhancing their credibility
• The poor are willing to pay when they are
  provided with good quality service
• But companies must first convince customers
  through facts (quality improvement) in order to
  overcome the negative legacy of previous
  government ownership
• Cultural biases
• Hostility towards the company

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Service trend in Puerto Colombia, 1997-2004
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Service trend in Soledad, 1997-2004
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Lesson 2 Making utilities more affordable and
easier to pay

• Flexible tariff rates (Colombia)
• Heavily discounted rates affordable for poor
  communities (Colombia and Ecuador)
• Incentives for customers to pay on time (Colombia
  and Ecuador).
• Easy means for customers to pay their bills
  (Colombia water)
• Improved quality and accessibility of service
  (Colombia and Ecuador)
• Improved customer service and billing procedures
  (Colombia and Ecuador)
• Fraud and theft charges dropped if client agrees
  to pay (Colombia water)

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Lesson 3 Making poor communities feel that they
are part of the solution

• The Colombian cases addressed cultural,
  historical, and political characteristics of
  their service areas
• An innovative element of the Colombian approach
  was the emphasis on building trust
• Paying for services rendered would improve
  community and individual well-being
• Community based organizations needed to be
  involved and had to be treated as stakeholders
• Communities had to recognize the benefits of
  cooperation
• The Company needed to demonstrate commitment and
  provide support for community initiatives

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Using community-based intermediaries

• Selection
• Respected within the community
• Could deliver community compliance  
• Roles
• Articulating community needs/problems during
  program design
• Making message believable
• Leveraging trust to deliver and collect
• Explaining the mechanics of service delivery and
  setting up self-policing functions
• Trained in order to perform the tasks assigned
  to them within the program

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Company role

• Companies promoted an environment of social
  responsibility through
• town meetings
• training programs
• educating people through public workshops about
  the importance of paying to assure good service
• Basic message (sales pitch)
• were all on the same boatthe company can only
  do well if customers are getting better service
  and paying regularly, which then allows companies
  to expand service and invest in the community.

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Government support is key  

• Provided necessary subsidies to help companies
  offset infrastructure costs and low rates
• Including capitalization of debts from energy
  purchases
• But also refused blanket rate increases to absorb
  losses (Colombia electricity)
• Authorized adjusting quality of service to
  collections ratio
• Municipal governments dealt with land tenure
  issues to legalize squatters residency status
• Regulatory institutions stepped in to legitimize
  the process by guaranteeing its transparency and
  fairness (Colombia electricity)

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Lesson 4 When customers are missing, they must
be created

• Improving community life
• Legalizing consumers
• Making utilities harder to steal and easier to
  monitor and fighting back illegal activities.
• Balacing carrot and stick approaches

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Improving community life

• Gain credibility and trust through efforts to
  show commitment toward social responsibility
• Investment in local school programs and parks
  (Colombia).
• Support for local soccer teams (Colombia).
• Help for community associations (Colombia).
• Assistance for Non-Governmental Organizations
  (NGOs) operating at the local level.
• Emphasis on local employment (Colombia).
• Development of educational programs on
  conservation and safety procedures (Colombia and
  Ecuador).
• Legalization of residency (Colombia).

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Legalizing customers

• Unsafe illegal connections replaced by safe ones
• Payment plans for upfront cost of connection and
  meter
• Mapping of streets and dwellings to identify each
  consumer
• Issuance of service contracts and bills
• Can constitute proof of residency to receive
  municipal and other services

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Prevention, monitoring, and control

• Installation of meters that are difficult to
  tamper with
• Meters placed in visible spots for easy
  monitoring
• Corrupt workers dismissed (Colombia and Ecuador)
• Illegal connections cut off (Colombia
  electricity)
• Cooperation with police and local communities to
  identify and prosecute offenders (Colombia
  electricity)
• Media campaign (Colombia and Ecuador)
• Explain that illegal activities harm both the
  company and the community
• Expose wrongdoing
• Inform about the legal consequences of fraudulent
  behavior

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Balancing carrot and stick approaches

• Persuasion far preferable to sanctions, although
  both are necessary
• Monitoring and policing costs will always be
  higher than programs geared at voluntary
  cooperation.  
• AAA estimated 1 million in community programs
  equal or better for cooperation than 10 million
  for prosecution of delinquent payers and
  fraudulent behavior  
• Courts are too slow, unreliable, and costly
• Many judges and police officers are reluctant to
  enforce the law
• Interagua preferred to put pressure on large
  users through informal channels to avoid
  political backlash

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Payment arrears by government institutions,
Interagua 2001-2004
Source Interagua
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Lesson 5 Politics matters

• The most difficult problems to solve are
  political
• High political discretion within government
  institutions allows political executives to have
  a disproportionate influence in the
  decision-making process
• Consequently, if the political executive supports
  the role of the private enterprise, things can
  get solved and improvements accrue over time  
• Otherwise, if the mayor, governor, or president
  is not strongly committed, private companies face
  an uphill battle 
• Positive results in Colombia and Ecuador and poor
  results in Dominican Republic clearly illustrate
  this point

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Limiting political opportunism

• International arbitration
• Transitional subsidies may be unavoidable
• Avoid sharp rate increases associated with
  privatization
• Careful and transparent staging
• Clear regulatory framework
• Clear jurisdictional lines
• Company strategy avoid short-term deals build
  trust and legitimacy instead
• Multilaterals can help
• Address social and cultural obstacles to increase
  legitimacy of reforms
• Timely and ongoing post-transaction support

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Final considerations Some problems are hard to
solve

• Macroeconomic conditions
• Difficult adjustment to shocks
• Political clientelism
• Pervasive and perhaps exacerbated by political
  competition
• Political cycles
• Inevitable in democraciesneed to build bridges
  with all forces

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But other problems can be dealt with

• Purchasing power
• Making payment easier and focusing subsidies on
  the poorest
• Cultural attitudes
• Tying payment to good servicea social
  partnership
• Legal statutes and law enforcement
• Minimize recourse to the courts
• Regulatory agency behavior
• Building cooperation with regulators and
  governments
• Company image
• Provide quick and tangible benefits
• Corruption within the company
• A managerial issue
• Standard commercial problems
• Making utilities harder to steal and easier to
  monitor
• Fighting back fraud, corruption, and theft