toolkit: approaches to private participation in water services module 4 setting upstream policy
TRANSCRIPT
Toolkit: Approaches to Private Participation in Water Services
Module 4
Setting Upstream Policy
Introduction:
Navigating through this E-Learning Module This is one of 9 Toolkit e-learning Modules. Each Module is created in PowerPoint, and you advance through the Module by pressing the right arrow or ‘Enter’ button. Core Module: The Module takes you sequentially through four or five major issues, depending on the Module. The progress through the Module is shown by the colored area on a logo on the top right hand corner of each slide. Here is an example: Supplementary Content: The Core module covers all key issues. However, you can choose to access additional information. These supplementary slides can be accessed by passing the cursor over colored buttons. The button colors relate to issues of various levels of detail:
Navigation through the supplementary material is also by pressing the right arrow or ‘Enter’ button. At the end of each section you will return automatically to the core Module. However, there is an extra button (to pass over) on the top right hand of each supplementary page that gives you the option of a shortcut back to the core Module:
Basic Concept Detail
Expert insight
Supplementary Information / Case studies
Back to Module
E-learning design: [email protected]
Elements of the Toolkit
TOOLKITTOOLKIT
1ConsideringPrivate Participation
2Planning the Process
5Standards, Tariffs, Subsidy, Financials
4Setting Upstream Policy
3Involving Stakeholders
6Responsibilities & Risks
7Developing Institutions
8Designing Legal Instruments
9Selecting an Operator
Additional MaterialCD-ROM
Appendix BPolicy Simulation
Model
Appendix AExamples of PP Arrangements
General Outline of Toolkit
TOOLKITTOOLKIT
1ConsideringPrivate Participation
2Planning the Process
4Setting Upstream Policy
3Involving Stakeholders
6Responsibilities & Risks
7Developing Institutions
8Designing Legal Instruments
9Selecting an Operator
Additional MaterialCD-ROM
Appendix BPolicy Simulation
Model
Appendix AExamples of PP Arrangements
Module 4
5Setting Service
Standards, Tariffs, Subsidies &
Financial Arrangements
Module 4
Setting Upstream Policy
Module 4 - What will we learn?
Management Contract for
Jordan Valley Authority,
Irrigation Water Supply, may be
the first of its kind.
How do we DEFINE an appropriate
Market structure
for the Water Sector?
What are the
Responsibilitie
s of other
levels of
Government?
How do we IDENTIFY the level of Government to be responsible for water services?
COMPETITION – how can we establish it?
Module 4 Setting Upstream Policy
Identify the Reform
Leader (Module 2)
SETTING UPSTREAM POLICY
In this Module we look at the issues that Governments need to address to set Policy upstream from the design of the Private Participation Arrangement
This involves three broad topics
These steps do not need to be considered in sequence, as the results are often examined simultaneously as the reform strategy develops
Introduce Private Participation
ALLOCATE Responsibilities to different
levels of Government
DETERMINE Market Structure
ESTABLISH Competition Rules
Allocate Responsibilities Step 1 – Examining existing
3 Steps - ALLOCATE Responsibilities to different
levels of Government
Step 3 DECIDE Which levels of Government responsible for tariff setting ,
environmental issues etc.
Step 2. DECIDE Which level of Government should
be responsible for water service provision
3 Steps - ALLOCATE Responsibilities to different
levels of GovernmentStep 1. EXAMINE
Responsibilities under current law & institutional arrangements
In many countries, responsibilities for water services are spread between two or three levels of government. For Example
Federal states, like India, the constitution may assign roles to regional or state government, with some responsibility with central governmentLocal governments may be involved in reform at national levelEven in non-federal states the division of responsibility may not be clear
Example: Jamaica – service provision is at national level, with small systems and standpipe payments at local level. However, legal and financial relationships between utility and local government is not clearly defined. [See also Brazil case study]
“Systems can work well with distributed responsibilities, but introduction of private participation has to be done with care so as the change in roles does not cause conflict.”
