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Tripartite Meeting on Managing the Privatization and Restructuring of Public Utilities

Report for discussion at the Tripartite Meeting on
Managing the Privatization and Restructuring of
Public Utilities

Geneva, 12-16 April 1999

International Labour Office   Geneva

Copyright ® 1999 International Labour Organization (ILO)

 

Preface and Part 1

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utilities report

Cover photograph: Milton Becerra:
Raspadores de monedas, 1994/97

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Preface

This report has been prepared by the International Labour Office as the basis for discussions at the Tripartite Meeting on Managing the Privatization and Restructuring of Public Utilities. It reviews the changing environment in the utilities sector, with special reference to new technologies, environmental requirements, liberalization and privatization and their repercussions on employment, working conditions and industrial relations. It also describes how these changes are managed by the social partners and other stakeholders within a social and societal perspective.

Background to the Meeting

The Meeting is part of the ILO=s Sectoral Activities Programme, the purpose of which is to facilitate the exchange of information between constituents on labour and social developments relevant to particular economic sectors, complemented by practically oriented research on topical sectoral issues. This objective has traditionally been pursued by the holding of international tripartite sectoral meetings for the exchange of ideas and experience with a view to: fostering a broader understanding of sector-specific issues and problems; developing an international tripartite consensus on sectoral concerns and providing guidance for national and international policies and measures to deal with related issues and problems; promoting the harmonization of all ILO sectoral activities, with the meetings acting as a focal point between the Office and its constituents; and providing technical advice, practical assistance and support to the latter to facilitate the application of international labour standards in the various economic sectors.

At its 267th Session (November 1996) the Governing Body of the ILO decided that a meeting on managing the privatization and restructuring of public utilities would be included in the programme of sectoral meetings for 1998-99. At its 268th Session (March 1997) the Governing Body decided that this meeting should be tripartite, with 60 participants, and that the following 20 countries be invited to participate: Benin, Croatia, Egypt, El Salvador, Ethiopia, France, Grenada, Hungary, Israel, Republic of Korea, Kuwait, Mauritius, Nepal, Pakistan, Peru, Russian Federation, Sierra Leone, South Africa, Suriname and Sweden. A number of countries were included in a reserve list from which further invitees would be drawn in the event that a government in the first list declined the invitation. Furthermore, 20 employers= and 20 workers= representatives were invited. The Governing Body decided that the purpose of the Meeting would be to exchange views on experience in the privatization and restructuring of public utilities and the impact of these processes on employment, working conditions, human resource development, and service delivery; to draw up conclusions that include guidance for further action; and to adopt a report on the discussion. The Meeting may also adopt resolutions.

Background to the report

Traditionally organized on the basis of national and local public or private monopolies, water, electricity and gas utilities have, over the last decade, been facing the challenges of international liberalization, privatization and restructuring. The Joint Meeting on Employment and Conditions of Work in Water, Gas and Electricity Supply Services held in 1987 had already noted various aspects of the structure of ownership in the utilities industry and in particular, the emerging trend towards privatization. In its conclusions, the Meeting acknowledged that experience with changes in ownership varied among countries and that while in some cases employment and working conditions remained stable, or improved, in others they had been adversely affected. Bearing in mind that privatization of utilities can affect the development, delivery, price and quality of services provided, the Meeting concluded that in all such cases of change in ownership, Aevery effort should be made to protect the rights and interests of workers ... through negotiation, consultation and collective bargaining(1), and that regardless of legal status and ownership structure, Athe services provided are of such importance that arrangements should be made to make them publicly accountable in accordance with national law and practice(2).

The challenges of liberalization, privatization and restructuring have mainly arisen from the need to meet soaring worldwide demand for utility services and the incapacity of the public sector to provide adequate services due to the multiplicity of areas demanding state attention in situations of prolonged economic crisis and hardship. In addition, new technologies, environmental and consumer concerns have increased pressure on the utilities to deliver services which are efficient, clean and above all affordable. Utility transnationals and multi-utilities are also increasingly common, creating new structures and forms of ownership and operation. These trends are pressuring public utility companies to restructure in order to deliver more efficient services and for governments in developing and transition countries to obtain international financing for infrastructure development. In addition, restructuring of the utilities has often preceded privatization in order to make public companies more attractive to potential buyers or operators. The radical changes which have characterized the utilities sector over the past decade are even reflected in the composition of the present Meeting, where for the first time the sector is represented on a fully tripartite basis.

The vital role of water and electricity (and to a lesser extent gas) in the life and development of societies explains the strong public interest in the ownership and management of utilities infrastructure and distribution. Usually undertaken with the aim of increasing efficiency and boosting productivity but also due to the threat of economic collapse and budget deficits, restructuring and privatization can take many and varied forms. Thus, social, economic and political factors play a major role in the choice of the restructuring and privatization formula adopted. In this regard there are no Abest practices@, but rather there could be a variety of Agood practices@. The State, however, usually retains some type of public authority or regulatory role and only rarely are assets completely sold or transferred from the State to the private sector. The special concern for water quality has meant that many governments have retained the predominant responsibility for the distribution of water. This is less the case with electricity and even less with gas. What does seem to be emerging from experiences in the last decade is a recognition of the benefits of public-private partnerships in the development and management of public utilities and the importance of involvement by the social partners at early stages of the restructuring and privatization processes.

The report reviews the trends and processes in privatization and restructuring of water, electricity and gas utilities and their impact on employment levels, remuneration, working conditions, industrial relations and consumer interests. Examples are given of measures to handle redundancies and of participation by the social partners in the privatization and restructuring processes. After identifying some of the conditions that may facilitate successful reform in the utilities sector, the report concludes with a brief summary and a list of suggested points for discussion.

Notes

1. ILO: Report of the Joint Meeting on Employment and Conditions of work in Water, Gas and electricity Supply Services, Geneva, 1987, para. 5.

2. ibid., para. 7.

Contents

Preface

Acknowledgements

1. The privatization and restructuring of electricity, gas and waterservices: A global phenomenon

2. Privatization and restructuring: The impact on employment andhuman resource development

3. The impact of privatization and restructuring on remuneration andother working conditions

4. Privatization, restructuring and labour relations

5. Prices, charges and quality: Crucial elements in the social debate

6. The role of the ILO and other international organizations inprivatization and restructuring

Summary and suggested points for discussion

Tables

Figures

Boxes

Acknowledgements

The information on which this study has been based comes from a variety of sources. Extensive use was made of a monograph study published by the ILO in 1998 entitled Labour and social dimensions of privatization and restructuring (public utilities: water, gas, electricity), edited by Loretta de Luca, with case-studies by Patrick Plane for Africa, Michael Paddon for Asia and the Pacific, David Hall for Europe, Enrique Saravia for Latin America and Brendan Martin and Nicolas White for the United States and Canada. The publication was part of a series of research studies undertaken within the framework of the ILO's action programme on privatization, restructuring and economic democracy (1996-97). ILO publications, books on privatization in different countries, as well as academic journals and the financial press were also frequently consulted. The figures and tables in the report are based on statistics collected by the ILO and data drawn from the literature. In addition, valuable information was supplied by ILO member States, employers' and workers' organizations, research institutions, as well as by ILO regional and area offices and the multidisciplinary teams. The report was prepared by Claude Duchemin, Brian J. Mallet and Linda Wirth of the Salaried Employees and Professional Workers Branch of the Sectoral Activities Department of the ILO.

