How can developing countries increase the poor’s access to utilities while maximising the spillover benefits? This issue of ‘Poverty in Focus’ argues that universal access to basic utilities is justified both on human rights grounds and because it is a public good with positive externalities. Where initial utility coverage is low, subsidy and cross-subsidy schemes are the best option. Where access is higher and privatisation can be considered, contracts must transfer risk to private providers. Instead of focusing on ‘public versus private’, policy debates should consider the constraints on public intervention, possible improvements, and the potential for alternative provision under a poverty reduction framework.
The many positive transaction spillover effects of access to basic utilities include the empowerment of women by reducing their burden of unpaid work. Access for the poor is difficult, however, as they often live in areas where establishing infrastructure is physically and financially challenging. Communities with the least access to basic utilities live in slum dwellings and remote areas.
The overall evidence is that privatisation of utilities is not a solution where initial access is low and the objective is the coverage of the poor. This is because of problems associated with affordability and regulatory capacity. However, where access is already high in developed and middle-income countries, privatisation may yield productive and dynamic efficiencies.
- Rapid urbanisation and informal settlements pose particular problems for water provision. Privatised network utilities face planning and development challenges and small-scale service providers struggle to overcome pricing and quality issues; the expansion of the public water and sanitation network is needed.
- The focus of utility provision in Sub-Saharan Africa has been to transfer investment, demand and currency risks to governments and end users in order to attract private investors. This always results in exorbitant tariffs and neglected infrastructure, and often in contract cancellations and renationalisation.
- In Brazil, however, private participation in the water sector has been successful – partly because contracts transferred investment risk to the providers and clearly outlined providers’ investment obligations.
- Provision by community and small-scale water providers usually results in high prices, inadequate maintenance, concerns over quality, and lack of accountability for service interruption. It is not easy to regulate such providers, nor to engage in cross-subsidy.
- Increasing the poor’s access to basic services can be organised successfully by public initiatives. The persistent challenge of public provision is financing investment outlays. The options are reducing system losses such as water leakages; improved billing; domestic resource mobilisation; and external financing (both donor and private bond/equity financing).
The debate on private versus public provision of utilities is complex, but the guiding principle for the kind of provision preferred must be the initial level of access to water, sanitation and electricity. Key lessons are that:
- Where there are low levels of initial access, cross-subsidy schemes can be designed so that all consumers benefit, with the poor covering the variable cost and making some contribution to fixed costs. Income-based targeting schemes, for instance, with a mix of some consumption-, age and geography-based targeting of beneficiaries, can be sustainable.
- Decentralised and locally-based utility provision has been promising in the electricity sector, facilitating access for geographically isolated communities. In Brazil, local renewable energy-generating services using photovoltaic, small-scale hydropower and biomass sources have become viable solutions.
- Where initial access to utilities is high and privatisation is considered, better contract design is needed so that risk is transferred to private providers, not to governments and consumers. A human rights framework must guide the design and implementation of private provision based on the principles of availability, accessibility, acceptability and quality.
- Utility provision can only succeed if effective regulatory and institutional capacities are put in place to enforce contracts and ensure the efficiency of cross-subsidy mechanisms.