“The first step is to identify current responsibilities of each level of Government, the legal and constitutional basis for these, and to identify any unclear areas”
Allocate Responsibilities at different Government Levels
ALLOCATE (In 3 Steps)Responsibilities to different
levels of GovernmentStep 1. EXAMINE
Responsibilities under current law & institutional arrangements
Step 2. DECIDE Which level of Government should
be responsible for water service provision
Step 3 DECIDE Which levels of Government responsible for tariff setting ,
environmental issues etc.
CREATE LEGAL INSTRUMENTS
These have to :
Be clear
Allocate appropriate responsibilities
Allocate adequate powers to each level of Government
Note:
This subject is covered in Module 8
“Dividing up the responsibilities for water services is a three step process, ………”“,……… then we need to set up the legal & institutional framework”
In this section we look at a three step ALLOCATION process:
Current legal responsibilities and institutionsDecide which level of Government to be responsible for water servicesDecide level of Government responsible for issues such as tariff setting, quality and managing water resources. Create legal instruments that allow this to happen, and adequate power to each level of Government
Allocate Responsibilities Step 1 – Examining existing
3 Steps - ALLOCATE Responsibilities to different
levels of Government
Step 3 DECIDE Which levels of Government responsible for tariff setting ,
environmental issues etc.
Step 2. DECIDE Which level of Government should
be responsible for water service provision
ALLOCATE (In 3 Steps)Responsibilities to different
levels of GovernmentStep 1. EXAMINE
Responsibilities under current law & institutional arrangements
“The first step is to identify current responsibilities of each level of Government, the legal and constitutional basis for these, and to identify any unclear areas”
Example: Question of Responsibility in Brazil
Allocate Responsibilities Step 2 – Choose Level
“ Generally the tier of Government ( local, provincial or federal) responsible for water delivery should also be the Contracting Authority with the Private Operator”
3 Steps - ALLOCATE Responsibilities to different
levels of Government
Step 2. DECIDE Which level of Government should
be responsible for water service provision
Step 1. EXAMINE Responsibilities under current law
& institutional arrangements
Step 3 DECIDE Which levels of Government responsible for tariff setting ,
environmental issues etc.
Although the tier of government responsible for water services should generally be the Contracting Authority, many factors influence the choice of tier:
Need for collective choice mechanism: in order to set an equitable service level and tariff, best if control is at a local level, representing the area of service.
Different capacities at different levels of government: Provision of water services needs specialized technical and commercial skills that may be in short supply, and perhaps only available at national level.
Economies of scale: It may be more efficient to have a single service provider serving several towns and villages rather than a number of smaller providers.
Dilemma of regional water storage and transmission networks: These may cut across several local areas. It may be possible to separate regional transmission systems from local distribution systems.
Allocate Responsibilities Step 2 – Choose Level
“ Generally the tier of Government ( local, provincial or federal) responsible for water delivery should also be the Contracting Authority with the Private Operator”
ALLOCATE (In 3 Steps)Responsibilities to different
levels of Government
Step 2. DECIDE Which level of Government should
be responsible for water service provision
Step 1. EXAMINE Responsibilities under current law
& institutional arrangements
Step 3 DECIDE Which levels of Government responsible for tariff setting ,
environmental issues etc.
Example: Economy of Scale -Small towns in France
Step 3 DECIDE Which levels of Government responsible for tariff setting ,
environmental issues etc.
Allocate Responsibilities Step 3 – ‘External’ issues“ Institutions and rules need to be set up to monitor performance, regulate contract obligations, set tariffs and regulation and compliance with relevant laws and codes
(e.g. environmental , water resources etc.)”
ALLOCATE (In 3 Steps) Responsibilities to different
levels of Government
Step 3a DECIDE Which levels of Government responsible for tariff setting ,
environmental issues etc.
Step 1. EXAMINE Responsibilities under current law
& institutional arrangements
Step 2. DECIDE Which level of Government should
be responsible for water service provision
Step 3b ESTABLISH
Regulatory regimes and institutions
Allocate Responsibilities Step 3a – Monitoring/Tariffs
“ Central Government can monitor contract performance and set tariffs. Difficulties may arise when Municipalities or states take on this responsibility”
3 Steps - ALLOCATE Responsibilities to different
levels of Government
Step 2. DECIDE Which level of Government should
be responsible for water service provision
Step 1. EXAMINE Responsibilities under current law
& institutional arrangements
Step 3 DECIDE Which levels of Government responsible for tariff setting ,
environmental issues etc.
