O U B L I C    P                                           O L I C Y    F   O R    T H  E            JUNE 1999
Privesecetor
_ 4 | | | -~~~~~19690
5  A Scorecard for Encrgy Refo m
in Developing Countries
Robert Bacon
13 Private Participation in the
Transmission and Di st but on
of Natural Gas-Recen T ends
Ada Karmna Izaguirre
21 Regulation in New Natural Gas
-Markets-The Northern Ireland
Experience
Peter Lebmann
25 Mitigating Currency Convertibility
Risks in High-Risk Countries-
A New IDA Lending Approach
Karen Rasmussen
29 Checks and Balances in Utility
Regulation-The U.K. Experience
Richard Green
36 The 1996-97 Gas Price Review
in Argentina
Andres Gomez-Lobo and Vivien
Foster
43 Expanding Water and Sanitation
Services to Low-Income
Households-The Case of the
La Paz-El Alto Concession
Kr'istin Komives and Penelope I
Brook Cowen
47 Management Contracts in Water-
and Sanitation-Gaza's Experience
Jamal Sagbir, Elisabeth Sherwood,                                                                                            -Z
and Andrew Macouin
51 Private Participation in the Rail
Sector-Recent Trends
Nicola Tynarn
59 Rail and Subway Concessions
in Rio de Janeiro-Designing 
Contracts and Bidding Processes
Jorge i. Rebelo
LW4                      ~~~~~~The World Bank Group   m  Finance, Private Sector, and infrastructure Network



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Dear Readers,
The first Note in this volume shows that despite the hype about the private power industry, privati-
zation, competition, and the implementation of sustainable regulation are barely under way in the
majority of developing and transition economies. Power reform is most advanced in Latin America
and the Caribbean.
Two Notes provide data and analysis from the Bank's Private Participation in Infrastructure Project
Database. The first reviews natural gas transmission and distribution projects. Among other things, it
shows that divestitures and greenfield projects are more common than operations and management
projects and that export-oriented projects are starting to emerge. Investments in private natural gas
transport projects totaled nearly US$19 billion in 1990-97. Reviewing the rail sector, the second Note
shows that here operations and management contracts are more common than greenfield projects or
divestitures. Investments in private railway projects for the same period totaled US$14 billion.
Compare these totals with US$131 billion in power (see December 1998 issue) and US$24 billion in
water (September 1998 issue).
The volume also includes:
* lThree case studies illustrating actual or potential problems with the design of contracts for private par-
ticipation-a management contract for water in the Gaza Strip, a water concession for the neighbor-
ing cities of La Paz and El Alto in Bolivia, and subway and suburban rail concessions in Rio de Janeiro.
X Two case studies examining measures to mitigate risk in natural gas projects.
* Two case studies showing approaches used to deal with some of the complexities of regulating
private monopolies: methods applied in the United Kingdom to ensure that regulators do not abuse
their power, and the process for periodic price reviews in the gas transport industry in Argentina.
One of the first in developing countries, the Argentine review could be a trend setter.
Suzanne Smith
Managing Editor



Privatesector
Quarterly No. 17, June 1999
A Scorecard for Energy Reform in Developing Countries    5
A NWorld Bank survey of 115 developing countries shows that on average in mid-1998 just 39 percent of key energy
reform steps had been carried out. Only the upstream oil and gas sector shows a substantially higher degree of
reform, largely because of the need to facilitate concession agreements for high-cost exploration and production.
Private participation in energy is also fairly limited, as is privatization of existing assets-especially in Sub-Saharan
Africa and the Middle East and North Africa. There are large variations among countries in the number of reform
steps taken, with most reforms concentrated in a small number of countries. Reform is most advanced in Latin
America and the Caribbean. In the great majority of countries little or no reform has been done.
Private Participation in the Transmission and Distribution of Natural Gas-Recent Trends    13
Between 1990 and 1997 twenty-six developing countries introduced private participation in the transmission
and distribution of natural gas. This Note, which draws on the NWorld Bank's Private Paiticipation in Infrastructure
(PPI) Project Database, provides an overview of the patterns and trends in the projects in these countries. The
form of private participation varies-ranging from greenfield projects to export natural gas from Algeria to
Europe or to create a natural gas distribution market in Mexico to the privatization of existing assets in Argentina
and Hungarv. During 1990-97 the private sector took on the operations or construction risk of seventy-seven
natural gas transport projects, with investments totaling US$18.9 billion.
Regulation in New Natural Gas Markets-The Northern Ireland Experience    21
So far gas market liberalization has generally occurred in mature markets-particularly where much of the
pipeline system has already been laid, as in Argentina, Britain, and the United States. In these cases a compet-
itive structure is appropiiate. In new markets, however, it may be difficult to introduce a competitive regime
from the outset, and a different approach and form of regulation, such as a period of exclusive licenses, may
be needed. In 1997 the Northern Ireland authorities awarded Phoenix Natural Gas an exclusive license for a
limited period to develop a new gas market from scratch in the greater Belfast area. This Note explains the
rationale for a period of exclusivity and describes Northern Ireland's approach to gas market regulation.
Mitigating Currency Convertibility Risks in High-Risk Countries-
A New IDA Lending Approach    25
A proposed Currency Convertibility Fund, backstopped by a contingent credit from the International Development
Association (IDA)-the NWorld Bank's concessionary window for the world's poorest countries-has been designed
for the Songo Songo Gas Development and Power Generation Project in Tanzania. The fund is a transitional mech-
anism aimed at supporting the Tanzanian government's efforts to attract foreign equity in circumstances where
the private sector perceives a high level of risk and is otherwise unwilling to invest. The fund may be a replica-
ble mechanism that, by mitigating sovereign risks that investors are unwilling to bear and unable to hedge against,
could help catalyze foreign equity investment in other IDA countries and in projects that generate local currency.
Checks and Balances in Utility Regulation-The U.K. Experience    29
In the United States the courts have long been involved in the oversight of regulators. In the United Kingdom,
which created its utility regulators from scratch in the 1980s, an alternative system was sought. This system cen-
ters on three concerns: the procedure followed by the regulator, the substance of the decisions, and the accept-
ability of the decisions to the public. Three main institutions have oversight roles: the Competition Commission



(formerly the Monopolies and Mergers Commission), parliamentary select committees, and the courts. This Note
reviews the roles of these institutions.
The 1996-97 Gas Price Review in Argentina    36
This gas transport and distribution price review is of interest for several reasons. First, it is the first of its kind
in Argentina, and one of the first in a developing country. The outcome of the process provides a test of the
regulatory framework adopted by the Argentine government, and may influence regulatory reform in other
parts of the world. Second, as the first such event, the 1996-97 review set a precedent for methodologies and
approaches to be used in future utility price reviews in Argentina. Finally, the approach used to calculate the
cost of capital-as well as the other parameters used to set prices-provide an interesting illustration of how
theoretical and practical methods from regulatory practice in industrial countries can be adapted to develop-
ing countries, where data availability and other restrictions prevent a direct transfer of techniques.
Expanding Water and Sanitation Services to Low-income Households-
The Case of the La Paz-El Alto Concession    43
Bolivia's first major contract for private participation in the water sector was implemented in 1997. This was a
,wenyt-five-year concession for the neighboring cities of La Paz and El Alto. To date the La Paz-El Alto con-
cessionaire has met its service expansion obligations. But certain features of the contract could make it unnec-
essarily difficult to achieve the broad objective of universal service-as well as unnecessarily painful for some
households. This Note explains why.
Management Contracts in Water and Sanitation-Gaza's Experience    47
In 1996 a management contract was awarded to help the local government service providers and the Palestinian
WVater Authority improve water service. Since the contract became active, water quality has improved, water
losses have fallcn, and consumption and rcvcnues have increascd. Despitc the improvcd performancc, the
management contract has illustrated some of the limitations of this approach to private participation in water
supply. This Note reviews the contract design and discusses the lessons.
Private Participation in the Rail Sector-Recent Trends    51
The 1990s have marked the reemergence of private railway operation in developing countries after half a cen-
tury of nationalization and public sector management. By the end of 1997 the governments of fourteen devel-
oping countries had transferred varying degrees of responsibility for railway operation to the private sector. In
these countries private companies entered into a total of thirty-seven new contracts for the operation and man-
agement of railways. This Note uses the World Bank's PPI Project Database to analyze what has happened in
the rail sector since 1990.
Rail and Subway Concessions in Rio de Janeiro-Designing Contracts and Bidding Processes    59
In early 1995 the Rio de Janeiro state government began reforms aimed at selling or concessioning to the pri-
vate sector loss-making state-owned enterprises. This Note describes the concessioning of Rio's subway. the
Metro. in December 1997 and its commuter rail service, Flumitrens, in July 1998. The reforms were expected
to eliminate subsidies for the Metro and reduce them by two-thirds for Flumitrens, to improve service, and to
clear the backlog of maintenance and investment.



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Cover illustration by Ruth                                     Xa                                                                            i
Sofair Kotlnter.. f?~ ~ 4~~   ItJ0 U.~J~~                                                                                                                     _
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5
A Scorecard for Energy Reform
in Developing Countries
Robert Bacon
Only a handful of developing countries have fully reformed their energy sectors-oil, gas, and power.    The scorecard was
produced by a project
A World Bank survey of 115 developing countries shows that on average in mid-1998 just 39 percent         funded by the World Bank
and United Nations
of key reform steps had been carried out. Only the upstream oil and gas sector shows a substantially      Development Pro
gramme's Energy Sector
higher degree of reform, largely because of the need to facilitate concession agreements for              ManagementAssistance
Programme. The longer
high-cost exploration and production. Private participation in energy is also fairly limited, as is       paper on which this Note
is based is forthcoming
privatization of existing assets-especially in Sub-Saharan Africa and the Middle East and North           and will be available from
the World Bank at
Africa. There are large variations among countries in the number of reform steps taken, with most         202 458 2321 (telephone)
or esmap@worldbank.org.
reforms concentrated in a small number of countries. Reform is most advanced in Latin America and         The paper includes
scorecards for each
the Caribbean. In the great majority of countries little or no reform has been done.                      country.
TABLE 1   ENERGY REFORM INDICATORS BY REGION, 1998
Percentage of maximum
Region                                                                                                Average
East Asia and the Pacific           41         47             38             58           21             41
Europe and Central Asia             45         44             36             45            45            43
Latin America and the Caribbean     71         50             63             24            33            53
Middle East and North Africa        17         43             11             17            27            23
South Asia                          50          50            50             44            27            46
Sub-Saharan Africa                  15          59            31             24            20            32
All regions                         34          49            38             35            32             39



6                       A Scorecard for Energy Reform  in Developing Countries
Sector reform  scores                                        each sector because the coverage differs among
them.
The survey of energy reform covered the power,
upstream  oil and gas, and downstream  oil and               Energy sector reform  requires a number of facil-
gas sectors (box 1). Oil and gas pipelines and               itating steps, but the final goal is to introduce pri-
power transmission were omitted from  the sur-    vate ownership where possible and competition
vey if they had already been separated from  the             in the parts of energy industries that are not nat-
rest of the sector. For each sector the survey cov-          ural monopolies, with  monopolistic  elements
ered  only countries that have the  sector and               being regulated.
where it has not been entirely under private
ownership for the past ten years; sectors that    The average reform  indicator for all sectors is
have been under private ownership for ten years              around 35 percent, except for upstream  oil and
are not considered part of the current reform                gas, where it is nearly 49 percent (table 2). These
movement. The results are given separately for    figures indicate that, at the global level, many
The World Bank surveyed energy reform in 115 coun-     freely set, since almost all countries have some pri-
tries to see what steps had been taken and what mile-  vate retail gasoline outlets.
stones achieved in this process. The first four survey   All the survey questions could be answered yes or
questions asked about reform steps that enable pri-    no, making it possible to give precise values to the
vate capital investment in a sector that was previously  number of steps taken. Each yes scored one and each
owned by the state. The last two questions asked       no scored zero, giving a maximum of six for a sector
whether private capital had entered the sector. The    when all the questions were answered positively. The
six questions are:                                     number of steps actually taken, expressed as a percent-
1. Has the utility been commercialized and             age of this maximum, is termed the reform indicator.
corporatized?                                          For several reasons the data presented in this Note
2. Has parliament completely passed a law that         understate what remains to be done:
allows the energy sector to be unbundled or priva-     The survey asked whether there was any private
tized in part or in whole?                             participation, so even a small asset or share sale
3. Has a regulatory body that is separate from the util-  would be counted as a yes and given the same
ity and from the energy ministry started work?         weight as complete divestiture.
4. Has the core state-owned utility been               * All countries were treated as equally important in
restructured?                                          the questionnaire, so different countries with some
5. Is there any private investment in greenfield sites,  privatization received the same weight regardless
either in operation or under construction?             of the size of the sector.
6. Has any of the public utility been privatized?      * Some countries have many regions, so success in
The questions about downstream oil activities dif-     one region (for example, in one state in India)
fered slightly from those for power and upstream oil      counts as success for the entire country. In reality,
because refining was separate from wholesale and         the other states may be far from reform.
retail functions. For refining the survey asked about    The reform indicator was calculated for each
private greenfield investment, but for retail and      sector, for each country, for the aggregate of the
wholesale functions it asked whether prices are        countries in the sample, and for each region.



The World Bank Group                        7
TABLE 2    ENERGY REFORM STEPS BY SECTOR
Percent
Sector and  II:   full U
'sample size
Power, 115 countries        44        33          29          35          40         25       n.a.        34
Upstream oil and gas,
49 countries               67        69          31          43          69         14       n.a.        49
Downstream gas,
55 countries               60        40          40          35          27         27       n.a.        38
Downstream oil
(refining), 57 countries   54       n.a.        n.a.        n.a.         23         28       n.a.        35
Downstream oil (wholesale
and retail), 72 countries  43       n.a.        n.a.        n.a.       n.a.         28        25         32
n.a. Not applicable.
a. Though not among the six main reform steps for the other sectors, freeing retail prices is considered crucial to reform of downstream oil activities.
steps still have to be taken before the fullest   tured through vertical and horizontal separation.
gains from  private involvement in the energy    Private greenfield  investment could  then  be
sector can be realized.                              allowed. Finally, existing assets should be priva-
tized. Thus the first and most common step is cor-
The higher level of reform activity in upstream oil   poratization and commercialization of the state
and gas is significant because there is often fierce    enterprise, and the final and least common step is
government opposition to private sector entry in    privatization of existing assets (see table 2). In
this sector. But a distinguishing feature of upstream  power and upstream  oil and gas a much larger
oil and gas activities is that the cost of exploration    percentage of countries have permitted private
and development, especially of offshore oil, can    investment than have introduced formal regula-
be very large, and the risks very great. In cases    tion or restructured the industry. Such countries
where the state cannot take on the financing    appear not to be preparing for privatization and
burden, private finance is often recognized as   the creation of competitive markets. Rather, they
essential and is allowed through the use of con-    appear to be augmenting the existing system by
cessions. Such concessions may require that laws    admitting private investment on new sites, prob-
be changed and state enterprises restructured, but    ably selling to the state enterprise through some
in few cases have countries been willing to priva-    type of contract. The small portion of countries
tize existing upstream oil and gas assets.          that have privatized energy assets confirms this
interpretation, especially for upstream oil and gas.
There is a logical sequence to reform steps if a
country is working toward full private sector par-    Comparing reform  across countries
ticipation and competition, and the survey results
were expected to show this pattern. First, the state    For the most part reform has spread very unevenly
company must be corporatized and commercial-    across countries, with upstream oil and gas expe-
ized. Next, a law permitting private entry must be    riencing the most even pattern (table 3). In power
passed. Then regulation must be implemented.    more than a third of the 115 countries in the sam-
After that the state enterprise should be restruc-    ple had taken none of the six reform steps. The



8                     A Scorecard for Energy Reform in Developing Countries
TABLE 3    NUMBER OF COUNTRIES BY FULL EXTENT OF ENERGY REFORMS
a- N
Power                                  42      15       16       12        8        10       12
Upstream oil and gas                    5       4        7       15        12        3        3
Downstream gas                         12      12        8        6         7        8        2
Downstream oil (refining)              24      14       11        8      n.a.      n.a.     n.a.
Downstream oil (wholesale and retail)   32     21        9       10      n.a.      n.a.     n.a.
n.a. Not applicable.
Note:This table shows that in power, for example, only twelve countries have taken all six steps, and fifteen have taken only one step.
TABLE 4    COUNTRIES IN EACH REGION TAKING KEY REFORM STEPS IN POWER
Percent
I  ii            I       . N; i                i
Corporatization               44          63          61          25          40          31
Law                          33           41          78          13          40           15
Regulator                     11          41          83           0          40           8
Independent power
producers                   78           33          83          13         100          19
Restructuring                44           52          72          38          40           8
Generation assets
divested                    22           37          39          13          40           4
Distribution assets
divested                    11           30          44          13          20           4
Reform indicator              41          45          71          17          50           15
Note: Numbers in parentheses are the number of countries in each region's sample.
10 percent most reforming countries accounted           ferences among regions. The results show  that
for 30 percent of the reform steps that had been        power reform  is much more advanced in Latin
taken. This pattern suggests that reform  is not a    America and the Caribbean than in other regions:
uniform  process, but rather that it proceeds    71 percent of the key reform  steps have been
rapidly when conditions are favorable-and does    taken, compared with 15 percent in Sub-Saharan
not even start when conditions are unfavorable.         Africa and 17 percent in the Middle East and North
Africa (table 4). But even in Latin America and the
Comparing reform  across regions                        Caribbean only 40 percent of countries have
started to privatize existing generation or distrib-
The country data were grouped by the World    ution assets-while in Sub-Saharan Africa the cor-
Bank's regional classifications to highlight the dif-    responding figure is just 4 percent.



The World Bank Group                       9
TABLE 5   COUNTRIES IN EACH REGION TAKING KEY REFORM STEPS
IN UPSTREAM OIL AND GAS
Percent
Reform step           II' I
Corporatization            80          65         63         80          33         73
Law                        60          65         63          60         67         91
Regulator                  40          24         50          0          33         36
Restructuring              60          29         25         40         100         55
Concessions                40          65         63         80          67         91
Privatization               0          18         38          0           0          9
Reform indicator           47          44         50         43          50         59
Note: Numbers in parentheses are the number of countries in each region's sample.
TABLE 6   COUNTRIES IN EACH REGION TAKING KEY REFORM STEPS
IN DOWNSTREAM GAS
Percent
Reform step  EhIlEhIll Eu
Corporatization           100          59         56         50         100         33
Law                        50          33         78          0          67         33
Regulator                  25          41         78          0          33         33
Restructuring              25          30         56          17         67         33
Investment                 25          22         56          0          33         33
Privatization               0          33         56          0           0         17
Reform indicator           38          36         63         11          50         31
Note: Numbers in parentheses are the number of countries in each region's sample.
The regional picture for upstream oil and gas is    mercialized and laws permitting private entry to
very different from that for power. The average    be passed. Still, only one Sub-Saharan country
indicator for all regions is around 50 percent, and    has been willing to privatize upstream  oil and
for Sub-Saharan Africa it is nearly 60 percent   gas assets.
(table 5). In African countries where there is
upstream production there has been an almost   In  downstream  gas Latin  America  and  the
universal willingness to allow  private conces-    Caribbean has again seen the most activity, with
sions, which are associated with the need for    all steps being taken equally often, including pri-
state oil companies to be corporatized and com-    vatization (table 6). Other regions have done little



10                   A Scorecard for Energy Reform in Developing Countries
TABLE 7   COUNTRIES IN EACH REGION TAKING KEY REFORM STEPS
IN DOWNSTREAM OIL (REFINING)
Percent
Corporatization            75          59         45         33          67         55
Investment                 50          32          9          0          33         18
Privatization              50          45         18          17         33          0
Reenrm indicator           58          45         24          17         44         24
Note: Numbers in parentheses are the number of countries in each region's sample.
TABLE 8   COUNTRIES IN EACH REGION TAKING KEY REFORM STEPS
IN DOWNSTREAM OIL (WHOLESALE AND RETAIL)
Percent
_                                                           s~~~~~~~~~~~~~I
Corporatization            50          50         36         40          60         29
Privatization               0          42         18         40          20         24
Free prices                13          42         45          0           0          6
Reform indicator           21          45 :    33            27          27         20
Note: Numbers in parentheses are the number of countries in each region's sample.
to allow private investment on greenfield sites    existing in every country, in some 37 percent of
and almost nothing to privatize existing assets.    countries the sector had involved private partic-
ipation for at least ten years. In countries where
The reform  effort in refining is notably low in   this had not been the case the willingness to pri-
Sub-Saharan Africa, the Middle East and North    vatize was generally low, especially in Latin
Africa, and Latin America and the Caribbean    America and the Caribbean and East Asia and the
(table 7). Thus in Latin America and the Carib-    Pacific (table 8). As with refining, many countries
bean there has been less enthusiasm for privati-   in Europe and Central Asia privatized wholesale
zation of refining than for privatization of power,    and retail functions. In some regions down-
upstream  oil and gas, and downstream  gas. In    stream   wholesale  and  retail  oil  activities
Europe and Central Asia, where many countries    appeared to be viewed as a strategic sector that
have domestic refining capacity, a large propor-   the government was unwilling to sell, while in
tion have privatized these assets.                  Europe and Central Asia governments have been
willing to  divest themselves of this under-
The downstream wholesale and retail oil sector    performing sector. This contrasts with the pattern
is very different from the other sectors. Besides    in the upstream oil and gas sector, where Latin



