Restructuring Infrastructure Report: World Bank briefing

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Public Enterprises

08 June 2005
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Meeting report

 

PUBLIC ENTERPRISES PORTFOLIO COMMITTEE
8 June 2005
RESTRUCTURING INFRASTRUCTURE REPORT: WORLD BANK BRIEFING

Chairperson:
Mr Y Carrim (ANC)

Documents handed out:
World Bank PowerPoint presentation on reforming infrastructure
Restructuring Infrastructure and Services: The African Experience

SUMMARY
World Bank officials briefed the Committee on reform of the infrastructure sector. They felt the old economic model of state ownership had been replaced by a new paradigm that entailed a combination of institutional reforms: privatisation, competitive restructuring, and regulatory reforms. They outlined problems encountered with the old model, the prerequisites of effective privatisation, the promises and challenges of the new paradigm, and the lessons learned. Members expressed concern about the lack of research conducted in South Africa, the discrepancy between empirical evidence and public perceptions about privatisation, the impacts of privatisation, tariff rebalancing, and delivery in rural areas. The Committee expressed interest in how this economic model could be applied in South Africa.

MINUTES
The Chairperson said that the Secretary had invited the Portfolio Committees on Minerals and Energy, Provincial and Local Government, Water Affairs, Transport and Trade and Industry to attend this meeting. However, because the date of the meeting had changed, only representatives of Provincial and Local Government, Water Affairs, and the Standing Committee on Public Accounts had been able to attend. He highlighted that the World Bank official, Dr I Kessides, had published a book on the issue entitled "Reforming Infrastructure: Privatisation, Regulation, and Competition".

World Bank briefing
Dr Kessides, Lead Economist, gave a PowerPoint presentation on reforming the infrastructure sector. This sector played a critical role for economic growth, international competitiveness, and foreign direct investments. During the past two decades, a profound reassessment of public policy towards infrastructure had taken place. The old model of state ownership had been replaced by a new paradigm that entailed a combination of institutional reforms: privatisation, competitive restructuring, and regulatory reform. Dr Kessides outlined problems encountered with the old model, the prerequisites of effective privatisation, the outcomes of privatisation, and challenges of the new paradigm. Latin American countries were pointed out as examples to show the improvements in performance after institutional reform had taken place.

The main problem of the state owned model had been underinvestment. This had largely been caused by underpricing, because in most sectors, infrastructure prices had been below economic costs. Worldwide, performance in infrastructure sectors had gradually deteriorated where the state owned model prevailed.

Empirical evidence had shown that the combination of institutional reforms had improved infrastructure performance, increased investment, and expanded service coverage. Different countries demanded different infrastructure reforms and a county-specific strategy. Concerns that the restructuring process would adversely affect the poor had been largely unfounded. Challenges faced by the new reforms were the difficulty of establishing effective regulatory institutions, the lack of technical expertise, introducing competition, and the complexity of pricing reforms.

There was a significant discrepancy between empirical evidence and the public perception on privatisation. The latter had been increasingly disapproving over the last few years. Four factors could explain this paradox. First, there had been a tendency to associate unrelated economic problems – such as stock market collapses and the Internet bubble burst – with privatisation. Secondly, the public might have been disillusioned because too much had been promised at the time when the reforms were introduced. Thirdly, not enough time had passed yet for the reforms to bring about the desired outcomes. Fourthly, the increase in prices in certain sectors had contributed to the disapproving opinion of the public on privatisation.

Discussion
Mr P Hendrickse (ANC) queried how service could best be delivered. He voiced concern about the substantial gap between empirical evidence and the public perception on privatisation. He further asked whether there had been a follow-up survey on the quality of telecommunications in Brazil of the 1980s that had been mentioned during the presentation.

The Chairperson stressed that the public perception of privatisation was as important as the scholarly assessments because it was the public that ultimately decided the fate of government. Recent elections in several Latin American countries had resulted in a shift towards left-off-centre governance. The public perception had a great impact on governance. Privatisation should be one of several options in the restructuring process of state owned enterprises (SOEs). Every option had to be both tested in its specific context and the relevant sector. In South Africa, restructuring entailed more than privatisation, although restructuring often meant privatisation. Restructuring stood for making SOEs more effective, efficient, productive, and more oriented towards delivery.

Ms L Moshiane (ANC, Standing Committee on Public Accounts) commented that South Africans were impatient with government, particularly regarding housing delivery. The public forced government to live up to its promises and to deliver. Price increases would hit the poor even further. She wondered whether the model presented by the World Bank would have the desired outcome in a South African context. Experiences of restructuring reforms from countries that shared more similarities with South Africa would be more useful than the mentioned Latin American examples. She wondered whether there was time to experiment with policies. She then queried whether the infrastructure reforms would provide adequate services in rural areas.