In the case of municipalities or states there are three options for allocating responsibility for monitoring operator performance and adjusting tariff and quality controls:
Assign functions to the level of Government where services are provided: Example: municipal contract supervision units for municipal contracts
Establish a National Regulator:Even if services are provided at municipal level, with responsibility for monitoring performance and adjusting tariff and quality controls.
Spread functions among various levels of Government:The level to depend on who is best to perform particular functions.
Step 3 DECIDE Which levels of Government responsible for tariff setting ,
environmental issues etc.
Allocate Responsibilities Step 3 – ‘External’ issues“ Institutions and rules need to be set up to monitor performance, regulate contract obligations, set tariffs and regulation and compliance with relevant laws and codes
(e.g. environmental , water resources etc.)”
ALLOCATE (In 3 Steps) Responsibilities to different
levels of GovernmentStep 1. EXAMINE
Responsibilities under current law & institutional arrangements
Step 2. DECIDE Which level of Government should
be responsible for water service provision
Step 3b ESTABLISH
Regulatory regimes and institutions
Allocate Responsibilities Step 3b – Regulators
“ A Regulatory institution or arrangement needs to be set up to monitor contract performance and set the tariffs.
3 Steps - ALLOCATE Responsibilities to different
levels of Government
Step 2. DECIDE Which level of Government should
be responsible for water service provision
Step 1. EXAMINE Responsibilities under current law
& institutional arrangements
Step 3 DECIDE Which levels of Government responsible for tariff setting ,
environmental issues etc.
There is a need to decide what are the best Regulatory arrangements, and at what level of Government it should be established. Should it be at national, state or local level?
LOCAL or NATIONAL REGULATION? THE ISSUES:
Local Governments:
Close to customer. If acts as both contracting authority and regulator avoids coordination problems.
Local decision makers may have less capacity and knowledge of comparative data
National Regulators:
Has capacity and experience to act for all service providers in the country. Example: OFWAT in England & Wales
There may be coordination problems. Local government may feel national regulators infringe on their power. Some countries had problems where powers duplicated at national and local level.
Allocate Responsibilities Step 3b – Regulators
“ A Regulatory institution or arrangement needs to be set up to monitor contract performance and set the tariffs.
3 Steps - ALLOCATE Responsibilities to different
levels of Government
Step 2. DECIDE Which level of Government should
be responsible for water service provision
Step 1. EXAMINE Responsibilities under current law
& institutional arrangements
Step 3 DECIDE Which levels of Government responsible for tariff setting ,
environmental issues etc.
There is a need to decide what are the best Regulatory arrangements, and at what level of Government it should be established. Should it be at national, state or local level?
National or Local Regulation:A compromise?
Allocate Responsibilities Step 3b – Regulators
“ A Regulatory institution or arrangement needs to be set up to monitor contract performance and set the tariffs.
3 Steps - ALLOCATE Responsibilities to different
levels of Government
Step 2. DECIDE Which level of Government should
be responsible for water service provision
Step 1. EXAMINE Responsibilities under current law
& institutional arrangements
Step 3 DECIDE Which levels of Government responsible for tariff setting ,
environmental issues etc.
There is a need to decide what are the best Regulatory arrangements, and at what level of Government it should be established. Should it be at national, state or local level?
Different mechanisms and Regulators for different tasks. Some of the key tasks include:
Contract monitoring & tariff setting Example: municipal contract supervision units for municipal contracts
Environmental protection:It is possible for services to be provided at municipal level, with responsibility for monitoring performance and adjusting tariff and quality controls.
Allocate Responsibilities Step 3b – Regulators
“ A Regulatory institution or arrangement needs to be set up to monitor contract performance and set the tariffs.
3 Steps - ALLOCATE Responsibilities to different
levels of Government
Step 2. DECIDE Which level of Government should
be responsible for water service provision
Step 1. EXAMINE Responsibilities under current law
& institutional arrangements
Step 3 DECIDE Which levels of Government responsible for tariff setting ,
environmental issues etc.