The World Bank Group                  11
TABLE 9   COUNTRIES THAT HAVE ALLOWED PRIVATE INVESTMENT THAT HAVE TAKEN
OTHER REFORM STEPS
Percent
Sector                  fmf                          l                 Privatization
Power
Countries with
independent power
producers                  63          57         50          57           50
All countries               44          33         29          35           25
Upstream oil and gas
Countries with
concessions                74          79         38          50           18
All countries               67          69         31          43           14
Downstream gas
Countries with private
investment                 80          67         67          67          60
All countries               60          40         40          35           21
Downstream oil (refining)
Countries with private
investment                 92         n.a.       n.a.        n.a.         62
All countries               54         n.a.       n.a.        n.a.          28
n.a. Not applicable.
America and the Caribbean has the highest pro-   either to operate successfully. The same argu-
portion of privatization and all other regions   ment applies to other energy sectors with respect
have virtually no privatization.                to private entry into greenfield investment.
Does private investment encourage               To test whether governments that were willing
other reforms?                                  to allow private investment in new projects were
also willing to undertake other reform steps, the
In the early days of reform one strategy advo-   relationship between these steps was calculated.
cated for the power sector was to encourage the    For example, forty-three countries have inde-
entry of independent power producers. This   pendent power producers, and of these 57 per-
approach was considered less problematic for   cent have passed a privatization law (table 9).
government because it did not involve the sale of   Among the complete power sample of 115 coun-
national assets or the immediate labor shedding   tries, thirty-eight (33 percent) had passed a pri-
that a private owner might require. It was hoped    vatization law. Thus countries that have admitted
that independent power producers would set a    independent power producers have been more
good example for the rest of the sector and even-   ready to take other reform steps.
tually force other players to become more effi-
cient and privatize assets. If that were to happen    In power, downstream gas, and refining countries
the sector would ideally need a law permitting   that have allowed private investment are more
private entry and a regulator-even though inde-   likely to have taken other reform steps, including
pendent power producers, when governed by    privatization of existing assets. The difference in
long-term take-or-pay contracts, do not require   the reform  indicator between countries with



12                   A Scorecard for Energy Reform in Developing Countries
TABLE 10 REGIONS WITH PRIVATE INVESTMENT AND PRIVATIZATION OF ASSETS BY SECTOR
Percent
Power
Independent power producers                 40        78        33        83        13      100         19
Privatization                               25        33        41        50        13       40          6
Upstream oil and gas
Concessions                                 69        40        65        63        80       67         91
Privatization                               14        0         18        38         0        0          9
Downstream gas
Private investment                          27        25        22        56         0       33         33
Privatization                               27         0        33        56         0        0         17
Downstream oil
Private refinery investment                 23        50        32         9         0       33         18
Refinery privatization                      28        50        45        18        17       33          0
Wholesale privatization                     28         0        42        18        40       20         24
All sectors as a share of
maximum (weighted)
Private investment                          40        48        38        53        23       58         40
Privatization                               24        17        36        36        14       19         11
private investment and all countries is about 20    new private investment in the sector (table 10).
percentage points for power and 30 percentage    Though there are large regional differences, even
points for downstream  gas and refining. In   in  the  two  regions with  the  most reform
upstream oil and gas the picture is quite differ-    experience-Latin America and the Caribbean
ent. The presence of a concession is associated    and Europe and Central Asia-just 36 percent of
with only a slight increase in the likelihood of    countries have allowed existing energy assets to
having taken most other reform steps, and with    be privatized. In East Asia and the Pacific, the
almost no increase in the likelihood of having pri-    Middle East and North Africa, South Asia, and Sub-
vatized existing assets.                            Saharan Africa this figure is around 15 percent. In
all regions except Europe and Central Asia there
How far has reform  gone?                           is a notable difference between the willingness to
permit private participation in greenfield sites and
Commercialization  and  corporatization, legal   the willingness to privatize existing assets.
reform, regulation, and restructuring are all cru-
cial to energy reform. But by themselves these    Robert Bacon (rbacon@worldbank.org), Oil
four steps do not bring about the improvements    and Gas Division
sought. To secure those improvements, countries
must also take the next two steps: allowing pri-
vate investment and privatizing assets. Only 24
percent of countries have privatized existing
energy assets, and only 40 percent have allowed



13
Private Participation in the Transmission and
Distribution of Natural Gas-Recent Trends
Ada Karina Izagztirre
The 1990s have seen a significant increase in pri-    structure has been prompted not only by the    The World Bank's Private
vate participation in the transmission and distri-    acceptance of private participation in infrastruc-    Participation in
Infrastructure (PPII
bution (transport) of natural gas in developing         ture, but also by public sector budget constraints,    Project Database covers
countries, Until 1990 private participation in the                                                               private participation in
construction and ownership of natural gas trans-    Between 1990 and 1997 twenty-six developing    infrastructure in
developing countries.
port facilities in these countries was limited to a    countries introduced private participation in the    The database compiles
few isolated cases. The increasing participation        transmission and distribution of natural gas (figure    information on
of the private sector in gas transport has resulted     1). This Note, which draws on the World Bank's    privately owned or
managed electricity,
mainly from  a growing demand for new  gas    PPI Project Database, provides an overview of the    telecommunications,
transport facilities coinciding with a growing          patterns and trends in the projects in these coun-    transport, water, and
consensus in favor of private participation in    tries. The database covers only projects that trans-    natural gas transmission
infrastructure. The increasing demand for gas    port natural gas to end users; captive pipelines    anddistribution projects
transport facilities has been driven by the strong      owned by private upstream  gas producers and             natural gas projects that
growth in energy demand, discoveries of impor-    condensate operations are not included (box 1).   reached financial closure
betwveen 1990 and 1997,
tant natural gas fields, and concerns about the    The form of private participation varies-ranging              surveying regional trends
environment. Private involvement in the con-    from greenfield projects to export natural gas from              in and types of private
struction or ownership of gas transport infra-    Algeria to Europe or to create a natural gas    participation.
FIGURE 1 DEVELOPING COUNTRIES WITH TRANSMISSION AND DISTRIBUTION PROJECTS WITH
PRIVATE PARTICIPATION, 1990-97
El I project                                               / X                                 V
2-3 projects1                                                                       o 
5-11 projects                                     The boundaries, colors, denominations, and other information shown on any map in
this Note do not imply on the part of the World Bank Group any judgment on the
Source: PPI Proiect Database.                          legal status of any territory or the endorsement or acceptance of such boundaries.



14                    Private Participation in the Transmission and Distribution of Natural Gas-Recent Trends
Database coverage                                  * Operations and management contracts. The pri-
To he included, a project must have reached        vate entity takes over the management of a state-
financial closure and directly or indirectly       owned enterprise for a given period. This
serve the general public.                          category includes management contracts and
* The sectors covered are electricity, natural gas,  leases.
telecommunications, transport, and water.          Operations and management contracts with
* The period covered is 1984-97.                     major capital expenditure. A private consortium
* The natural gas sector includes two segments:      takes over the management of a state-owned
transmission and distribution. The database        enterprise for a given period during which the
excludes liquefied natural gas plants, movable     private entity also assumes significant
assets, incinerators, stand-alone solid waste     investment risk. This category includes build-
projects, and small projects such as windmills.    transfer-operate, build-lease-transfer, and build-
* The database covers developing countries, as       rehabilitate-operate-transfer contracts as
defined and classified by the World Bank, in East  applied to existing facilities.
Asia and the Pacific, Europe and Central Asia,
Latin America and the Caribbean, the Middle     Definition of financial closure. For greenfield pro-
East and North Africa, South Asia, and Sub-     jects and for operations and management con-
Saharan Africa.                                 tracts with major capital expenditure, financial
closure is defined as the existence of a legally
Definition of private participation. The private com-  binding commitment of equity holders or debt
pany must assume operating risk during the oper-   financiers to provide or mobilize funding for the
ating period or assume development and operating   project. The funding must account for a significant
risk during the contract period. In addition, the  part of the project cost, securing the construction
operator must consist of one or more corporate     of the facility.
entities with significant private equity participa-  For operations and management contracts, there
tion that are separate from any government agency.  must be a lease agreement or a contract authorizing
the commencement of management or lease ser-
Definition of a project unit. A corporate entity cre-  vice. For divestitures, the equity holders must have
ated to operate infrastructure facilities is consid-  a legally binding commitment to acquire the assets
ered a project. When two or more physical          of the facility.
facilities are operated by the same corporate entity,
all are considered as one project.                 Sources
- World Wide Web.
Project types                                      * Commercial databases.
* Divestitures. A private consortium buys an equity  * Specialized publications.
stake in a state-owned enterprise. The private  * Developers and sponsors.
stake may or may not imply private management   * Regulatory agencies.
of the company.
* Greenfield projects. A private entity or a public-  Contact. The database is maintained by the
private joint venture build and operate a new   World Bank's Private Participation in
facility. This category includes build-own-     Infrastructure Group. For more information con-
transfer and build-own-operate contracts as well  tact Mina Salehi at 202 473 7157 or
as merchant power plants.                       msalehi@worldbank.org.



The World Bank Group                     15
distribution market in Mexico to the privatization    Operations and management contracts with sig-
of existing assets in Argentina and Hungary.    nificant capital expenditure have been rare in gas
During 1990-97 the private sector took on the    transport facilities, particularly relative to the
operations or construction risk of seventy-seven    water sector.2 By 1997 only two operations and
natural gas transport projects, with investments    management contracts involving significant cap-
totaling US$18.9 billion (figures 2 and 3)1       ital expenditure had been signed. One was for
the rehabilitation and operation of the natural
The diverse development levels of the natural   gas transmission system  in Kazakhstan, The
gas sector in developing countries raise policy    other was for the expansion and operation of a
issues for private participation that are quite dif-   small distribution system in Turkey. Operations
ferent from those in other infrastructure sectors.
Except for countries in Europe and Central Asia
and a few in Asia and Latin America, most devel-     FIGURE 2  NATURAL GAS TRANSPORT PROJECTS WITH
oping countries have limited or no gas resources                PRIVATE PARTICIPATION IN DEVELOPING
or transport facilities (figures 1 and 4). Some                 COUNTRIES, 1990-97
countries have promoted private involvement in       25
existing facilities, while others have relied on the
private sector to establish new gas networks. A      20
third group of countries has no gas network-
public or private.                                   15
Although private participation in natural gas        10
transport projects has increased significantly in
recenat years, it remiainis limiited. Still, four trenids 
are evident:
* Divestitures and greenfield projects are more
common than operations andl management              0  190     19    1992   1993   1994    1995   1996    1997
contracts.
* Stand-alone  transmission  and  distribution       Source: PPI Prolect Database.
projects are more common than integrated           FIGURE 3  INVESTMENT IN PRIVATE NATURAL GAS TRANSPORT
(transmission, distribution, and  sometimes                   PROJECTS IN DEVELOPING COUNTRIES, 1990-97
production) projects.
* Export-oriented projects are starting to emerge.  1997 US$ millions
* Projects are concentrated in certain regions       5,000
and countries.
4,000
Divestitures and greenfield projects
dominate                                            3,000
Of the total investment in private gas transport    2,000
projects, about 56 percent has gone to the forty-
eight divestitures and 40 percent has gone to the     00
twenty-seven greenfield projects (figure 5). As
might be expected, divestitures have occurred in 
countries with well-developed  pipeline net-               1990   1991   1992  1993   1994   1995   1996   1997
works, while greenfield projects have occurred       Source: PPI Project Database.
mainly in countries with little or no transport
infrastructure for natural gyas.



16                    Private Participation in the Transmission and Distribution of Natural Gas-Recent Trends
FIGURE 4 WORLD GAS RESOURCES
Trillions of cubic meters
Western Europe
CIS and Central Europe
East Asia
Latin America                     0A r
<     Additional natural gas resources (total: 150 trillion cubic meters)
Proved recoverable natural gas reserves (total: 133 trillion cubic meters)
Note: CIS is Commonwealth of Independent States.
Source: Ruhrgas.
and management contracts (without capital
FIGURE 5  INVESTMENT IN PRIVATE NATURAL GAS                                 expenditure) and lease contracts have not fea-
TRANSPORT PROJECTS IN DEVELOPING                                tured as a form of private participation in the nat-
COUNTRIES BY TYPE OF PROJECT, 1990-97                           ural gas sector.
1997 US$ millions
Investments focus on stand-alone
5,000                                                                       projects
4,000                                                                       Most private investment in gas transport projects
has been concentrated in vertically deintegrated
facilities. Of the total invested, 64 percent has
3,000                                                                       been  captured  by  the  twenty-two  projects
involving the operation or construction of trans-
mission facilities (figure 6 and table 1). Most of
2,000                                                                       these projects have been in Latin America and
the Caribbean (twelve projects). Stand-alone dis-
tribution facilities, in turn, have been concen-
1,000                  l             _I              _trated in Europe and Central Asia (twenty-five)
and Latin America and the Caribbean (twenty-
one). The predominance of stand-alone projects
1990    1         1992                                                   might be explained bv increasing attempts by
1990   1991   1992   1993   1994   1995   1996   1997                government to create more competitive markets
for natural gas supply. huilding on experiences
U Divestitures E] Greenfield *  Operations and management              for  nated   supply, ang on edpStates
projects     contracts with capital expenditure       in the United Kingdom  and the United States.
Source: PPI Project Database.                                               There have been just five integrated-utility gas
projects involving private participation, and most



The World Bank Group                    17
FIGURE 6   INVESTMENT IN PRIVATE NATURAL GAS TRANSPORT
PROJECTS IN DEVELOPING COUNTRIES BY SEGMENT,
1990-97
have been in Europe and Central Asia (Latvias                     Transmission and distribution
Gaze in Latvia, Eesti Gas in Estonia, Lietuvos                             9%
Duio in Lithuania, Gazpromn in the Russian Fed-
eration, and Petronas Gas in Malaysia). Private
involvement in these projects has fallen short of
ftill private ownership.
Export-oriented pipelines emerge                       Distribution
21%
Another feature of the private participation in nat-
ural gas has been the implementation of large                                                        Transmission
export-oriented pipeline projects. The natural gas                                                   Tr_nsilsb4%
industry requires access to gas fields, which may
or may not exist in a country. Thus the develop-
ment or expansion of a domestic gas industry has
required international gas trade. Five private pipe-
line projects of this type, representing total invest-  Source: PPI Project Database.
rnent of US$4 billion, reached financial closure
between 1990 and 1997: the Yadana gas pipeline         TABLE 1   PRIVATE NATURAL GAS TRANSPORT PROJECTS
from  Myanmar to Thailand, the Maghreb gas                       IN DEVELOPING COUNTRIES BY SEGMENT,
pipeline from Algeria to Europe, the Gas-Andes                   1990-97
pipeline from Argentina to Chile, and the sections
of the Yamal gas pipeline in Belarus and Poland.                           _ _ _ _ _5 _               _      _
Among those projects, the Argentine-Chilean gas                                                 I
pipeline was the first to introduce natural gas into
a country (Chile). The project, developed bv a
fully private consortium, is part of a business plan
to develop Chile's natural gas industry.
Distribution                  50            5,013
More cross-border projects are expected to be          Transmission                  22           12,102
implemented in the next few years. In addition to      T          a      .                         1
the Bolivia-Brazil pipeline now close to comple-       Trandi               o                      1,16
tion,3 there are plans for international transmis-     Total                         77           18,876
sion pipelines in most regions. Examples include       Source: PPI Project Database.
proposals to develop pipelines from Turk-
menistan to Turkey, from Indonesia to Singapore,
from Bangladesh and Oman to India, from
Argentina to Chile and IJruguay, and from Egypt   investment in private projects in the sector
to Israel and other countries in the Middle East.    between 1990 and 1997 (table 2). Countries in
Europe and Central Asia have also been active
Investments reflect a regional and               in opening their natural gas utilities to the pri-
national concentration                           vate sector, awarding thirty-three projects repre-
senting total investment of US$3 billion during
Investment in private natural gas transport pro-   the same period. Private sector activity in other
jects is concentrated in Latin America and the    regions has been limited to a few projects.
Caribbean. Thirty-three projects have reached
financial closurc in the rcgion, mobilizing invest-   As in the electricity and water sectors, a few coun-
ments of US$9.3 billion, or 49 percent of the total   tries capture most projects and investments.4 The



18                  Private Participation in the Transmission and Distribution of Natural Gas-Recent Trends
TABLE 2    PRIVATE NATURAL GAS TRANSPORT PROJECTS IN
DEVELOPING COUNTRIES BY REGION, 1990-97
countries (Argentina, Bolivia, Brazil, Chile, Co-
lombia, and Mexico) that have developed a local
* ^  a       j;  I  L   gas industry. In most of these countries private
participation in natural gas projects has been part
of broader sector reform that has usually
East Asia and the Pacific          3,131                        included the establishment of new regulatory
Europe and Central Asia            3,087          33            frameworks and the vertical separation of the
Latin America and the Caribbean    9,274          33            sector into its three basic business units (pro-
Middle East and North Africa       3,271           2            duction, transmission, and distribution). New
South Asia                           75            3            legal frameworks in these countries have also
Sub-Saharan Africa                   40            1            required mandatory open access to pipelines for
third parties in order to promote competition in
Total                             18,878          77            natural gas markets. Argentina and Chile have
Source: PPI Project Database.                                   been the most market-oriented reformers in the
region, creating competitive market structures,
transferring investment decisions to the market,
and allowing full private ownership of transmis-
top five countries ranked by investment in pro-   sion and distribution assets.
jects involving private participation accounted for
33 percent of all projects and almost 67 percent   Most natural gas reforms in Latin America have
of total investment in 1990-97 (table 3). Among    also been a component of broader energy
those five countries, two (Argentina and Algeria)   reforms. Six of the seven countries started to
captured about half of the total investment in the    reform their natural gas sectors at the same time
sector. The list of top five countries changes sig-   that they were liberalizing their electricity sectors.
nificantly when the countries are ranked by num-
ber of projects, although the high concentration    Latin American countries have chosen different
of projects in a few countries remains (table 4).   forms of private participation depending on the
These changes in ranking can be partly explained   initial development of their natural gas facilities.
by divestiture approaches taken by the Czech    Countries with a fully developed network, like
Republic and Kazakhstan, which privatizcd their   Argentina, or with main transportation assets,
natural gas utilities through mass (voucher) pri-   like Bolivia and Brazil, have opted for divesti-
vatization schemes.                              tures. Fifteen of the seventeen divestitures in the
region are located in these three countries.
A breakdown of investment by project reveals a    Other countries with limited or no transporta-
similarly high concentration of resources in few    tion networks-such as Chile, Colombia, and
projects. The top five projects accounted for   Mexico-have focused on constructing facilities
more than 40 percent of total investment in the    through greenfield projects. The fifteen green-
sector in 1990-97 (table 5). Three of these pro-   field projects in the region are all in these three
jects were in Argentina, representing around 37    countries. More projects are expected in these
percent of the investment in divestitures. The    countries, and in others such as Uruguay and
Maghreb gas pipeline from Algeria to Europe, in    Peru, as the private sector leads the drive to
turn, accounted for 45 percent of the investment   make natural gas available to all major urban
in greenfield projects.                          centers.
Latin America and the Caribbean                  Europe and Central Asia
The private sector has been involved in the trans-   Private participation in natural gas transport in
portation of natural gas in the six Latin American    Europe and Central Asia has focused on the pri-



The World Bank Group                       19
TABLE 3     TOP FIVE DEVELOPING COUNTRIES BY
INVESTMENT IN PRIVATE NATURAL GAS
TRANSPORT PROJECTS, 1990-97
vatization of existing assets. Of the thirty-three pri-                                   Total investment
vate gas transport projects in the region, twenty-                                        in projects with
nine have been divestitures, accounting for 59                                           private participation
percent of the investment in the region. The pri-          Country                       (1997 US$ millions)
vatization mechanism has differed across coun-_
tries. Hungary sold controlling stakes to private
consortia, reflecting the priority it puts on improv-      Argentina                            6,284           10
ing the efficiency and reliability of existing assets.     Algeria                              2,570            1
The Czech Republic, Kazakhstan, and the Russian            Malaysia                             1,436            2
Federation opted for mass privatization programs.          Hungary                              1,324            7
And Estonia, Latvia, and Lithuania privatized their        Colombia                              938             5
natural gas companies by creating joint ventures                                               12,551           25
with Gazprom, Russia's partially privatized and            Total
vertically integrated natural gas company.                 Source: PPI Project Database.
Although private participation in natural gas
activities  has  increased  significantly  in  the         TABLE 4    TOP FIVE DEVELOPING COUNTRIES BY NUMBER OF
region, the new investment that has come with                         PRIVATE NATURAL GAS TRANSPORT PROJECTS,
divestitures has been minimal. The main reasons                       1990-97
appear to be low retail natural gas tariffs, which
have impaired the financial viability of natural
gas utilities, and underdeveloped legal and reg- _
ulatory frameworks.5                                                                     ii
East Asia and the Pacific
East Asian countries can be considered in two              Argentina                      11              6,284
groups. The first group comprises countries with           Kazakhstan                     11                  a
existing gas transport facilities, such  as the            Mexico                         10               604
Republic of Korea, Malaysia, and Thailand. In              Czech Republic                  8                  a
these countries (except Korea) natural gas trans-          Hungary                         7              1,324
mission  and  distribution  is still a business            Total                          47              8,211
reserved for the public sector.6 This situation mir-
rors that in these countries' electricity sectors,        a. Both countries privatized their gas utilities through mass privatization, so there is no
which remain dominated by state-owned enter-               divestiture revenue.
prises. The second group comprises countries               Source:PPI Project Database.
with limited or no gas transport facilities, such as
China, Indonesia, and the Philippines.
Private participation in the region has been    zation  proposals  in  Korea  and  greenfield
restricted to a few greenfield projects, mainly for    projects in Indonesia and the Philippines are
the construction of new transmission pipelines    implemented.
(three projects) and one small distribution sys-
tem. The only divestiture, which was partial,   South Asia
took place in Malaysia and took the form of a
public offering aimed at raising funds rather    Private participation in South Asia has been lim-
than transferring control to the private sector.   ited to three small greenfield projects to develop
This situation is expected to change as privati-    or expand distribution facilities in India. But if



