Pro-Poor Design of Projects involving
Private Sector Participation
in Infrastructure
KfW PPP WorkshopJagdschloss Niederwald
13:15 – 15:15Thursday
4th September 2003
Katalyst Solutions
Overview
Introduction Katalyst teamFocus of work for KfWThe 3 stages of infrastructure assistance
Designing pro-poor PSP
Get the facts on the groundInformal providers & market structureTariffs and subsidiesNon-monetary barriersAccess to financeRegulation and contract design
Implementation & Monitoring
Making it workLearning from experience
Keith Stallard• Founding Director, Katalyst21• Water and environmental sector• PSP in industrialised and developing countries
(Africa, Asia, Middle East)• Small-scale PSP in Ghana• KfW, World Bank
David Ehrhardt• Director, Castalia• Reform of public services through PSP• Electricity, gas, telecommunications, water,
transport• Joint author of book “Infrastructure for Poor
people – Public Policy for Private Provision”, World Bank, 2003
Focus of our work for KfW
• When thinking of helping the poor, think about PSP
• When thinking about PSP, think about helping the poor
Finance Skills & Efficiency
Structure
Traditional Public/Development Bank Lending
Technical assistance
Exclusive franchise
PSP Private capital
Profit motive Exclusive franchise
Pro-poor PSP
Public and private
Profit motive+ competition+ communities
Competition,entrants,informal providers
3 Stages of Dev. Assistance
Designing Pro-poor PSP
Get the facts on the ground
Recognise reality – avoid the cultural gap
Development agency
Country officials + utility manager
Poor consumers
• University educated
• Lives in formal section house
• Receives regular pay check
• Has a bank account
• Lives in a shack / slum• Didn’t go to university• No bank account
Between countries
Within countries
Poverty surveys & mapping
Who … are they?
Where …do they live?
What … service are they getting now?
How …much are people paying now?
AspirationsWhat improvements do people want?
How much will they pay? [Market Research]
Negombo, Sri Lanka
Social impact model
Information on: Coverage Reliability
Quality
Household of particular type
Information on sunk cost coping
strategies
Information on current cost
coping strategies
Information on other costs
associated with given coverage, reliability and
quality
MODEL PREDICTED EFFECTS OF CHANGES
IN COVERAGE, RELIABILITY QUALITY
Information on the distribution of income (and
other proxies of welfare)
MODEL PREDICTED WELFARE EFFECTS OF
TARIFFS AND TARGETS
Information on willingness to pay
Informal providers and competition
a.k.a
Market structure
Pro-poor structures
• Recognise reality on the ground• Be flexible (chaotic) in using
competition to serve poor customers• Policy focus on promoting
competition, helping small providers / entrants provide good service
How people are served now
Development agency
Private utility company
Country officials / utility managers
Formal utility focused:
•Grid supply•Uniform technical and service stds
•Monthly billing
Informal providers
Poor consumers
•Not connected to the network
•Variable service standards
•Pay as go
Informal providersReality Legal / policy
position
•LagosWater
70% of population served by water truckers
PSP strategy focused on concession to extend formal connections
•PhilippinesRural Electrification
Co-ops have exclusive franchises.20% of households unconnected
300+ small private operators are illegal
•Former Soviet Union Most public transport now provided by private minibuses
Govt focus still on trams and metros
Recommendations
• Don’t – • Grant exclusive franchises• Over-regulate small operators
• Do –• Make subsidies and support neutral
between dominant utility and others• Consider pro-competitive regulation of
dominant utility – e.g:• for bulk supply / interconnection• coverage targets can be met by other providers
Town
Peri-urban
Village
Slum
Old paradigm
Lack of funds & influence, means network never built
Low density means network is uneconomic
Connection costs too high, new system underused
Town
Peri-urban
Village
Slum
New paradigm Entrepreneur develops local production and
network
NGO sponsors low-cost solution, connected to grid
Connection to town grid, but alternative distribution
technology
Jamaica telecom liberalization
-
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
- 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000
GDP per capita (PPP)
Mo
bile
ph
on
es (
per
100
peo
ple
)
USA
Barbados
Costa Rica
Trinidad
Mauritius
New Zealand
Singapore
Mexico
Jamaica
Samoa
Fiji
Honduras
Tariffs & Subsidies
Funding service to poor people
Tariffs paid by poor
customers
Tariffs paid by other
customers (cross subsidy)
Taxpayers(direct subsidy)
Pro-poor tariffs and subsidies OldStyle
Government subsidy to water company
Helps connected customers (tend to be better off)
Cross-subsidy / lifeline block
Disincentive to serve poor / Many people per connection => no real subsidy
New Style
Cost recovery The poor are valuable customers
Government Output-based aid
Subsidy paid only for service for the poor
Non-tariff barriers
BarriersCapital constraints Can’t manage large infrequent
payments. Need to be able to control billCan’t finance connectionsNo bank account
Lack of legal title Customer can’t offer securityOperator may not be allowed to supply
Illiteracy Can’t read bills, or customer informationCan’t complain effectively
Physical constraints Utilities offices are far from poor communities
Power / fear Status gap, harassment, intimidation
Overcoming non-monetary barriers
•PhilippinesRural Electrification
Distribution company sells to ‘barangay’ association. Association on-sells to community (and earns margin to cover administration)
•Jamaica Utility Regulator
Customer service function – set up for telephone interaction
•Examples?
Access to finance
Finance for incumbents
• Development Bank finance needs to support PSP•Should be built into contract structure•Operator should control planning and
implementation•Concessional finance should be
targeted toward poor
Finance for small operators
Issues:• May not have accounts, business-
plan, assets• Small capital needsResponses• Appropriate on-lending vehicle• Guarantees
Traditional v. Output-based aid
GovernmentDevelopment agency
Subsidy fund
Operator Target customer
Connects / serves
Monitors Pays per output
Debt service
Regulation and contract design
Contract embodies policyTopic[Incumbent]
Traditional Pro-poor
Coverage Additional connections per year
Add:- Micro-geo targets- Use of small providers- Tariff + subsidy = incentive
Tariffs Average cost + lifeline block
Make poor profitable:- Tariff + subsidy = cost + profit
Billing Every 2- 6 months - Frequent- Pre-pay / pay-as-you-go options
Technical standards
Uniform, first world, ‘good engineering’
- Flexible- Cost-benefit trade-off
Service standards
Uniform, first worldResponse to complaints
- Targetted to customer- ‘Better than before’- Outreach
Topic Traditional Pro-poor
Whole-sale supply /
Interconnection
Not provided for Required:- Reasonable prices- Convenient points
Small providers Not allowed
or
Regulated like incumbent
Light-handed:
Safety, environmental – partnership approach
Tariffs – rely on competition?Gradual, minimal, recognise risk and need for profitsRecognise low capacity
Pro-competitive
Implementation and monitoring
• Capacity / TA intensive• Keep getting facts on the ground!• Compare to expectations• Learn for next time
Summary
• Facts on ground• Market structure – informal competition• Contract / regulatory design
• Tariffs & subsidies• Coverage • Non-monetary barriers• Access to finance
• Implementation and monitoring