The report is published under the authority of the International Labour Office.

1. The privatization and restructuring
of electricity, gas and water
services: A global phenomenon

Despite the widely held view that large infrastructure services have traditionally been provided by the State, with little or no private participation, there are in fact numerous caseswhich testify to the historical role played by private enterprises in the utilities industry.(1) In France, where the water concession technique was common practice in the nineteenth century, the Compagnie Générale des Eaux was founded in 1853, followed by the Société Lyonnaise des Eaux in 1888. Private water concessions were also granted in many European cities in the nineteenth century, including Berlin in 1856 and Barcelona in 1867 (the Sociedad General de Aguas de Barcelona was founded in Liege in 1867, and acquired from the Lyonnaise des Eaux in 1911 by a group of Catalan entrepreneurs). In Morocco, the water distribution system was developed by private enterprise around 1914, although after the country's independence, concessions held by French operators were not renewed. However, a private company still provides Casablanca with a large part of its bulk water supply through a 50-year concession granted in 1949.

Other examples can be found in the gas and electricity sectors. In 1818, the city of Brussels awarded a concession to a private company to build the first public gas lighting system in continental Europe. The invention of the generator and the light bulb, as well as the introduction of alternating current in the late 1880s, all contributed to the development of franchises for street lighting, electric street cars and power distribution, both in Europe and the United States. In several countries, private tramway companies, which had converted to electric power in the 1880s, used existing networks to bid for lighting and later power distribution concessions, thus becoming the precursors of the electric power industry. In many countries, including Argentina, Brazil, Indonesia, Philippines, Thailand and Venezuela, the electricity companies established in the nineteenth century were initially privately owned -- and are to a large extent still privately owned in several instances. After the Second World War there was, however, widespread nationalization and/or municipalization of private utilities with the rapid growth of newly independent nations, and in order to meet expectations of universal efficient services at acceptable prices. Then, in the 1980s and 1990s, privatization has been promoted as an instrument of fiscal policy leading to a reduction in the role of the State and the granting by public authorities of long-term concessions to private companies, increasingly multinational enterprises. In Argentina and the United Kingdom, to mention but two well-documented cases, events have now come full circle: power companies which were initially private, then nationalized, have once again been fully returned to the private sector.

These trends have coincided with the recognition of considerable investment needs in these sectors for a variety of reasons -- decay of old networks, demand for higher environmental and social standards, increased demand for energy resulting from economic growth, the infrastructure required for developing economies to provide for social and commercial needs. Additionally, regional economic groupings such as the EU or MERCOSUR, and technological advances, made it feasible and desirable to develop energy as an international tradable commodity.

With this historical caveat, it is notable that over the last decade, in the wake of globalization and the opening up of the economy, privatization has speeded up and spread throughout the world at a pace which can only be described as phenomenal. However, the public sector remains a key player and there are many examples of restructuring within public utility companies.

1.1. The privatization revolution

More than 100 countries in every continent have in recent years embarked on projects to privatize or restructure their state-owned enterprises (SOEs), including Argentina, Chile and Mexico in Latin America; Malaysia, Pakistan and the Philippines in Asia; the United Kingdom and France in Western Europe and the transition countries of Central and Eastern Europe; as well as Côte d'Ivoire, Nigeria and Togo in Africa. Some industrialized countries, including New Zealand and the United Kingdom, and several developing countries, such as Argentina and Mexico, have pursued privatization programmes that are both radical and ambitious in their scale and scope.

The process has affected all economic sectors, with almost all the large transactions of the last few years occurring in so-called "strategic" sectors, including the utilities; national and local monopolies are broken up into smaller units, competition in power generation and supply is introduced, electricity exchange systems are set up, oil and gas giants expand into energy services and multi-utilities allow customers to pay one bill to one company for a wide range of services which include electricity, gas, water and telecommunications. Thus, the water service in Newcastle, United Kingdom, is provided by a subsidiary of the same group which runs the water and sewerage services of Buenos Aires, the Lyonnaise des Eaux, a French company which is also the biggest road builder in the Czech Republic, while the water supply to Gdansk, Poland, and the power and water supply of Côte d'Ivoire are provided by the same French construction company, Bouygues, which also co-financed the award-winning film The Piano.(2)

By the end of the 1980s, sales of state enterprises worldwide -- from electrical utilities and railroads to education and prisons -- had reached a total of over $185 billion. The largest single sale was in the United Kingdom, where over $10 billion were paid for 12 regional electricity companies. Many other countries adopted similar policies, sometimes as a matter of political and economic principle, or to raise revenue, or to meet the requirements imposed by structural adjustment programmes, while several countries in transition in Central and Eastern Europe have embraced the privatization philosophy as a means of achieving systemic change.

However, although the restructuring and privatization of the utilities have now become major priorities for many national governments, these trends -- which in fact are often associated with "internationalization" or devolution in this context -- are not things which happen in isolation, or even something which governments necessarily want to see happen, but are rather a result of the global trend towards the dismantling of monopolies, cuts in public spending, deregulation and the liberalization of markets, in particular through the impetus provided by the World Bank, the European Bank for Reconstruction and Development (EBRD) and the European Union. The improvement of existing infrastructure and service delivery in the utilities sector is essential for both business performance and the improvement of living standards -- hence the current emphasis on greater efficiency and the universal service. But the sheer scale of the privatization revolution poses an enormous challenge to governments, particularly in developing countries and transition economies, which have little experience in dealing with private international enterprises active in the utilities sector or the problems involved in combining a guarantee of universal access with the monitoring of acceptable standards of safety, quality and service delivery.

1.2. Restructuring and privatization methods

Restructuring and privatization are now widely seen as important instruments of government policy for creating appropriate conditions for enhanced economic growth and for redefining the role of the State. They are also processes with significant social and employment implications.