20                       Private Participation in the Transmission and Distribution of Natural Gas-Recent Trends
TABLE 5   TOP FIVE PRIVATE NATURAL GAS TRANSPORT
PROJECTS IN DEVELOPING COUNTRIES, 1990-97
Conclusion
Maghreb gas pipeline from           Algeria/                                      Private participation in the transmission and dis-
tribution  of natural gas has increased  signifi-
cantly in recent years and should continue to
Transportadora de Gas del Sur    Argentina               1,939                    expand. Experiences  in  Argentina  and  Chile
Petronas Gas Sdn Bhd                Malaysia             1,265                    show  that the private sector can play the leading
Transportadora de Gas del Norte   Argentina              1,070                    role in developing or expanding the natural gas
Distribudora de Gas                                                               industry. As in other infrastructure sectors, the
Metropolinata                      Argentina             969                     key role for the government is to establish an
appropriate  enabling  environment,  including
Total                                                    7,798                    well-defined  policies  and  a  sound  regulatory
Source: PPI Project Database.                                                     framework. The  growth  in  privately  financed
and operated export projects promises to bring
the economic and environmental benefits of nat-
ural gas to a larger number of countries.
recent proposals to privatize natural gas facilities
in  India and  to  build  cross-border greenfield              I All dollar amounts are in 1997 U.S. dollars. The PPI Project
transmission   pipelines  from   Bangladesh   or                  Database records total investment, not private investment alone,
Oman to India are implemented. there should be                   in infrastructure projects involving private participation. There
were no natural gas projects involving private participation in
a significant increase in private participation in                developing countries in 1990 and 1991.
the region over the next few  years.                           2 See Gisele Silva, Nicola Tynan, and Yesim Yilmaz, "Private
Participation in the Water and Sewerage Sector-Recent Trends"
(Public Policy for the Private Sector September 1998).
Middle East and North Africa                                   3 See Peter L. Law and Nelson de Franco, International Gas Trade-
The Bolivia-Brazil Gas Pipeline" (Public Policy for the Private
Private participation in natural gas in the Middle                Sector September 1998).
4 See Gisele Silva, Nicola Tvnan, and Yesim Yilmaz, "Private
East and North Africa has focused on one export-                  Participation in the Water and Sewerage Sector-Recent Trends"
oriented  greenfield  project (the  Maghreb  gas                 (Public Policy for the Private Sector September 1998), and Ada
pipeline in Algeria) and one domestic pipeline                   Karina Izaguirre, 'Private Participation in the Electricity Sector"
(Public Policy for the Private Sector December 1998).
(Tunisia). But private participation in the region               P For a discussion on the status of natural gas reform in Europe and
should increase over the next few  years if pro-                 Central Asia see Economic Commission for Europe, "Restructuring
jects awarded in Egypt to provide natural gas to                  of the Gas Industrv in Transition Countries" (1998).
6 Most natural gas distribution facilities in Korea are owned by long-
areas with no supply and other export-oriented                   established investor-owned utlities,
pipeline proposals are implemented.
Sub-Saharan Africa                                             Ada Karirta Izaguirre (aizaguirre
@worldbank.org), Consultant, Private
Private participation in natural gas in Sub-Saharan            Participation in Infrastructure Group
Africa has been limited to one greenfield project,
the Cl-11 gas pipeline in Cote d'Ivoire. There is
also a proposal for the Nigerian government and
Chevron to build a West African gas pipeline. The
limited activitv in the region is explained mainly
by the lack of gas reserves and the limited trans-
port infrastructure in the region (except in South
Africa). Small domestic markets in most countries
have also limited the development of gas distrib-
ution infrastructure.



21
Regulation in New Natural Gas Markets-
The Northern Ireland Experience
Peter Lehmann
So far gas market liberalization has generally occurred in mature markets-particularly where
much of the pipeline system has already been laid, as in Argentina, Britain, and the United States.
In these cases a competitive structure is appropriate. In new markets, however, it may be difficult
to introduce a competitive regime from the outset, and a different approach and form of
regulation, such as a period of exclusive licenses, may be needed.' In 1997 the Northern Ireland
authorities awarded Phoenix Natural Gas an exclusive license for a limited period to develop a new
gas market from scratch in the greater Belfast area. This Note explains the rationale for a period of
exclusivity and describes Northern Ireland's approach to gas market regulation.
The Northern Ireland authorities had been eager   The economics of supplying gas to areas outside
to develop a natural gas market, both for envi-   Belfast are difficult, though better opportunities
ronmental reasons and to make the province   may develop. Indeed, in a new gas industry it
more attractive to foreign investors. Their effort  can be argued that the initial development
was triggered by the conversion to natural gas of  license should be granted only for part of a
a power plant in Northern Ireland, with com-   region or country. In that case it may be best to
missioning in 1996. The plant was owned by   develop the network as a series of regional fran-
British Gas (now BG), and the gas is transported   chises. That way, two or more licensees will be
from Britain by a subsea pipeline. This pipeline   well placed to compete in each other's areas
provided an opportunity to deliver natural gas to   once the industry matures.
homes and industry.
Monopoly in transportation
To take up this opportunity, a license for natural
gas for the greater Belfast area was granted to   The authorities accepted British Gas/Phoenix's
Phoenix Natural Gas in a tender limited to only   argument that a long (twenty-year) transporta-
one other candidate. Phoenix was originally a   tion monopoly period was needed to attract an
100 percent subsidiary of BG, though Keyspan   investor into the market. The necessary invest-
Energy now has a 24.5 percent shareholding.   ments appeared to British Gas/Phoenix to be
Phoenix was granted a combined license for  fairly marginal. Major marketing risks stemmed
transport and supply, but different approaches   from having to displace coal, liquefied petro-
were used for the two activities. An exclusive   leum gas, and oil in the residential market and
transport license lasts twenty years, but compe-   from the dependence of Phoenix on the deci-
tition in supply will be allowed after only two to   sions of a single body, the Northern treland
eight years.                                Housing Executive, the public housing authority
that owns more than a quarter of the houses in
Northern Ireland contains 600,000 households,   greater Belfast. There were also substantial tech-
with just over 250,000 in the greater Belfast area.   nical and financial risks. The authorities decided



22                Regulation in New Natural Gas Markets-The Northern Ireland Experience
that all these risks would be compounded if mul-  If Phoenix does not meet its obligations, it will
tiple infrastructure licenses were granted.   lose its exclusive license in the districts where it
fails. Thus other companies could then be
The authorities also agreed with British Gas/   granted transportation licenses.
Phoenix that a single license would have other
advantages. A single developer is more likely to   Transportation charges
develop an optimal, well-designed "backbone"
network (avoiding, for example, multiple pipes   From the outset Phoenix has maintained separate
and wires running down the same street). And a   charges for the use of the transport network by
single developer is easier to deal with in terms   gas suppliers and for the supply of gas to final
of granting approvals, planning traffic, making    customers. Until competition is introduced, the
contingency plans, and providing local authority   transport charge will simply be a transfer price
support services,                             between  Phoenix's distribution  and  supply
businesses.
Development obligations
Both Phoenix and the authorities recognized that
One of the authorities' primary goals was to   the price to final customers would have to be
secure the construction of an extensive natural   kept low for many years to persuade customers
gas pipeline system in Belfast. Thus investment   to switch to gas and that the overall costs of sup-
obligations were a key part of the license. Several   plying gas would be dominated by the transport
challenges arise when an investment program is   charges. Thus the debate over pricing focused on
expected of an exclusive licensee: how to ensure   the transport charges; the supply prices were less
that the investment takes place, what sanctions   contentious.
to put in place if it does not, and how to deal
with unforeseen circumstances.                Standard  approaches  to  setting  transport
charges are not appropriate for a new industry.
The license requires Phoenix to complete its net-   The regulatory asset base starts from  zero,
work in twelve years and to perform the work   changes rapidly, and  is unpredictable. If
in each of Belfast's twelve districts in a specific   charges are based on a return on assets, they
order, within a specified timeframe. Moreover, a   would be exceptionally high at the outset
pipeline must run within 50 meters of 90 percent   (because of low utilization) and would change
of the homes in each district. This was a much   sharply from year to year. Thus it was decided
inore detailed blueprint than Phoenix would   to set transport charges at a level that is
have liked. Phoenix argued that it already had   expected to provide an 8.5 percent real pretax
major sunk investments-in medium- and high-   return on cash flows over twenty years, with
pressure pipelines-and so had the necessary   calculations based on forecast capital and oper-
commercial incentives to connect up the maxi-   ating costs, sales levels, and mix of sales.
mum load. The detailed blueprint created a risk   Phoenix considered this return rather low given
that Phoenix will fail to meet its obligations. Two   the risks involved in the project. But there was
safeguards for Phoenix reduce but do not elimi-  some upside from the prospect of additional
nate the risk:                                transport revenue after the initial twenty-year
* The regulator can agree to changes in the   license period. The big question mark was the
order and dates of pipeline construction if  enormous uncertainty about all the forecasts.
there are good reasons for doing so.        To address this uncertainty, it was agreed that
* Phoenix does not have to lay pipes past hous-   there would be a reforecast every five years,
ing that the Northern Ireland Housing Executive   with one possible additional forecast in the ini-
had not converted to, and does not intend to   tial five-year period. Under these reforecasts the
convert to, natural gas.                    previous five years will be "water under the



The World Bank Group                 23
bridge"-that is, Phoenix will retain any gains   The scope for competition may be limited given
and bear any losses if developments differ from    the small or nonexistent margins between trans-
what was forecast. Thus there are incentives for   port and supply charges for many years. Still,
efficient and rapid market development. How-   Phoenix wanted an initial exclusivity period. The
ever, prices for the remaining period of the   company was concerned that potential competi-
license would be adjusted in light of changes in   tors would protest and that the authorities would
the forecasts so that the net present value over   take action if competition did not develop when
the remaining period, given the new forecasts,  it was permitted on paper. In the end the exclu-
would be the same as in the original net pre-   sivity periods agreed on were quite short-partly
sent value calculations.                       because the rest of the United Kingdom has com-
petitive gas markets.
One of the most controversial issues in the nego-
tiations over transport charges was how to deal   Prices to final customers
with changes in the distribution of gas sales
among market segments and with the effects of   A key challenge for the new gas industry is to
such changes on costs and average prices. In   win customers who are using competing fuels.
addressing these matters the authorities wanted   The gas industry sometimes argues that it needs
to prevent excessive profits for Phoenix, but also   neither regulation nor gas-to-gas competition
to provide incentives for rapid development of   because there is strong competition between
the network and market.                       fuels. In a mawure market with many gas cus-
tomers, interfuel competition may need to be
Competition in supply                          supplemented, especially in the residential mar-
ket. But where a gas industry is being estab-
In a mature utility industry it is generally desir-  lished, the industry's argument is valid.
able to separate the transport business and the
stupply business, as there is different scope for   Thus in Northern Ireland there is no regulation of
competition and different competitors in the two    gas prices to consumers, other than rules barring
sectors. In a developing industry, however, too    discrimination, for the first five years of the license.
strict a separation is undesirable. For example,   After that the regulator can introduce a price for-
the transport arm and the supply arm should   mula if he decides that customers' interests are not
plan an integrated rollout of the network to avoid   adequately protected by competition between
major cost inefficiencies. That process involves   fuels or within the gas market. This regulation
information sharing and cooperation that might   applies only to consumers using less than 2.2 mil-
be unacceptable in a mature industry. Moreover,  lion kilowatt-hours a year; larger industrial cus-
the cost allocations between infrastructure and   tomers are not subject to regulation of final prices.
marketing are blurred in the early days of a new
industry.                                      The license sets out extremely broad principles for
determining prices to customers if and when reg-
Phoenix will face competition in supply in domes-   ulation is introduced. Moreover, there is a provi-
tic and small industry markets (less than 2.2 mil-   sion for a ruling by the Competition Commission
lion kilowatt-hours a year) in late 2004. Given that   (formerly the Monopolies and Mergers Com-
customers are being connected gradually over the   mission) if the regulator and licensee cannot agree
eight-year exclusive license period, the average   on prices.
monopoly supply period for these customers will
be four to five years. The monopoly period is   Cooperative approach to regulation
shorter for larger industrial customers-from two
to three years, with each district opening up to   The former regulator for electricity in Northern
competition on a rolling basis.               Ireland has become the joint gas and electricity



24                  Regulation in New Natural Gas Markets-The Northern Ireland Experience
regulator. But for several reasons the common    with gas than was expected. There has also been
adversarial approach to regulation is inappropri-   a shortage of appliance retailers and, more impor-
ate in the new gas market. The uncertainty and    tant, qualified installers.
pace of change mean that the ground rules will
change rapidly-both sides need to recognize    It is still early days, hut so far it has been the mar-
this. The lack of an asset base and the absence    ket rather than regulation that has had the major
of "entrenched" high operating costs will also   impact on the development of the Northern
affect the regulator's approach. In any case the    Ireland gas industry.
normal regulatory battle-where the regulator
wants low prices and the company wants high    This Note has been prepared with the help of Gearoid Lane, Chris
profits-will likely be replaced in the early years   Miurray, and Martin Plackett of Centrica, United Kingdom.
by a major shared objective: both sides want       The European gas directive, which provides separately for emerg-
rapid penetration of the market. Furthermore, at   ing markets, recognizes this.
the initial stages the fledgling industry will be a
small or medium-size company and should not   PeterLebmann (all@lehmann.demon.co.uk),
be burdened by unnecessarily high costs of   until 1998, Commercial Director Centrica,
funding the regulator's office, staffing a big reg-   now Chairman, Energy Saving Trist, United
ulatory affairs team, and funding inquiries from    Kingdom
the Competition Commission.
Conclusion
A lack of good precedents and credible compet-
ing offers made negotiations over the gas license
unusually difficult in Northern Ireland. For good
reasons, the approach taken to choosing the
licensee was partly but not fully competitive. In
some circumstances a more competitive process
might be better. Still, the license that emerged
may be useful for anyone working on the regu-
lation of new gas industries.
In the two years since license discussions were
concluded, Phoenix has completed the initial
development of its network, meeting all regula-
tory targets and overcoming some inevitable dif-
ficulties. Moreover, Phoenix's gas prices have
been lower than was anticipated.
Still, the market has posed some tough challenges.
Competing fuel prices have been low (especially
for oil), and threatened competitors, especially in
residential markets, have fought back. The
Northern Ireland Housing Executive, which had
needed to demonstrate impartiality between fuel
suppliers, has only recently announced that nat-
ural gas is the preferred fuel. As a result fewer of
the executive's properties have been refurbished



25
Mitigating Currency Convertibility Risks
in High-Risk Countries
A new IDA lending approach
Karen Rasnit sseni
A proposed Currency Convertibility Fund, backstopped by a contingent credit from the International  This Note examines
howthe International
Development Association (IDA)-the World Bank's concessionary window for the world's poorest  Development
Association's lending
countries-has been designed for the Songo Songo Gas Development and Power Generation Project in   instruments can be
tailored to support
Tanzania. The fund is a transitional mechanism aimed at supporting the Tanzanian government's efforts   foreign equity investment
in projects that generate
to attract foreign equity in circumstances where the private sector perceives a high level of risk and is  only local currency and
for which currency
otherwise unwilling to invest. The Songo Songo power project has suffered delays since 1997 arising  convertibility insurance is
not commercially
from a dispute between the government and the Malaysian sponsors of another private power project.    available.
Now that this dispute is being resolved, preparation of the proposed Songo Songo project has resumed.
The World Bank's support for the Currency Convertibility Fund is not due to go before the Bank's board
for approval until 2000. Still, the fund may be a replicable mechanism that, by mitigating sovereign risks
that investors are unwilling to bear and unable to hedge against, could help catalyze foreign equity
investment in other IDA countries and in projects that generate local currency.
The government of Tanzania solicited private   own-operate arrangement, underpinned by a
sector interest in a project involving the con-   power purchase agreement between Tanesco
struction of a gas processing plant on Songo   and Songas. Project costs are estimated at about
Songo Island and of a 220-kilometer gas pipeline.   US$280 million (table 1). Equity investors wzould
The project also includes the privatization and   provide about USS72 million, and the govern-
conversion to gas firing of a 110-megawatt gen-   ment would contribute about US$8 million. The
erating plant owned by Tanesco, the public elec-   remaining USS200 million would be provided to
tricitv utility. The government saw significant  the government through a credit from IDA and a
advantages in a public-private partnership-with  loan from the European Investment Bank, both
a direct stake in the project, equity investors   of which would be on-lent to Songas on com-
should have a strong incentive to operate the   mercial terms. In addition, IDA would provide a
facility efficiently, and Tanzania has no expertise   contingent credit of tJS$35 million that would
in gas-fired electricity generation and so could   provide limited protection to the project sponsors
benefit from private sector technical and main-   against the risk of currency inconvertibility.
agerial expertise.
The currency problem
The project would establish Songas, a miajority
privately owned and managed gas and electricity   Private involvement in the project ran into two
utility. The project would be structured as a build-   main impediments: the unavailability of currency



26                 Mitigating Currency Convertibility Risks in High-Risk Countries
TABLE 1   PROJECT FINANCING PLAN
US$ millions
The conclusions of a World Bank study and dis-
OTC (Ocelot Energy and TransCanada                            cussions with international oil and gas compa-
PipeLines, the two private sponsors)  50        50           nies and political insurance agencies confirmed
International Finance Corporation     6           6           that foreign equity investment for the project
Commonwealth Development Corporation  6           6           would not materialize unless IDA  or other
Deutsche Investitions und                                     donors were willing to address the project's cur-
rency convertibility risk. The project's foreign
Entwicklungsgesellschaft mbH         6           6           exchange needs would be high relative to the
European Investment Bank/Tanzania                             size of the foreign exchange market. The pro-
Development Finance Corporation      4           4           ject would require the equivalent of 8 percent
IDA project loan (on-lent to Songas)      155   155           of the annual volume of foreign exchange trans-
European Investment Bank loan                                 acted in the market.
(on-lent to Songas)                       45    45           The World Bank Group examined the instru-
Government                                  8     8           ments it had available to encourage equity invest-
Total                                72   208   280           ment. At the time the Bank's pilot program for
partial risk guarantees to private lenders in IDA
IDA contingent credit                      35    35           countries was not available to help raise com-
mercial debt. Moreover, the Multilateral Invest-
Source: International Development Association.                ment Guarantee Agency (MIGA) was unwilling to
offer currency convertibility coverage on its own
account because of the high perceived risk of the
project. So, to maximize mobilization of private
convertibility insurance from public and private   equity in the proposed project, the Bank de-
sources, and Tanzania's weak balance of pay-   signed a new financial mechanism, the Currency
ments performance and heavy debt burden.   Convertibility Fund (CCF), to mitigate the risk of
There were no prospects for commercial debt   currency inconvertibility.
financing for the project because foreign com-
mercial banks have been willing to lend only for   What is the Currency Convertibility
short-term trade transactions (all export credit   Fund, and how does it work?
agencies are off cover in Tanzania). And in any
event, foreign-denominated commercial debt   The CCF is a financial instrument, to be backed
would have exacerbated the project's foreign    by a contingent IDA credit of US$35 million, that
exchange requirements.                          would provide the project sponsors with limited
protection (up to US$35 million) against currency
For these reasons, the government preferred to   inconvertibility for operations and maintenance
seek private equity in the project rather than com-   expenditures, dividends, and capital redemptions
mercial debt. But while foreign equity investors   payable in foreign exchange.
were willing to assume the construction and com-
mercial risks associated with the project, they    The CCF will mitigate but not eliminate the risk to
were not willing to take on sovereign risks   Songas of currency inconvertibility. Songas's
against which they could not hedge. Specifically,   annual foreign exchange requirements for opera-
foreign investors wanted assurances that, on pro-   tions and maintenance, dividends, and capital
ject sustainability grounds, they could reasonably   redemptions are estimated at about US$25 mil-
expect to cover the project's operations and   lion, or US$500 million over the twenty-year term
nmaintenance expenditures payable in foreign    of the power purchase agreement. The coverage
exchange, and repatriate their earnings in a con-   provided by the CCF would help ensure the finan-
vertible currency.1                             cial viability of the project in the event of a tem-



The World Bank Group                         27
porary lack of foreign exchange in the market.    The CCF is structured to discourage both the gov-
The CCF is equivalent to about sixteen months of    emient and the project sponsors from causing a
the project's foreign exchange requirements.            claim  to be filed. For the sponsors these disin-
centives include an extended transfer delay
The CCF would disburse only as needed to pay            period before which a claim can be filed, a less
valid claims submitted by the project sponsors    than 100 percent claim  coverage ratio, and an
and substantiated by MIGA, which will adminis-    annual stop loss. Government deterrents include
ter the fund on behalf of the government (figure    mandatory use of any foreign exchange recov-
1). The government would issue to MIGA an               ered by MIGA in connection with a claim to pre-
irrevocable right to make withdrawals from the    pay the CCF credit to IDA, and IDA's option of
fund to pay eligible claims. The IDA credit (and        accelerating the credit if a call is made on the CCF.
contract of guarantee) for the CCF would have a
term  of fifteen years (or thirteen years of com-    In addition to the proposed development credit
mercial operations under the twenty-year power    agreement between the government and IDA for
purchase agreement). This period is considered          investment in the Songo Songo Gas Develop-
reasonable because it reflects the time required        ment and Power Generation Project, the CCF
for investors to generate adequate cash flows at    would involve three legal agreements:
the agreed tariff level, and because it will help       * The development credit agreement between
ensure that Songas remains a going private sec-           the government andIDAfor the credit tofund
tor concern over the long terrn.                           the CCF. The proposed IDA credit of US$35
FIGURE 1 THE CURRENCY CONVERTIBILITY FUND SCHEME
-    Repayment through any MIGA recovery
of claims in foreign exchange
t                 ~~~~~t.
US$200     R                       US$35 million                                           Premiums less
million    Repayment               standby credit                                         administrative fee
Disbursements of IDA
creditforvalid claims
US$200 million    t
on-lent    Repayment
US$72 million                       nnual premium
payments
Investors' dividend                    Curr   Convertibility
payments                               Fudcoverage
Note: Arrows indicate money ilows.
a. Ocelot Energy Inc. and TransCanada PipeLines (the project sponsors) are providing USS50 million in contributions. CCF coverage is being provided only for the private equity sponsors.
The International Finance Corporation, Commonwealth Development Corporation, Deutsche Investitions und Entwicklungsgesellschaft mbH, and European Investment Bank
are providing US$22 million in equity.



