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Private Participation in Infrastructure for Poor People
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 Â Governments around the world are turning to the private sector as part of reforms aimed at raising efficiency in service delivery, attracting investment, and reducing the financial burden on the public sector. Consumers stand to gain as costs are reduced, coverage expands, and government expenses are freed up for other needs. Ensuring the poor benefit from reforms requires that contracts, regulations and tariffs are carefully designed.
 | |  | | 1. Process issues | | | | Choosing a reform option | This stage of the process is concerned with setting out the objectives of reform and choosing the best form of PPI. Fundamental decisions are made about risk sharing. The decision about the best PPI option is fundamentally about the sharing of risk between the public and private sectors. Where the private sector's scope of responsibilities is large,and total revenues form the basis for remuneration, it assumes a relatively large degree of risk. While it will expect to be compensated, usually in the form of a higher potential profit, so too will the government as it anticipates greater efficiency gains and investment. There are other arrangements that place a greater share of risk on the government, but here the expected gains are lower. | | Detailed design of reform elements | A framework of incentives is developed. This stage of the process concerns the establishment of an incentive framework-one that encourages the private sector to contribute to the objectives set out in the previous stage. How is this done? Service providers are granted a set of rights, and in exchange make commitments to achieve specific goals and comply with rules. Incentives for compliance are built in, and backed up by specific processes for dealing with contingencies and disputes. Regulatory institutions are designed to put this into practice. | | Tendering | The goal at this stage is to select a private sector partner through a competitive process, and to reach the best possible agreement prior to the award of a contract. A number of specific actions are taken, which may vary according to the government's own procurement rules (or those of a multilateral agency). They usually involve these basic steps:... | | Maintenance and cancellation | Efforts to ensure transactions are pro-poor do not end once a private operator has been selected. When a contract becomes effective, regulators and other actors must follow through to ensure the full range of PPI goals are met. This means reviewing relevant performance indicators, and evaluating the impact of reform on the poor. |
| | | | 2. Reform topics | | | | Market structure | Traditionally, most infrastructure services were assumed to involve "natural" monopolies in which a single firm supplies the market at lower cost than two or more firms. To sustain this structure-and transfer cross-subsidies between different categories of users-governments have controlled market entry by creating legally-sanctioned monopolies. This takes the form of a single enterprise that is integrated vertically and horizontally, and which has an exclusive right to provide services across a given area. | | Contract design | At a fundamental level, contract design is about the allocation of responsibilities and risks between the public and private sectors. There are three main characteristics of contracts that determine this allocation. | | Regulatory system design | A sound regulatory framework is central to PPI and will often determining if reforms succeed or fail. Every regulatory framework has three distinct but interrelated elements: | | Subsidy design | Overall efficiency gains achieved through PPI reforms will go a long way in making services more affordable. However, to ensure the poorest are able to afford a minimum quantity of services it may be necessary to introduce a system of subsidies. Designing a subsidy scheme for infrastructure services involves a number of choices and tradeoffs. The main objectives are to: | | Involving stakeholders in the reform process | A range of stakeholders have a legitimate interest in the impact of reform. By involving them in the process, governments can better anticipate their concerns while building support for arrangements that benefit the poor. Such partnerships can also yield valuable information about market structure, consumer preferences and other aspects of reform. Some groups may offer insights on labor issues, others on ways of bettering procurement processes. Whatever, form it takes, stakeholder involvement is important throughout the reform process, from initial exchanges on reform options to the design and implementation of transactions. |
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