A substantial body of literature has already documented many of the salient features of the privatization and restructuring processes (see figure 1.1) that have accompanied the structural adjustment programmes introduced since the 1980s.(3)

There is a great variety of privatization and restructuring models for the public utilities, ranging from minimum to full withdrawal of the State. Furthermore, restructuring often precedes privatization, its aim being to make the companies more attractive to potential buyers or operators. At one end the State retains ownership and operation of the utility and opts for restructuring, introducing modifications in the structure, work organization and human resource strategy, often taken from private enterprise organization and management models. Many municipalities in the United States and Canada have chosen this option for water, though it is less common in the case of electricity, and even less with gas. As for the various stages of the industry, overall the private sector appears to be less present in distribution than in generation and transmission.

At the minimum withdrawal end, there are many examples of management privatization, through corporatization and commercialization, as well as a good deal of decentralization to the provincial and local levels. But a key point is to make sure that these levels have indeed the capacity to operate, maintain and develop public service networks, and that they can do it more efficiently than centralized bodies. Other schemes provide for the contracting out of all or parts of the operations, where governments retain some say in the running of the company, while contracts and concessions grant private developers full responsibility for management and investment. Finance privatization, through BOO (build-own-operate) and BOOT (build-own-operate-transfer) schemes and variations on them, are perhaps the options spreading the most rapidly at present in the utilities.

At the far end of the spectrum there is the partial or full transfer or ownership, through the partial or total sale of shares to the national private sector or to international private or public companies (see figure 1.1).

It may be noted that the development of international and liberalized forms of provision of energy have sometimes coincided with, and sometimes conflicted with, privatization. In some cases, for example the United Kingdom, political imperatives resulted in the creation of private monopolies at all levels, in electricity, gas and water. In other cases, such as the Scandinavian electricity market, liberalization has led to the internationalization of strong state-owned companies.

Although the terms "privatization" and "restructuring" are often taken together as part of the same process, restructuring (industrial and organizational changes and their effects in the social and labour spheres) can occur with or without privatization. Some countries have unbundled the generation, transmission and distribution of electricity without privatizing them or prior to privatization; the electricity grid, for example, remains a publicly owned monopoly in most countries. Restructuring may also take the form of decentralizing to the municipal level former state regional companies, as in the case of water in the transition countries of Central and Eastern Europe, very few of which have been privatized. Similarly, private companies may also act to reverse earlier forms of restructuring, as in Sweden, where power generators have taken over electricity distributors to guarantee outlets for their power. In the United Kingdom, the recent purchase by PowerGen, the electricity generator, of East Midlands, the electricity distributor, in effect reassembled two bits of an old state system broken up on privatization.

It is now generally agreed, however, that privatization and restructuring do not produce the same outcomes in all places, and their design and implementation require considerable preparation and consultation. The processes do not necessarily lead to more competition, greater efficiency or more profitable operations, and must be developed within the larger context of market reform, with account being taken of the standards of good management, regardless of ownership, and with competition being seen as an important source of managerial discipline.

In the case of strategic public services, there is a need to strike a balance between profitable business operations and the provision of cheap, reliable, good quality and widely accessible services. This means that mechanisms need to be developed to monitor, follow up and regulate the privatization process according to a broad range of criteria, including social, environmental and economic considerations.

1.3. Nature and scope of data

Although a number of bodies, including the World Bank, the EBRD and UNCTAD track the progress of privatization and public sector reform, and considerable data have been collected on the impact of privatization and restructuring on economic performance (in terms of increased investment, higher factor productivity, secular growth and economic diversification), there is still a lack of accurate and transparent methodologies for establishing a clear picture of the benefits and costs of the various processes under way and of efforts to seek alternatives. In the same way, although the impact on and the reaction of consumers of general interest services have attracted attention, little emphasis has until recently been placed on methods of documenting and redressing the various social and labour implications of these processes, in particular as regards employment, human resource development, pay and industrial relations, or on the ways in which the workforce can influence the restructuring or privatization process. Although these industries do not usually account for more than 2 per cent of the total national workforce, with a low presence of women (except in clerical jobs), employment levels and working conditions in the utilities have a proportionally much wider impact, since employment opportunities in other sectors depend on a smooth supply of water, gas and electricity. The traditional public service creed ensured the existence of much common ground between "employer" and "employee", which is now subject to new and conflicting pressures as management and shareholders in the privatized utilities endeavour to maximize profits, enhance dividends and keep costs down.

1.4. The privatization of utilities

For reasons due to the public service and natural monopoly characteristics of the water, electricity and gas industries, where both ownership and operation have traditionally been considered of strategic importance to governments,(4) privatization came later and proceeded more slowly in these industries, although this did not preclude prior restructuring measures, including the decentralization of operations from the central down to local and community levels, the vertical separation of upstream and downstream activities, and the separation of production, transportation and distribution, etc. Privatization has generally been less common, the least far-reaching and the most regulated in the case of water, whereas gas, the least essential of the three utilities, has raised the least controversy. In all cases, however, the State remains ultimately responsible for the delivery of water, gas and electricity and for establishing an enabling environment subject to certain rules and regulations.

Since the launch of the privatization programme in the United Kingdom in the 1980s, the process has extended throughout the world and moved from the industrial, commercial and financial sectors to the infrastructure and municipal services. The world value of such transactions increased from $2.5 billion in 1988 to more than $23 billion in 1992.(5) However, the movement has not always been uniform. While several industrialized countries (United Kingdom, New Zealand) and a number of developing countries with a well-developed sense of private ownership and a liberal economic philosophy (Argentina, Chile, Malaysia and Mexico) privatized major infrastructure early on, another group, including transition countries, poorer developing countries and industrialized countries with nationalistic or statist economic policies(6) focused their privatization efforts on other sectors. However, in some countries, many large infrastructure services have always been in private hands, as in the United States (with the exception of water and sanitation services (often run by municipal enterprises), some electric utilities and some railways).

While many of the issues surrounding public vs. private ownership of public services are still being debated, it is now clear that the privatization experience in England and Wales has been critically examined by the water industry worldwide as water authorities look for ways to introduce private sector finance and management into their capital investment and operations. For governments and authorities in the United States, Europe and the developing world that are considering the privatization of their own water services, there are many lessons to be drawn from the United Kingdom experience (although the French water model may be a more appropriate source of inspiration for many countries).(7) The utilities in the United Kingdom are now entering a period of growing competition and price cutting, with the power of independent regulators and watchdogs being extended to tackle anti-competitive practices. Under new legislation, utility shareholders in the United Kingdom will be obliged to share more of their profits with utility customers, with a ban being placed on anti-competitive agreements, such as price-fixing, market-sharing cartels or predatory pricing. Companies that abuse market power will be liable to fines of up to 10 per cent of their turnover.