28                  Mitigating Currency Convertibility Risks in High-Risk Countries
million to the government of Tanzania to fund    Catalytic role
the CCF would be provided under a separate
development credit agreement because the    IDA's involvement in the project is seen as cru-
CCF would involve terms and conditions that   cial to catalyze foreign private investment by
differ significantly from those that would gov-   alleviating equity investors' concern about non-
ern the proposed IDA credit to the govern-   commercial risks. This involvement is consistent
ment for the investment project. For example,   with the Bank's policies to assist sector reform
this agreement would contain conditions of   by involving the private sector and to assist gov-
disbursement related to the submission of   ernment borrowers in attracting this private cap-
documentation from MIGA substantiating that   ital by alleviating investors' and lenders' concern
a valid claim had been filed for which pay-   about sovereign risk. The contingent IDA credit
ment was to be made. It would also confirm    of US$35 million has a leveraging effect, mobi-
the government's assignment to MIGA of an   lizing US$50 million of private equity and USS22
irrevocable right to withdraw funds from the    million in other foreign equity that would other-
CCF credit on the occurrence of the defined    wise not have materialized.
events. Thus the CCF would disburse only if
MIGA were to determine that the project   ' Investors were also concerned about the risk of nonpayment by
sponsors had filed a valid claim substantiat-    Tanesco. This risk has been mitigated through a government-
ing their inability to convert or transfer       funded revolving liquidity facility designed to ensure complete and
and  maintenance  expenditures timely capacity and energy payments by Tanesco to Songas, and
operations and maintenance expenditures          by an escrow account that would protect b he project sponsors
payable in foreign exchange, dividends, or       against the loss of their equity investnent in the event of an incur-
capital redemptions in accordance with the       able govemment default.
provisions of the contract of guarantee (see
below).                                        Karen Rasmussen (krasmussen@worldbank.
• The administration agreement between the    org), Africa Region
government and MlIGA relating to the CCF.
This agreement would spell out the relation-
ship between the government and MIGA with
respect to the management and administration
of the CCF and the responsibilities of each
party, including the procedures for paying eli-
gible claims, recovering claims, and distribut-
ing premiums.
* The contract of guarantee between the project
sponsors and MIGA spelling out the insurance
coverage to be provided by the government
and issued by MIGA. The contingent IDA credit
of US535 million to be made to the govern-
ment of Tanzania would provide the financial
backing for MIGA to issue currency convert-
ibility risk coverage to the sponsors up to the
same amount. Thus this document would spell
out the specific terms and conditions of the
CCF contract of guarantee, including the items
covered, the terms of coverage, and the pre-
miums to be charged annually to the sponsors
and the procedures to be followed by the
sponsors before filing a claim.



29
Checks and Balances in Utility Regulation-
The U.K. Experience
Richard Green
A utility regulator has the task of ensuring that consumers are protected from exploitation by a            This Note is the third in a
subseries of three by the
monopoly supplier. This generally means that the regulator has the right to set limits on the supplier's    author on the recent
experience of regulating
prices or profits. Effectively, the regulator has the power to confiscate assets belonging to the           utilities in the United
Kingdom. The first looks
company's shareholders by setting prices insufficient to cover the supplier's costs and allow a             at the evolution of the
price cap approach to
reasonable return on the capital invested. Giving this much power to a small commission (as in the          regulation and assesses
its success. The second
United States) or a single individual (as in the United Kingdom) can be risky unless there are checks       presents a critical path
forthe price cap review
and balances on its use. In the United States, whose constitution prohibits confiscation of property,       process, which usually
occurs every five years.
the courts have long been involved in the oversight of regulators. In the United Kingdom, which             All three are based on
Richard Green and
created its utility regulators from scratch in the 1980s, an alternative system was sought. This system     Martin Rodriguez
Pardina, Resetting Price
centers on three concerns: the procedure followed by the regulator, the substance of the decisions,         Controls:A Manual for
Regulators (Washington,
and the acceptability of the decisions to the public. Three main institutions have oversight roles: the     D.C.: World Bank, 1999,
stock no. 14338). Contact
Competition Commission (formerly the Monopolies and Mergers Commission), parliamentary select               books@worldbank.org.
committees, and the courts (table 1). This Note reviews the roles of these institutions.
TABLE 1    REGULATORY CHECKS AND BALANCES IN THE UNITED KINGDOM
Openness and
Checks         Competition Commission  Select committees           Judicial review        consultation
Procedure      Does not usually         Can comment                Determines whether
make a determination                               procedure was correct
Substance      Makes a determination    Can comment                Determines only        Gives regulator
if appealed to                                     whether decision       more information
was unreasonable
Acceptability    Acts as arbitrator     Can approve or disapprove                         Provides explanation



30                 Checks and Balances in Utility Regulation-The U.K. Experience
The framework                                   Most of the regulator's powers over the compa-
nies reside in the licenses. The licenses contain
Each utility regulator in the United Kingdom was   clauses limiting the prices that the companies
established by a different act of Parliament. The    can charge their customers (or their smaller,
act gives the sectoral ministers-the secretary of   more vulnerable customers). These price control
state for trade and industry (for gas, electricity,   clauses typically last four or five years, after
and telecommunications) and the secretary of   which the regulator must propose a new clause.
state for the environment (for water)-the power   Other clauses may prohibit the companies from
to appoint a regulator for a fixed term; regula-   discriminating among customers or require them
tors can be reappointed and are subject to   to provide particular services.
removal only for incompetence or misconduct.
Three main bodies are involved in the oversight
The act also sets out the functions of the regula-   of U.K. regulators: the Competition Commission,
tor and the minister, which differ from industry    parliamentary select committees, and the courts.
to industry. In general, however, the regulator is   The legislation establishing the regulatory system
required to issue a license to companies before   also gave some responsibilities to the sectoral
they can enter the industry and to monitor their   ministers, though these powers have rarely been
compliance with the conditions in their licenses;   used. Although as yet the system has no formal
he may also amend the licenses. The require-   requirements for explaining regulatory deci-
ment to hold a license is not used as an entry   sions, the regulators have become increasingly
barrier in market sectors that have been opened    aware of the need to do so if they are to become
to competition, such as most telecommunica-   trusted.
tions activities and electricity generation.' Li-
censes are quickly issued to suitable applicants,   The Competition Commission
for a moderate administrative charge covering
the costs of the regulator's organization, nor-   When the regulator proposes a license amend-
mally calculated on the basis of the licensee's    ment, the company may choose to accept it. But
market share.                                   if the company believes that it is being treated
unfairly, it can ask for an appeal to the Com-
The act obligates the regulator and the minister   petition Commission, which took over from the
to exercise their functions in the way they deem    Monopolies and Mergers Commission (MMC) on
best to meet the objectives it sets out. In the    April 1, 1999. The United Kingdom's "competition
Electricity Act of 1989 these objectives are to   court," the commission dates back to the Mono-
ensure that all reasonable demands for electric-   polies and Restrictive Practices Commission estab-
ity are satisfied, to ensure that license holders are   lished in 1948. The commission has about thirty
able to finance their activities, and to promote   part-time members-from  business, academia,
competition in the generation and supply of   trade unions, and the law and other professions-
electricity. Subject to these duties, the regulator   and a full-time staff of civil servants. A small panel
and the minister should also protect the interests   of commission members with relevant expertise
of consumers (with respect to the prices, conti-   are appointed specifically to serve in utility
nuity, and quality of services), promote effi-  inquiries. A group of four to six commission mem-
ciency and economy by companies, encourage    bers are selected for each inquiry. Only these
research and development, protect the public    members are responsible for the report on the
from any dangers arising from electricity, and set   results of the inquiry, but the reports are still gen-
standards for promoting the health and safety of   erally considered to be issued by the commission.
industry employees. They should also take into
account the environmental effects of activities   To launch an inquiry, the regulator makes a for-
relating to the electricity industry.           mal reference to the commission, asking it to



The World Bank Group               31
determine whether the license condition in   ulator, it will expect to gain little from an appeal
question-such as a condition allowing the com-   unless the dispute relates to the data used by the
pany's price control to lapse or continuing with  regulator.
the old control for another period-might be
expected "to operate against the public interest"  If the commission does not find that the existing
and, if so, whether amendments to the license   situation is against the public interest, the regula-
could prevent this. The commission normally has  tor cannot change the company's license. Thus
six months for its inquiry, although this period   the existing control might lapse or continue un-
can be extended. It asks interested parties   amended. But if it finds that the condition may be
(including the regulator, the company, and rele-   expected to operate against the public interest, it
vant branches of government) for evidence and   will propose amendments that could remedy this,
also solicits views more broadly. The group holds
meetings with the most important parties and
may visit some of the company's facilities. After   The commission  had  to rule on six
considering the evidence, the group produces a
report with factual information on the company   price cap  disputes between  1992 and
and its industry, the views of the company, the
regulator, and other interested parties, and the   1997: British  Gas (twice), Scottish
commission's conclusions. The report is signed
by the members of the group that produced it.   Hydro-Electric, South  West Water
(Dissenting reports are possible but rare, and
tllere have been none in price control reviews.)   Portsnouth  Water, a  id Northerin
This report is sent to the regulator and the com-
pany and then published by the regulator (in a   Ireland Electricity.
version that omits confidential material but notes
where it has been removed).
and the regulator is allowed to change the
The MMC had to rule on six price cap disputes   company's license, taking account of the com-
between 1992 and 1997: British Gas (twice),   mission's recommendations. The comrnmission
Scottish Hydro-Electric, South West Water, Ports-   might recommend a price control nearly identical
mouth Water, and Northern Ireland Electricity. It  to the regulator's initial proposals but also could
also reset the price control for the British   recommend higher-or lower-prices (and there
Airports Authority (under the Airports Act of   are precedents for both). Whether regulators had
1986 this price control is automatically referred   to follow these recommendations exactly was
to the commission rather than being reset by a   unclear for several years. But as discussed below,
regulator). These rulings have gradually built up   a recent Court of Appeal case has confirmed that
some case law, for while each case is decided   the regulator's discretion is strictly limited. The
individually, the commission has recognized the   government has announced that it intends to
value of developing a consistent methodology.  introduce legislation to require regulators to seek
Some commission members have served in  final endorsement from the commission that any
several price control inquiries, which is also   license modifications developed following a ref-
likely to add to consistency. Not wanting com-   erence to the commission are necessary to rem-
panies to appeal proposed license amendments,   edy or prevent the adverse effects identified by
the regulators have increased the information   the commission. 2
that they release and now generally argue that
they are following the "commission methodol-   The minister retains veto power over the regula-
ogy." If a company knows that the commission   tor. The minister can instruct the regulator not to
is likely to use the same methodology as the reg-   make a reference to the commission or not to



32                Checks and Balances in Utility Regulation-The U.K. Experience
make a particular license amendment, but this   nesses in hearings lasting an hour or two, gener-
power has never been used. Regulators publish   ally spread over several weeks. In an inquiry
their decisions very soon after making them.   involving a regulated industry the witnesses might
They may inform the company or the minister of  include the chief executives of some of the com-
what they are about to say, but there is little time   panies in the industry, consumer representatives,
for lobbying the regulators to change their mind.   outside experts, and the regulator. The companies
Thus the minister can act only after a decision is  selected should represent a cross-section of the
published, when the political cost of interference   industry; thus an inquiry on telecommunications
could be high.                               might hear from BT (the incumbent), Mercury (its
oldest competitor), a cable company, and a new
Select committees                            entrant in the business sector. Oral hearings are
almost invariably public, and committee members
The main bodies overseeing the regulators are   sometimes try to persuade witnesses to answer a
parliamentary select committees. A select com-   question "on the record" when they have already
mittee consists of about ten backbench members   given the answer in written evidence but in con-
of Parliament (that is, MPs who are members nei-  fidence. Transcripts of the hearings are appended
ther of the government, as ministers or in minor   to the committee's report.
positions, nor of the opposition party's shadow
government"). Each committee's party balance   Select committees have no formal powers to
reflects the balance of the House of Commons   order a regulator (or a company) to do some-
(so that the governing party has a majority), but  thing, but they have a great deal of influence.
the committees usually aim  for unanimous   Their reports almost always contain recommen-
reports and therefore seek consensus. They gen-   dations, and regulators (and government depart-
erally act in a nonpartisan manner.          ments) prepare formal responses to those that
affect them. If the regulator rejects a recommen-
There is a committee for each ministry, which   dation, he must give reasons for doing so. And
can hold inquiries on any subject falling within  if the regulator accepts it, the recommendation
that ministry's purview. Although the Trade and   may provide useful momentum for change.
Industry Select Committee has produced the
most reports on regulation, there was an Energy   The courts
Committee until 1992 (when the Department of
Energy was absorbed by the Department of   Under English law any branch of the government
Trade and Industry) and the Environment   can be subject to a process known as judicial
Committee can hold inquiries on the water   review.3 If an individual or company brings a
industry. The committees can invite written and   complaint about a government decision (includ-
oral evidence and can require witnesses to  ing a decision by a regulator), the courts must
appear before them. Some committee members   determine whether proper procedures were fol-
build up great expertise in their subjects, but the   lowed in reaching that decision. Judicial review
committees also appoint expert advisers, often   does not concern itself with the substance of the
academics, to assist them in inquiries.      decision unless it can be shown that the decision
is unreasonable given the procedures that should
When a committee feels that a matter is worth   have been followed and the evidence presented.
investigating, the members set terms of reference   Thus the court would not attempt to determine,
for themselves and announce the inquiry so that  for example, whether the real rate of return to be
interested parties can submit evidence. All the   used in the calculations for a price control should
substantive evidence is published in the commit-   be 6.5 percent or 7 percent a year. But it might
tee's reports except that submitted in confidence.   determine that 3 percent a year is unreasonable if
The committee takes oral evidence from wit-  evidence had been presented that the nearly risk-



The World Bank Group               33
free return on indexed British government secu-   mended a cut in British Gas's transport prices of
rities was 3.5 percent a year and it was willing to   21 percent in real terms, but the gas regulator
hold that no reasonable person would think that  imposed a 25 percent cut, to balance higher vol-
a regulated company should earn less than that.   umes than had been predicted at the time of the
MMC report. The Northern Ireland Electricity case
Regulators have generally been able to avoid judi-  had a different outcome. In 1997 the electricity
cial review by following sensible administrative   regulator for Northern Ireland proposed that he
procedures. But they have lost some cases. A   would "adjust" the MIMC's recommendations for
housing developer that complained about the fee   the company's revenues, reducing them from
for connecting a new development to an electric-   £575 million to £.538 million over five years. The
ity company's system, but paid it anyway, later   company took the case to court and lost on a
asked the electricity regulator to determine the fee.
The regulator had believed that he could not inter-
vene after the event, but the court interpreted the    The Court of Appeal ruled that the
law differently, and the regulator was required to
determine the fee payable. In a case against the   regulator mustfollow  the substanitive
water regulator the High Court ruled that a regu-
lator must take action to enforce license conditions   proposals in  the commiission s report,
unless this is precluded by some other legal dutv.
giving what hazd allwqys beenl a
The electricity regulator also lost a case about the
price cap for Scottish Power, a vertically inte-  presumption  the force of a  legal
grated company. The regulator had proposed
allowing the company to charge its smaller cus-  precedent.
tomers the average cost of electricity in the
wholesale market in England and Wales, and
Scottish Power had accepted this proposal. But  rather narrow interpretation of what the MMC had
the other public electricity supplier in Scotland,   said. But the Court of Appeal ruled that the regu-
Hydro Electric, appealed to the MMC, which   lator must follow the substantive proposals in the
determined that Hydro Electric should be   MMC's report, giving what had always been a pre-
allowed to charge the (higher) purchase price   sumption the force of a legal precedent. The gov-
that English companies paid for the power sold   ernment now plans legislation to ensure that the
to smaller customers. The regulator argued that   commission approves any license amendments
there was no need to make the same concession   that follow from its recommendations.
in Scottish Power's price cap, since the company
had accepted the lower price, but the Court of   Openness and consultation
Appeal determined that this was unreasonable.
The regulator and Scottish Power subsequently  In the first few years of the United Kingdom's
agreed on a more generous price cap.        new system of regulation regulators seemed to
believe that one good defense against judicial
The most recent case, involving Northern Ireland   review was to release very little information
Electricity, is probably the most important one,   about their decisions: a decision could not be
because it clarified how much discretion regula-  judged unreasonable if nobody knew how it had
tors have on the substance of license amend-   been reached. In 1992, for example, BT's regu-
ments. In an earlier case, involving British Gas, the   lator issued a consultation paper revealing that
gas regulator had proposed substantive changes  the company's 1989 price cap had been set in
to the MMC's recommendations, and these were  the expectation that it would produce a 17 per-
accepted by tlhe company. The MMC hacl recoiin-   cent return on histoiic cosl capital by the end of



34               Checks and Balances in Utility Regulation-The U.K. Experience
the period, but this information had not been   Since then, regulators have begun to issue much
made public at the time. In the same year the   more information, and to precede their final
electricity regulator announced a new price con-   announcements with a series of informative con-
trol for the National Grid Company in a six-page   sultation papers. The regulators often use these
statement containing very few numbers.     papers to publicize possible price controls and
judge the reaction to them. They also publish
The regulators recognized the disadvantages of  information to show that their proposals are
this secrecy, however, when many people came   consistent with the Competition Commission's
to believe that they were not being tough   accepted methodology for the calculations
enough on the companies that they regulated.   underlying price controls. In the past, regulators
The electricity distribution companies' profits   might have been worried that this information
would give companies an excuse to seek judicial
review, but now that an accepted methodology
The regulator badpublshed little                            exists, following it should provide a sufficient
defense.
information showing how he had
The regulators also have been willing to publish
reached his conclusions, and  there                         more data on the companies that might have
been treated as confidential in the past. The elec-
was a  widespread perception  that he                       tricity regulator, for example, has recently pub-
lished the five-year business plans of the regional
had  been far too lenient.                                  electricity companies.4 These contain the infor-
mation that he will use (together with indepen-
dent consultants' reports on the companies'
rose significantly after they were privatized in  relative efficiency) to set their price controls for
1990, reflecting cost reductions and price con-  the period after April 2000. The water regulator
trols that allowed rising prices. The Trade and   now publishes companies' "July returns" each
Industry Select Committee twice recommended   year, which contain detailed cost data for the pre-
that the regulator revise these controls ahead of   vious year and operating characteristics such as
schedule, but he argued that such a response to  the length of their pipelines. These factors are
unanticipated profits would damage the compa-   used to explain the companies' costs in yardstick
nies' incentives in future. In October 1993 the   regulation, which predicts how far each of the
regulator published a consultation paper on   companies in a group could cut its costs based
revised price controls to apply after April 1995   on the performance of the others. The case for
with no information on their likely level. In May   keeping these data confidential is much weaker
1994 a letter from the regulator to the companies  for these monopolies than for competitive busi-
that was leaked suggested initial price reductions   nesses, but their publication shows how far the
of up to 30 percent, and the companies' share  regulators have come.
prices suffered accordingly. When the regulator's
formal proposals were published in August, the   The regulators will be under pressure to keep
average reduction was only 14 percent, and the   moving in the direction of openness and trans-
companies' share prices rose dramatically. The   parency. The new  Labour government an-
regulator had published little information show-   nounced a review of utility regulation, which led
ing how he had reachcd his conclusions, and   to a consultation document, followed by a set of
there was a widespread perception that he had   policy proposals. One of these is that regulators
been far too lenient. In the end, the regulator   should be given a legal duty to publish their rea-
revised the price control the following year, los-  sons for key decisions. Regulators have to pro-
ing a great deal of credibility in the process.  duce annual reports, and the government also



The World Bank Group                         35
intends to specify the matters that these must    People must have confidence in the regulatory
cover.                                                  system if it is to survive. That does not imply that
they have to agree with every single decision, but
The government also hopes to promote consis-    they must believe that decisions take their inter-
tency among regulators by assigning them a legal    ests into account. The best way of achieving
duty to give collective (and open) consideration        acceptability is through increased openness and
to matters of common interest, such as best prac-    consultation, a strategy that may also improve the
tice for price control reviews, replacing the exist-   information available to the regulators-and thus
ing informal collaboration. In addition, because    the substance of their decisions.
most of the regulated energy utilities are now
active in both gas and electricity markets, the gov-    Aso see the authors "Has Price Cap Regulation of U.K. Utilities
ernment will replace the separate regulators for    Been a Success?" and "Utilitv Regulation-A Cntical Path for Revising
the two industries with a single energy regulator.    Price Controls," botha tn Public Policyfor the Private Sector (December
Z~~~ ~19971.
One person now holds both positions as a tran-            SIince December 1997. to aid the coal industrv, the government has
sitional measure.                                         been using other powers to restrict the construction of new gas-
fired stations: this is intended to be a temporary" measure.
Department of Trade and Industry, A Fair Dealfor Cconsaumers-
The greatest change arising from  the review,              7TheResposelfo Consiiltation (London. 1998), concdusion 7 14. The
however, is that three-member boards  will                commiss-on's decisions are alieads' hinding for the water industry.
replace some of the individual regulators. The             where the legal basis of the price controls is slightly different.
3Scoilandi has uts own legail system.
government suggests that this will increase               These are availsble fron ihe offer Wehsite: http://mwwwopeo.
accountability, give scope for greater continuity         gyv. Lk.'offer/'documentts/peshusplans.pdf
as new regulators arc appointed, and spread the
burden of regulation, but it can also be seen in    Richard Green, Departmnent of Applied
the framework of checks and balances. A system          Economics, University of Cambridge, a:nd
of checks and balances is most important if    Visiting Fe/low, World Bank Institute
power would otherwise be concentrated in the
hands of an individual. Replacing individual reg-
ulators with boards dilutes the power of any one
person. We will have to wait and see whether
this leads to less use of the other parts of the sys-
tem of checks and balances.
Conclusions
Judicial review is the only mechanism focused on
ensuring that the right procedures are followed.
Judicial review can also overrule a regulator on a
substantive matter, but only if it finds that the deci-
sion is unreasonable, a tough test in English law.
The main check on substantive decisions comes
from the companies' ability to appeal to the
Competition Commission. Select committees have
no power to determine the outcome of a regula-
tory process, but their comments (on procedure
and substance) can have a significant effect on
whether the regulator's actions are acceptable to
the public. The need for acceptability is summed
up in the phrase justice must be seen to be done."



