Pro-Poor Design of Projects involving

Private Sector Participation

in Infrastructure

KfW PPP WorkshopJagdschloss Niederwald

13:15 – 15:15Thursday

4th September 2003

Katalyst Solutions

Overview

Introduction Katalyst teamFocus of work for KfWThe 3 stages of infrastructure assistance

Designing pro-poor PSP

Get the facts on the groundInformal providers & market structureTariffs and subsidiesNon-monetary barriersAccess to financeRegulation and contract design

Implementation & Monitoring

Making it workLearning 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

Finance Skills & Efficiency

Structure

Traditional Public/Development Bank Lending

Technical assistance

Exclusive franchise

PSP Private capital

Profit motive Exclusive 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• Didn’t 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?

AspirationsWhat improvements do people want?

How much will they pay? [Market Research]

Negombo, Sri Lanka

Social impact model

Information on: Coverage Reliability

Quality

Household of particular type

Information on sunk cost coping

strategies

Information on current cost

coping strategies

Information on other costs

associated with given coverage, reliability and

quality

MODEL PREDICTED EFFECTS OF CHANGES

IN COVERAGE, RELIABILITY QUALITY

Information on the distribution of income (and

other proxies of welfare)

MODEL PREDICTED WELFARE EFFECTS OF

TARIFFS AND TARGETS

Information on willingness to pay

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 providersReality Legal / policy

position

•LagosWater

70% of population served by water truckers

PSP strategy focused on concession to extend formal connections

•PhilippinesRural Electrification

Co-ops have exclusive franchises.20% of households unconnected

300+ small private operators are illegal

•Former Soviet Union Most public transport now provided by private minibuses

Govt focus still on trams and metros

Recommendations

• Don’t – • 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

-

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

- 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000

GDP per capita (PPP)

Mo

bile

ph

on

es (

per

100

peo

ple

)

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 OldStyle

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 recovery The poor are valuable customers

Government Output-based aid

Subsidy paid only for service for the poor

Non-tariff barriers

BarriersCapital constraints Can’t manage large infrequent

payments. Need to be able to control billCan’t finance connectionsNo bank account

Lack of legal title Customer can’t offer securityOperator may not be allowed to supply

Illiteracy Can’t read bills, or customer informationCan’t complain effectively

Physical constraints Utilities offices are far from poor communities

Power / fear Status gap, harassment, intimidation

Overcoming non-monetary barriers

•PhilippinesRural 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 needsResponses• Appropriate on-lending vehicle• Guarantees

Traditional v. Output-based aid

GovernmentDevelopment agency

Subsidy fund

Operator Target customer

Connects / serves

Monitors Pays per output

Debt service

Regulation and contract design

Contract embodies policyTopic[Incumbent]

Traditional Pro-poor

Coverage Additional connections per year

Add:- Micro-geo targets- Use of small providers- Tariff + subsidy = incentive

Tariffs Average cost + lifeline block

Make poor profitable:- Tariff + subsidy = cost + profit

Billing Every 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 worldResponse to complaints

- Targetted to customer- ‘Better than before’- Outreach

Topic Traditional Pro-poor

Whole-sale supply /

Interconnection

Not provided for Required:- Reasonable prices- Convenient points

Small providers Not allowed

or

Regulated like incumbent

Light-handed:

Safety, environmental – partnership approach

Tariffs – rely on competition?Gradual, minimal, recognise risk and need for profitsRecognise 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