A second major characteristic has been the increasing transnational activity and ownership of utility firms, with national utility markets being opened up to cross-border competition, as in the case of electricity supply in the European Union. In electricity, the global annual value of transnational acquisitions rose from about $1 billion to $20 billion in the decade 1985-95.(8)

Privatization in infrastructure services, such as utilities, telecommunications and transport, raises special issues which require specific approaches and techniques, insofar as they are (or were) usually considered to have monopoly characteristics inevitably linking them to the public enterprise which dominated them. These issues concern such matters as the choice of prior restructuring measures and privatization instruments, constitutional and legislative restrictions, the unbundling of infrastructure sectors and its sequencing, the use of yardstick or benchmark competition as a regulatory tool, regulatory bodies and their powers, new technologies and the emergence of a global industry for infrastructure services.

1.5. Regional trends(9)

1.5.1. Europe

Privatization on the United Kingdom model (rapid and extensive privatization, with the establishment of a specialized regulator in each subsector) has not been followed elsewhere in Europe in water, gas or electricity. Furthermore, the privatization of water is less extensive than is often thought to be the case (figure 1.2). In Western Europe only the United Kingdom and France have predominantly private water services, and there are important differences between the two; in Spain water is approximately one-third privatized (as in France, some concessions date back to the turn of the century) and although there are a small number of water privatization concessions in Italy, privatization in this country has not developed substantially over the last five years. Elsewhere, the sector is mainly run by public sector bodies.

In the transition countries of Eastern and Central Europe, several major cities in the Czech Republic and Hungary have established semi-private ventures on a concessionary basis in the water services; however, there has been a more marked trend towards decentralization, as part of a broader political reform, with the responsibilities of former regional state agencies being taken over by municipalities. The creation of multiple companies at the municipal level has not always resulted in greater efficiency, although it has been argued that the lack of financial and infrastructure capacity at the municipal level might well prove an incentive to greater privatization.

In electricity, there are a number of complex patterns at work, although publicly owned services still play an important role (see tables 1.1 and 1.2). In Portugal, up until the early 1990s, electricity was the responsibility of a vertically integrated public enterprise with a legal and de facto monopoly over production, transmission, distribution and supply. Over a three-phased period, the enterprise was transformed first into a state-owned limited company, governed by private law, which in turn was divided in 1994-95 into a number of separate enterprises (a production company, a transmission company, and four distribution companies; other companies were set up for services and activities outside the country). The national electric system is therefore a combination of two systems -- one public and the other independent. The public system retains its supply and tariff equalization obligations, but the overall structure fosters transparency and the development of competition.

Some state-owned generation companies, such as Electricité de France (EDF), Vattenfall (Sweden) and IVO (Finland), have successfully internationalized their operations. In Scandinavia, the most successful companies are the state-owned generators; distribution is mainly the responsibility of municipally controlled companies. In Norway, 85 per cent of the electricity generation capacity is owned by municipalities, county councils and the State. The restructuring of the electricity sector began in 1991, with an Act on the liberalization of the electricity market. However, there has been little privatization as such, with preference being given to the introduction of marketing techniques (with all customers being able to choose their supplier).(10)

Table 1.1. Ownership of electricity and gas industry in the EU, 1997
(M=municipal; P=private; S=State)

Country

Electricity
generation

Electricity
transmission

Electricity
distribution

Gas
transmission

Gas
distribution

Austria

S/M

S

M

S

M

Belgium

P

P

P/M

S/P

P/M

Denmark

M

S/M

M/P

S

Finland

S/P

S/P

M/P

France

S

S

S

S

S

Germany

P

P

M

P

M

Greece

S

S

S

Ireland

S

S

S

S

S

Italy

S

S

S

S

M

Netherlands

S

S

M

S/P

M

Norway

S/P

S

M

Portugal

S/P

S

S

S

S

Spain

S/P

S

S/P

S/P

Sweden

S/P

S

M/P

S

P/M

United Kingdom

P

P

P

P

P

Source: Various, PSPRU database.

Table 1.2. Activities of international companies in energy in Europe

Company

Home country

State
owns(%)

Western Europe

CEE

Other regions

Other sectors

AEP

United
States

United
Kingdom

AES

United
States

United
Kingdom

Hungary

Latin
America,
Asia

British Gas

United
Kingdom

Italy

Czech
Republic,
Poland

Latin
America

Calenergy

United
States

United
Kingdom

CEZ

Czech
Republic

67

Slovakia

Asia

Telecom-
munications

Cinergy

United
States

United
Kingdom

CSW

United
States

United
Kingdom

Dominion

United
States

United
Kingdom

Edison

United
States

United
Kingdom

Latin
America

Housing

Electricité de France (EDF)

France

100

Austria,
Italy,
Portugal,
Spain,
Sweden,
Switzerland

Bulgaria,
Czech
Republic,
Hungary,
Poland,
Russian
Federation,
Slovakia,
Ukraine

Africa,
Asia,
Latin
America

Water,
waste
management

Endesa

Spain

75

France,
Portugal

Africa,
Latin
America

Water,
waste,
telecom-
munications

ENI-SNAM-Italgas

Italy

100

Hungary,
Slovenia

Enron

United
States

Poland

Entergy

United
States

United
Kingdom

Czech
Republic

Latin
America

Gaz de France (GDF)

France

100

Spain

Hungary,
Romania,
Slovakia

Gazprom

Russian
Federation

40

Austria,
Belgium,
Finland,
Germany,
Greece,
Italy,
United
Kingdom

Belarus,
Bulgaria,
Estonia,
Hungary,
Moldova,
Poland,
Slovakia,
Ukraine

GPU

United
States

United
Kingdom

Hyder

United
Kingdom

United
Kingdom

Water,
construction

Imatran Voima Oy (IVO)

Finland

97

Sweden,
United
Kingdom

Estonia,
Hungary,
Latvia,
Lithuania,
Poland

Asia

NRG

United
States

Czech
Republic,
Estonia

Pacificorp

United
States

Powergen

United
Kingdom

Germany,
Portugal

Hungary

Asia

PS Colorado

United
States

United
Kingdom

Ruhrgas

Germany

Estonia,
Czech
Republic,
Hungary,
Latvia

RWE

Germany

Spain,
Switzerland

Czech
Republic,
Hungary,
Poland

Telecom-
munications,
water,
waste
management

Southern Company

United
States

United
Kingdom

Latin
America

Tractebel (now 50% owned by Lyonnaise des Eaux)

Belgium

Germany,
Italy,
Portugal,
Spain,
United
Kingdom

Hungary

North
America,
Latin
America,
Asia

Telecom-
unications,
waste
management

United Utilities

United
Kingdom

United
Kingdom

North
America

Water

Vattenfall

Sweden

100

Finland,
Norway,
Germany

Estonia,
Latvia,
Lithuania,
Poland

Veba-Preussenele-ktra

Germany

Sweden

Telecom-
munications

Viag-Bayernwerk

Germany

Austria

Czech
Republic,
Hungary,
Slovakia

Telecom-
munications

Source: L. de Luca (ed.): Labour and social dimensions of privatization and restructuring, op. cit., p. 151.