36
The 1996-97 Gas Price Review in Argentina
Andres Gornez-Lobo and 1iv/en Foster
The 1996-97 Enargas  Argentina's natural gas industry was privatized at   The regulatory framework
prce review offers a  the end of 1992. Prior to divestiture, the state-
sophisticated epproach
to the price regleation of    owned monopoly Gas del Estado was divided    The tariff paid by final gas consumers in Ar-
natural monopolies, An  into two transport and eight distribution compa-   gentina is composed of three parts:
extremely complex   nies, all of which were sold through international
procedure, the review
was based to the extent    bidding.                                     Final price = gas wellhead purchase price
possible on objective                                                              + transport margin
inforrmation and rules. Its    An  independent government bodv, Ente               + distribution margin
well-hefined procederes    Nacional Regulador del Gas (Enargas), was
turned out to be very  established to regulate the transport and dis-   Gas wellhead purchase prices are not regu-
helpfel in resisting  tribution segments of the industry. As part of   lated, but are determined by the contracts
pressure from lobbies
and preventing     its mandate, Enargas is in charge of price    negotiated between gas suppliers and pro-
regulatory capture.  reviews. These reviews, which occur every    ducers. Purchase costs are passed through to
five years, determine the allowed tariffs for   final consumers, subject to Enargas's approval
each transport and distribution company. The    of the prices as reasonable. There is, however,
first such review took place in 1996-97, and    no formal mechanism  to promote efficient
the new tariffs went into effect inJanuary 1998.   purchases.
This Note examines the methodology and out-
come of this experience.                         Price margins for transport and distribution are
set by Enargas for five-year periods. The price
The Enargas price review is of interest for sev-   control system is similar to the price cap regu-
eral reasons. First, it is the first of its kind in   lation used in the United Kingdom. But unlike
Argentina, and one of the first in a developing    U.K. firms, Argentine firms do not have flexibil-
country. The outcome of the process provides   ity in setting individual prices subject to an
a test of the regulatory framework adopted by    aggregate revenue or tariff basket constraint.
the Argentine government, and may influence    Enargas sets the maximum tariff for all individ-
regulatory reform in other parts of the world.   ual services and customer categories. These tar-
Second, as the first such event, the 1996-97   iffs must be sufficient to:
review set a precedent for methodologies and    * Cover operating costs, taxes, and depreciation.
approaches to be used in future utility price    * Provide a reasonable rate of return on invested
reviews in Argentina. Finally, the approach        capital.
used to calculate the cost of capital-as well as    * Guarantee a secure supply by providing
the other parameters used to set prices-           resources to fund system  maintenance and
provide an interesting illustration of how theo-   expansion.
retical and practical methods from regulatory
practice in industrial countries can be adapted    Tariffs are automatically adjusted  every  six
to developing countries, where data availability    months according to:
and other restrictions prevent a direct transfer
of techniques.                                   (1)            g = PPI - X + K



The World Bank Group                  37
where g is the percentage change of the tariff,   each tariff, and different types of outputs. Another
PPI is the producer price index in the United    simplification in the above formula is the omis-
States,1 X is the efficiency factor, and K is the    sion of taxes. Cash flows should be net of taxes,
investment factor, both of which may differ   since it is the posttax income that is relevant for
across firms. The last two parameters may also   the valuation of companies.
differ for each six-month semester of the five-
year period.                                    To give investors a fair rate of return on their
invested capital, the regulator should set g in
The efficiency factor (X) reflects the cost reduc-   equation 1 (and therefore tariffs Tj) in such a wv ay
tions that the regulator estimates can be achieved   that the NPV is equal to the capital invested in
in the next five-year period, which are thus   the firm at the beginning of the review period.
passed directly on to customers. The investment   This initial investment was set equal to the price
factor (K) is an adjustment to allow revenues to   paid for the companies at the time of divestiture
cover expected investments in improving and    rolled forward to the review, date by adding the
expanding  netwzork  infrastructure. Company    new investments made during the interim period
investment plans are first screened by Enargas.   and subtracting depreciation.
Once approved, they are assigned K factors. The
K factors are project-specific and are contingent   There is a further issue in determining the time
on the investment being undertaken. They come    profile of the tariff changes: changes could be
into effect only after a project has come on stream    gradual-through small changes each semester-
and is delivering benefits to customers.        or made all at once at the beginning of each five-
year review period. Enargas decided that the full
Setting the new tariffs                         price reductions would occur onJanuarv 1, 1998.
Thus the first X factor was set to achieve this tar-
Estimates of future cash flows for each firm are   iff reduction, while the X factor for each subse-
the starting point for the setting of new tariffs.   quent biannual price adjustment was set to zero.
The cash flow' analysis should extend until the    This is in contrast to K factors, which are imple-
licenses expire, since this is the relevant time   mented gradually, as noted above.
horizon over which owners can recoup their
investment. At the time of the review, current   Information requirements
licenses vwere set to expire in thirty-five years.
Estimates of the growth in demand (that is, pre-
The net present value (NPV) of a firm's future   diction of the parameter 1 in equation 2) arc cru-
cash flows is:                                  cial for determining appropriate tariff levels.
Enargas used information provided by other gov-
92)      NPV       TV- v 1  - C( - It          emient departments (such as the Secretaria de
(2)       NPV   L                               Energia V Puertos) and the gas companies them-
(  r)                   selves. The available information was used to con-
struct probable demand scenarios for each firm.
where T7 is the tariff for transporting (or distrib-
uting) gas in period t, 17 is the volume of gas   Detailed information on operating costs and
transported (or distributed), C, is the operations   revenues, as well as planned investments, was
and maintenance cost, I, is additional investment,   submitted to Enargas by each regulated firm ac-
and r is the firm's cost of capital.            cording to a format provided by the regulator
(Enargas 1996bh).
In the actual modeling of cash flows, T is a vec-
tor of tariffs and V is a vector of outputs, since    Prodtictivity increases were considered by the
there are different tariff zones, different parts to   regulator when forecasting costs and, therefore,



38                  The 1996-97 Gas Price Review in Argentina
TABLE 1   DEBT AND EQUITY IN THE ARGENTINE GAS
INDUSTRY, 1996-97
US$ millions
C..  -a    * -where ic is the cost of capital, rd is the nominal
interest charged on the firm's debt, t is the profit
Transport         874         1,512         0.58                tax rate faced by the firm (0.3 in Argentina), D is
Distribution     1,015        2,403         0.42                the debt of the firm, re is the opportunity cost of
Source:Enargas 1996ia, table 7.                                 equity capital, E is the value of the firm's equity,
and V= D + E. Debt and equity are measured by
their market value. Where a firm's debt or shares
were not traded in the market, information from
TABLE 2   FINAL COST OF CAPITAL FOR THE ARGENTINE               financial statements was used. The equity and
GAS INDUSTRY                                         debt figures for the Argentine gas industry at the
Percent                                              time of the review are presented in table 1. The
final nominal and real capital costs for transport
and distribution, as calculated by Enargas, are
miiiiiirniiiiiii-iu  jpresented in table 2.
Transport        13.4            1.9            11.3            The cost of equity capital. The cost of equity cap-
Distribution     15.2            1.9            13.1           ital must include a risk premium to compensate
Source: Enargas 1996a.                                          investors for the nondiversifiable volatility of the
financial returns on a firm's equity. The higher
the volatility, the higher the expected rate of
return investors will demand to hold the asset.
setting the efficiency (X) factor. The exact   Calculating this risk premium for a regulated util-
approach used by Enargas is described below.   ity is a necessary but contentious aspect of any
Investments that expand  the  network  will   price review. A widely used tool in this endeavor
increase the volume of gas sold and will also   is the capital asset pricing model.
affect future cost estimates. These activities are
considered when setting the investment (K) fac-   Use of the capital asset pricing model is problem-
tor and are also described below.                atic in countries where stock markets are under-
developed or where the industry under analysis
The cost of capital                              has not historically been quoted on the stock
exchange. This was the case in Argentina. Only
A fundamental parameter that must be estimated   two of the ten gas firms had been quoted on the
before tariffs can be set is the cost of capital-   stock exchange at the time of the review, and even
that is, the cost to a firm of raising an additional   for these companies, the time series for stock mar-
unit of capital. Enargas estimated separate rates    ket data was rather short. Recognizing these obsta-
for the transport and distribution sectors but did   cles, Enargas used the following adjusted capital
not attempt to differentiate these rates across   asset pricing model:
individual companies.
(4)     r0 = rf + D(p,   - r + riskARG,
The aggregate cost of capital is a weighted aver-
age of the cost of debt capital and the cost of   where r0 is the cost of equity for an Argentine
equity capital. The weights are the portion of   firm, if is the return provided by a risk-free asset
debt and equity relative to company assets.   in a reference industrial country, rm is the return
Formally,                                        on a well-diversified portfolio in the reference
country, ft is a parameter proportional to the
D     E                  covariance between the return on the equity of
(3)         qC=rd(1-t) +rre-                     the gas firm and the return on the diversified
3)r=rd 'V    V                 portfolio in the reference country, and riskARG



The World Bank Group                   39
is a premium reflecting Argentina's sovereignty   this adjustment can be found  in Enargas
risk. Except for the last term, the above formula   (1996a). The adjustment for the differences in
is the standard capital asset pricing model.     regulatory regimes is undertaken by examin-
ing the beta coefficients for firms regulated
The risk-free interest rate (rf) was taken to be the    under different regimes in Britain and the
yield to maturity on U.S. Treasury bonds of the    United States.
same average life as the Argentine gas compa-
nies. The sovereign risk premium (riskARG) was   The final result was an average beta coefficient
obtained by comparing the rate of return of a    for Argentine gas distribution companies of 0.78.
foreign currency-denominated Argentine bond    For gas transport companies there was no equiv-
with that of a U.S. Treasury bond. Enargas used    alent information on beta coefficients from the
Argentine euronote bonds as the basis for com-   United States. Instead, the parameter for this sec-
parison. These bonds are denominated in U.S.   tor was obtained by rescaling the beta coeffi-
dollars and in deutsche marks and were issued    cient for the distribution sector by the relative
by the Argentine government in European finan-   standard deviation of the returns to each type of
cial markets. The risk premium  of a well-   activity in Argentina. (Details can be found in
diversified portfolio (rt? - r ) was estimated as   Enargas 1996a.) The result is an estimated beta
M f
the difference between the return on a basket of   coefficient for gas transport companies of 0.58.
stocks in the United States and the rates on U.S.   This accords well with prior expectations. Gas
Treasury bonds with long maturities.             transport is less risky than the more competitive
distribution sector, and so should have a lower
The final parameter needed is the beta coeffi-   risk premium.
cient (Pe). This parameter is proportional to the
correlation between the returns on the firm's   The cost of debt capital. The cost of debt capital
equity and those on  the market portfolio.   was estimated as rf + riskARG, the sum of the
Estimated betas were available in the United    risk-free interest rate (measured by the rate of
States only for gas distribution companies. The    return on U.S. Treasury bonds of similar average
average beta coefficient for these companies was   life as the Argentine gas firms) and the sovereign
0.58 (Enargas 1996a). The estimated beta coeffi-   risk premium for Argentina. The cost of debt cap-
cients for the United States were adjusted for two    ital amounted to 12.56 percent for transport and
factors before being applied to Argentina. Both    13.02 percent for distribution.
adjustments relate to differences in the risk char-
acteristics of the companies in each country:    Determining the efficiency factor
* First, the financial gearing of a firm will influ-
ence the beta coefficient. Unless firms in    Enargas analyzed three sources of information
Argentina have the same financial gearing as   on potential efficiency gains to forecast costs and
firms in the United States, the beta coefficients   set efficiency (X) factors:
for U.S. firms are not applicable to Argentine    * Efficiency-enhancing project and restructuring
firms.                                           plans submitted by the firms.
* Second, gas distribution firms in the United    * Global productivity trends in the industry.
States are regulated by a rate-of-return system.  F Financial models to check the consistency of
This regulatory regime may be considered         results.
inherently less risky for investors than the price
cap regime practiced in Argentina.             Legislation requires Enargas to identify and
quantify the impacts of specific efficiency pro-
An adjustment for the first factor requires the   jects as a basis for setting the X factors. To that
use of a formula that relates the beta coeffi-   end Enargas, with the help of independent con-
cient to the gearing ratios of firms. Details on    sultants,  analyzed  detailed  programs  that



40                  The 1996-97 Gas Price Review in Argentina
allowed for reliable estimates of efficiency gains.   The final X factors for each company are shown
Examples included inventory control programs,   in table 3. These factors are applied once at the
changes to firms' input purchasing strategies,    beginning of the five-year period. Thus on
and changes in billing systems.                    January 1, 1998, tariffs were reduced by the full
amount of the efficiency factor.
In this respect, the legislation requires Enargas to
adopt a method that requires detailed knowledge    Determining the investment factor
of the management of firms, and thus contradicts
the spirit of arm's-length regulatory control. The    Investment (K) factors, if positive, increase tar-
problem  with this approach is that asymmetric   iffs each semester. Their purpose is to stimulate
information prevents the regulator from identify-   investment in improving and expanding the gas
ing all the efficiency improvements that a com-    system. Investment projects are approved by
pany could introduce and that, moreover, not all   Enargas if they:
efficiency gains can be linked to specific pro-    * Have reasonable costs and schedules.
grams. For these reasons, Enargas also analyzed    * Cannot he funded with the original tariffs and
historical total factor productivity in setting the X  so require additional investment.
factors. However, since license conditions re-   * Expand the system-maintenance investment
quired that the X factors be based on clearly iden-  is considered when setting the efficiency (X)
tified and quantified projects, Enargas had to       factor-and improve the quality and security
expend some legal effort in justifying the appli-    of supply beyond the requirements stipulated
cation of total factor productivity analysis in set-  in the license conditions.
ting the factors.                                  * Benefit the majority of the firm's customers.
* Are structured so that companies assume all
construction cost risks.
TABLE 3   FINAL EFFICIENCY (X) FACTORS FOR                         The  transport and  distribution  companies
TRANSPORT AND DISTRIBUTION FIRMS                        presented investment projects worth 1,774 mil-
Percent
lion pesos, of which just 192 million pesos
________________________  were approved by Enargas and qualified for a
K factor. Because Enargas was still evaluating
many projects at the time of the final tariff
determination,  it retained  the  power  to
Transportadora de Gas del Norte                    5.2             approve further projects up to niinety days after
Distribuidora de Gas Cuyana                        4.8            this date.
Gas Natural BAN                                    4.8
Litoral Gas                                        4.7             The K factor is broken down by project and
Metrogas                                           4.7             semester. It is activated only when an invest-
ment project has been completed according to
its original specification and it meets the objec-
Camuzzi Gas del Sur                                4.6            tives for which it was proposed. The K factor for
Camuzzi Gas Pampeana                               4.5             each project is estimated as the percentage
GASNOR                                             4.4            increase in tariffs that would be required so that
the value of the firm is the same with and with-
Note: For transportfirms the Xfactors apply to all interruptible supply and firm supply  out the project.
tariffs. For distribution firms the Xfactors affect residential, general small, general,
compressed natural gas, and subdistribution tariffs.               Tariff increases for system expansion apply only
Sooirce: Enargas 1997.
to customers who benefit from the investment.
Consequently, K factors are specific to each



The World Bank Group                            41
TABLE 4    INVESTMENT (K) FACTORS APPROVED FOR GAS DEL NORTE, 1998-2002
Percent
Salta                  0         0.84      0.52       0.74      0.46        0          0         0          0          0
Tucuman                0         1.74      0.61       0.82      0.55        0          0         0          0          0
Central                0         1.85      0.65       0.87      0.58        0          0         0          0          0
Litoral                0         1.83      0.64       0.86      0.57        0          0         0          0          0
Aldea Brasilera        0         1.81      0.63       0.85      0.57        0          0         0          0          0
Gran Buenos Aires      0         2.56      1.38       1.55      1.24        0          0         0          0          0
Note: These factors are for a project to reinforce gas mains in some areas with high population densities. Gas del Norte proposed two other projects that were still
pending approval by Enargas at the time the new tariffs were formally announced.
Source: Enargas 1997.
TABLE 5    INVESTMENT (K) FACTORS APPROVED FOR METROGAS, 1998-2002
Percent
1998                  ,,                    l
First    Second      is1I_
Tariff affected    semester semester
Residential            0         0.57      0.54       0.51      0.48       0.45      0.42       0.40       0.37      0.35
Commercial
and industrial        0        0.41       0.39      0.37       0.35       0.33      0.31       0.29      0.27       0.26
Note:These data are provisional Kfactors for two of the three projects presented by Metrogas. The factors are provisional pending the evaluation and approval of
the third project.
Source: Enargas 1997.
geographic tariff zone. In addition, only tariffs for    Conclusion
services that benefit from an investment project
ace affected.                                               The  1996-97  Enargas  price  review   has  set
important precedents for future price reviews in
Final K  factors for the northern transport firm            the Argentine gas industry, as wvell as subse-
(Transportadora  de  Gas del Norte) and  for    quent utility price reviews in other countries and
Argentina's biggest distribution company (Metro-    sectors.
gas) are presented in tables 4 and 5.
A point of interest in the Enargas review is the
It must be borne in mind that K  factors are                adaptation   of  tmethods  developed   in  the
applied to tariffs in the semesters when the cor-    United States or Europe to overcome the lack
responding investment projects are under way.    of data in Argentina. In particular, the method-
Thus the dates shown in tables 4 and 5 rmay not    ology adopted for estimating the cost of cap-
he the effective ex post dates if projects fall    ital may  be  relevant to  other  developing
behind schedule.                                            countries.



42                         The 1996-97 Gas Price Review in Argentina
However, the process has not been without
problems. Gas transport and distribution licenses
require Enargas to identify projects that will lead
to efficiency gains in order to set the X factors.
This approach is unlikely to detect the full range
of efficiency improvements that could poten-
tially be made, and furthermore may lead to
excessive micromanagement of firms by the reg-
ulator. To overcome these problems, Enargas
used a more aggregate method (total factor pro-
ductivity analysis) to determine companies'
potential efficiency gains. The use of this
methodology was contested by the industry,
however.
Legal restrictions prevent domestic price indexation in Argentina.
But because of the country s currency board svstem, domestic infla-
tion is not expected to differ from international inflation.
References
Enargas (Ente Nacional Regulador del Gas). 1996a. "El costo de cap-
ital en la revision quinquenal de tarifas." WVorking Paper. Gerencia
de Desempefo y Economia.
-. 1996b. "Metodologia revisi6n tarifaria solicitud de informa-
cion." Letter and annexes sent to licensed companies.
-    1997. "Informe de aprobacicon revision tarifaria quinquenal
periodo 1998-2002." Informes GDyE/GAL/GT/GD/GR N. 58-67.
Hetherington, B. 1992. "Estimating the Rate of Retmrn for Gas
Transportation." U.K. Office of Gas Supply.
National Economic Research Associates. 1996. 'Contrato de consul-
toria N' 006 metodologia de calculo del factor de eficencia (X)."
Report prepared for Enargas.
Andres Gomez-Lobo (andres_gomez-lobo
@oxera.co.uk) and Vivien Foster (vivien
fosterfoxera.sprint. corm), Oxford Economic
Research Associates Ltd., United Kingdom



43
Expanding Water and Sanitation Services
to Low-Income Households
The case of the La Paz-El Alto concession
Kristin Komnivies ancd Penielopej. Brook Cowen
Bolivia is one of a growing number of develop-   number of innovations, the La Paz-El Alto con-
ing countries turning to the private sector to   cession follows this general approach. But the
improve urban water and sanitation services.  criteria used to select a private concessionaire in
The country's first major contract in the sector, a   La Paz-El Alto marked a departure from earlier
twenty-five-year concession for the neighboring   concession awards in the region, in which bid-
cities of La Paz and El Alto, was implemented in   ders were asked to specify the tariff they would
August 1997.                                require to meet prespecified investment and ser-
vice obligations. Bidders for the La Paz-El Alto
The public utility in La Paz-El Alto provided cen-   concession, by contrast, identified the number of
ter city residents with in-house water and sewer   water connections they would make in exchange
connections but did not serve lower-income res-  for a prespecified tariff. (The tariff and sewer
idents in outlying areas. Unserved households   expansion requirements were fixed in the bid-
relied on alternative water and sanitation ser-   ding documents.)
vices-often at high cost. A primary objective in
moving to a private concession was to turn this   Contract obligations
situation around-expanding services to low-
income households while holding down costs by   At the time the contract was awarded coverage
increasing efficiency. It is not a foregone con-  wvas 87 percent for in-house water connections
clusion that the new concessionaire will do a bet-  and 48 percent for sewer connections. The win-
ter job of expanding service; much will depend   ning bidder-the Suez Lyonnaise des Eaux con-
on how well the contract and sector regulation   sortium  Aguas del Illimani-committed  to
have been designed. But because the La Paz-El   achieve 100 percent water coverage in La Paz
Alto concession was explicitly designed to   and to install 71,752 new water connections in
expand service to the poor, this concession is a   the El Alto subsystem (the poorest in the metro-
good case study for evaluating how different   politan area) by December 2001. By some esti-
provisions in the contract and the sector regula-   mates the new connections will achieve 100
tion may help or hinder service expansion.  percent water coverage in El Alto. The conces-
sionaire also coimimitted to 90 percent sewer cov-
Most water and sanitation concessions in devel-  erage in El Alto and 95 percent coverage in La
oping countries have followed a broadly similar   Paz by 2021.
model. The contracts are typically long term-
twenty-five to thirty years-and offer the con-   The concession contract specifies that all new
cessionaire an exclusive right to provide services   water and sewer connections must be in-house
in a defined area, paired with obligations to   connections. The contract also sets out require-
achieve certain coverage and quality targets.   ments for service quality (including water qual-
Concerns about service access for low-income   ity, continuity of service, water pressure and
households are usually addressed through uni-  flow, and customer service). The contract is
versal service obligations and a 'social" tariff for  largely silent on the inputs to be used to achieve
low levels of consumption. Though it contains a   these outcomes.



