June 2001 Insights Issue #37

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Power to choose: is pro-poor privatisation possible?

How can private sector contracts be designed to serve the needs of the poor more effectively? Should quality of service be set at costly western standards? Or can large and small water providers compete to supply a range of services at prices that reflect consumer willingness and ability to pay?

Privatisation can lead to price hikes that put services beyond the reach of the poor. The failure of the Cochabamba concession is a good example: consumers (and water vendors whose interests were at stake) protested violently until the private operator withdrew. Consumer interests must be central to contract design if privatisation is to succeed for all. A World Bank study suggests that quality of service issues should be approached more imaginatively than following in western footsteps as is currently the case.

Commonly, privatisation involves not only management of the utility's assets but also obligation to improve, update and expand the network. Poor areas are often seen as unprofitable and difficult to serve, however. Thus, contracts often include coverage targets - the number of households to be connected to the network by a given date - that are inflexible and reduce service options for the poor. Further salient drawbacks are:

• Private operators often obtain exclusivity rights over the area they are supposed to serve so as to reduce their perception of risk and lower the rate of return required for investing. Exclusivity can, however, force small-scale providers out of business or relegate them to illegality.
• Coverage is often interpreted as a connection in every household.

Yet, community connection or alternative technologies (pipes at lower depth or condominium sewerage) may be cheaper and more affordable. A one-size-fit-all service can be costly for the poor as quality standards are often set at western levels and uptake may not even cover investment costs of extending the service.

Given a choice of service providers and types of service, the consumer can decide on price and quality depending on financial circumstances and need. What changes would improve the design of private sector contracts to ensure poor consumers as well as the better-off benefit?

• Exclusivity rules could be relaxed to allow existing small-scale providers to compete for the provision of services, with improved regulation to protect consumers: this is vital for those areas not served by the main concessionaire and would later help create competition.
• The concessionaire should be allowed to provide a range of service options in response to local demand such as lower-cost technology and flexible payment options. Partnerships with small-scale providers and bulk supply contracts would also help and should be specifically allowed.

Sophie Trémolet
Stremolet@netscapeonline.co.uk

See also
'Access to infrastructure: let competing firms offer a mix of price and quality options' in Public Policy for the Private Sector, World Bank, by Bill Baker and Sophie Trémolet, September 2000 online at: http://www.worldbank.org/html/fpd/notes/221/221summary.html