There is a need to decide what are the best Regulatory arrangements, and at what level of Government it should be established. Should it be at national, state or local level?
Different mechanisms and Regulators for different tasks. Some of the key tasks include:
Contract monitoring & tariff setting Example: municipal contract supervision units for municipal contracts
Environmental protection:It is possible for services to be provided at municipal level, with responsibility for monitoring performance and adjusting tariff and quality controls.
Water resource management:The level to depend on who is best to perform particular functions.
LOCAL or NATIONAL REGULATION?:
ENVIRONMENT PROTECTION & WATER RESOURCE MANAGEMENTRules on Environmental Protection and Water Resource Management are particularly important to a private operator, since governments tend to be stricter with private operators than with Government utilities on compliance with environmental standards.
Poor overall water resource management may bring additional costs
Example: Illegal groundwater abstractions may deplete resources so much that the Operator has to develop new sources to meet obligations
Example: Upstream discharges may pollute and increase treatment costs, when increased discharge rules would be more effective
New regulatory arrangements need to be in place before Private participation. A dedicated Water Resource institution is best the arbitrate between competing water users. The Model of River Basin Agencies, originated in France, is finding increasing favor throughout the world, where typically they represent the interests of all water users, and are financed through charges on abstraction and discharge.
DetermineMarket Structure
DETERMINE Market Structure
“ Market Structure refers to the number of service providers and their responsibilities. There are three main market structure models
Horizontal Structure Interaction between providers at the
same level on the value chain
Vertical Structure Interaction between providers at
different levels on the value chain
Cross Sector StructureLimits on ownership or other
affiliations between water utilities and companies in other sectors
Once Market Structure has been chosen, Government will have to decide what areas of privatization will be sought, and in what sequence:
Example: If an existing utility is divided into a bulk supply company and a distribution company, should private participation be invited in both
parts?
Existing Market Structure is maintained in many cases, in order to minimize disruption and transition costs. However it may be better to consider a range of market options (as described in this section)
It is better to make any changes before introduction of Private Participation
Market Structure:Horizontal
DETERMINE Market Structure
“ Horizontal structures relate to service areas – and this section looks at decisions on selecting service areas”
Horizontal Structure Interaction between providers at the
same level on the value chain
Vertical Structure Interaction between providers at
different levels on the value chain
Cross Sector StructureLimits on ownership or other
affiliations between water utilities and companies in other sectors
Horizontal Structure Interaction between providers at the
same level on the value chain
HORIZONTAL STRUCTURE
Deciding on Service Areas
The options range from having a single provider responsible for the whole country, to allowing every town and village to have its own provider, and, in between, various groupings of rural and city areas.
Various issues are considered:
Environmental and Technical factorsImpact on Service EfficiencyAdministrative boundaries & collective choiceFinancial attractiveness and capacityTransaction Costs
‘Technical & Environmental coordination can either be by awarding all responsibility to a single entity, or by ensuring adequate contracts or rules related to coordination’
Capital City
Secondary Town
Provincial Center
Town
Village A
Village B
Village C
Village D
Village E
Village F
BOUNDARY
BOUNDARY RIVER
Bulk Supply
Treatment Plant
Transmission Pipe
Reservoir
Transmission
Horizontal Structure:Environmental & Technical
ENVIRONMENTAL & TECHNICAL FACTORS:
Configuration of Existing NetworksLeast Cost technical solutions to improve supply
Single Utility?
When areas are served by a single network (like Capital City and Villages C & D in the example) there may be an argument for a single utility covering this area
Single Utility?
When areas are served by a single network (like Capital City and Villages C & D in the example) there may be an argument for a single utility covering this area
Least - Cost Technical Options?
If the best technical and financial scheme involves a scheme serving several areas, there may be an argument for a single provider serving the whole area
Least - Cost Technical Options?