Mr S Mshudulu (ANC, PC Provincial and Local Government) expressed concern about the lack of research that had been conducted in South Africa regarding infrastructure reform. He asked about Dr Kessides’ relationship with institutions like the Municipal Infrastructure Investment Unit. This unit had been created by the Department of Provincial and Local Government (DPLG) to address the lack of technical expertise. It was difficult to invest in rural areas where returns were minimal. The development of infrastructure further faced the problem of land availability. He suggested that World Bank researchers should compare their key findings with the South African Municipal Systems Act. Provisions regarding service delivery were clearly described in chapter eight of the Act. He further asked whether World Bank officials had engaged with institutions of learning in developing countries regarding the lack of capacity and specifically the lack of technical expertise. The restructuring process required a profound analysis of the current situation. He asked how the World Bank rated South Africa in a worldwide context.

The Chairperson emphasised that the Committee did not expect that all questions raised would be answered. Members merely expressed how they felt. This was the first of a series of exchanges that the Committee would have with international experts in the future.

Ms P Bhengu (ANC) asked whether South Africa was currently in a position to privatise, taking into account that the country was in the difficult process of eradicating poverty and creating employment.

Ms B Letompa, Researcher of the Public Enterprises Committee, emphasised that privatisation did not only promise economic growth, efficiency, and competition, but that it was also a political process with far-reaching economic and social impacts. Mali had been one of the first countries benefiting from World Bank and International Monetary Fund (IMF) lending, but no significant improvements had been reported 12 years after their intervention. Instead, there had been a public revolt against World Bank policies. She asked about the current situation in Latin America where structural adjustment programs had created serious problems. She felt that instead of eradicating poverty, World Bank policies often intensified poverty because of their structural adjustment policies. In Uganda, government had employed contractors with the assistance of the World Bank to privatise electricity plants. The Ugandan government was currently paying almost 110% of the rate that the private companies were supposed to pay, because private companies were reluctant to take risks.

Mr S Kholwane (ANC) wondered why Eskom’s prices were so high before infrastructural reforms, and queried the probable effects of structural adjustment in the sector. He then asked how regulatory independence could be achieved in South Africa, taking into account the lack of capacity and skills.

Ms N Ngcengwane (ANC) commented that South Africa was a developing country that had socio-economic responsibilities towards its citizens. South Africa had a very high ‘Gini Coefficient’. The World Bank presentation had indicated that the process of restructuring resulted temporarily in an increase in prices or taxes, and employment reduction. This would impact negatively on South African citizens. The priority of the South African government was job creation. The private sector tried to increase profits at any costs. She asked whether in-depth research had been conducted in South Africa that took all of these factors into account.

Mr C Gololo (ANC) asked which economic model South Africa should follow. In his opinion, South Africa had to use the old model of state ownership as a starting point.

Dr Kessides replied that he did not know what an appropriate model for South Africa would be. He suggested that if thus far, the old model had not failed in South Africa, government should continue with it. If there was however a need for improvement, he suggested assembling world class expertise. These experts could visit South Africa, analyse the infrastructure sectors, and subsequently make appropriate recommendations.

Mr B Gasa, Chief Director: Policy Issues, Department of Public Enterprises, commented that when the privatisation process had been introduced in Latin America in the 1980s, they had faced entirely different circumstances such as budget constraints and fiscal deficits. The South African government had decided that SOEs, particularly those that were strategic and important for infrastructure service delivery, would remain in state hands. He therefore disagreed with Dr Kessides’ questioning of the present validity of SOEs.

Examples from East-Asian countries and China would be useful, as those countries had never privatised but merely ensured effective competition and regulatory policies. The characteristics of developing countries described in the presentation did not apply well to South Africa. Research that was more relevant to South Africa was needed. He agreed that South Africa was challenged by a scarcity of technical expertise, particularly in regulatory institutions. Skills were not only scarce but also frequently absorbed by the private sector. He asked about the importance of cooperative governance and risk management in SOEs. He pointed out that the increase in labour productivity that had been described in the presentation was largely a result of employment reduction and not privatisation.

Dr Kessides agreed that both physical constraints and the inadequate micro performance in the infrastructure sector had led to major policy reforms in Latin America and other parts of the world. He conceded that he knew little about South Africa. The standard of development in South Africa was different. It would be inappropriate to simply apply the lessons learnt to the South African context.

Dr Kessides further conceded that in certain cases, labour reduction had in fact been the cause for significant improvements in labour productivity. Improvements had also been achieved without significant labour reduction. In the telecommunication sector, for instance, the overall employment had even increased after the reforms. There had been high levels of excess employment in the infrastructure sectors, sometimes to generate employment. The inefficiency in these sectors was affecting many other economic activities. The following two questions had to be considered: How costly was it to the overall economy to have infrastructure sectors that were inefficient and that had very high level of excess employment? Were there alternative means of generating the same level of employment without adversely impacting on other economic activities?