The situation in the United Kingdom is once again unique, since it has privatized its entire electric industry, with most distribution having been taken over by United States companies.

In the transition countries, major privatization projects (in both generation and distribution) have been undertaken in Hungary, which has gone further than other countries along the privatization path, and the Czech Republic, and there are some independent power producers (IPP) in these countries and in Poland, which enacted a new energy law in 1997. As with water, there is also a trend towards decentralizing electricity distribution down to the local level.

In the gas sector, the partially privatized Russian gas company Gazprom, which produces approximately one-third of the world's natural gas, is actively seeking to extend its network across the continent through joint ventures. Ruhrgas, Germany's largest gas distribution company, recently announced the establishment of a long-term "strategic alliance" with Gazprom, by signing contracts for the supply of up to 13 billion cubic metres of Russian natural gas a year from the year 2008.(11) Ruhrgas and Gazprom are also stepping up cooperation in the transmission of Russian gas through Germany, which might lead to the construction of new pipelines. Gazprom is also expected to cement its strategic alliances with Royal Dutch Shell and ENI of Italy. However, there has been some political resistance in the case of the former Soviet Union countries, which are endeavouring to seek alternative supplies.

1.5.2. The European policy for the liberalization of the
public electricity and gas distribution services

Since the last ILO report of 1987, one of the major events in the electricity and gas distribution sector has been the gradual emergence in the Member States of the European Union of a European policy for the liberalization of these sectors, with a view to the establishment of a "liberalized internal energy market". The main objective of the European Commission in the development of the internal energy market has been to show how a greater integration of national energy markets would reduce exploitation costs, lower prices and improve competitiveness. A Community market without any internal frontiers would provide a more flexible and diversified energy supply, and contribute to the security of supply for the Community as a whole. According to the European Commission,(12) greater competition would also result in lower tariffs for energy consumers, who would thereby gain a competitive advantage in their production. In 1997, electricity and gas prices in Europe were on average 40 per cent higher than in the United States.

A Council directive concerning a Community procedure to improve the transparency of gas and electricity prices charged to industrial end-users was adopted on 20 June 1990.(13) Electric and gas enterprises must twice a year provide the Statistical Office of the European Communities with the prices which they apply to all categories of consumers. The figures published throughout the 1990s up to the present reveal major differences in the conditions of gas and electricity supply for industrial consumers in the different Member States, and even within the same country, since the markets are closed.

The Community Directives on the transit of electricity and gas(14) are designed to maximize and facilitate the exchange of electricity and gas between non-neighbouring countries. This exchange has in fact only been possible between public monopolistic networks and distributors, and not between consumers in a Member State and producers in another.

Up until 1996, these two directives constituted the first phase of energy liberalization. A more ambitious phase recently involved the fixing of a specific timetable for liberalization.

Electricity

Cooperation between electric systems, which has been strengthened by the two above-mentioned directives, had already in the 1950s led to the gradual interconnection of networks and the development of trade in electricity in Europe. Important electricity price differences within Europe were noted. It was therefore through directives on the gradual opening up to competition that the European electricity market took shape at the end of the 1990s. The privatizations introduced in various countries in this sector are a consequence of the disappearance or restructuring of the national monopolies of production, transport and distribution.

After nine years of negotiations, the Council of Ministers of the EU adopted on 19December1996 a directive concerning common rules for the internal market in electricity.(15) This directive provides for the gradual opening up of the electricity market over six years.

The first phase of this process, which must be completed by the beginning of 1999, requires each Member State to ensure that the market is open in a proportion corresponding to its share in Community consumption as represented by final consumers consuming more than 40 GWh per year (per site) in 1997. This threshold will be gradually reduced to a level of 9 GWh annual electricity consumption after six years. More precisely, under the electricity directive, EU Members have until February 1999 to open up a minimum of 25 per cent of their electricity markets -- accounted for by the largest energy users -- to competition. The minimum rises to 28per cent in February 2000 and to 33 per cent in 2003. The European Commission will subsequently propose an additional opening due to come into effect in the ninth year.(16) In fact the liberalization of the electricity market has proceeded much more rapidly than envisaged by the directive. According to the European Commission, the directive could result in an opening up of an average of more than 50 per cent of the market from 1999. Figures submitted to Brussels by a working group of energy experts from EU Members show that Finland, Germany and Sweden already allow (in 1998) 100 per cent of energy users to shop around for electricity, and liberalization in the United Kingdom was due to reach 100 per cent in 1998.(17)

The main thrust of the directive concerns the liberalization of the production of electricity and access to the market by third parties, which will allow certain electricity buyers to take advantage of competition through prices between producers. This gradual liberalization does not necessarily imply the privatization of operators, since European law is neutral concerning the public or private ownership of enterprises. However, it does encourage privatization of production.

As regards the methods used for the opening up of the market, the directive proposes the following alternative: either direct access by third parties (customers, suppliers) to transport and distribution infrastructure, or access to the market through the network holder, who becomes buyer and sole reseller of electricity.

Member States will be left to decide the categories of buyers who, under the directive, will be able to choose a supplier ("eligible" customers). The directive stipulates that large customers consuming more than 100 GWh per year must be included in this category, as well as distributors for the quantity of electricity consumed on their distribution network by other eligible customers. The directive also states that distributors will be able to buy electricity from other suppliers for the purposes of supplying their own customers who are themselves qualified.

In comparison to other "deregulation directives" which have been introduced in other sectors, one of the most original characteristics of this directive is the role played by the concept of the public service.(18) Under article 3(2) of the directive, "Member States may impose on undertakings operating in the electricity sector, in the general economic interest, public service obligations which may relate to security, including security of supply, regularity, quality and price of supplies and to environmental protection ... As a means of carrying out the above-mentioned public service obligations Member States which so wish may introduce the implementation of long-term planning." By mentioning the security of supply, the protection of the environment and planning, the directive does not restrict the general economic interest to the concept of the "universal service", as in the case of other general economic interest service sectors such as telecommunications.(19)

It is important to note that the European trade unions in the electricity and gas sector organized in the European Federation of Public Service Unions (EPSU) opposed the first proposals of the European Commission. The proposals were seen to argue for a complete liberalization. Protests of the unions concentrated on the lack of regard for impact on employment and dangers for established national structures, public services and the environment. The unions also demanded structures for employers and unions to meet at European level. EPSU organized demonstrations in Luxembourg (1995), Bologna (1996) and The Hague (1997) while significant demonstrations and opposition also took place at national level. As a result of these pressures, the European Parliament amended the Commission proposals significantly and strengthened the public services obligations. A European energy consultative committee was established in November 1996 to advise the European Commission. Trade unions are part of this committee and vice-chair. A process of social dialogue with Eurelectric, the European organization for electricity companies, was started in 1995. Both sides consider developments in health and safety, and the impact of restructuring on employment and equality.

