Pro-Poor Design of Projects involving Private Sector Participation in Infrastructure KfW PPP Workshop Jagdschloss Niederwald 13:15 – 15:15 Thursday 4 th September 2003 Katalyst Solutions

Overview Introduction Katalyst team Focus of work for KfW The 3 stages of infrastructure assistance Designing pro- poor PSP Get the facts on the ground Informal providers & market structure Tariffs and subsidies Non-monetary barriers Access to finance Regulation and contract design Implementation & Monitoring Making it work Learning 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

FinanceSkills & Efficiency Structure Traditional Public/ Development Bank Lending Technical assistance Exclusive franchise PSP Private capital Profit motiveExclusive 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 Didnt 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? Aspirations What improvements do people want? How much will they pay? [Market Research]

Negombo, Sri Lanka

Social impact model

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 providers RealityLegal / policy position Lagos Water 70% of population served by water truckers PSP strategy focused on concession to extend formal connections Philippines Rural Electrification Co-ops have exclusive franchises. 20% of households unconnected 300+ small private operators are illegal Former Soviet UnionMost public transport now provided by private minibuses Govt focus still on trams and metros

Recommendations Dont – 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 ,00010,00015,00020,00025,00030,00035,00040,000 GDP per capita (PPP) Mobile phones (per 100 people) 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 Old Style 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 recoveryThe poor are valuable customers Government Output-based aid Subsidy paid only for service for the poor

Non-tariff barriers

Barriers Capital constraintsCant manage large infrequent payments. Need to be able to control bill Cant finance connections No bank account Lack of legal titleCustomer cant offer security Operator may not be allowed to supply IlliteracyCant read bills, or customer information Cant complain effectively Physical constraintsUtilities offices are far from poor communities Power / fearStatus gap, harassment, intimidation

Overcoming non-monetary barriers Philippines Rural 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 needs Responses Appropriate on-lending vehicle Guarantees

Traditional v. Output-based aid Government Development agency Subsidy fund Operator Target customer Connects / serves MonitorsPays per output Debt service

Regulation and contract design

Contract embodies policy Topic [Incumbent] TraditionalPro-poor CoverageAdditional connections per year Add: - Micro-geo targets - Use of small providers - Tariff + subsidy = incentive TariffsAverage cost + lifeline block Make poor profitable: - Tariff + subsidy = cost + profit BillingEvery 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 world Response to complaints - Targetted to customer - Better than before - Outreach

TopicTraditionalPro-poor Whole-sale supply / Interconnection Not provided forRequired: - Reasonable prices - Convenient points Small providersNot allowed or Regulated like incumbent Light-handed: Safety, environmental – partnership approach Tariffs – rely on competition? Gradual, minimal, recognise risk and need for profits Recognise 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