Regulation and Reform – Small Scale Service Providers

1. Regulation and Reform – Small Scale Service Providers Clive Harris Senior PSD Specialist The World Bank 3rd SAFIR Core Course on "Infrastructure Regulation and Reform", October 8-19, 2001.

2. Goals of the Presentation • Outline the role that small scale providers of infrastructure services play in developing countries • Highlight case studies • Discuss implications for sector reform, including privatization of network service provider, and for regulation 3rd SAFIR Core Course on "Infrastructure Regulation and Reform", October 8-19, 2001.

3. Examples of small scale providers This covers a range of service providers of different sizes: Water: water carriers and vendors, water tankers, small scale networks Power: mini-grids, household systems, small generators selling to grid Telecoms: small scale public phone provision Transport: private mini buses etc. Different types of organizations are involved: NGOs, for-profit businesses, 3rd SAFIR Core Course on "Infrastructure Regulation and Reform", October 8-19, 2001.

4. Why consider role of small scale providers when reforming? • The poor and those in rural areas often receive their services through small scale/informal providers • Official attitudes are often either hostile or neglectful • Many approaches to sector reform do not accommodate, or even work against, small scale providers e.g. exclusivity 3rd SAFIR Core Course on "Infrastructure Regulation and Reform", October 8-19, 2001.

5. Why do consumers use SSPs? 3rd SAFIR Core Course on "Infrastructure Regulation and Reform", October 8-19, 2001.

6. Price/Quantity Tradeoffs: why SSPs may be more attractive for some consumers 3rd SAFIR Core Course on "Infrastructure Regulation and Reform", October 8-19, 2001.

7. Advantages of SSPs – institutional and commercial • Inefficient and loss-making network providers lack funds to extend services, partic. to marginal areas • Business approach of network providers may not extend well to e.g. squatter areas • SSPs can offer more attractive price/quantity bundles • SSPs can offer more flexible payment methods, including “in-kind” contributions (e.g. labour in connection construction) • Squatters may lack legal tenure, which prohibits the network providers from offering a connection 3rd SAFIR Core Course on "Infrastructure Regulation and Reform", October 8-19, 2001.

8. What role do SSPs play? • Serve customers in areas where network provider is absent or where consumers prefer not to use network services • Wheeling – use of network to provide services to consumers • Production – e.g. electricity or water – fed into the network • “On-sell” services of network provider and facilitation – service is delegated or retailed by SSPs 3rd SAFIR Core Course on "Infrastructure Regulation and Reform", October 8-19, 2001.

9. Stylized infrastructure sector structure 3rd SAFIR Core Course on "Infrastructure Regulation and Reform", October 8-19, 2001.

10. How do SSPs fit in? 3rd SAFIR Core Course on "Infrastructure Regulation and Reform", October 8-19, 2001.

11. Small scale water networks: Paraguay’s aguateros Sector structure: • Urban: public agency covers 2.0m of 2.9m • Rural: public agency covers 0.9m of 2.5m • Peri-urban: approx. 400 aguateros cover 0.9m Aguateros: average 300 consumers, average systen age 10 years. Use boreholes, plus disinfection, plus above ground storage, some use of meters. 90% have 24 hr service. Some quality monitoring. Costs: c.$250/connection ($500 public agencies), tariff c. $0.20-0.50/cm 3rd SAFIR Core Course on "Infrastructure Regulation and Reform", October 8-19, 2001.

12. Paraguay’s aguateros contd. Unprecedented expansion of privately financed piped water systems (though existence of networks not unique) due to: • Poor performance of public sector • Availability of groundwater (not present in parts of country where this is not available) which can be accessed without great expense • Adoption of low cost systems that allows recovery of connection costs in 3 years Uncertainty over future regulatory framework – in particular possibility of exclusivity in future concessions with the 3rd SAFIR Core Course on "Infrastructure Regulation and Reform", October 8-19, 2001.

13. Cambodia’s rural electric enterprises • State owned EDC has system in capital Pnom Penh and through independent systems in provincial capitals totalling c. 190,00 consumers. Considerable self-supply in this area due to high tariffs and poor reliability of supply • Approx 220 privately owned rural electricity enterprises serve c. 115,000 consumers. Estimated capacity of around 60MW (versus 160 MW in EDC) • Some are licensed by provincial governments • Large growth because of inability of incumbent to expand, and liberal entry regime 3rd SAFIR Core Course on "Infrastructure Regulation and Reform", October 8-19, 2001.

14. Cambodia’s rural electric enterprises • Business characteristics: average asset value $17,633, most are sole proprietorships • Average tariff is $0.51/kWh, service provided for 4 hours, most customers metered • Average customer base is around 200: range is large • 80% of those surveyed report making a profit New regulatory framework is presently being developed which could lead to closer regulation of tariffs and QOS. Govt. also interested in expanding EDC – clash between optimum technical and commercial solutions 3rd SAFIR Core Course on "Infrastructure Regulation and Reform", October 8-19, 2001.

15. Karachi – Water • Large slum population (c 3.3 million) not served by Karachi Water and Sanitation Board • Variety of vending practices: water tankers (some fill from KWSB points), push carts etc. Approx. 5000 tankers in city; smaller vendors on-sell from tankers • Interaction between KWSB and tankers largely informal 3rd SAFIR Core Course on "Infrastructure Regulation and Reform", October 8-19, 2001.