Gas

One year after the adoption of the electricity directive, the Council of Energy Ministers adopted a common position on 8 December 1997, on the proposal for a directive on common rules for the internal market in natural gas. A progressive and cautious approach has also been preferred in this sector. The proposal establishes common rules for the transmission, distribution, supply and storage of natural gas; it regulates access to the market and the operation of systems and determines the applicable criteria and procedures for the granting of authorizations for the construction and operation of gas installations.

In average Community terms, the opening up of national markets will be around 30 per cent of the annual gas consumption, with a minimum of 20 per cent; this minimum percentage will be increased to 28 per cent after five years and to 33 per cent after ten years. Similarly, the category of eligible customers (i.e. undertakings with the legal capacity to conclude national gas supply contracts) will be gradually broadened. Once the directive comes into force it will cover all clients consuming more than 25 million cubic meters of gas per year and per consumption site, with the figure falling to an annual consumption of 15 million per year after five years and to 5million after ten years. Gas-fired electric power plants are considered as eligible customers, irrespective of their annual consumption level.

As regards access to the system, Member States would have a choice between negotiated or regulated access, both of which must be implemented according to objective, transparent and non-discriminatory criteria.

Gas distribution is covered by the proposed directive, but Member States may, in certain conditions, not apply some of its provisions respecting distribution if they are likely to jeopardize the achievement of public service obligations. The text stipulates in this case that Member States may invoke the principle of "general interest service" which the Commission must assess on a case-by-case basis. In this respect, the Amsterdam Treaty signed in 1997 establishes a new article7D which makes more explicit the Community attachment to the general interest objectives, by stating that the public services must be able to operate in conditions which enable them to fulfil their general interest missions.

The EU water policy and environmental issues

In the water sphere, the concerns of the EU authorities have been motivated to a large extent by environmental considerations, including the "polluter pays" principle. At present local measures play a decisive role in the assessment and improvement of the water situation and it is Member States and local authorities which are responsible for implementing most of the provisions concerning the protection of the environment. However, calls have also been made for the establishment of a European body to make water strategies more effective and economic. The Commission has also set up a Task Force Environment-Water, whose three main objectives are to define research priorities in consultation with the social partners, strengthen coordination between Community, national and private research programmes and to promote innovation. In its preliminary report published in 1996, the Task Force established the following research priorities: the fight against pollution, the rational use of water, the redress of water shortages and the prevention and management of crisis situations.(20)

1.5.3. Africa

The privatization process is now well under way in some ten countries of Africa, although it has not so far involved the transfer of shares or capital, but has been based on various alternative forms of privatization (performance contracts, leasing contracts, concessions, etc.). Table 1.3 gives some examples of privatization of water and electricity utilities in Africa. With the exception of Côte d'Ivoire, the institutional process began in the early 1990s, when management operations were transferred to a small number of international operators, either competing against one another or working together in horizontal cooperation arrangements. Côte d'Ivoire provided the original privatization model for the continent: in the case of both water (1960) and electricity (1990), the system is based on a separation between ownership and management. The electricity utility concession signed in 1990 with a private developer gave the latter the task of restoring operating balance and increasing technical efficiency with a view to lowering energy prices, with the management system being completely restructured. Water privatization was introduced in Guinea in 1989 in the form of a leasing contract to a private international consortium, and in the Central African Repubic in 199l along similar lines. Other privatization projects have been introduced in Gabon, Guinea-Bissau and Mali (for water and electricity production and distribution), Senegal (water supply) and Ghana (electricity generation and distribution). Although there has been no outright privatization of the utilities in Malawi, the steps taken to transform the Electricity Supply Commission (ESCOM) into the Electricity Supply Corporation Ltd. has been seen by the unions as the first move towards privatization.(21) Apart from Morocco (electricity generation, 1996), the Maghreb countries have so far remained untouched by the privatization of utilities. The gas industry in African countries is either non-existent or publicly owned and operated in a way which has changed little over the last decade.

Table 1.3. Examples of privatizations of water and electricity utilities
in Africa, as of June 1996

Country

Company and legal status

Activity

Type of contract

International operator

Côte d'Ivoire

Public ownership of facilities and private operating company (SODECI)

Water supply

From 1960, leasing contract, then concession renewed every 15 years on negotiated basis

SAUR

Public asset-owning company (EECI)

Electricity generation and distribution

Leasing contract negotiated in 1990 for a 15-year term, renewable

SAUR-EDF

Private operating company (CEI)

Guinea

Public asset-owning company (SONEG)

Water supply

Leasing contract signed end-1989 for a 10-year term, awarded after international tendering

SAUR-CGE

Private operating company (SEEG)

Asset-owning company (ENEGGUI)

Electricity production and distribution

Leasing contract signed in 1994 for a 10-year term, awarded after international tendering

EDF-SAUR-HQI

Private operating company (SOGEL)

Guinea-Bissau

Public enterprise (EAGB) and private management partners

Water and electricity production and distribution

Management contract
Private partner's remuneration 75 per cent fixed, 25 per cent performance-linked

EDF-Lyonnaise des eaux

Gabon

64 per cent public company and indirect shareholdings (SEEG)

Water and electricity production and distribution

Management contract signed in 1993 after tendering

EDF-GQI-Lyonnaise des eaux

Private partner (SOCAGI)

Development towards a concession under way with reduced state share in SEEG capital

Mali

Public enterprise (EDM)

Water and electricity production and distribution

4-year overall management contract

SAUR-EDF-HQI-SOGEMA

Private management partner (SHEC)

Senegal

Public asset-owning company (SONES)

Water supply

10-year leasing contract from 1995 after international tendering

SAUR

Private operating company (SDE)

Central African Republic

Public asset-owning company (SNE)

Water supply

15-year leasing contract from 1991 after international tendering

SAUR

Private operating company (SODECA)

Morocco

Public enterprise (ONE)

Electricity generation

30-year generating concession with transfer of ownership to the State when Jorf Lasfar project starts operation

Consumer Michigan Services (CMS) and Asea Brown-Boveri (ABB)

Private concessionnaire (Jorf Lasfar Energy Company)

Public company (RAD)

Water and electricity distribution for Casablanca

30-year distribution concession after tendering

Lyonnaise des eaux-EDF-ENDESA-Agnas de Barcelona

Private concessionnaire (Maghrébienne des eaux)

Ghana

Public generating company (VRA)

Electricity generation and distribution

Partial delegation of commercial management for 4-year period from 1994 between ECG and technical operators. Industrial changes under way

SAUR-EDF

Public electricity distribution company (ECG and NED)

Source: L. de Luca (ed.): Labour and social dimensions of privatization and restructuring, op. cit., p. 21.

