InterAmerican Development Bank

1
Inter-American Development Bank

• Second Generation Issues in the Reform of Public
  Utilities

October 4 and 5, 1999
2
Introduction

• Post-Privatization Renegotiations and Disputes
• Open Access to networks
• Flaws in the Initial Reform Process
• Alternative Solutions
• Challenges Ahead for the Consolidation of Reforms

3
Organization of the Discussion

• The Initial Reform Process
• The Role of the IDB
• Post-Privatization Disputes and Renegotiations
• Promoting Competition in Public Services
• Final Remarks

4
The Initial Reform Process

• Reform of Infrastructure Services Aimed at
  Avoiding Inefficiency Trap
• From vertically integrated and publicly owned
  monopolies
• To a model that
• Promotes PSP and competition
• Creates conditions for economic efficiency
• Translates efficiency gains into improvements for
  society

5
The Initial Reform Process

• Key Elements
• Promote Competition
• IN the market in competitive segments of the
  industry
• FOR the market in the natural monopoly segments
  of the industry
• Create Appropriate Legal and Regulatory Framework
• Ensure competition when possible
• Set prices and quality levels
• Protect producers and consumers

6
The Role of the IDB

• Promote and Support Reforms
• Adopting a policy on public utilities that
  promotes competitive reforms and proper
  governance
• Developing new financial and non financial
  instruments appropriate to the new situation

7
The Role of the IDB

• Policy Recommendations
• Separation of roles of policy formulator,
  regulator and entrepreneur
• Sector structure that favors efficiency and
  maximizes the scope of competition
• Adoption of a sound and adequate regulatory
  regime
• Appropriateness of institutional vehicles for
  regulation
• Adequacy of the legal framework
• The adoption of governance modes that provide
  efficiency incentives for management

8
The Role of the IDB

• Financial Support
• Public and Private Sector Loans
• 1.9 billion in average annual financing for
  infrastructure in 95-98
• Increased proportion of loans to the private
  sector ( 580 million in 1998)
• Guarantees to mitigate regulatory and political
  risks
• Technical assistance to the public sector to
• Design sector strategies
• Design and implement regulatory frameworks
• Strengthen regulatory institutions
• Grants (MIF) for implementing reforms

9
The Role of the IDB

• What next?
• Reforms began a decade ago
• Time is right for looking into the following
  questions
• Was the market structure appropriate?
• Was the regulatory and legal framework
  appropriate ?
• Did the regulatory institutions behave as
  expected ?
• What should be done to ensure that reforms spread
  their benefits to society as a whole ?

10
Disputes and Renegotiations

• The analysis is focused on post-privatization
  disputes and renegotiations because
• Disputes
• Argentina, Colombia, Chile
• Investment programs have been delayed
• Tariff trends have differed from expectations
• Renegotiations
• Impact on consumers and private operators
• Threats to the financial community

11
Disputes and Renegotiations

• Origins of Disputes
• Award Process
• Lack of competition lack of clarity
• Market Structure
• Lack of competition
• Vertical and horizontal integration
• Regulatory Framework
• Ambiguities in contracts and law
• Deficient design
• Omissions

12
Disputes and Renegotiations

• Origins of the Disputes
• Tariff System
• Problems with tariffs, subsidies, investment
• Adjustment mechanisms
• Inefficient and unsustainable price structure
• Lack of specificity lack of flexibility
• Regulatory Institutions
• Lack of independence, resources and/or expertise
• Unanticipated Events
• Changes in technology and/or demand, natural
  phenomena

13
Disputes and Renegotiations

• Settlement of Disputes
• Procedures
• Regulator ruling arbitration the courts
• Role of Different Institutions
• Consequences
• Economic efficiency
• Financial equilibrium
• Transfers among different agents

14
Promoting Competition

• The Reform Promoted Competition in Areas that
  were Considered Natural Monopolies
• Generation of electricity
• Production of natural gas
• Non-local telephony
• Different train operators using the same existing
  rail system
• Did the benefits from competition reached
  consumers?
• More competition will increase efficiency

15
Promoting competition

• Regulating Access is Crucial
• Create the Proper Conditions for Entry Into the
  Competitive Segment Without
• Inducing excessive entry
• Expropriating previous investments
• Discouraging future investment in the monopolized
  part of the industry
• Generating inefficient bypass.

16
Promoting competition

• Success in Regulating Access
• The effects of existing legislation
• Ways in which prices and terms of access are
  determined
• How disputes over access are resolved
• Identifying pitfalls (and possible solutions) in
  existing arrangements

17
Final Remarks

• Identify Main Pitfalls of Reform and Possible
  Solutions
• Day One
• Key elements to reduce the conflicts and disputes
  
• Procedures for increasing the efficiency of
  settlement processes
• Actions to minimize the negative impact of
  disputes on the economic efficiency, social
  perception and the financial community
• Day Two
• Consumer benefits from widening the scope of
  competition in several sectors
• Key and uncomplicated components for effective
  open access to network regulations

18
Final Remarks

• Countries have made considerable efforts remove
  public services from the inefficiency trap
  through PSP and competition
• The IDB has supported the process
• Appropriate solutions to the problems resulting
  from the initial reform are needed to consolidate
  the process