16. Karachi –Sanitation Due to lack of sanitation, many communities have developed their own sanitation Baldia: community on outskirts of Karachi, developed sewer system linked to nullahs. KWSB then developed trunk sewers in Baldia but did not link to the community sewers => most sewage still goes through nullahs Highlights need for effective interaction and incorporation of different standards of works: KWSB reluctant to link to community sewers as engineering standards not good 3rd SAFIR Core Course on "Infrastructure Regulation and Reform", October 8-19, 2001.

17. Rural telecoms – Grameen Telecom • Grameen Telecom (not-for-profit) re-sells air time from Grameen Phone • Grameen Bank finances leasing of cell phones from Grameen Telecom by women who then operate them as village pay phones • 1997-2000: reached c. 1100 villages and 2.8 mn people • Key issue – interconnection rates: at present, BTTB keeps all revenue generated by calls from its network, GrameenPhone treated as consumer in terms of interconnection rates • Demonstrates need for level playing field enforced by independent regulator 3rd SAFIR Core Course on "Infrastructure Regulation and Reform", October 8-19, 2001.

18. Small scale power plants Exist in many countries in region – selling power into grid to incumbent operator or sometimes wheeling power Issues: • Other policy objectives – e.g. renewables (bagasse, micro-hydro) often important • Role of regulator in determining access conditions and purchase prices – wider links to sector reform (competition) 3rd SAFIR Core Course on "Infrastructure Regulation and Reform", October 8-19, 2001.

19. Water trucking in Teshie, Ghana Ghana Water Co Ltd (GWCL) currently reaches 55% of consumers in Teshie. Remaining reached by: • Tankers purchasing from GWCL metered bulk supply points for tankers • Vendors purchasing from tankers and GWCL domestic supply points Tankers have to be licensed and are members of one of 3 tanker associations Formal relationship between GWCL and tankers has improved its finances, expanded service. Associations have improved monitoring of QOS, but some concerns over ability to enforce collusion. Legality makes regulation easier, however. 3rd SAFIR Core Course on "Infrastructure Regulation and Reform", October 8-19, 2001.

20. Dhaka: expanding water services through intermediation: DSK • 1996 survey: 20% Dhaka population living in slum and squatter settlements • 97% do not own plot of land they reside on. Public utilities do not provide service without evidence of legal title • Dushtha Shasthya Kendra: NGO originally involved in health programs and building community organizations => emphasis on provision of water and sanitation services to poor communities 3rd SAFIR Core Course on "Infrastructure Regulation and Reform", October 8-19, 2001.

21. Dhaka: expanding water services through intermediation: DSK • DSK acts as intermediary with DWASA => organization of community for management of water points, financing (repaid by community on agreed terms), guarantor of payments for water bills. Around 30 water points in operation by 1999 • Lessons: • Need to manage impact of existing power structures within slums • Commitment of DWASA not institutional – based on individual contacts • Need to consider delinking right to utility services from land title • Community mobilization critical – but can be high cost 3rd SAFIR Core Course on "Infrastructure Regulation and Reform", October 8-19, 2001.

22. Drawbacks of relying on SSPs • Can be taken over by “mafia” and criminal elements • Price-gouging • No monitoring of quality – but in some cases • Unlikely to adhere to safety and environmental standards • If “on-sale” of network provider services, who is responsible for QOS and customer service? So there are policy and regulatory concerns 3rd SAFIR Core Course on "Infrastructure Regulation and Reform", October 8-19, 2001.

23. Implications for sector reform Key questions over policies on public funding/subsidies and entry provisions: • Entry can lead to cherry-picking – may erode ability of network provider to cross-subsidize some consumers • General subsidy fund e.g. Universal Service Fund could be developed; but needs administrative capacity to administer • Central question: which is more pro-poor: competition via entry, or cross-subsidy? Need to understand where present subsidies go, who is served => need for more analysis and information than available at present 3rd SAFIR Core Course on "Infrastructure Regulation and Reform", October 8-19, 2001.

24. Sector reform: Service expansion through SSPs Paraguay:pilot scheme to expand service to 4 peri-urban towns by channelling funds to aguateros: • Operators bid on 10 year concession (DBO) in each • Subsidy of US$150 per connection • Operators bid on lowest connection cost • Tariffs for supply fixed at local norms • Regulation of some technical standards • Some insurance for costs of repeated drilling for raw water sources • 15% of subsidy paid up front • To be funded with World Bank loan Similar pilot scheme is underway in Cambodia, again for expansion of water services 3rd SAFIR Core Course on "Infrastructure Regulation and Reform", October 8-19, 2001.

25. Implications for regulation High transactions costs in regulating small providers – benefits may not be worth costs Approaches could include: • Flexibility in quality of service rules to accommodate SSPs who provide poor with QOS they want • Focus on interconnection with network provider • Light-handed approach => don’t raise costs of doing business • Consider pros and cons of self-regulation (but can enforce cartels), setting standards and encouraging monitoring by independent bodies e.g. NGOs 3rd SAFIR Core Course on "Infrastructure Regulation and Reform", October 8-19, 2001.