1.5.4. Asia-Pacific

Tables 1.4, 1.5 and 1.6 provide an overview of the privatization of the utilities in the Asia-Pacific region. Water supply, waste management and sewerage in the region are mainly the responsibility of local authorities or state bodies. Similarly, in all Asian countries the State has the main responsibility for generating and providing electricity, although projected future demand and the lack of adequate infrastructure will probably lead to an emerging pattern of restructuring and deregulation, with increasing private participation. In Japan, power generation was liberalized in 1995 when new players were admitted to the market. Electric power producers became free to purchase power from IPPs through collective bidding, to construct power generation facilities and to sell electricity on the retail market. At the end of 1997, as a means of encouraging further competition, proposals were made for expanding the bidding system, to allow power wholesale companies to bid for supplies from new or rebuilt thermal power plants. However, since Japan does not have sufficient energy resources, maintaining the country's security and supplies is seen as a basic requirement which cannot be sacrificed for the sake of increasing competition.(22)

Table 1.4. Privatization of water in the Asia-Pacific region

Country

Structure of industry

Privatization

Australia

Water supply owned and operated by state governments

Corporatization;
price rebalancing under national competition policy;
private investment in BOO and BOOT;
contracting out of some functions;
contracting out of water supply in Adelaide to United Water

Bangladesh

WASA responsible for water, waste and sewage in cities and towns;
sanitation and sewage managed by WASA and municipal authorities;
BWDB responsible for dams, reservoirs and rural water

BWDB to be corporatized and divided into separate functions;
some private sector participation in billing and collection

India

Water supply owned and managed by public sector;
the only private sector involvement in the sale of bottled water

No plans for privatization

Indonesia

Government-owned utility

Management privatization planned for 1998 through two area-based concessions

Japan

Water, waste and sewage operated by large number of individual enterprises owned by municipalities

Contracting out of specific maintenance and support functions

Malaysia

Water supply managed and provided by mixture of public and private bodies;
waste and sewage now provided under contract

Waste and water privatized in 1993 with contract to Indah Water;
increasing private sector investment in water and sewerage;
BOT in Johor Water Company;
contracting out of billing and collection, leak repair

New Zealand

Water and waste facilities owned and managed by local government

Corporatization and greater commercialization;
first contracting out in April 1997, Papakura Council contract with United Water

Philippines

Local water utilities are quasi government corporations;
MWSS largest water supply agency

MWSS reorganized in 1995, privatized in 1997 through award of two geographical concessions to consortia of multinational and local companies

Thailand

Mixture of public and private;
private management of specific individual water plants

Privatization of East Water Resources and Development;
privatization through investment in new projects

Sources: PSI survey and individual country surveys conducted by PSRC.

Table 1.5. Privatization of electricity in the Asia-Pacific region

Country

Structure of industry

Privatization

Australia

Generation, transmission and distribution operated by vertically integrated publicly owned state monopolies

Move to national grid and nationally competitive market;
corporatization in all states and separation of generation, transmission and distribution;
privatization in Victoria

Bangladesh

3 state utilities;
DESCO manages distribution in Dhaka region;
Rural Electricity Board manages rural distribution through cooperatives;
BPDB generation, transmission and distribution to all other areas;
PGCB recently established as future single buyer of all power

Separation of generation, transmission and distribution;
corporatization of BPDB, with further plans to break it up into four corporatized distribution firms;
corporatization of DESA with some contracting out (now DESCO);
increasing use of Independent Power Producers (IPPs);
PGCB to take over all transmission

India

National planning, generation and transmission agencies under DOP;
generation and distribution managed by 23 State Electricity Boards (SEBs)

Plans for restructuring, corporatization and privatization in SEBs: Rajasthan Madhya Pradesh, Noida, Kanpur and others;
privatization of distribution in Orissa is proceeding;
plans to privatize transmission;
reform of Haryana power sector, including privatization, under way;
Enron to operate first IPP at Dabhol

Indonesia

State utility PLN handles generation, transmission and distribution;
a large number of small entities in villages and commercial groups

Plans to partially privatize generation; plans to increase the number of IPPs

Japan

Ten private, Japanese-owned utilities have regional monopolies over generation, transmission and distribution

Deregulation from 1995 with easier entry for new producers;
foreign investment in new power plant;
government approval in 1997 for the privatization of the Electric Power Development Company Ltd.

Republic of Korea

KEPCO has overall responsibility for generation (89% of capacity), transmission and distribution;
IPPs provide small amount of capacity;
co-generators sell surplus power to KEPCO

Sale of 21% of KEPCO through share issue in 1989, with plans for further future sales;
promotion of IPPs

Malaysia

TNB manages generation, transmission and distribution in Peninsular Malaysia;
separate generation and distribution boards in the islands of Sarawak (SESCO) and Sabah (SEB)

Partial sale of TNB (29%) in 1992; partial sale of SESCO;
plans to corporatize SEB as prelude to partial sale;
significant share of generation by IPP;
unbundling of generation and transmission under consideration

New Zealand

ECNZ controls 60% of generation;
transmission grid operated by Transpower NZ;
distribution run by area-based franchised supply companies

ECNZ to split into three competing state-owned generating companies by April 1999 (privatization has been ruled out)
corporatization of supply companies, producing mergers and acquisitions with greater private involvement;
private generation projects

Pakistan

KESC responsible for generation, transmission, and distribution in Karachi and surrounding area;
WAPDA has same responsibilities for rest of the country (80% of generating capacity):
newly established National Electric Power Regulatory Authority will promote competition and regulate the sector

Disaggregation of integrated companies;
sale of power plants on plant by plant basis;
sale of minority stake in KESC;
private investment in IPPs through BOO and BOOT;
plans for financial or management privatization of Faisalabad Area Electricity Board and KESC

Philippines

NAPOCOR responsible for generation, transmission and distribution;
26 private and municipal distribution companies, the largest is MERALCO;
Energy Regulatory Board regulates tariffs

NAPOCOR corporatized in 1992;
NAPOCOR to break up into regions and new transmission company;
privatization of NAPOCOR one of the requirements of IMF loans;
promotion of IPPs through BOO and BOT;
contracting out of meter reading by MERALCO

Thailand

EGAT responsible for generation, transmission, distribution to large consumers;
MEA for distribution in Bangkok and adjacent provinces;
PEA for distribution to other 93 provinces

Deregulation from 1992 with private generators and joint private/EGAT ventures;
restructuring of EGAT with corporatization and privatization; restructuring of PEA and MEA;
increasing use of IPPs

Sources: PSI survey and individual country surveys conducted by PSRC.

