The cool thing about working in infrastructure is everyone knows your business.
We’ve all paid bills, lost power during storms, and worried about the quality of the water we’re about to drink. We’ve all been on a dead phone line sputtering, “Hello? Hello?” having just confessed, “I love you,” to a disconnected piece of plastic.
And if we in the professional world care about these basic services that are so fundamental to our lives, we know their reliable and affordable delivery is even more crucial for the poor. When a long wait for a new phone connection means no link to the outside world, no power means no study, and tainted water means sick children, then utility services are the difference between stagnation and growth, poverty and opportunity.
Everyone knows when services work and when they don’t. But infrastructure economists have long struggled to understand why some utilities work well and others don’t. Is there a package of reforms that will get us more connections, higher levels of efficiency, better quality service and cheaper rates?
It turns out that, even if there is not one magic elixir, there are a few answers to these questions. Based on panel data from hundreds of power, water and telecommunication utilities across the Latin America and Caribbean Region, an analysis of that rich source of information [see “Uncovering the Drivers of Utility Performance”] provides us some insights.
Private versus Public
This debate may be as old as the hills, but it can still split families in half—or at least ruin a dinner party. Let’s take the emotion out of the discussion and allow the data to speak. Utilities that go private offer more efficient and better quality services than their public sector sisters, on average. Losses and service interruptions go down, labor efficiency goes up and the duration of outages shrink. (There are some exceptions to this: about 1 in 10 public utilities perform better than the average private utility.) Private utilities have also expanded access, but on average, access hasn’t grown faster than with publicly owned utilities, and tariffs don’t drop below public utilities’ rates, particularly for water and power.
If efficiency improves but consumer prices remain the same under private provision, then at least one of two things is happening: fewer subsidies are going into the sector to cover the cost recovery gap; and/or service providers are capturing a larger part of the benefits of efficiency. That may be fair given the need to pay taxes, make a profit and cover investment costs, but it also means someone has to be watching the hen house. In most infrastructure services, consumers can’t rely on competition to regulate prices and service quality. In power, water and sanitation services as with fixed line telephony, natural monopoly traits still dominate. In some power markets, generators compete for dispatch, and suppliers occasionally compete to sell power or water through existing wires and pipes, and fixed lines are more efficient with mobile services competing, but for the most part, the chunky investments in the assets that define infrastructure are not redundant. That is, the most efficient way to build the infrastructure remains a single network servicing individual households and businesses.
Once that network is in place, regulation protects the relationship between the consumer and the utility. The data reveal that the law of separation of principle and agent—of service provider and regulator, as protector of the public interest—holds. Regulation brings us better results for the consumer—fewer losses, fewer outages, more efficiency gains, quicker corrections to problems—and the stronger the regulator’s capacity, the better the results. This is true for both private utilities and for state-owned enterprises (SOEs). Stronger regulators also correlate with higher cost recovery, so even if average tariffs are a bit higher, everyone is better off, including the consumer.
The Mystery of State Owned Enterprises
Hidden within the truth of averages, however, are wide ranges of performance results. What makes those SOEs that perform as well or better than private utilities tick? The difference revolves around corporate governance and incentive systems. Performance is better in public service providers that have strong legal frameworks, independent boards, incentives for performance, and transparent finances.
The Science of Our Storyline
For those of us who have spent an adult lifetime trying to build a narrative on how to reform infrastructure service providers, this work gives us an evidence-based storyline. It goes something like this…
- On average, private utilities outperform public utilities, but don’t expect that to solve all access and pricing issues.
- Oversight and regulation impacts performance and returns rents to consumers across countries with different legal traditions and for both private and public utilities. The regulator needs some teeth to have any bite.
- Finally, you may not have to risk street protests by selling your public utility—some SOEs do perform well. To get efficiency and service quality standards more typical of the private sector, however, you may have to implement structural reforms under the principles of commercialization, transparency and independence.
Now everyone truly knows our business.