Improving Service Delivery for the Poor through Better Utility Performance

For Juan Ramirez, living in Oaxaca, Mexico, the only way to obtain water for his family to wash and clean is to buy water from a truck. For this service he pays almost five times more than families with running water. On top of that, he has to buy drinking water, a burden that is difficult to afford with his income as a construction worker.

Like Ramirez, millions of people around the world still lack access to basic services such as water and sanitation, electricity, and telecommunications. The problem is especially acute in rural areas. Bridging this gap will be essential to eradicate extreme poverty and promote shared prosperity.

A key issue is improving the performance of the utilities that provide the services. Take Latin America and the Caribbean:  Many of the region’s electricity, water, and telecom companies have improved service over the last two decades. But there are still wide variations in performance, which means many people still go without essential services.  

Why do some utilities perform well?

So why do some utilities perform well and others perform poorly? This is the question a new study, “Uncovering the Drivers of Utility Performance,” seeks to address. It finds that ownership structure, regulatory governance, and corporate governance are all key determinants of sector performance.  

The report uses an original dataset on the performance of utility companies in Latin America and the Caribbean. It includes information from more than 250 electricity distribution companies and 1,700 water and sanitation companies, and extensive data on telecommunications service providers, private sector participation in infrastructure, regulatory frameworks, and internal incentives to improve utility performance. Countries covered include Argentina, Bolivia, Brazil, Chile, Colombia, El Salvador, Guatemala, Mexico, Nicaragua, Panama, Peru, and Trinidad and Tobago.

“This study presents a comprehensive, evidence-based assessment of the impact of private sector participation, regulation, and governance structures on the performance of utility (electricity, water, telecommunications) companies. It is part of the Bank’s efforts to bring the rigors of econometric analysis to real sector questions, so that we can better assist our clients in their efforts to improve social welfare,” said Augusto de la Torre, World Bank Chief Economist for Latin America and the Caribbean. 

Private and public sector participation

According to the analysis, on average, private utilities outperform public utilities – although there are good public and private utilities and underperforming private and public utilities. In electricity, for example, labor productivity in private utilities is twice that of public utilities.  

“When carefully designed and implemented, private sector participation in service provision has a significantly positive effect on labor productivity, efficiency, and the quality of service. In telecommunications, it has also increased output and coverage,” explained Luis A. Andrés, co-author of the study.  

The private sector alone is not the solution, however. The government, in its dual quality of regulator and service provider, plays a central role in improving sector performance.  Independent regulatory agencies are critical and need to be transparent, accountable, and free of political interference. State-owned enterprises need a strong accountability mechanism with an independent board of directors, a professional staff, disclosure policies, and a mechanism for evaluating performance.  

Improving sector performance

According to the study, improving sector performance requires a holistic approach that is tailored to specific circumstances. In addition to sound regulation, factors that influence sector performance include incentives and market structure, which have been empirically modeled and tested; and other aspects such as subsidy mechanisms and social accountability for which few econometric studies have been conducted so far.

“We wanted to understand the science of service delivery across infrastructure sectors, so we set up a laboratory populated with data from hundreds of utilities across a decade of reform. The forensic analysis of that data uncovers the mysteries of what drives the performance of utilities, providing policy makers a strong sense of what to expect from changes in ownership, regulatory structures, and even governance arrangements of utilities,” said Jordan Schwartz, co-author of the study.  

The authors recommend that policy makers considering sector reforms should:

• Prioritize performance objectives, in order to determine which solutions seem most appropriate.  
• Heed lessons from the past.  Concession laws and contracts should focus on securing long-term sector efficiency, assigning and mitigating risk, and discouraging opportunistic bidding and renegotiation.
• Maintain a strong government role in infrastructure service delivery, even in the presence of private sector participation.  Governments need to ensure that resources and policies increase access for the poor.
• Support people in need who are adversely affected by reform (through lay-offs and higher tariffs) and improve communication to safeguard against corruption and ensure popular support.