= = ~~21480 I O 7C@GA§ˇpolnt t- (3t MA3 Micro Infrastructure Bill Baker and Regulators Must Take Small Operators Seriously Sophie Tremolet Small-scale providers of infrastructure services are proving to be more Bill Baker is head of responsive than utilities to needs of poor consumers. They might be National Economic Research Associates mvater econiomics delivering water services by tanker, transport services by minivan, or o practice. SophieTremoletisa electricity through mini-grids or household solar panels. They make consultant at NERA. Bill has applied his experience of their services affordable to the poor by using cheaper technology or theprinvatization and regula- permitting flexible payment. Regulators are customarily hostile to tion of the UK. water sector incountnessuchasPeru, these alternative providers. The interests of the poor would be better Brazil, andArgentina. served if regulators treated them as valid service providers and Sophie has worked in the brought them under a regulatory umbrella. water, electricity, and health sectors, with assignments sectors, with assignments p Why poor customers choose alternative providers .-C ranginzgfrom the prinvatiza- ------.------- tion of electric utilities in P customers WVest Afnica to tariffstudies _for water comnpanies in Petu Af w Do they have access to service provided by the formal utility? I- and Argentitna. s~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~e No,[E1EL X Is the connection charge affordable? YV Is the price/qualiq package attractive? z Main utility Alternative providers provider cService Paymeo 3t ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ehooy flexibility optioosn alternative wu zr a L-- _ _ - - -- - L_ _ _ _ __- - MICRO INFRASTRUCTURE REGULATORS MUST TAKE SMALL OPERATORS SERIOUSLY Market share for small providers pipes than the main provider, not buried as deep. Small scale providers operate where traditional The Orangi Pilot Project run by an NGO in network utility providers fail to provide access at Karachi, Pakistan developed a cheap technique conditions of price and quality that satisfy the for providing low-income households with in- needs of the poor or other well-defined seg- house sanitary latrines, household sewers and ments of the population. There are many types connection to underground sewers in adjoining of such providers. Some produce services them- lanes and streets. This innovative system cost selves (small independent power producers, or $100 per household, instead of the $1000 2 water suppliers with their own wells), others buy required for installing a sewer connection in the 2 services from the main utility provider and retail traditional way and was quickly extended to con- them (vendors of water from trucks or by the nect 600,000 people in the urban area of Karachi. bucket). Their institutional structure may vary In Brazil, condominial sewers have been greatly, from community-based businesses and introduced in shanty towns as a form of lower- NGOs to commercial entrepreneurs. quality affordable sewerage system. These sewers These providers often take up a large share run througlh backyar-ds instead of the street. of the market, especially when access to main Sewers can be placed at a shallower level, and the providers is relatively low. For example, it is esti- length of sewer required to connect each house- mated that between 20 and 30 per cent of urban hold is reduced. Households receive lower qual- dwellers in developing countries buy water by ity service, because it is not a separate household the bucket, either from licensees of standpipes connection. In addition, communal coopera- owned by businessmen (as in Nairobi) or from tion for maintenance of sewers is essential, traditional water carriers. because individual connections are no longer Alternative providers have proved to be more independent of each other. responsive to the poor than main providers, Alternative providers also provide services providing services that correspond more closely needing no network, such as local electricity to their demand patterns and ability to pay. generation or cellular phones. More consumers Unlike the main providers who mostly provide in rural Kenya get electricity from household a one-size-should-fit-all service, they recognize solar cells than from the official rural electrifi- the range of circumstances and markets in cation program, which is constrained by limited which the poor might resort to alternative resources. For low power loads, this solution is providers and provide price and quality bundles cheaper than other solutions, such as grid con- to match (figure 1). nections, isolated generators, kerosene or For consumers who do not live on a service drycell batteries. network, or for those who do but cannot afford Examples of flexibility in customer service a connection, alternative providers may be the are smart cards that allow prepayment for water only option. Many alternative providers allow or power, pre-paid telephone cards, and load connection charges to be paid in installments. limiters that keep electricity consumption to