If the best technical and financial scheme involves a scheme serving several areas, there may be an argument for a single provider serving the whole area
‘Technical & Environmental coordination can either be by awarding all responsibility to a single entity, or by ensuring adequate contracts or rules related to coordination’
Capital City
Secondary Town
Provincial Center
Town
Village A
Village B
Village C
Village D
Village E
Village F
BOUNDARY
BOUNDARY RIVER
Bulk Supply
Treatment Plant
Transmission Pipe
Reservoir
Transmission
Horizontal Structure:Environmental & Technical
ENVIRONMENTAL & TECHNICAL FACTORS:
Configuration of Existing NetworksLeast Cost technical solutions to improve supplyWater Resources issue
Common resource?
If areas compete for the same resource (for example abstracting from the same reservoir as Capital City and Provincial Center) it may make sense to have a single provider to resolve conflict
Common resource?
If areas compete for the same resource (for example abstracting from the same reservoir as Capital City and Provincial Center) it may make sense to have a single provider to resolve conflict
“Empirical research shows economies of scale in water services”
Capital City
Secondary Town
Provincial Center
Town
Village A
Village B
Village C
Village D
Village E
Village F
BOUNDARY
BOUNDARY RIVER
Bulk Supply
Treatment Plant
Transmission Pipe
Reservoir
Transmission
Horizontal Structure:Service Efficiency
Economies of Scale?
As more customers are added to the service, generally the unit cost drops. This can be important in small towns and villages that lack the scale to employ specialist managers and staff
There are limits to this. Utilities that are too large become difficult to manage
Economies of Scale?
As more customers are added to the service, generally the unit cost drops. This can be important in small towns and villages that lack the scale to employ specialist managers and staff
There are limits to this. Utilities that are too large become difficult to manage
“Aspects of water services provided by a network are the same for most customers ”
Capital City
Secondary Town
Provincial Center
Town
Village A
Village B
Village C
Village D
Village E
Village F
BOUNDARY
BOUNDARY RIVER
Bulk Supply
Treatment Plant
Transmission Pipe
Reservoir
Transmission
Horizontal Structure:Administrative boundaries
Collective Choice?
Customers need a collective way to decide on key service issues.
Using local government boundaries can give a democratic voice in this matter
However, technical considerations may dictate a larger service area, and then some way of coordinating responses between administrative areas is a good idea
Collective Choice?
Customers need a collective way to decide on key service issues.
Using local government boundaries can give a democratic voice in this matter
However, technical considerations may dictate a larger service area, and then some way of coordinating responses between administrative areas is a good idea
“Grouping areas together may increase the financial attractiveness”
Capital City
Secondary Town
Provincial Center
Town
Village A
Village B
Village C
Village D
Village E
Village F
BOUNDARY
BOUNDARY RIVER
Bulk Supply
Treatment Plant
Transmission Pipe
Reservoir
Transmission
Horizontal Structure:Financial Attractiveness & Capacity
Financially Attractive?
Operators, particularly the large international companies, may have large fixed marketing costs. This gives a preference for the larger projects where these costs can be absorbed.
However once established in a large urban center, there may be scope for further expansion to surrounding towns, peri–urban, and rural areas, to benefit from efficiency of private participation.
Grouping poor areas, or less developed areas, with wealthy ones is a way to attract private operators to serve poorer areas, allowing cross subsidization, and meeting social goals. Care must be taken to ensure that the overall project is still attractive to the Operators.
Financially Attractive?
Operators, particularly the large international companies, may have large fixed marketing costs. This gives a preference for the larger projects where these costs can be absorbed.
However once established in a large urban center, there may be scope for further expansion to surrounding towns, peri–urban, and rural areas, to benefit from efficiency of private participation.
Grouping poor areas, or less developed areas, with wealthy ones is a way to attract private operators to serve poorer areas, allowing cross subsidization, and meeting social goals. Care must be taken to ensure that the overall project is still attractive to the Operators.
“The costs of changing market structure can be substantial”
Capital City
Secondary Town
Provincial Center
Town
Village A
Village B
Village C
Village D
Village E
Village F
BOUNDARY
BOUNDARY RIVER
Bulk Supply
Treatment Plant
Transmission Pipe
Reservoir
Transmission
Horizontal Structure:Transaction Costs
Transaction costs need to be included in any Trade-off analysis between alternative options.