44                 Expanding Water and Sanitation Services to Low-income Households
The concession is regulated by a relatively inde-   vide service in the fringes of the service area
pendent national body, Superintendencia de   (called the area no servida) unless neighbor-
Aguas, established in 1994 to grant and regulate   hoods in this area meet certain criteria. Today this
concessions for municipal water and sanitation    area is not highly populated, but it is an impor-
services. The regulator monitors and enforces   tant area of settlement for new rural immigrants.
compliance with the expansion and quality obli-
gations but not the specific investments made by    Exclusivity within the service area has tradition-
the concessionaire. The regulator also must   ally been justified on the basis that it reduces rev-
approve all tariff revisions over the life of the con-   enue risk-and thus increases the financeability
tract. An increasing block tariff structure and an    of projects with high capital costs and long amor-
average 38.5 percent tariff increase were intro-   tization periods. It is also sometimes advocated
duced just before the concession began. The tar-   as a way to protect the revenues of concession-
iff. based on water consumption, is for both water   aires that are required to cross-subsidize some
and sewerage services, and for low-income con-   groups of consumers. But exclusivity can have a
sumers is well below cost. The first tariff review    major downside, especially for low-income areas
is scheduled to take place five years into the con-   that lack formal connections. Exclusivity illegal-
tract; in the interim, tariffs are indexed to the U.S.   izes and suppresses the emergence of alternative
dollar. The contract also sets maximum connec-   service providers, even in areas that the conces-
tion fees: US$155 for a water connection and    sionaire may not serve for some time. There may
US$180 for a sewerage connection.               be other ways of increasing the attractiveness of
a concession that are less harmful than exclusiv-
Help or hindrance?                              ity, such as improving the stability and credibil-
ity of the regulatorv regime and eliminating
Using the La Paz-El Alto concession to illustrate,   unduly costly investment obligations.
the remainder of this Note looks at whether the
concession contract's service area boundaries and    The La Paz-El Alto contract does not explicitly
exclusivity provisions, expansion mandates, tech-   state whether Aguas del Illimani has exclusivity
nical specifications, and tariff structure and con-   over its service area, but the contract and Bolivia's
nection fees help or hinder service expansion.  water regulations protect the concessionaire from
competition. The regulations, for example, pro-
Service areas and exclusivity                   hibit the sale of water by connected households
and allow the concessionaire to charge a fee for
Most concession contracts define the service areas   private groundwater extraction within its service
where the concessionaire is expected to operate.   area. The contract requires that the concession-
Wlater and sanitation concessionaires are almost   aire eliminate all communal standpipes, but these
always given an exclusive right to provide service   standpipes are inexpensive alternatives to in-
in these areas for the life of the contract. Service    house connections for many households. Re-
area boundaries and exclusivity rights shape the    stricting the options available to poor households
service options available to low-income house-   will likely do more harm than good in areas (such
holds. For example, a concessionaire can offer   as the area no ser-vida) where the concessionaire
connections to households within the service area   is not obligated to provide in-house connections
but is not required to connect-and may be pro-   in the foreseeable future.
hibited from connecting-households outside
that area.                                      Thus exclusivity is actively harmful when it
restricts service options that households might
The La Paz-El Alto concession creates a third   otheenise choose. Service area boundaries are
group of households by dividing the service area    generally neutral but potentially harmful if they
in two. The concessionaire is not required to pro-   exclude households best served by the utility.



The World Bank Group                45
Expansion mandates                           averse to sinking large investments early in the
life of a contract-for example, if there is uncer-
Connection requirements like those in the La   tainty about the independence and sustainability
Paz-El Alto concession are a direct way to   of regulatory arrangements. Some neighbor-
include expansion goals in private contracts. If   hoods may be more costly or risky to invest in-
such requirements are enforced, they can induce   for reasons as varied as location, density,
utilities to expand services to customers they   obstructive local officials, neighborhood vio-
might otherwise be unwilling to serve. Expansion   lence, or delays in legalizing land tenure.
mandates may be:                             Expansion mandates do not directly address any
M Mandates on the number of new connections   of these problems. And a concessionaire may,
to be added. These mandates are reasonably   depending on the regime, be able to argue that
straightforwaard to monitor and enforce pro-   it is impossible to comply wvith its mandates
vided that what counts as a connection is   given the magnitude of such problems. In this
clearly defined and the mandates are backed   situation expansion mandates may at best open
up with incentives for compliance. In La   a dialogue on how these problems can be
Paz-El Alto all connections must be in-house   addressed. On the whole, though, expansion
connections. Failure to make all required con-   mandates can be neutral to positive.
nections within a specified period results in a
fine and, for major lapses, an increase in the   Technical specifications
expansion mandate for the following period.
Mandates on percentage coverage. The long-   Most concession contracts say something about
terIIm sewerage coverage imianldates in the La   how water and sanitation services must be de-
Paz-El Alto concession take this form. Such   livered. They may specify outputs (type of ser-
mandates may be difficult to monitor and   vice, number of connections, minimum service
enforce. In La Paz-El Alto, for example, no one   quality) or inputs (technical and materials stan-
knows how many houses are in each subsys-   dards, required construction techniques, proce-
tem, so mandating, say. 50 percent coverage is   dural requirements). In general, mandating
difficult. In an attempt to address this problem,   outputs and not inputs-as is generally the case
the concession requires the regulator to trans-  in the La Paz-El Alto contract-is preferable
late the contract's percentage coverage require-   because it allows the concessionaire to choose
ments into a mandated number of connections   the most efficient way to provide the desired
at the beginning of each five-year period.  outputs.
• Mandates to connect all households or neigh-
borhoods meeting certain criteria. The La   Output requirements are not witlhout their prob-
Paz-El Alto contract subjects expansion in the   lems, however. By requiring in-house connec-
area nio serida to this type of mandate. The   tions and mandating service quality standards,
concessionaire must connect neighborhoods   the La Paz-El Alto contract greatly restricts the
in this area if they meet density criteria and if  flexibility of the concessionaire's service offer-
doing so w7ould not significantly increase   ings. The regulator recognizes that the mandated
costs. This mandate is potentially quite weak   service levels are expensive and could jeopar-
because whether a neighborhood meets the   dize expansion efforts. Thus efforts have been
criteria is subject to debate.             made to lower costs. For example, while main-
taining the requirement for in-house connec-
The basic idea behind expansion mandates is  tions, the regulator has sanctioned a pilot project
that they can encourage concessionaires to do   in which the concessionaire is installing condo-
things that they might otherwise be unwilling to   minial water and sewerage systems in some El
do. An unwillingness to expand service might   Alto  neighborhoods. (Condominial systems
have several causes. Concessionaires may be   reduce costs by using smaller pipes, installed in



46                 Expanding Water and Sanitation Services to Low-income Households
relatively shallow trenches, often under house-   water consumption. This setup will likely dis-
holds' yards rather than under roads.)            courage the concessionaire from  providing
sewerage connections.1
Output requirements are generally preferable to    * Connection fees. The La Paz-El Alto contract
input requirements, which risk raising costs and  sets maximum connection fees for water and
making procedures unduly burdensome. But          sewerage that do not vary with the true cost of
output requirements can also be harmful if, by    connection. The same connection fee applies
restricting a concessionaire's service offerings,  for in-fill connections on existing lines and for
they make service expansion too costly for the    connections in areas with no existing network.
concessionaire or out of line with household      In this situation the concessionaire is likely to
preferences.                                      prefer making in-fill connections, where profit
margins may be greater. The concession con-
Tariff structure and connection fees             tract seeks to counteract this inclination by
mandating that in-fill connections can account
Whatever the cost of service, a concessionaire    for no more than half of all new connections.
must be able to cover its costs if the desired
expansion plan is to be sustainable. Cost recov-   Tariff structures can have a positive effect if they
erv over the life of the contract will be affected   facilitate serving the poor by ensuring that rev-
by such factors as the tariff structure, the ability   enues cover the cost of these connections.
to disconnect customers for nonpayment, regu-   Otherwise they can have a potentially negative
latory rules for adjusting the overall tariff level,   effect if they create disincentives for service
and  the  soundness  and  independence  of   expansion-possibly blocking expansion of ser-
arrangements for applying those rules. Here we    vice to households that are willing to pay more
concentrate on the tariff structure.            for access to better water and sanitation services.
Concessionaires will have an incentive to focus    Prospects and problems
service expansion efforts on areas where capital
expenditure costs are relatively low or quickly   To date the La Paz-El Alto concessionaire has met
recoverable and where tariffs cover or exceed   its service expansion obligations. But certain fea-
operating costs. In La Paz-El Alto there are at   tures of the contract could make it unnecessarily
least three possible disconnects between the tar-   difficult to achieve the broad objective of univer-
iff structure and the contract's service expansion    sal service-as well as unnecessarily painful for
objectives:                                     some households. For example, the contract
• The social tariff Households are charged a unit   mandates a uniform and costly level of service,
tariff that falls well below costs for the first 30   the tariff provides disincentives to meet expan-
cubic meters of water they use each month. The    sion goals, and exclusivity provisions have the
sale of water to low-consumption households is   potential to restrict water and sanitation options
thus a loss-making proposition, and a conces-   before in-hotuse connections become available.
sionaire might be expected to prefer not to serve
such households. Most of El Alto (the focus of  After the first five years of the contract the concessionaire is
the contract's expansion efforts) is a low-con-  required to propose separate water and sewerage tariffs, which
sumption area, with the average household con-  may help remedy this problem.
suming about 10 cubic meters a month.
* The unified water and sewerage tariff Under   Kristin Kornives (komives@emnail.unc.edu),
the unified tariff a household with a water con-   University of North Carolina-Chapel Hill. and
nection but no sewerage connection will have   PenelopeJ. Brook Cowen (pbrook@
the same monthly bill as a household with a    worldbank.org), Private Participation in
sewerage connection and the same level of   Infrastructure Group



47
Management Contracts in Water and Sanitation-
Gaza's Experience
Jamal Saghir, Elisabeth Shervood, and Andrew Macoun
In 1995, as the interim agreements between the   cubic meter'-for a contract based on revenues
Palestine Liberation Organization and the gov-   to succeed.
ernment of Israel were being finalized and
signed, water and sanitation services in the Gaza   Under these circumstances a management con-
Strip were in crisis. Gaza has an extremely dense   tract offered several advantages: it was highly flex-
population of about 2,500 people per square kilo-  ible, of limited duration, and ensured that a range
meter (the population is around 900,000). The   of options would be available at the end of the
thin strip of land's primary source of water, a shal-  contract. In addition, the contract would allow
low aquifer, was being mined at more than twice   both the Palestinian Authority and the general
its estimated annual recharge rate, resulting in an   public to judge the advantages of private sector
increasing deterioration in quality. Responsibility   management without committing to a long-term
for water services was fragmented among four   relationship. The contract would also allow the
municipal water departments, twelve village   private sector to judge the Palestinian Authority's
councils, and the United Nations Relief and   commitment, particularly to cost recovery through
Works Agency. There was no accurate account-  tariffs. Finally, the terms of the contract included
ing of water production or consumption, though   a number of tasks necessary to establishing a
estimates put daily per capita consumption at less   sound commercial approach (such as implement-
than 70 liters, well below levels in countries with  ing a computerized administrative system, net-
similar incomes. About half of the water supplied   work mapping, and hydraulic modeling). By the
was unaccounted for-the result of system losses,  time the contract ends the Palestinian W7ater
illegal connections, and nonfunctioning meters.    Authority will be able to make an informed deci-
sion on future private participation in infrastruc-
A stepwise approach to reform               ture and regulatory arrangements. At that point an
alternative means of private sector involvement-
All stakeholders recognized that private sector   such as a lease or a full performance management
involvement vTas the only way to rapidly   contract-is expected to be implemented.
improve the water supply system. But long-term
arrangements posed significant risks to both the   So in mid-1996 Lyonnaise des Eaux/Khatib and
Palestinian Authority and potential private con-   Alami (LEKA) was awarded a four-year water ser-
tractors. First among these was the risk resulting   vices management contract to help local govern-
from the political and security situation in Gaza.   ment service providers and the Palestinian Water
Second, the Palestinian authorities had only just   Authority improve water service. The contract is
been empowered to manage water resources, it  the first of its kind in a World Bank-funded pro-
was unlikely that they would agree to divest-  ject in the Middle East. Since the contract became
ment. Third, so little information was available   active, water quality has improved, water losses
on the existing system that there was almost no   have fallen, and consumption and revenues have
basis for establishing the terms or expectations   increased. Despite the improved performance,
of a concession contract or lease. Finally, tariffs  the management contract has illustrated some of
were too low-between US$0.30 and US$0.40 a   the limitations of this approach. The contract



48                 Management Contracts in Water and Sanitation-Gaza's Experience
leaves the implementation of management deci-   The performance payment is calculated accord-
sions in the hands of the local authorities, limiting   ing to thirty-one performance targets grouped
the benefits of improved management. For exam-   under the four contract objectives. Each of the
ple, although LEKA has identified nearly 11,000   performance targets-ranging from the number
illegal connections, resolution is left to munici-   of meters repaired or replaced, to reductions in
palities and the Palestinian Water Authority-and    unaccounted-for water, to the completion of
to date, action has been limited. And although   tasks such as the development and implementa-
LEKA has provided training to well operators on   tion of maintenance and materials management
chlorine dosing and routine maintenance proce-   systems-was given indicator values that quan-
dures, most failures in the dosing units are due to   tify the annual achievement of the target. In addi-
the reluctance or inability of municipal employ-   tion. all performance targets were weighted to
ees to carrv out basic procedures.            reflect the priority of the target. Critical targets
were given much higher weightings-for exam-
The contract design                            pie, reducing unaccounted-for water is weighted
the highest of any target. The indicator weight-
The contract fee is split between a fixed annual   ings emphasize the importance placed on
pavment and an additional performance pay-   increasing the quantity of available water. A
ment based on the achievement of performance   composite performance score determines the
targets.                                      incentive payment. If the composite score does
not meet a threshold level the operator is dis-
The fixed-fee portion of the contract, which    qualified from any incentive payment.
formed the basis for international competitive
bidding for the contract, is about US$6 million   The rating system provides for exclusion of work
over four vears. In return, the operator provides   performed by contractors hired by other agencies
full-time expatriate managers, full-time local   or authorities.2 In addition, LEKA  and the
technicians, administrative support, and short-   Palestinian Water Authority are allowed to invoke
term expatriate specialists to undertake specific   a force majeure clause of the contract for any
tasks. The scope of work for the contract focuses   event beyond their control that makes it impossi-
on four objectives:                            ble to fulfill their obligations. Such events include
* Increasing the quantity of available water by   strikes, lockouts, and other industrial actions
improving the efficiency of the water supply   (except where such events can be prevented by
distribution system and operating equipment.   the parry invoking force majeure) as well as con-
• Improving the quality of the water supply and   fiscation or any other action by government agen-
of wastewater effluent.                      cies. Many such events have occurred over the life
* Improving management of water and waste-   of the contract because of border closures and
water systems through better operations, rev-   other disruptions. As a result a one-time agree-
enue collections, and customer serv-ice.     ment was negotiated to carry over to the second
* Strengthening water and wastewater institu-   year the balance of the first year's performance
tions through long-term system planning and    payment, less a 10 percent penalty, in return for
training.                                    withdrawing all force majeure claims.
An incentive payment was added to the contract   No significant changes have been made to the
to encourage the achievement of the contract's   performance targets. Though some criteria were
objectives. The total incentive payment for the   not sufficiently challenging (metering, system dis-
four years is US$3 million, or an additional 50   infection), on the whole targets have been chal-
percent of the fixed contract payment. The   lenging but achievable. At the same time,
annual ceilings for incentive payments were set   performance targets for institutional and proce-
at one-quarter of the total, or USS750,000.    dural development objectives have generally not



The World Bank Group                 49
been met-either because of different interpreta-   sible payment). The auditor downgraded four of
tions of actions taken or the operator's prioritiza-   the performance indicators-in three cases LEKA
tion of other benchmarks. Different weightings in   claimed full compliance whereas the auditor
the original contract, or some other mechanism    found that compliance was poor. The auditor's
for ensuring equal attention to institutional devel-   score was ultimately used to calculate the incen-
opment, might have addressed this issue from the   tive payment of US$444,000. Performance in the
start. In more recent performance-based man-   second year was assessed close to US$800,000
agement contracts for Amman, Jordan, and for   (due to the carryover from the first year).
the Bethlehem and Hebron areas of the West
Bank fewer and better-defined indicators have    Funding
been used.
The Gaza management contract is not funded by
Contracting out regulation                    revenue from  water and sanitation services.
Rather, it is funded entirely by a US$25 million
Some tension between a private operator and an   credit from the World Bank to the Palestine
oversight body is to be expected. In Gaza no reg-   Liberation Organization for the benefit of the
ulatory capacity existed before the management   Palestinian Authority. In most cases it should not,
contract went into effect, and the Palestinian   however, be necessary to guarantee an external
Authority, with no experience with a private oper-   source of funds. Sector reforms should raise rev-
ator, feared being taken advantage of. The solu-   enues enough to cover all or most of the costs
tion agreed on was to hire a reputable auditing   of a management contract, thereby increasing
firm (Deloitte and Touche, Norway) to perform    private sector interest in such arrangements. In
an annual audit of the operator's technical and   Gaza, however, political and security concerns
financial performance.3 At the end of each six-   would likely have dissuaded operators from tak-
month period of the contract, the operator pre-   ing on such a large assignment without the sup-
pares a performance report detailing its progress   port of the Bank credit.
against the performance indicators, including
evidence necessary for substantiation. As part of   The Bank also contributed to another crucial
this exercise the operator calculates its own per-   aspect of sector improvement, establishing a
formance score. The operator also reports its   US$12 million fund to invest in the operational
activities in each of Gaza's sixteen municipalities   capacity of water and sanitation infrastructure.
and villages. In addition, the Palestinian Water   The fund gives the operator the means to make
Authority prepares progress reports.          improvements in the system in much the same
way a lessee would, based on needs identified
At the end of each contract year the auditor   by management. The operator has considerable
reviews the performance reports, confirms their  flexibility in determining immediate investment
accuracy by visiting sites and examining records   needs and can procure (using World Bank guide-
and inventories, and verifies the performance   lines) goods and services as needed.
score. The incentive payment is then calculated
on the basis of the performance score. The audi-   Lessons
tor also reports to the Palestinian Water Authority
on the operator's financial statements and any   More than two years after the award of the con-
issues arising froiii them.                   tract the water supply system is much improved.
In the first half of 1998 unaccounted-for water
This approach has worked well. At the end of   was around 35 percent lower than in 1995. Water
the first year of the contract, LEKA's assessment   consumption for the same period was almost 16
of its performance yielded an incentive fee pay-   million cubic meters, nearly 50 percent more
ment of US$498,000 (64 percent of the total pos-   than in 1995. Total revenue collected in 1997 was



50                   Management Contracts in Water and Sanitation-Gaza's Experience
almost twice that in 1996. In addition, water    Overall, the Gaza experience suggests that man-
delivered in the Gaza Strip is now reliably chlo-    agement contracts are most likely to work under
rinated, more than 11,000 illegal connections    four conditions:
have been identified, more than 2,000 leaks have    * The primary objective is to rapidly enhance the
been repaired, a complete database of service          technical capacity and efficiency of services.
connections has been prepared (with almost    * Government faces obstacles to committing to
10,000 connections replaced), 80 percent of the        a long-term arrangement for private participa-
system has been mapped, and more than 7,000            tion in infrastructure or to inducing the private
meters have been repaired and 8,000 replaced.          sector to undertake capital investment or take
on commercial or political risk.
Experience with the management contract in             Tariffs are too low  to suppoIrt a long-term
Gaza suggests that conferring higher degrees of        arrangement for private participation in infra-
management responsibility on an operator could         structure.
expedite improvements. As successful as the            Government faces  difficulties  in  securing
operator has been in meeting the requirements          agreements to allow the long-term involvement
under its direct authority, local authorities have     of the private sector, or the regulatory frame-
not  been  consistent  in  supporting  those           work is incompatible with a long-term arrange-
improvements. This remains the weakest link of         ment for private participation in infrastructure.
the contract.
Where the above conditions apply (as in Gaza),
One essential feature of the contract was its use    a management contract provides a window of
of independent technical and financial auditors    opportunity in which trust can be developed
to audit the achievement of the annual perfor-    between the public and private sectors. Such
mance targets, calculate the incentive fee, and    contracts also allow  the authorities to devote
provide a comfort letter for payment of the incen-    attention to creating an appropriate regulatory
tive fee. But although the contract established    framework, adjusting tariffs and subsidies, and
clear benchmarks and a performance rating sys-    creating an environment more conducive to pri-
tem, it allowed the operator to focus on bench-    vate risk taking.
marks that would generate a higher performance
pavment. As a result less attention was given to       While within the range of mnanv other tariffs in the region, thlis rate
benchmarks that were perceived as being harder         could not begin to cover realistic provisioning for the major capi-
to achieve or worth too little in terms of their      tal investments that are needed. In contrast, water supplied by
Jerusalem Water Undertaking costs between USS1 and tJSS1.50 a
weighted worth (for example, training and pub-         co-bic meter.
lic relations). Structuring the contract so that    2 Many donors are helping the Palestinian Authority rehabilitate and
some objectives are simple contractual require-        extend infrastrLcture and services. The rating system discounts
ments,withineitefee or the incentive  these contributions to the operator's achievement of performance
ments, within either the base fe   rteicnie            targets.
fee, would overcome this problem.                    3 The auditor's wvork is funded by a bilateral donor.
For several reasons multilateral financing was   Jamal Saghir (jsaghir@worldbank.org),
essential in such a high-risk environment as Gaza.    Elisabeth Sherwood (esheriwood@worldbank.
This financing covered the fixed fees of the oper-    org), and Andrew Macoun, M7iddle East and
ator, easing concerns that low revenlue and oLher    North Afr-ica Region
risks would prevent payment by the Palestinian
Water Authority or the municipalities. It financed
the operating investment fund, without which the
operator could not commit to meeting service tar-
gets. And it provided assurances on the policy
reforms supported by the donors.