Even consumers who are connected may not use affordable levels. Prepaid cellphone services the service much if high quality standards make have proved very popular with consumers and prices too high. providers. The user is assigned a number to receive calls, and can buy recharges to make Low-cost technology, high flexibility calls. He pays no connection or rental charges Some alternative providers make their service but would typically pay a higher usage fee. affordable by using low-cost technology or offer- Those who would not otherwise be able to ing lower quality than the main provider. afford or qualify for normal telephone services Others do so by offering more flexible customer can do so. Providers have lower costs because services (in particular, more flexible payment prepayment relieves them of the cost of collect- methods and low or no connection charges). ing debts. Some even introduced lower-cost pre- An example of cheap technology is the build- payment schemes, with activation costs lowered ing of sewerage systems using cheaper, shorter by 80 per cent and usage costs by 40 percent. Regulators are hostile or indifferent costs, even if this involves high operating and Regulating the quality of alternative providers is maintenance costs. A survey in the Kenyan city difficult, because they are diverse, numerous, of Onitsha found that vendors of water from and often outside the formal sector. The author- tanker trucks there seemed to be able to charge idies are often reluctant to try, hoping the alter- excessive prices. But in many other developing native providers will disappear as soon as service countries water vending seems to be a competi- from the main provider becomes accessible. The tive industry in which prices are determined by official attitude ranges from hostility (banning market forces. The survey report attributed the alternative providers, or granting an exclusive high prices in Onitsha to the fact that a project concession to the main operator) to neglect. for developing water supply, funded by the Regulation is often limited to construction World Bank, had been announced (and repeat- standards, through licensing requirements, and edly delayed) and had created uncertainty enforcement is often weak. A policy of active about future profitability of tanker truck vend- encouragement is rare. Most aspects of price ing, deterring the vendors from productivity- and quality are left to market forces, but this enhancing capital investments. means that alternative providers can be harmful Exclusion of existing alternative providers for customers' safety and the environment. also takes place when governments try to secure Some attempts at self-regulation by providers a dominant position for the main operator. are evident, possibly to enhance reputation (but Examples include concession arrangements possibly also to organize cartels). with international private providers. The con- The authorities often accuse alternative tract for the La Paz-El Alto water concession in providers of causing harm. Informal urban Bolivia specifies that new water and sewer con- transport providers are often blamed for much nections must always be in-house connections of the pollution and congestion in the cities of and gives an exclusivity agreement to the con- the developing world. Governments ban them cessionaire, which results in the elimination of repeatedly, overlooking the fact that they pro- all communal standpipes, even though they are vide an important service option for the poor. low-cost alternatives to in-house connections. By For example, the Indonesian government once contrast, in the Manila water and wastewater banned cycle rickshaws, saying they were dan- concession, such exclusivity rights were not gerous and created traffic congestion. granted to the concessionaires. Any licensed Informal providers are also accused of deliv- pre-existing private provider was allowed to ering sub-standard and dangerous services, remain in place, operating in "pockets" within such as dirty water, unsafe electrical wiring or the service area, with the concessionaire able to dangerous transport, although hard evidence compete to extend service to those areas if cus- of inappropriate quality levels being delivered tomers there are willing to pay the concession- is not easy to document, which is unsurprising aire's price. Also, for new developments within given the lack of regulation and consistent the concession area, the concessionaire can enforcement. But there is some evidence that obtain a license to supply the service only if it informal urban transport is often less safe than can do so at a cheaper price than any compet- formal transport, because drivers compete for ing third-party supplier. Non-piped suppliers customers. For example, in Delhi, private buses are not specifically regulated (they do not hold were 0.15 percent of registered vehicles in a license) but they are not banned either. 