Aggregation or disaggregation may require transfer of assets, liabilities and staff. To carry out these transfers an inventory of assets is needed, and technical issues need to be addressed
Example: It may be technically difficult (and costly) to completely separate two systems previously joined, and physical transfers (each with a transaction cost) will still have to be carried out for each area
Transaction costs need to be included in any Trade-off analysis between alternative options.
Aggregation or disaggregation may require transfer of assets, liabilities and staff. To carry out these transfers an inventory of assets is needed, and technical issues need to be addressed
Example: It may be technically difficult (and costly) to completely separate two systems previously joined, and physical transfers (each with a transaction cost) will still have to be carried out for each area
“The costs of changing market structure can be substantial”
Capital City
Secondary Town
Provincial Center
Town
Village A
Village B
Village C
Village D
Village E
Village F
BOUNDARY
BOUNDARY RIVER
Bulk Supply
Treatment Plant
Transmission Pipe
Reservoir
Transmission
Horizontal Structure:Transaction Costs
Benefits & CostsIncreasing Size & Scope
Horizontal Structure:Common Issues
“National Utilities – Metropolitan Utilities – Rural Areas”
This section gives access to additional information on common issues:
Pros & cons of a National Utility
Considerations in the case of a Metropolitan or Municipal Utility
Ensuring service provisions in rural service areas & small towns
National Utility: Ghana
Metropolitan Utility: Manila
Metropolitan Utility Buenos Aires
Small towns:Franchising Examples
Market Structure:Vertical
DETERMINE Market Structure
“ Vertical structure relates to the provision of water services from Source to Tap and beyond. There is the possibility of unbundling these water service components”
Horizontal Structure Interaction between providers at the
same level on the value chain
Vertical Structure Interaction between providers at
different levels on the value chain
Cross Sector StructureLimits on ownership or other
affiliations between water utilities and companies in other sectors
Vertical Structure Interaction between providers at
different levels on the value chain
Vertical Market Structure:The Value Chain
“The various Water Services components can be shown as items on a Value Chain”
Water Abstraction
Sludge
Treated Water
Treatment
Customers
Treatment Disposal
Transport
Distribution
Collection
Discharge
‘Unbundling’
‘Unbundling’ is the where items on the value chain are given to separate service providers.
More typical in the electricity sector, but still feasible in the water sector
‘Unbundling’
‘Unbundling’ is the where items on the value chain are given to separate service providers.
More typical in the electricity sector, but still feasible in the water sector
“Unbundling , or vertical separation, has to be done with care related to the horizontal structure issues as well as the value chain ”
Capital City
Secondary Town
Provincial Center
Town
Village A
Village B
Village C
Village D
Village E
Village F
BOUNDARY
BOUNDARY RIVER
Bulk Supply
Treatment Plant
Transmission Pipe
Reservoir
Transmission
Vertical Structure:Unbundling
Unbundling – An Example:
If responsibility for serving Capital City is separated from responsibility for supplying Villages C & D, issues of vertical separation follow.
One option would be to separate reservoir and pipelines from distribution services, resulting in 4 separate providers:
1 Bulk Supply Business: Reservoir and pipelines3 Distribution businesses: Capital City, Villages C& D
Of course, this is only one option.
Unbundling – An Example:
If responsibility for serving Capital City is separated from responsibility for supplying Villages C & D, issues of vertical separation follow.
One option would be to separate reservoir and pipelines from distribution services, resulting in 4 separate providers:
1 Bulk Supply Business: Reservoir and pipelines3 Distribution businesses: Capital City, Villages C& D
Of course, this is only one option.
VERTICAL SEPARATION IN THE WATER SECTOR
Here are four typical examples of ‘unbundling’ used in the water sector:
Wastewater separated from Water Supply.
Bulk Water Production & Treatment separated from Water Distribution.
