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A Fair Deal for Consumers?

by Cecilia Ugaz and Catherine Waddams Price

How have consumers fared from the sale and introduction of competition to the traditional ‘public utilities’ (electricity, water, telecommunications, etc) in Latin America? Have some consumer groups benefited more than others from increased coverage and changes in price structure? These issues are crucial both for countries considering introducing such reforms, and for those who have already introduced them and are discussing future policy.

This WIDER project explores these questions for four Latin American countries where extensive reforms in the utilities sectors have taken place, starting in Chile in the 1980s (the pioneer in the region) and more recently in Argentina, Bolivia and Peru. These four cases were compared with two European countries: Spain because of her continued investment in Latin America, and the UK because of her influential experience in the field. The experience of the UK is also relevant because of recent concerns with distributional issues which led to reform of the regulatory law in 2000 by the Labour government. These case studies have been complemented by more general considerations of the role of Universal Service Obligations, subsidies and of regulation, the determinants of connection to utilities world wide, and the effects of utilities reform in a general equilibrium framework.

Distributional Impacts are Complex

The distributional impact of reforms between consumer groups depends on two main factors. The first is changing access to the services. This may arise from increased investment to expand the network leading to better geographical coverage or, in the case of fixed line telecoms, the presence of a substitute. The second factor is changes in affordability. Price rebalancing, for example between a fixed charge and the charge per unit or between rural and urban areas or among different categories of consumption (residential, commercial, industrial, etc) has a direct impact on affordability both for new and previously existing consumers.

The Latin American region, as other regions in the developing world, is very ‘vulnerable’ to distributional concerns. There are large areas of these countries where there is no effective access to many infrastructure services, and there is a major disparity in the ability of consumers to connect physically and financially to the network. In the past, cross-subsidies have generally been extensive, both in size and in coverage. But, they have often benefited those with political power, the urban elite, rather than necessarily those in greatest need. As a result, the current challenge is to reach the poor (particularly in rural areas) who have been excluded from networks and subsidies.

The WIDER project, undertaken by experts in each country, estimated changes in access (measured as the number of connections) and in the consumer surplus (a measure of consumer welfare favoured by economists) using data from household surveys for years pre- and post privatization. The partial equilibrium approach used clearly imposed limits on the analysis, but nevertheless captures an important aspect of the reform programme.

One overall pattern is that the effects are often greater for industries privatized earlier, perhaps because those which are easier to open to competition, i.e. telecoms, are more likely to be reformed first. Some of these effects may emerge later in other industries, albeit more slowly. Causality is also difficult to determine. Changes in connections and in consumer surplus are unlikely to be exclusively attributable to privatization and associated reforms.

Access has Mostly Increased

The number of connections has increased in Bolivia and Peru, particularly for telephones. Moreover benefits do not seem to have bypassed the poor. In Bolivia there is evidence that connection rates for the poor increased faster than for other groups across all utilities. In Peru, the pattern of access is similar. In Chile, service coverage increased for most income groups. Electricity coverage increased most dramatically amongst the lower income deciles, and telephone coverage amongst middle income groups. Measuring changes in access for Argentina was more complicated because the only available household survey corresponds to 1997 but statistics from the annual reports of the companies operating in the sectors Internet connections are no longer exceptional services Ara Kazandjian12 indicate an increase in the total number of service users.

For pre-existing customers, the telecoms sector in Peru showed substantial consumer welfare losses associated with the increase in fixed charges for telephones. The effects are negative for all income quintiles, although surplus losses are larger for the poorest consumers, who use the telephone less intensively. For Peru there were positive changes in consumer surplus for telecoms, though water and electricity effects remained negative for all income quintiles. This calculation reinforces the perception that gains in access in some cases dominate the negative effect of higher tariffs on consumer welfare.​

In Argentina most residential consumers have gained from telecoms and electricity price changes, but the poorest have the lowest absolute gain and improvement relative to their income. In gas, water and sewerage there are losses across the board. For lowincome groups these losses are higher relative to their income. Again, Bolivia is similar in this respect to Peru: consumer welfare losses from electricity consumption are in general greater in the richer quintiles. The results for the area of the water concession of the city of La Paz/El Alto also show consumer surplus losses but these were smaller than in other departmental capitals where there had been no reform of the water and sanitation system.

In conclusion, we see a mixed picture. Prices have often risen as a result of reforms, and this has frequently adversely affected low income groups more than others, either in absolute or relative (to income) terms. But most networks (including cell telephony) are extending their coverage, and the poor, who have had least coverage to date, are benefiting more than other groups in most cases. Changes in access were crucial, and often dominated the effect of changing prices for those already connected. The analysis may underestimate consumer gains as it does not account for quality improvements. However, the deficit of connection, particularly for water and sewerage, remains high in many Latin American countries, as reforms have concentrated on urban areas. Concerning the evolution of tariffs, one way of circumventing monopoly power is strengthening regulation, making it more participatory. The experience of the UK and Chile also show that introducing competition wherever possible is the ultimate tool to curb increases in tariff levels, though it may result in price rebalancing which adversely affects the poor in the short term.

Cecilia Ugaz is a Fellow at the Institute of Development Studies, University of Sussex. Catherine Waddams Price is Director of the Centre for Competition and Regulation at the University of East Anglia. They co-directed the WIDER project on the ‘Social Impact of Privatization and Regulation of Utilities in Latin America’, which will be published as Utility Privatisation and Regulation: A Fair Deal for Consumers? by Edward Elgar.