1995, but they were involved in 11 percent of Indeed, much of the population still buys water accidents. from them. When alternative providers charge high prices, official hostility is sometimes to blame. Self-regulation by association High prices can be contrived by a monopoly or Confronted with a lack of formal regulation and cartel, but they also arise because providers that in search of the advantage of signaling quality, operate under the threat of expropriation will some small private providers have chosen invest only in technologies with low capital self-regulation as a way to enhance their MICRO INFRASTRUCTURE REGULATORS MUST TAKE SMALL OPERATORS SERIOUSLY reputation and secure a consumer base. In providers evolved from being truckers a decade Benin, SIBEAU, a private firm which disposes of ago, and switched to pipe supply because it was about 60 percent of latrine waste from its local cheaper and more efficient. They are entirely area, and 10 other sewage collection firms have privately financed and appear to be more effi- formed an association to standardize collection cient than public suppliers. Government agen- viewpoint procedures and prices. cies regularly test the water, and an aguatero can Route associations play a significant role in be shut down if its water fails the test. Aguateros organizing informal urban transport markets. compete with each and with the municipal is an open forum to They exist at all levels of private urban transport water companies, which offer subsidized prices. services in the developing world, and are The issue for regulation thus becomes oneof encourage dissemination of formed to bring order and avoid inefficiencies transition between service levels: in the first private-sector led and and redundancies within a spatially defined instance, alternative providers should be market-based solutions for service area. For example, they would prohibit allowed to complement the main providers. As development. The views members from stealing customers by running possibilities for network provision increase, published are those of the ahead of the pack, a practice known as "head- alternative providers can compete with the authors and should not be running" which is very common in the develop- main provider for the supply of network services attributed to the World ing world. They would levy a fee on their best suited to customers' needs. Alternative Bank or any other affiliated members in order to finance their activities, and providers should be allowed to evolve to avoid organizations. Nor do any of hire field agents, to ensure orderly behavior at the risk that their customers arc lockcd into a the conclusions represent pick-up points, along routes and at major traffic "poverty trap." official policy of the World intersections. As income levels rise, route asso- One solution might be what is often adopted Bank or of its Executive ciations tend to be more formal. The most for privately-owned main providers: a gradual Directors or the countries developed and organized ones are in Latin tightening in minimum service standards, with they represent. America and the Caribbean, for example in some incentives placed on alternative providers Puerto Rico, Mexico City and Buenos Aires. to enter the formal sector and upgrade their To order additional copies service in the long run. For example, this could contact Suzanne Smith, Regulation of a continuum be done through giving financing facilities to managing editor, There are a number of reasons whygovernments those alternative providers that want to expand Room 19-216, prefer infrastructure services to be provided by their activities, on the condition that they The World Bank, centralized networks rather than alternative would fulfill licensing or operating quality 1818 H Street, NW, providers. Building high quality networks may requirements. Washington, D.C. 20433. be cheaper in the long term than if the network Such an approach would treat alternative has to be upgraded several times. Economies of providers as a valid long-term solution to be con- Telephon; scale and scope attached to network supply sidered in full alongside other options and to be Fax: mean that the prices of network supplies are also taken into account when designing institutional 001 202 522 3181 likely to be lower in the long run. But given that structures and regulatory mechanisms for quality Email: public funds are usually not available to develop and price. ssmith7@worldbank.org the entire network at once with the level of qual- ity required for long-term investments, alterna- tive providers must be allowed to co-exist with Printed on recycled paper the main provider and provide low-cost solu- Bill Baker (bill.baker@nera.com) and Sophie Tremolet tions at acceptable levels of quality. (sophie.tremolet@nera.corn), National Economic Research If given the chance, some alternative Associates (NERA), London. providers can consolidate into networks and provide healthy competition for the main provider. For example, there are approximately 400 aguateros in Paraguay-small private water suppliers operating their own wells and provid- ing piped water to households in areas usually not served by the public operator. These This Note is available online: www.worldbank.org/html/fpd/notesI