Wastewater Treatment & Discharge separated from Collection
Water Transmission separated from Distribution
“When deciding whether to vertically separate services, consider several issues: ”
Vertical Structure:Unbundling Issues
The current structure of the sector
How to ensure quality of service
Planning investment
Where new investment or management is needed
Taking advantage of scale and scope
Managing payment risk
Managing scarce water resources
Promoting decentralized decision making
“The issues and solutions will be specific to the particular case ”
“When deciding whether to vertically separate services, consider several issues: ”
Vertical Structure:Unbundling Issues
The current structure of the sector
How to ensure quality of service
Planning investment
Where new investment or management is needed
Taking advantage of scale and scope
Managing payment risk
Managing scarce water resources
Promoting decentralized decision making
“The issues and solutions will be specific to the particular case ”
More Detailed Analysis of Unbundling Issues
Example: Senegal Sewage & Water Unbundling
Market Structure:Cross Sector
DETERMINE Market Structure
“ It is possible for water services to be provided jointly with other utility services (for example power or gas). The issue is whether they should be separated or combined”
Horizontal Structure Interaction between providers at the
same level on the value chain
Vertical Structure Interaction between providers at
different levels on the value chain
Cross Sector StructureLimits on ownership or other
affiliations between water utilities and companies in other sectors
Cross Sector StructureLimits on ownership or other
affiliations between water utilities and companies in other sectors
Market Structure:Cross Sector - benefits
“ Grouping services can offer benefits…….”
Possible benefits of grouping services together include:
Economies of scope
Reducing payment risk
Financial sustainability and cross subsidy
Market Structure:Cross Sector - Benefits
“ Grouping services can offer benefits…….”
Possible benefits of grouping services together include:
Economies of scope
Reducing payment risk
Financial sustainability and cross subsidy
More Detailed Analysis of Cross Sector Benefits
Example: Gabon & Morocco
Market Structure:Cross Sector - Disadvantages
“ ……Grouping services can also pose disadvantages”
Possible disadvantages of grouping services together include:
Problems in cost allocation and tariff setting
Competitive distortions
Loss of management focus
Market Structure:Cross Sector - Disadvantages
“ ……Grouping services can also pose disadvantages”
Possible disadvantages of grouping services together include:
Problems in cost allocation and tariff setting
Competitive distortions
Loss of management focus
More Detailed Analysis of Cross Sector Disadvantages
Establish Competition Rules
ESTABLISH Competition Rules
“ Market structure is likely to evolve based on the rules established for competition as defined at the time of the Transaction”
Competition for the Market
Competition via Capital Markets
Competition in the Market
Competition:For the Market
ESTABLISH Competition Rules
“ Competition for the Market consists of re-bidding private sector contracts at regular intervals”
Competition via Capital Markets
Competition in the Market
Competition for the Market Competition for the Market
Issues:Rebidding is an efficient way of maintaining competitive pressure to provide high quality service at reasonable price: because the contractor risks losing the contract at the next bid stageTypically long term contracts (up to 50 years): necessary for the contract to mimic competition – such as price controls, based on competitive comparisonsShould firms be encouraged to bid for several projects?
Firms can bid for several contracts; increase demand, spread overhead cost and benefit from economies of scale If firms are allowed to expand without limits, it may develop into a monopoly, making difficult for new entrants at re-bid stage.
The issue of maintaining competition may limit the number of contracts an operator may be allowed to win, to prevent a monopoly.
Example: Metro Manila – operators were not allowed to win both of the two Concessions for this major urban area
In most developing countries, however, it may be necessary to allow operator to develop their demand base to gain economies of scale.