51
Private Participation in the Rail Sector-
Recent Trends
NVicola T7ynan
The 1990s have marked the reemergence of pri-    For these thirty-seven projects, private compa-    The World Bank's
vate railway operation in developing countries    nies committed to rehabilitating existing infra-    Private Participation in
after half a century of nationalization and public    structure or building new  systems, involving a    Project Database covers
sector management. Since private operators took    total investment of more than US$14 billion over    private participation in
over freight transport on Argentina's Rosario to    the life of the contracts (figure 2).2 The invest-   infrastructure in
Bahia Blanca railway line in 1991, private partic-    ment involved in each project depends primar-    The database records
ipation in the sector has grown significantly. By    ily on the type of contract (box 1!), but also on    details of all projects
the end of 1997 the governments of fourteen    the state of existing infrastructure and expected    newly owned or
developing  cou-ntries had  transferred varying    traffic volumes. Another six rail projects reached    managed by private
companies from 1984 to
degrees of responsibility for railway operation to    financial closure during the first half of 1998, and    the present in water,
the private sector. In these countries private com-    the trend tovw,ard private contracting is expected    electricity,transport,
telecommunications, and
panies entered into a total of thirty-seven new       to continue.                                           natural gas transmission
contracts for the operation and management of                                                                and distribution. This
railways in 1990-97 (figure 1). By contrast, only    This Note uses the PPI Project Database to ana-    Note focuses on rail
five projects in just three developing countries    lyze what has happened in the railway sector    projects with private
p                                          I           ~~~~~~~~~~~~~~~~~~~~~~~~~~~participation that
reached financial closure during the six years    since 1990. The database reveals the following    reached financial closure
before 1990.1                                         patterns:                                              ins 990-97, surveying
regional trends, types of
private participation, and
project size.
FIGURE 1  CUMULATIVE RAIL PROJECTS                FIGURE 2  CUMULATIVE INVESTMENT IN
WITH PRIVATE PARTICIPATION                        RAIL PROJECTS WITH PRIVATE
IN DEVELOPING COUNTRIES,                          PARTICIPATION IN DEVELOPING
1990-97                                           COUNTRIES. 1990-97
1997 US$ billions
40                                                15
35
30                                                 12
25                                                 9
20
15                                                 6
10
5
0                                    ~~~~~~~~~~~~~~~0
1990 1991 1992 1993 1994 1995 1996 1997           1990 1991 1992 1993 1994 1995 1996 1997
Source: PPI Project Database.                     Source., PPI Project Database.



52                    Private Participation in the Rail Sector-Recent Trends
g ~~~~~~  ''1       *                     *~~~~~~~~~~a 113J  II tll
Database coverage                                 assuming significant investment risk. This
* To be included, a project must have reached     category includes build-transfer-operate,
financial closure and directly or indirectly    build-lease-transfer, and build-rehabilitate-
serve the general public.                       operate-transfer contracts as applied to exist-
* The sectors covered are energy, water, trans-   ing facilities.
port, and telecommunications.                * Greenfieldprojects. A private entity or a public-
* The transport sector includes the following     private joint venture builds and operates a new
subsectors: rail, roads, and ports. Rail       facility. This category includes build-operate-
includes the following segments: freight,      transfer and build-operate-own contracts.
intercity passenger, local passenger, and fixed    * Divestitures. The state sells an equity stake to
assets.                                         private entities; this may or may not involve
* Movable assets, incinerators and stand-alone    private management. This category includes
solid waste projects, and small projects such   full and partial divestitures.
as windmills are excluded.
* The period covered is 1984-97.                Definition of financial closure. For greenfield
• The countries covered are developing coun-    projects and for operations and maintenance
tries, as defined and classified by the World  contracts with major capital expenditure,
Bank, in East Asia and the Pacific, Europe and    financial closure is defined as the existence of
Central Asia, Latin America and the          a legally binding commitment of equity holders
Caribbean, the Middle East and North Africa,  or debt financiers to provide or mobilize fund-
South Asia, and Sub-Saharan Africa.          ing for the project. The funding must account
for a significant part of the project cost, secur-
Definition of private participation. The private  ing the construction of the facility. For opera-
company must assume operating risk during the  tions and management projects, a lease
operating period or assume development and      agreement or a contract authorizing the com-
operating risk during the contract period. In   mencement of management service must exist.
addition, the operator must consist of one or   For divestitures, the equity holders must have a
more corporate entities with significant private  legally binding commitment to acquire the
equity participation that are separate from any  assets of the facility.
government agency.
Sources
Project types                                  * World Wide Web.
* Operations and management contracts. The      * Commercial databases.
private entity takes over the management of a  - Developers and sponsors.
publicly owned enterprise for a given period.  - Regulatory agencies.
This category includes management contracts
and leases.                                   Contact. The database is maintained by the
* Operations and management contracts with      Private Participation in Infrastructure Group of
major capital expenditure. The private entity  the World Bank. For more information contact
takes over the management of existing facil-  Mina Salehi at 202 473 7157 or msalehi@
ties under a concession contract while also  worldbank.org.



The World Bank Group                    53
TABLE 1   PRIVATE RAIL PROJECTS AND INVESTMENT IN
DEVELOPING COUNTRIES BY TYPE OF PROJECT,
1990-97
* Operations and management contracts (man-                                     !1
agement contracts, leases, and concessions)          Type                          a
are more common than greenfield projects or
divestitures.                                        Operations and
* Private participation is more common for              management with major
freight than for passenger services.                  capital expenditure        22              6,319
* Latin America has led the new wave of private        Greenfield                   6              7,399
railway projects.                                    Operations and
Operations and management                               management                  5                 0
contracts are most common                              Divestiture                  4               699
Total                       37            14,417
Concessions that are for managing and operat-
ing existing railways and involve major capital        Source: PPI Project Database.
expenditure by private sponsors are the domi-
nant form of contract for private participation in
the rail sector, accounting for twenty-two of   The greenfield projects are concentrated in
thirty-seven projects (table 1). Another five oper-   rapidly growing cities of East Asia, a regional
ations and management contracts do not involve    concentration that mirrors the pattern in gas,
significant private investment. Divestitures and    electricity, and water and sanitation. In all these
greenfield projects are less common, accounting    sectors private participation in Asia has typically
for a total of ten projects.3                    focused on increasing capacity in rcsponse to
rapid urbanization and growing demand for
Governments wanting to improve the efficiency   infrastructure services rather than improving the
of railway networks and reduce the burden of   efficiency of existing public operators.
subsidies have transferred management respon-
sibility to the private sector. In some of these    Greenfield projects are distinct not only in loca-
countries underinvestment by the public oper-   tion, but also in subsectoral classification. All the
ator had left railways in need of rehabilitation    greenfield projects are for metropolitan light or
to meet expected demand. Governments were   'heavy" rail systems rather than for long-distance
keen to transfer the risk of this investment to   freight lines.' The build-operate-transfer (BOT)
the private sector, and private sponsors were    contracts in Asia account for half the passenger
willing to assume the risk under credible con-   and fixed asset projects (figure 3).
tractual arrangements of sufficient duration-
ten to fifteen years where the operator invested    Divestitures account for only four railway pro-
only in rolling stock, but up to ninety years   jects and little private investment to date. There
where the track required substantial restoration.   is no standard model for these privatizations, and
Concession contracts allow  governments to   all four projects are quite distinct. They include
increase efficiency and investment while re-   full and partial privatizations, aimed at either
taining ownership of the rail infrastructure.   transferring operation to a strategic investor
Almost all the projects in Latin America are   (Brazil and Chile) or raising revenue (China).
concessions.
Private participation is more common
Numbering only six, greenfield contracts run a    for freight
distant second to operations and management
contracts. But with each greenfield project involv-   Most of the railway projects are in countries with
ing significant investment, they run slightly ahead    a long history of rail transport, often with early pri-
of concessions in terms of investment.           vate involvement. Heavy financial losses and poor



54                   Private Participation in the Rail Sector-Recent Trends
FIGURE 3 PRIVATE RAIL PROJECTS IN DEVELOPING
COUNTRIES BY TYPE, 1990-97
Freight and intercity
passenger      -Freight and local
Fixed assets,    5%       -      passeger                       In 76 percent of projects the government trans-
freight, and                                                    ferred the management of fixed  assets and
intercity passenger                                                rolling stock to the private sector as a vertically
8%prvt
integrated utility, introducing competition at the
Freight                                                      bidding stage. Even as regional monopolies,
16%                                                        however, railways are not insulated from  com-
petition; both passenger and freight customers
Fixed assets              typically have alternatives. Some govemrnments
and freight               have gone further, requiring concessionaires to
410/
Fixed assets and r  E B S                                   open their network to competing operators.
local passenger
27%                                                    The historically dominant use of rail for freight
transport partly explains the larger number of
Source:PPI Project Database.                                         freight than passenger projects awarded to the
private sector. Freight only and freight and fixed
assets account for 57 percent of all projects (table
2). The standard model for private participation
in railways in Latin America involves separating
TABLE 2    PRIVATE RAIL PROJECTS AND INVESTMENT IN                  passenger and freight service, leaving long-
DEVELOPING COUNTRIES BY SEGMENT, 1990-97                 distance passenger services with a public oper-
ator. Bolivia is an exception. It awarded leases
for the operation of both services on each of the
country's two networks. In Africa two projects
'*-  _*                        tes        E l 3 -              transferred responsibility for both freight and
intercity passenger services to the private sector.
Fixed assets and freight    15         41        3,537
Fixed assets and local                                              The transport sector faces greater intermodal
passenger                  10         27       8,847               competition than other infrastructure sectors-
i-reight                     6         16        1,427              railways are one of several forms of land trans-
Fixed assets, freight  and                                          portation-and  this competition is especially
Fixed assets, freight, and                                          intense for passenger transport. Roads offer most
intercity passenger         3          8          47               customers a less than fully priced alternative to
Freight and intercity                                               rail travel, leaving  most passenger railways
passenger                   2          5         560               unable to compete without subsidies. To deal
Freight and local                                                   with this problem, passenger concessions in
passenger                   1          3           0               Argentina were awarded on a least-subsidy basis.
Total                       37        100       14,417               East Asia and the Pacific has had less history of
Source: PPI Project Database.                                       private investment in freight railways and less
reliance on freight transport by major exporters.
But with rapidly growing cities, many Asian
countries face a rising demand for intercity pas-
operating efficiency prompted governments to    senger transport. To meet this demand and
consider (or reconsider)  private  sector ap-    improve passenger transport within their capital
proaches. The deficiency in government invest-    cities, Malaysia and Thailand turned to the private
ment led to interest among freight customers in    sector, aw-arding contracts for the construction of
taking over the networks, and the potential for    new light rail systems. Five other passenger and
reliable revenue encouraged sponsor support.         fixed asset contracts were awarded for the oper-



The World Bank Group                   55
TABLE 3   PRIVATE RAIL PROJECTS AND INVESTMENT BY
REGION, 1990-97
Investment
ation of suburban railway networks and the                                                        (1997 US$
Buenos Aires metro in Argentina. And in 1998 pri-      Region                                     millions)
vate sponsors were awarded concessions for the
Rio de Janeiro metro and suburban passenger            East Asia and the Pacific       7             7,959
services.                                              Europe and Central Asia         1                0
Latin America has led the return                       Latin America and the Caribbean    26        6,458
to private railway projects                            Sub-Saharan Africa              3                0
Total                          37           14,417
Latin America has clearly led the way in the
revival of private participation in the rail sector.'5  Source: PP Proect Database.
Seven countries in the region have awarded a
total of twenty-six contracts to private compa-
nies, 81 percent of the sector total. Fewer con-       TABLE 4   TOP FIVE DEVELOPING COUNTRIES BY
tracts have been awarded in East Asia and the                     INVESTMENT IN PRIVATE RAIL PROJECTS,
Pacific, although the size and nature of the pro-                 1990-97
jects have meant slightly more private invest-
ment (table 3). A few projects have reached                             Number of             Investment
financial closure in Sub-Saharan Africa and in         Country           projects          (1997 US$ millions)
Europe and Central Asia. South Asia and the
Middle East and North Africa have not yet trans-       Malaysia             4                    5,098
ferred any railway operation to the private sec-       Argentina            9                   2,745
tor, but some countries are considering private        Thailand             2                   2,301
participation.                                         Brazil               8                   2,216
Within each region, projects are further concen-       Mexico               2                    1,302
trated in a few countries. The top five countries      Source:PPI Project Database.
ranked by investment in rail projects account for
almost 95 percent of private investment in the
sector and for 68 percent of the projects (table
4). Ranking countries by number of projects   infrastructure sectors. Many Latin American gov-
would replace Thailand and Mexico with Bolivia   ernments have gained experience in concession-
and Chile, with three projects each.             ing through private participation in electricity,
telecommunications, and water and sanitation
Regions show  continued trend                    (see tzaguirre 1998 on electricity, and Silva,
to private participation                         Tynan, and Yilmaz 1998 on water and sanitation).
The following regional review of concessions    Most railway concessions in Latin America have
under way signals an ongoing trend toward pri-   been awarded to consortia of domestic compa-
vate participation in the rail sector. While not   nies, often in partnership with one experienced
comprehensive, it illustrates the drivers under-   international operator, and sponsored by a major
pinning the trend.                               freight customer. The overseas arms of state rail-
way companies have also taken an interest in
Latin America and the Caribbean                  recent projects. Involving existing customers
improves the operator's access to information on
One reason for Latin America's dominance in   expected demand changes and reduces the risk
private railway projects is the region's positive   to  the sponsor by  allowing investment to
experience with private participation in other   respond to these demand predictions. Sponsors



56                 Private Participation in the Rail Sector-Recent Trends
and operators of early concessions have capital-   some African governments to consider private
ized on their experience and taken a stake in   participation to improve rail service and prevent
later contracts. In the longer term, however, cus-   further deterioration of railway infrastructure.
tomer ownership may reduce the operator's   Latin American contracts provide good models
incentive to expand service for new users (see   for countries with a similar history of private
Campos and Cantos 1999).                      freight railways.
Argentina started moving toward private con-   Four railway projects in Africa have reached
tracting in the late 1980s. It awarded contracts in   financial closure since 1990, two with World
the early 1990s, with contracts for five freight rail-   Bank  assistance-the  Abidjan-Ouagadougou
ways reaching financial closure in 1991-93.   railway linking Cdte d'Ivoire and Burkina Faso
These routes have already achieved major gains   and the Maputo Rail network in Mozambique.6
in productivity and revenue. Encouraged by the   Cameroon and Gabon have started the bidding
success of freight concessioning, Argentina has   process for private concessions.
contracted out the operation of suburban pas-
senger rail and the subway in Buenos Aires,   Among countries in the Middle East and North
where again productivity has increased and sub-   Africa, Jordan and Tunisia are considering pri-
sidy costs have fallen.                        vate contracting. In Jordan negotiations for a
concession to operate, manage, and extend the
Argentina's freight and passenger concessions   283-kilometer Aqaba railway had reached an
have faced challenges despite their general suc-   advanced state by the end of 1998.
cess. Initial demand projections proved too opti-
mistic, and sponsors have been unable to fulfill   Eastern Europe and Central Asia
their investment commitments. Argentina's expe-
rience highlights the importance of renegotiation   The only country in Eastern Europe and Central
or other adjustment mechanisms that allow con-   Asia with private involvement in the railway sec-
cessionaires to remain in business without the   tor is the Czech Republic. In 1997 the Czech gov-
government losing credibility (Thompson and    ernment awarded regional railway leases to
Budin 1998).                                   private operators willing to maintain local ser-
vices.7 Since then it has also privatized two pre-
Concessioning started later in Brazil than in   viously leased regional railway operations, with
Argentina, but the outcome in traffic growth   the goal to transfer loss-making routes to private
and profitability in the two countries looks   operators rather than to raise revenue. The
likely to be similar. Sponsors in Argentina and    Czech contracts have left ownership of fixed
Brazil have committed to similar levels of   assets with the government, but transferred all
investment (see table 4). The Brazilian govern-   rolling stock-freight and passenger-to a pri-
ment recently awarded a concession for Fepasa,   vate operator.
the last of its seven regional railway networks,
and one for the Rio de Janeiro metro. Bolivia,   Asia
Chile, Colombia, Guatemala, and Mexico have
also awarded contracts to private sponsors and   In East Asia and the Pacific two countries domi-
operators.                                     nate private involvement in the rail sector:
Malaysia (four projects) and Thailand (two).
Sub-Saharan Africa and the Middle East and     Both countries have awarded greenfield con-
North Africa                                  tracts for new metropolitan light railway net-
works. The only other Asian developing
'I'he experience with private rail contracts in   economy with private investment is China,
Latin America and elsewhere has encouraged    where the government sold shares in the



The World Bank Group                            57
Guangshen Railway Company to raise capital    benefits  of splitting  infrastructure  provision
without a transfer of control.8  No country  in    from  service operation have driven many of the
South Asia has yet awarded a private contract,    reforms in OECD  countries and may offer one
but a light rail concession is under consideration          solution to the access pricing issues faced when
in India.                                                   vertically  integrated  companies  are  conces-
sioned with open access requirements (van de
In Malaysia and Thailand established property               Velde 1999).
development and construction companies were
attracted by the potential increase in property             Concessions  have  been  more  common  than
value from  improving local transport facilities.    other types of private participation, with most
But the importance of property development to               countries turning to the private sector to improve
the success of projects has made financing dif-    the management of loss-making  railways and
ficult, particularly with the recent financial crisis    rehabilitate deteriorating infrastructure. This pat-
drastically reducing property values. One pro-    tern looks set to continue. Improvements in per-
ject in Thailand, Hopewell's Bangkok Elevated               formance in most of the projects in Latin America
Road and Train System  (BERTS), reached finan-    have encouraged governments in Sub-Saharan
cial closure in 1990, but later suffered financial    Africa and the Middle East and North Africa to
problems and was officially terminated in 1998.    consider concessions for railway management,
To prevent the financial crisis from undermining            operation, and rehabilication. A few  BOT pro-
the country's second light rail project, the Thai    jects in Asia have involved the private sector in
government has provided soft loans to the spon-    financing and building new  infrastructure, but
sors. Two of Malaysia's three light rail systems            the financial crisis has made it difficult to gauge
have experienced financing difficulties, and the            their success.
already completed Star has reported revenue
below expectations (Symon 1998). The financial    ' Three were short-term leases for the operation of railwavs in
crisis is encouraging Asian governments to look               Thailand that expired in 1991 and were not renewed. The other
at using private participation to improve the effi-           rwo were a management contract in Mlexico and a BOT contract
ciency of existing  assets rather than building             2 All investment ftgures are in 1997 U.S. dollars.
new  systems.                                               3 In the rail sector concessions range from leases with little or no
private investment to full French-style concessions: all leave own-
ershtp of fixed assets with the poolic sector and transfer operating
Conclusion                                                    risk and responsibility to the private sectorn See Thompson ani
Budin 1998.
Private participation in the railway sector has               Almost all the privately operated passenger railwavs in des'elop-
increased significantly during the 1990s, with                ing countries are urban railway vsystems
increasd signiicantlyciuringthe 199s, with     See Thompson and Budin 199'7 for more details on railwav con-
fourteen developing countries reaching finan-                 cessioning in specific countries.
cial closure on thirty-seven projects in 1990-97.             Because the Maputo concession clotsed in 1998. it is not inclided
Althoucyh this  esurgence in prvate participa- in the figures and tahles.
Although this resurgence in private participa-                These small leases are recorded as one project in the PPI Project
tion is still in its infancy, the experience in Latin         Database
America highlights some lessons. For example,    " This follows the model fur investment in the electricity sector. See
the  renegotiation  of freight concessions  in                Izaguirre 1998.
Argentina has revealed the importance of estab-
lishing flexible contracts and setting clear rene-          References
gotiation or other adjustment mechanisms in
advance. Developing countries can also learn                Australia, Prodoctivity Commission. 1999. "Annex E. International
from  the experience of OECD  countries with                  Railways." In  "Program  'n  Rail Ref irm." Draft report.
different models of private involvement, such                 [vvw.pcggov.au/pcpubs/reporrs.htmll.
Campus, Javier, and Pedro Cantos. 1999. "Reguilating Prtvatizec Rail
as  Japan,  New   Zealand,  and  the  United                  Transport. Policy Research Working Paper 2064. World Bank
Kingdom (see Australia 1999). For example, the                Instimute, \Xashington, D C.



