Media Contacts:
Christopher Neal (202) 473-7229
Cneal1@worldbank.org
Jan Erik Nora (202) 458-4735
Enora@worldbank.org

WASHINGTON, June 14, 2004 — A new World Bank study finds that credible regulation is essential to ensure that reforms involving restructuring or privatization of infrastructure utilities such as water, power, transportation and telecommunications improve their performance and help reduce poverty.

"Getting infrastructure reform right is essential to achieving the Millennium Development Goals on reducing child mortality and empowering women," says François Bourguignon, the World Bank's Chief Economist and Senior Vice President, who directs the Bank's Development Economics department, which produced the study. "While there was probably some 'irrational exuberance' in recent years on the potential benefits of privatization, the fact is that utilities in developing countries need private financing to maintain and expand services to the poor."

The study launched at the Bank today, Reforming Infrastructure - Privatization, Regulation and Competition, cites "effective regulation"as the most critical enabling condition for getting infrastructure reform right. "Regulation that provides a credible commitment to safeguarding the interests of both investors and customers is crucial to attracting the long-term private capital needed to secure an adequate, reliable supply of infrastructure services," the report says.

Specifically, the report notes that regulatory agencies must be free of political influence, and that their decisions must be subject to review by the judiciary or oversight by another non-political entity. Regulatory processes, it urges, must encourage competition, be open and transparent, and be designed before privatization is undertaken.

Privatization has low credibility in many developing countries, the study finds, with disapproval rates over 80 percent in surveys conducted in Argentina and Peru. The report argues, however, that this dissatisfaction with privatized utilities is not due to their ownership structure, but rather to the weakness of institutions charged with regulating them.

Regulatory weaknesses explain most failed attempts at infrastructure reform and privatization in developing countries, says the report's lead author, Ioannis Kessides, a lead economist at the World Bank. "There are cases where privatization was undertaken without institutional safeguards and conducted in ways widely considered illegitimate," Kessides points out. "Privatization is no panacea, and neither is returning to the 'old ways' of wasteful, inefficient publicly-owned utilities."

Reforming Infrastructure reviews utility reform and privatization experiences in many developing and transition countries, drawing lessons aimed at helping policymakers avoid the pitfalls. It addresses the specifics of regulation and pricing to achieve an optimal balance between economic efficiency and universal service.

"A broad range of investment in infrastructure, including both public and private, is needed to achieve the Millennium Development Goals," says Nemat Shafik, the World Bank's Vice President for Infrastructure. "To get there we must clearly find ways to reverse the recent decline in private investment in infrastructure in developing and transition countries. This study reaffirms that pricing must provide investors with an incentive, but that there is also a continued need for well-designed subsidies and targeted safety nets to ensure that the poor benefit from efficiencies and gain access to vital services."

Reforming Infrastructure finds that private financing for infrastructure peaked at $130 billion in 1997, then dropped to $60 billion in 2001, due to falling stock markets worldwide, financial crises in emerging markets, and hesitancy caused by public opposition to privatization. But the old state-owned approach offers little promise, the study reports, as publicly-owned utilities in developing countries, taken together, incurred losses of about $180 billion a year in the early 1990s due to inefficiencies in water, railroads, roads and electricity — nearly as much as annual investments in those sectors.

But, even though private sector participation in infrastructure has prompted increased investment and expanded services coverage, the reality is that 1.1 billion people still lack access to safe drinking water, 2.4 billion people live without adequate sanitation, and 1.4 billion make do without electricity. To address these needs and to achieve the Millennium Development Goals, the Bank's Global Development Finance 2004 report, released in April, found that developing countries need $120 billion a year from now to 2010 in infrastructure investments in the electricity sector, and $49 billion a year up to 2015 for water and sanitation.

Reforming Infrastructure draws distinctions among sectors in identifying candidates for privatization. It singles out the telecommunications sector as providing the most compelling case for privatization and liberalization in developing countries, while power and especially water are more problematic. In the water sector, concessions and leases are recommended as more effective ways to achieve the efficiencies of competition while retaining strong public oversight.

"Many countries can benefit from careful privatization of services if they do things right and don't oversell the benefits," says Michael Klein, Vice President for the joint World Bank/IFC Private Sector Development department and IFC Chief Economist. "Regulatory oversight must be in place. The awards process must be transparent. And privatization must address the needs of the poor, particularly by extending service coverage."

A major recommendation of the report is that a key to successful restructuring of old public monopolies is "unbundling", that is, breaking down the original monopoly in various private or, possibly, public entities, within the same utility or sphere of activity that is exposed to competition.

The remaining natural monopoly components, meanwhile, should be subjected to close oversight or retained under public ownership. The study warns, however, that such unbundling, "makes the regulatory task more complex, which is likely to be a problem in environments with weak governance — as in most developing and transition economies."

The report and related materials will be available to the public on the World Wide Web on June 14 at:
http://econ.worldbank.org/
Media outlets are encouraged to use this url in their reports.