This was the case in France where consolidation has happened over several years, reducing competition
This was the case in France where consolidation has happened over several years, reducing competition
Competition:via Capital Markets
ESTABLISH Competition Rules
“ Competition via Capital Markets occurs when Operators can purchase their competitors through buying shares on the Financial Markets, or through mergers”
Competition for the Market
Competition via Capital Markets
Competition in the Market
Competition via Capital Markets
Issues:
Threat of Purchase: maintains competitive pressure on Operators, and an incentive to maintain the company’s financial health
When does this occur?: when company’s shares can be bought and sold ( often for service providers, more restricted for asset owning companies
Mergers & Acquisitions: Governments may want to restrict mergers and acquisition, as this would have similar issues to allowing a company to win multiple contracts, including difficulties of establishing competitive service benchmarks
Example: Mergers have been prevented in the UK water Services market to ensure sufficient Operators remain for comparative competition [See Box 4.9]
Competition:via Capital Markets
ESTABLISH Competition Rules
“ Competition via Capital Markets occurs when Operators can purchase their competitors through buying shares on the Financial Markets, or through mergers”
Competition for the Market
Competition via Capital Markets
Competition in the Market
Competition via Capital Markets
Issues:
Threat of Purchase: maintains competitive pressure on Operators, and an incentive to maintain the company’s financial health
When does this occur?: when company’s shares can be bought and sold ( often for service providers, more restricted for asset owning companies
Mergers & Acquisitions: Governments may want to restrict mergers and acquisition, as this would have similar issues to allowing a company to win multiple contracts, including difficulties of establishing competitive service benchmarks
Example: Mergers have been prevented in the UK water Services market to ensure sufficient Operators remain for comparative competition [See Box 4.9] Example:
UK Capital Market
Competition:In the Market
ESTABLISH Competition Rules
“ Competition in the Market is when Operators are free to enter and offer services in a Market. More usual in consumer goods market, more difficult to organize in Water
Services market”
Competition for the Market
Competition via Capital Markets
Competition in the MarketCompetition in the Market
Exclusivity Issues: Often Exclusivity given to Operators, it limits competition, but may be needed to make the contract economic.
Liked by Operators - Protects Operator from competition and some uncertainty of future demand.
Prevents inefficient duplication of pipe networks. Helps preserve cross subsidies (since high paying customers cannot change providers)
Customers may benefit from more liberal entry policies.
May prevent small scale Alternative Providers from offering services
ALTERNATIVE PROVIDERS
Exclusivity may prevent small-scale alternative providers from offering services in areas unlikely to be connected.
Small scale Alternative Providers may be able to expand service coverage, with provision of bulk supply arrangements by the Operator.
ALTERNATIVE PROVIDERS
Exclusivity may prevent small-scale alternative providers from offering services in areas unlikely to be connected.
Small scale Alternative Providers may be able to expand service coverage, with provision of bulk supply arrangements by the Operator.
Competition:In the Market
ESTABLISH Competition Rules
“ Competition in the Market is when Operators are free to enter and offer services in a Market. More usual in consumer goods market, more difficult to organize in Water
Services market”
Competition for the Market
Competition via Capital Markets
Competition in the MarketCompetition in the Market
Exclusivity Issues: Often Exclusivity given to Operators, it limits competition, but may be needed to make the contract economic.
Liked by Operators - Protects Operator from competition and some uncertainty of future demand.
Prevents inefficient duplication of pipe networks. Helps preserve cross subsidies (since high paying customers cannot change providers)
Customers may benefit from more liberal entry policies.
May prevent small scale Alternative Providers from offering services Alternative Small Scale
Providers
Reviewing Module 4
“The Module has looked the main areas of upstream Policy that should be established before developing PP design…………”
Identify the Reform
Leader (Module 2)Introduce Private Participation
ALLOCATE Responsibilities to different
levels of Government
DETERMINE Market Structure
ESTABLISH Competition Rules
Module 4 More Information
“……..and further background information is available”
More information Setting upstream policy Market structure and competition: Ballance and Taylor 2001, Ehrhardt 2003, Ehrhardt and Burdon 1999, Ehrhardt and Webb 1998, PPIAF and Water and sanitation Program 2001, and Solo 1998. Service efficiency: Environmental Resources Management and others 2003 and Tynan 2003. Flexible approaches to setting quality standards: Baker and Trémolet 2000, EconOne Research and others 2003. Potential for cross-subsidization and government role: Trémolet and Neale 2002 and Trémolet and others 2002.
Supporting Material
• The Toolkit Financial Model• Toolkit Case Study material• Toolkit Website:
http://rru.worldbank.org/Toolkits/WaterSanitation/• For comments or further details contact Cledan Mandri Perrott at
Toolkit: Module 4
End of Module
Toolkit: Module 4
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