If private companies in developing countries cannot get a reliable supply of power, water, telephone service, or transport, they will provide it themselves. In Nigeria an inefficient public monopoly is the main problem. In Indonesia and Thailand it's more a question of keeping up with rapid growth.
Development experts have become increasingly concerned about the effect of deficient, unreliable supplies of electric power, water, transport, telecommunications, and waste disposal services in many, if not most, developing countries. Such infrastructure services not only are needed to meet the basic needs of households; they also are essential for commerce and manufacturing. But far too often, despite large capital investments by governments, the unreliability of public utilities forces private enterprises to invest in equipment to meet their needs for infrastructure services.
To see how Nigerian managers coped with infrastructure deficiencies and what this response cost each firm, a survey of 179 enterprises was conducted in five Nigerian states. This study, completed in 1992, contributed to the growing interest in the potential advantages of deregulating infrastructure services, providing incentives for competition, and increasing private investment in infrastructure. And it helped show that what is needed is to unbundle complex and often inefficient public systems. For example, a monopoly in an activity with high sunk costs, such as power distribution, could continue to be a government function while a way is opened for multiple, competitive ventures in power generation.
To strengthen the findings of the Nigeria study, surveys were conducted in 1992 of manufacturers in Indonesia and Thailand, two countries that have been growing at rates that strain the supply of infrastructure services. The Indonesian survey covered 290 firms in Jakarta and Semarang, and the Thai survey 300 firms in Bangkok and Chiang Mai. The results have now been combined and compared with the Nigeria study.*
Not surprisingly, there are large differences among the countries in the services that public entities provide and the way private firms respond to poor service. In all three countries private substitutions for public service divert capital and raise costs---and small companies pay the greatest penalty.
Small companies, less able than large companies to provide their own services, tend to be captive customers of the public entities. But even here there are national differences. Small Indonesian firms are more likely than their Nigerian counterparts to have some form of power generating equipment. While the Nigerian government strictly protects the Nigerian Electric Power Authority, the Indonesian government has lowered import duties on generators and encouraged private power generation. This burden of public sector inefficiency hampers the growth of small companies and blocks the formation of other ventures that together could make an important contribution to national employment and income.
Besides investing in their own equipment to meet a deficiency, firms can respond to infrastructure problems in three ways. In some countries they can relocate. Every year in Bogot‡ and Seoul, for example, one of 20 companies moves. But in Indonesia, Nigeria, and Thailand there is little movement, in part because the problems are worse outside the major metropolitan areas. Moving can mean trading one problem for another---a better water supply might be offset by commuting delays for workers.
A firm might also respond by reducing its dependency on the deficient infrastructure service. But most of the Indonesian and Nigerian firms surveyed use technologies that prevent this. A milk processing plant, for example, can do nothing about its need for a consistent supply of electricity.
A business can also simply reduce its output. This negative solution can be forced on small, undercapitalized firms. It can also be the only answer for big companies that consume large amounts of water or power but cannot find efficient equipment to meet their requirements.
In the end, for firms that can manage it, some form of self-sufficiency is the only solution. But often, the private firms are duplicating public capacity---and thus national investment, in countries that have far more need than they have capital. Large companies especially prefer 100% security---installing sufficient capacity to meet their needs. In Indonesia and Thailand, for example, 99% of the firms that have drilled their own wells rely on them almost entirely for their water supply.
Indonesian companies are most likely to invest in substitutions for public supply of services. Firms in Thailand are least likely to, probably because the services in that country generally are more widely available and of better quality. But in all three countries some form of substitution occurs for almost every infrastructure service nominally supplied by the government.
The substitutions are often unusual, but common to all three countries. In each country, for example, many firms own motorcycles---used for messenger services, they reflect the inadequacy of telephone services. Also common to all: the cost burden. In Indonesia, for example, privately produced power is 43 times more expensive than the average price charged by the public utility. For small producers it is 63 times more expensive.
Private firms, with strong encouragement from their governments, can make a variety of arrangements to replace public services partially or completely. These solutions fall into three general categories. One is joint production that borders on private competition with the government entity. A large firm that has been forced into making a major capital investment builds extra capacity at a low incremental cost and sells power or water to other firms. A second solution is "satellite behavior," the flip side of the coin. A smaller firm solicits emergency backup service from a large neighbor, switching from the public supplier to the private in times of need, when service is interrupted, or on a regular schedule matching the times of day when the public company's service is known to be unreliable. The third solution is a joint venture project between equals in which all share in the cost.
Governments of developing countries clearly need to adopt policies of opening the markets for power, water, and other infrastructure services. In Indonesia and Thailand the governments are doing so. These governments encourage private production of power. They are licensing private utility companies and encouraging private industrial estates to provide power and water to all the establishments on the property. In Nigeria, however, the government treats the public power company as a centralized monopoly, protecting it with arcane laws and regulations that prohibit the private sale of power or private cooperation in power generation. Until Nigeria changes its policy, its manufacturers, especially the smaller companies that can be so important in stimulating growth, will pay an unnecessary penalty while their Asian counterparts move ahead.
Manufacturing firms with capacity to supply own power and water
* For more details, see Kyu Sik Lee, Alex Anas, and Gi-Taik Oh, "Costs of Infrastructure Deficiencies in Manufacturing: Indonesia, Thailand, and Nigeria," World Bank, Transportation, Water, and Urban Development Department, Washington, DC, 1994.