The Chairperson reiterated that there were too many questions to be replied to in detail. Many Members wondered what the relevance of the World Bank presentation and Dr Kessides’ book was to South Africa. South Africa had particular socio-economic imperatives as outlined in the Constitution. During the World Bank conference on reforming infrastructure and service delivery in Africa that took place two days ago, there had been widespread concern that the private sector would not deliver in rural areas because there was no incentive for profits. The role of the state was thus crucial because it delivered in those areas where the private sector was reluctant to become involved in.

Studies presented during the conference had shown that the poorest 40% of the population were not reached by the private sector’s service delivery. Dr Kessides’ presentation, however, had pointed out that the poor were not adversely affected by infrastructure reform. He wondered whether these two contradictory statements could be reconciled. He agreed that the old model of state ownership had failed. The new model was however not working either. South Africa’s aim was to combine the delivery of the private and public sector. The Municipal Systems Act outlined the broad regulatory framework for the restructuring of municipal services. According to chapter eight of the Act, the public sector had to deliver, unless it was incapable of delivering or unable to compete with the private sector. He pointed out with reference to the recent World Bank conference that in the end, it did not matter whether the public or the private sector delivered, as long as the quality of service was good.

Dr Kessides disagreed that both models were not working. The failure of the state owned model had been well documented in many developing countries, excluding South Africa. He did not believe that the new model had failed, even though problems had arisen, particularly in the area of regulation. Not enough time had passed to make a proper assessment. The new model had to entail appropriate policy adaptation and new information had continually to be integrated. The new model had led to significant improvements in performance. The failure of the state owned model had in many instances been massive, whereas the problems encountered by the new model were not as severe.

He conceded that it was still largely unknown whether the presented economic model could be applied to developing countries without appropriate modification. He agreed that ultimately it was only important that service delivery was of a high quality, and not whether the public or private sector delivered. The structure of ownership was not the single most important variable explaining differences in performance. State owned ownership in infrastructure had worked reasonably well in the Scandinavian countries and France. But empirical evidence had shown that in the majority of developing countries, SOEs had led to significant deterioration in performance. The reasons for the difference in performance of SOEs had to be revealed.

Dr Kessides acknowledged the Committee’s concern regarding tariff rebalancing, admitting that an increase in prices would inevitably lead to disgruntled citizens. In the majority of transitional economies, prices for electricity did not even cover the variable costs, let alone fixed costs and funds needed for modernising. This had a negative impact on sustainability, and tariffs had thus to be gradually realigned with underlying costs. Prices had however not uniformly increased after infrastructure reforms. In the telecommunication sector, for instance, prices had in fact declined.

It was the combination of institutional reforms that was important, and not only privatisation. Besides the structure of ownership, competitive restructuring and effective regulation also had to take place. Competition might be the most important policy, and not necessarily the change of the structure of ownership. Where SOEs performed well due to liberalised markets and competitive pressure, there was no need for privatisation. Many countries had state owned monopolies that were protected from competition, which resulted in deterioration of performance. There had been performance problems in most developing countries with state owned utilities. If they had liberalised their markets and exposed the SOEs to competitive pressure, they might have performed better. In most countries there had not been any incentives for reform until an economic crisis had been reached, and only radical reforms and radical restructuring could rectify the situation.

There was widespread agreement that one of the fundamental explanations why the United States had performed better economically in the last few years than Europe were the regulatory reforms that the United States had introduced in their major infrastructure sectors. This contentious issue had to be analysed further.

Mr Z Bogetic, World Bank Lead Economist for the Southern African Customs Union (SACU) countries, stressed that when performance of infrastructure utilities was assessed, the following four key elements of performance had to be taken into account: investments, access to delivery, technological efficiency, and regional dimensions.

He then addressed how the new economic model could be appropriately applied to South Africa. South Africa had probably the best economic policies on the continent. Changes in economic policies had only to be marginal. Access of delivery could be expanded further while the costs of expansion had to be kept down. This could be achieved through subsidising connections.

The connection between Latin America and South Africa lay in investments. Public investments had been reduced in South Africa. Only 1.3% of GDP was invested in central government initiatives. This was very low. The total public investments would only increase to about 5% of GDP even when the investments of public enterprises were added. The reason why there was not yet a crisis in South Africa was because of the massive public investments in the 1970s and 1980s. The capital stock had already started to deteriorate in certain areas. The challenges facing South Africa were infrastructure investments and the spatial economy.

The meeting was adjourned.

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