58                        Private Participation in the Rail Sector-Recent Trends
Izaguirre, Ada Karna. 1998. "Private Participation in the Electricity
Sector-Recent Trends." Public Policy for the Private Sector-
(December).
Silva, Gisele, Nicola Tynan, and Yesim Yilmaz. 1998. "Private
Participation in the Water and Sewerage Sector-Recent Trends."
Public Policy for the Private Sector (September).
Symon, Andrew. 1998. "Crisis Takes Its Toll on Road and Rail."
Financial Times. September 14.
Thompson, Louis S., and Karim-Jacques Budin. 1997. "Global Trend
to Railway Concessions Delivering Positive Results." Public Policy
for the Private Sector (December).
- 1998. 'Railway Concessions: Progress to Date." Rail
Internationial, nio. 01/02: 60-73. General Proceedings of the
Marrakech Congress, October 6-10 1997.
van de Vlelde, Didier, ed. 1999. Changing Trains: RailwayReform and
the Role of Competition- The Experience of Six Countries. Oxford
Studies in Transport Series. Aldershot, England: Ashgate.
Nicola Tynan, George Mason University and
Pi vate Participation in Infrastructure Group



59
Rail and Subway Concessions
in Rio de Janeiro
Designing contracts and bidding processes
Jorge M. Rebelo
To help address a budgetary crisis in early 1995, the Rio de Janeiro state government began
reforms aimed at selling or concessioning to the private sector loss-making state-owned
enterprises. In the transport sector this meant selling or concessioning subway, commuter rail,
bus, and ferry services, at the time requiring subsidies of US$363 million annually. This Note
describes the concessioning of Rio's subway, the Metro, in December 1997 and its commuter rail
service, Flumitrens, in July 1998. Together they accounted for 80 percent of the subsidies. The
reform was expected to eliminate subsidies for the Metro and reduce them by two-thirds for
Flumitrens, to improve service, and to clear the backlog of maintenance and investment.
As a model and comparator for the Metro, the   paying the government an annual concession
state used the state-owned subway in Santiago,  fee. Suburban rail concessions in Argentina were
Chile, which is about the same length, carries  initially granted for ten years, and the subway
almost twice as many passengers at the same   concession for twenty years. In the event, the
average tariff, and has an operating surplus. For   model adopted in Rio differed from the one used
Flumitrens, it chose the Buenos Aires suburban   in Buenos Aires.
rail system, which has been operated by private
concessionaires since 1994 and has a productiv-   In the Rio concessions, as initially planned, con-
ity three times that of Flumitrens. The Metro and   cessionaires would not be required to fund the
Flumitrens concessions were initially expected to  investment plans because the state would assure
follow the Argentine model. This model, used in  funding. But the funding for the two concessions
the concession of the Buenos Aires urban rail   was to come from different sources. The Metro
systems, calls for bids to execute an investment   had already secured the funds for completing the
plan defined and funded by the state and to be   works required to double its ridership and
implemented by the concessionaire. It requests  increase its route length from 23 to 35 kilometers.
a schedule of declining operating subsidies to be   These works, started ten years earlier, had been
paid by the state and of fees to be paid by the   halted by the state's financial straits. The
concessionaire to the state for the concession   investment (US$620 million) was financed by a
rights. Finally, it stipulates a level of service to be   loan from Brazil's National Development Bank
met by the concessionaire at a tariff set by the   (BNDES). Flumitrens would receive funds under
government. The bidder with the lowest net pre-  the proposed Rio de Janeiro Mass Transit Project,
sent value for the cost of the investment plan   under preparation for financing by the World
plus the subsidy to be paid by the government   Bank. The investment (US$373 million) would go
minus the concession fee to be paid by the   mainly to rehabilitating rolling stock, signaling,
concessionaire wins the concession. The sched-  telecommunications, and stations judged neces-
ule of subsidies miust decline to zero by a certain   sary to reach a ridership of 1 million passengers a
date, after which the concessionaire must start  day by 2000. While the Metro investment was



60                 Rail and Subway Concessions in Rio de Janeiro
utnder way at the time of the concession, the Bank   icymakers decided to go ahead with a positive
loan for the Flumitrens investment had been   concession-one in which no operating subsi-
negotiated but not yet signed, representing a risk   dies would be paid by the state. Several factors
for potential concessionaires.                influenced this decision. First, the concessionaire
would have no major investment funding oblig-
Metro                                         ations because all the investment was being
financed by the state. Second, the concessionaire
The state government commissioned two major   would take over, by an agreed date and as
studies to help with the design of the concession    described in the concession contract, all the
contract and the bidding process.              ongoing extensions financed by the state as well
as additional rolling stock already ordered by the
The first, funded by a World Bank loan, identi-   state. Third, the concessionaire was expected to
fied the basic parameters to be included in the   move more boldly in rationalizing staff than the
bidding documents, undertook a demand analy-   projections had assumed. And fourth, tariffs were
sis of the system for different scenarios, prepared   increased to account for inflation, in line with the
financial projections, reviewed the legal and    government's policy.
institutional framework, and proposed actions
for dealing with redundant Metro staff who    By contrast to the Argentine concessions, where
would not be absorbed by the potential conces-   the concessionaires carried out the works, in the
sionaire. The study also looked at how the fed-   Metro concession the state is implementing all the
eral concession law would affect the proposed   investment plans funded by the BNDES loan. The
concession.                                    implemienitaLion of works sLarted two years before
the concession and continued after the conces-
The financial projections suggested that the sys-   sion was signed. This was another risk to be taken
tem would require an operating subsidy for one   into account by the potential concessionaires,
to two years before it would start producing an   which would project the revenues on the assump-
operating surplus. This subsidy estimate raised   tion that the line extensions and additional rolling
an important issue: the federal law did not seem    stock would be ready by a certain date. With the
to allow "negative concessions," like most of   state as implementing agent, the winning conces-
those in Buenos Aires. The state therefore hard to   sionaire would have no way to control delays
approve a law that would permit such subsidies.   other than by exercising the penalties in the con-
cession contract.
The second study, funded by the state under a
contract that included a success fee, was carried   The state maintained part of the existing Metro
out by local consultants. The study helped pro-   organization to handle issues related to redun-
duce a preliminary background memorandum,   dant personnel not absorbed by the concession-
cash flow  analysis, environmental and safety   aire, to assist the secretary of transport with
assessment, inventory of existing infrastructure   extensions of the system, and to provide support
and equipment, and procurement documents.  to the Public Services Regulatory Agency in mon-
The consultants were also responsible for running   itoring the performance and safety indicators in
the concession process, and they assisted the state   the contract. The state indicated that it had access
in the presentation of the concession documents   to funds to compensate redundant staff, but that
to the public and in some domestic road shows.   turned out not to be the case.
Strategy                                       Bidding process
Despite the finding that an operating subsidy   The concession included 41 kilometers of right-of-
would be required for at least two years, the pol-   way extension and the operational areas of the ter-



The World Bank Group                     61
TABLE 1   URBAN TRANSPORT CONCESSIONS IN THE RIO DE JANEIRO METROPOLITAN REGION
Metro                                     Flumitrens
Package size             41-kilometer right-of-way extension.      200-kilometer right-of-way extension.
Term of the concession   20 years, renewable once for 20 more years.    25 years, renewable once for 25 more years.
Ownership of equipment    Rio de Janeiro state government.         Rio de Janeiro state government.
and tracks
Service quality          Based on the performance targets for      Based on the performance targets for frequency,
specification          frequency, reliability, safety, and comfort  reliability, safety, and comfort established
established in the concession contract.  in the concession contract.
Payments by the          None.                                     None. But proceeds of the Metro concession
government                                                        fee will be made available to the
concessionaire for investments.
Award criterion          Net present value of best offer above the  Net present value of best offer above the mini-
minimum price (US$25 million) plus        mum price (US$28 million) plus materials in
materials in stock (US$3.56 million).    stock (US$8.25 million), plus the discount on cap-
ital made available by the state, plus the cost
of optional investments assumed by the bidder.
Tariff renegotiation     The flat tariff for a one-way trip was set by  The flat tariff for a one-way trip was set by the
conditions             the state in the bidding documents and can  state in the bidding documents and can be up-
be updated only for inflation, according to a  dated only for inflation, according to a formula.
formula. For expansion and new investments   The concessionaire will be allowed to increase
under the present contract, the conces-  the tariff by 50 percent if it installs air
sionaire must submit a plan for approval by  conditioning in the trains. For expansion and
the state government.                     new investments under the present contract,
the concessionaire must submit a plan for
approval by the state government.
Performance assurance    Concession contract monitoring by the     Concession contract monitoring by the
Public Services Regulatory Agency of      Public Services Regulatory Agency of
Rio de Janeiro State.                     Rio de Janeiro State.
Network planning         The state will establish the conditions for  The state will establish the conditions for
operation of new lines.                   operation of new lines.
Access to facilities                                               The concessionaire of the freight railway
system has access to Flumitrens lines
and pays a track access fee.



62                Rail and Subway Concessions in Rio de Janeiro
minals and other operational buildings described  the main ones filed by unions and the engi-
in the contract (table 1). The concession was   neers association. These opposed the conces-
awarded in a two-step process: a prequalification  sioning of the service to the private sector,
in which the experience of the potential conces-  arguing that the Metro was a state responsibil-
sionaires was compared against the requirements    ity. These injunctions were easily defeated.
set out in the bidding documents, and a compari-  The main unofficial protest came from the
son of the bidders' cost proposals, containing the  runners-up. They argued that the winner
net present value of the offer over the term of the  would be unable to cover its costs and make
concession.                                     a profit because of the high bid. They also
claimed that there should have been an inter-
The proposals for each step were delivered to a  mediate step in the bidding process calling for
special commission of the Rio de Janeiro stock  a business plan in which each bidder would
exchange, which first verified that the candidates  indicate how it would operate the system.
met the prequalification conditions. Once bid-  That, they argued, would have proved their
ders prequalified, their cost proposals were    point about the winner's bid,
opened in a public session on the premises of   * There were no strikes or destruction of inven-
the exchange. (In the event of a tie between two  tory as there had been in other cases in the
or more bidders the process allowed the tying   region in which a state-owned company was
bidders to bid in an open outcry auction during  taken over by the private sector.
the same session in which the cost proposals   * Unlike the Flumitrens concession, the Metro
were opened.)                                   concession process was completed without
postponements at either stage in the two-step
Results                                         process.
The Rio Metro system was concessioned to the   The main criticism after the concession was that
private sector on December 23, 1997. The win-   the minimum price set by the state had been too
ning bidder was a consortium  led by an   low, as evidenced by the fact that the price
Argentine company and a local investment bank.   offered was ten times the minimum. Hindsight
The concessioning process led to several inter-   suggests that the state could have required addi-
esting outcomes:                              tional investment as part of the concessionaire's
* A large number of bidders presented propos-   obligations, such as additional trains or small line
als, reflecting the private sector's confidence   extensions.
that the Metro's situation (the annual operat-
ing subsidy had been about US$120 million)   Flumitrens
could be turned around.
• A sizable number of foreign bidders partici-   The Flumitrens concession process was more
pated even though there had been no inter-   complicated than the Metro's. Flumitrens was
national road show, raising a question about   seen as a risky concession not only because of
whether the expensive international road   its high projected operating subsidy require-
shows often used for concessions are really   ments but also because the concessioning was
necessary.                                  left to the end of the administration's political
* The net present value of the concession fee in   term, close to the start of the state governor's
the winning bid was about ten times the min-   electoral period in April 1998. The decision-
imum price set in the bidding documents.    makers were forced to rethink the process twice
* Unlike in earlier privatizations in Brazil, there   as a result of hasty decisions and other factors.
were no official protests against the final
award of the concession. There were initial   Flumitrens had been transferred to the state in
legal injunctions against the concession, with   1995, benefiting from a World Bank loan sup-



The World Bank Group                63
porting decentralization of the system from the   Strategy
federal to the state government. At the time of
the transfer the federal government agreed to   Although the Metro concession had been a great
pay a full year of staff salaries to the state, which   success, the opposition party had harshly criti-
was expected to use those funds to reduce staff  cized the minimum price set for the concession
redundancies; instead, the state used the funds   and launched a media campaign aimed at show-
for another purpose. The investments under the   ing that the administration was giving away state
Bank loan, especially those in rehabilitating   propelrty. In response to this criticism, and
rolling stock, were expected to allow Flumitrens   despite the projections showing that Flumitrens
to maintain its ridership and prepare for the   would probably require an operating subsidy
concession. But because of poor decisions and   over the first four years, the state decided against
delays in the rehabilitation of trains, train fleet   a negative concession.
availability decreased, passenger demand de-
clined, and fare evasion increased. In the sec-   The state project team floated the idea of a for-
ond year the state started a rationalization   mula to provide the Flumitrens concession with
program. But Flumitrens continued to suffer   additional capital (from the concession fees paid
from lack of train availability because the com-   by the Metro concessionaire) and tariff increases
panies that had won the train rehabilitation con-   if improvements were made to the trains (such
tracts in international competitive bidding failed   as installing air conditioning). The funding from
to meet the proposed schedules, contributing to  the Metro would amount to a capital rather than
a further decline in ridership. As a result the   an operating subsidy but would be risky because
Bank agreed to finance another loan to rehabil-  it assumed that the Metro's concessionaire would
itate the remaining fleet if the state would   not default on any of its payments.
concession Flumitrens.
The rehabilitation of infrastructure and equip-
The Flumitrens concession process produced   ment financed by the Bank's decentralization
two major studies similar to those for the Metro   loan, the additional rehabilitation provided by
concession. The first, funded by the Bank,   the new loan, and the additional capital from the
evaluated the options and the market for con-   Metro were expected to be sufficient to attract
cessioning the system. The second, funded by   the private sector.
the state under a contract with a success fee,
prepared the preliminary background memo-   The original aim was to include the Bank loan in
randum, cash flow analysis, and bidding docu-   the bidding documents, giving the winning bid-
ments. The financial projections in the first study   der the right to execute the investment program
suggested that the system would require an   financed by the loan without further procure-
operating subsidy (of roughly US$150 million to   ment. This would have the advantage of allow-
US$250 million a year) for three to four years  ing the concessionaire to implement its own
before it would produce an operating surplus.   works and to coordinate its operations with
This led to the conclusion that Flumitrens would   ongoing works, a task that becomes difficult
have to be a negative concession, similar to the   when the operator and the implementation agent
ones in Buenos Aires.                        for the works are not the same. To include the
Bank loan in the bidding documents, the state
In addition, using Japanese funding, Flumitrens   would have had to comply with the Bank's
hired consultants to help the state review the   guidelines for international competitive bidding.
transaction report, to undertake a road show in   Since the state did not comply with Bank pro-
Miami, to explain the process to potential con-   curement guidelines, it simply indicated in the
cessionaires, to hire procurement consultants,   bidding documents that it had obtained a loan of
and to prepare the "data room."              US$186 million from the Bank to support the



64                 Rail and Subway Concessions in Rio de Janeiro
rehabilitation of infrastructure and equipment   Results
listed in the loan documents. The loan would be
implemented by the state, not by the conces-   Five consornia submitted bids. The highest price
sionaire as originally planned. This was another   was more than six times the minimum price set.
risk to be taken into account by the potential   The winning bid, awarded in January 1998, was
concessionaires. Some chose not to bid because   from a Spanish-Brazilian consortium. A good
in their opinion implementation of the package   number of the trains and works included in the
by the state would lead to unacceptable delays.   investment package for the loan negotiated with
the Bank, and listed as optional investments in
Bidding process                               the bidding documents, will instead be financed
by the concessionaire as part of its bid, leaving
The concession included 200 kilometers of right-  room for additional investments excluded during
of-way extension and the operational areas of the   preparation of the loan because of budget
stations, main terminals, and other buildings   restrictions.
indicated in the contract. Contracts with retail
businesses operating in the stations could be re-   Unlike the Metro concessionaire, which will
negotiated or terminated by the concessionaire.    have to pay the state the concession price
agreed to in the contract, the Flumitrens con-
The bidding process was similar to the two-step    cessionaire will have an out-of-pocket cost
approach used in the Metro concession. The state   equivalent only to the minimum price and the
administration prepared the concession docu-   materials in the inventory. The rest of the bid
ments according to Brazilian procurement law    consists of the cost for rehabilitating the fleet,
and called for prequalifications. Five consortia   the civil works assumed, and the discount on the
indicated that they would seek prequalification,   capital made  available  by the state. The
but at the last minute only one appeared ready   Flumitrens concessionaire must deliver the reha-
to present the bid bond required. Suspecting a   bilitated trains back to the state and complete
cartel, the state canceled the first bid and set a   the civil works according to a specified dead-
new date for the bidding process. In the mean-   line, but will not have to pay the state for these
time the state revised the bidding documents to   services. Thus the concessionaire's payment will
make the concession more attractive and the   be in terms of trains made available and civil
process more transparent and to allow time for   works completed. If the concessionaire is effi-
other bidders to enter.                        cient in procurement, it might be able to deliver
those outputs for less than the cost quoted. The
The state adopted the formula for providing a cap-   state must be strict in ensuring that the deliver-
ital subsidy from the Metro concession fees. It   ables meet the specifications in the concession
called for new prequalifications and set the mini-   contract.
mum price at US$28 million plus the cost of mate-
rials in Flumitrens's inventory. The net present   Lessons
value of the bid would include the net present
value of the offer above the minimum price to be   The Rio de Janeiro experience suggests that even
paid over the concession period, the cost to repair  in systerms experiencing very high deficits as a
the rolling stock included in the bid, the cost of   result of inefficient management, poor infrastruc-
other works listed in the bid and assumed by the   ture, and inadequate equipment, concessions can
bidder, and the discount offered on the invest-   be designed in such a way as to attract the pri-
ment capital made available by the state. Finally,   vate sector. Unlike Buenos Aires, which pio-
the state would allow tariff increases if the win-   neered modern urban rail concessions, the state
ning bidder introduced air conditioning in the   of Rio de Janeiro was able to concession its sys-
trains before a specified deadline.           tems without providing operating subsidies. This



The World Bank Group                 65
was a major achievement, and a big factor in it  cate the redundant personnel to agencies where
was political commitment.                     they are needed or find funding for the sever-
ance payments.
A robust bidding process helped achieve this out-
come. First, Rio ensured transparency in the   Another challenge for the new state administra-
process. The use of the Rio stock exchange for   tion that took over in 1999 will be to ensure that
presentation of the bids (through a certified bro-   there is true modal integration between subway,
ker hired by the bidders), and their evaluation by   rail, ferry, and bus services in a context in which
a commission associated with the exchange, are   all operators are private. Creating a multimodal
not acceptable under Bank procurement guide-   ticket will require the introduction of special tick-
lines. But in Brazil these measures added to the   eting, such as a smart card, and an agreement on
transparency of the process because the Rio stock   revenue sharing through some sort of clearing-
exchange is a highly respected institution.   house. The state must play the role of sector
coordinator and regulator.
Second, the state team was careful to prevent
the formation of cartels. When it suspected that   Since the state and municipal administrations
a cartel was forming, it simply delayed the   are controlled by different political parties, care
process and provided time for other bidders to   must be taken to ensure that municipal buses
join. And to prevent monopolistic behavior, the   do not engage in predatory pricing to undercut
Public Services Regulatory Agency prevented    privatized buses or Flumitrens. Proposals dur-
the Metro operator from bidding in the Flumi-  ing the election campaign to impose a flat fare
trens concession.                             for intercity buses should be carefully exam-
ined to ensure that they would not have a
Third, the process was run by the secretary of   major impact on Flumitrens's ridership. These
planning and finance rather than the secretary of   regulatory issues may be hard to deal with
transport. who is generally too closely associated   because the buses and trains are not regulated
with the operating agencies and subject to the   by the same agency. The bus lobby prevented
pressure of strong transportation lobbies.    bus regulation from being included in the man-
date of the Public Services Regulatory Agency,
Next steps                                    arguing instead to retain the state transport
ministry as regulator. The state administration
During preparation of the reforms, the state indi-   must work hard to bring the intercity buses
cated that it had access to a credit line with the   under the same agency that regulates trains and
Federal Savings and Loan (Caixa Economica   to persuade the Rio municipality, which regu-
Federal) to finance the severance payments of   lates the urban buses, to put them under the
redundant staff not retained by the concession-   same umbrella. Only in that way can there be
aires. The state had planned to eliminate redun-   coherent regulation of the main urban trans-
dancies through voluntary and involuntary staff   port modes.
reduction programs. But this goal w7as only par-
tially accomplished. Nine months after the rail   The regulator must also be very strict in ensur-
concession was awarded nearly 3,000 redun-   ing compliance with the performance targets set
dant staff remained (2,500 at Flumitrens and 500   in the contracts signed by the concessionaires,
at the Metro), at a monthly cost of USS6.3 mil-   applying the penalties set out in the contracts for
lion. Failing to make adequate provision for sev-   noncompliance. Without strict compliance with
erance payments was a major flaw  in the   agreed on targets, a point of failure in other
process, and the state must quickly take steps to   urban rail concessions, it will be difficult to
correct it. To realize tlhe potential savings offered   ensure the level of service that the state has
by the concessions, the state must either reallo-   promised to users.



66                         Rail and Subway Concessions in Rio de Janeiro
For a more detailed account of the concession process see Jorge M.
Rebelo, "Reforming the Urban Transport Sector in the Rio de Janeiro
Metropolitan Region: A Case Study on Concessions" (Policy Research
Working Paper 2096, World Bank, Latin America and the Caribbean
Region, Finance, Private Sector, and Infrastmcture Department,
Washington, D.C., 1999).
Murilo Junqueira, former Managing Director of Flumitrens, and
Regina Amelia Oliveira, former Planning Coordinator of Flumitrens,
provided data for this Note.
Jorge M. Rebelo, Principal Transport Specialist,
Latin America and the Caribbean Region