Table 1.6. Privatization of gas in the Asia-Pacific region

Country

Structure of industry

Privatization

Australia

Federal and state involvement in provision of infrastructure;
distribution privately owned and operated

Deregulation under national competition policy;
sale of government-owned pipelines by federal and state governments;
private companies investing in gas infrastructure

Bangladesh

Extensive private company involvement in developing gas resources

Corporatized Petrobangla coordinating exploration with private investors

India

Extensive private company involvement in developing gas resources and infrastructure;
state involvement through Gas Authority of India Ltd. (GAIL)

Minor sell-off of GAIL shares (3.37%) in 1995;
planned sale of 25% of GAIL cancelled in November 1997 due to economic conditions;
maybe re-offered in the near future

Indonesia

State-owned Pertamina carries out exploration and transmission of oil and gas;
state-owned Perum Gas Negara is gas retailer;
private sector involvement in transmission

Privatization of either organization ruled out

Japan

Extensive private company involvement in developing gas resources;
State assists gas and oil exploration through National Oil Corporation

Deregulation of supply introduced by legislation enacted in 1995

Republic of Korea

State involved in development of gas through Korean Gas Corporation;
extensive private company involvement in developing gas resources

Government inquiry into possibility of privatizing KGC in 1994

Malaysia

State oil company Petronas has initiated virtually all oil and gas projects;
Gas Malaysia Sdn. Bhd. distributes and markets to consumers;
State involved in joint ventures to develop projects;
private firms involved in exploration and production

Government is considering allowing competition between Petronas and GMSB

New Zealand

Natural gas supplied by private companies;
up to 1988, State involved in development of industry through Petrocorp

Petrocorp privatized in 1988;
State has also sold other interests in plant and development;
industry deregulated from 1993

Pakistan

State-owned Oil and Gas Development Corporation involved in developing the industry;
extensive private involvement in developing gas resources and infrastructure;
plans to set up a Natural Gas Regulatory Authority in 1998

Oil and Gas Development Corporation converted into joint stock company in 1996;
privatization being considered;
tentative plans to privatize Sui Northern Gas Pipelines Ltd. and Sui Southern Gas Pipelines Ltd.

Philippines

Extensive private company role in developing gas resources and infrastructure

Thailand

State Petroleum Authority of Thailand (PTT) plays development role and holds shares in joint ventures;
extensive private company participation in developing gas resources and infrastructure

Plans to privatize PTT

Sources: PSI survey and individual country surveys conducted by PSRC.

Gas usage across the region remains uneven. Although Australia, New Zealand and Japan have developed gas infrastructure (with significant public involvement in the first two), in other countries the minor role of gas as a power source and the limited role of goverments in this sphere have resulted in little active privatization.

As elsewhere, the rationale for the privatization of utilities has been the need for additional resources to extend access to the services and improve quality, as in the case of the privatization of water and sewerage in Manila. For several countries in the region (Bangladesh, India, Pakistan), structural adjustment programmes have provided a major impetus for privatization, coupled with deregulation through international trading agreements such as Asia-Pacific Economic Cooperation (APEC) (APEC policy on infrastructure covers water, electricity and gas utilities, with emphasis on competition and full cost pricing). Management privatization has been the most frequently used form (Australia, Bangladesh, Pakistan, Philippines, New Zealand), as well as contracting out (Japan, Thailand), the method also used in three major privatizations of water and waste projects in South Australia, Malaysia and the Philippines. However, the form most likely to predominate over the next decade is finance privatization -- the private funding of water and electricity schemes, through build-own-operate (BOO) and build-operate-transfer (BOT) arrangements. In electricity, the emerging pattern is one of deregulation, the disaggregation of vertically integrated facilities and systems and, in some cases, partial privatization through the selling off of assets.
 

Box 1.1
Restructuring of the Fiji Electricity Authority

On 13 June 1997 the Ministry of Public Enterprises declared the Fiji Electricity Authority (FEA) a "reorganization enterprise". Under its Reorganization Charter, the FEA has been split into three government commercial companies (GCC) responsible for generation, transmission and distribution. These companies have now been registered.

The generation and distribution companies will be further divided for partial privatization to allow strategic investors to bring in new technology and expertise, although investors will be expected to have access to funds for reinvestment. The transmission company will remain 100 per cent state-owned.

A board of directors has been appointed for each GCC, with the authority to make commercial decisions, and the companies will be required to report regularly and be accountable to the Government which, on behalf of the public, will set financial and non-financial performance targets. The three GCCs will compete on equal terms with the private sector, with no specific advantages or disadvantages, and competition in generation and distribution will be introduced early on.

The distribution company will be the power purchasing agency and be responsible for the systems development plan, including future load forecasts. In the short to medium term, any new generation sale would be to the new distribution company, whether from the generation company or IPPs. The Government is examining options for private sector participation in the generation and distribution of electricity. Significant interest has been expressed by IPPs, suggesting a potential for the establishment of a competitive framework for further development.

To develop competition, the Charter envisages greater private sector investment, improved operating efficiency and reduced electricity prices. A technical as well as an economic regulator will be established, the latter being part of the broader utilities regulatory body to be set up.

Source: Fiji Electricity Authority Staff Association: Reorganisation of the Fiji Electricity Authority, Information Memorandum, Department of Public Enterprises, Fiji, 1998.

1.5.5. Latin America

There is a wide diversity of situations and trends in the utilities industry in Latin America, where the privatization process initiated some 20 years ago has affected all sectors of economic life (see table 1.7). The utilities sector employs a large number of workers, with ratios of five to ten employees per thousand water connections being common practice in some water companies. Countries are also facing the challenge of meeting enormous infrastructural needs in the wake of the increasing pressures placed on the urban environment (73 per cent of the continent's population live in cities). The water and sanitation sector presents gigantic problems, with cholera appearing in the continent in 1990 after more than 100 years' absence. Since water and sanitation (unlike electricity and telecommunications) are considered a social service, efforts have focused on extending coverage rather than on human resource development policies. In many countries of the region, national constitutions and legislations define the utilities as public services, to be provided directly by the State or concessionaires. However, the present trend is for governments to establish regulatory frameworks and consumer/environmental protection policies, and to delegate responsibility for running the utilities to public and private bodies, coupled with a decentralization of responsibilities down to the provincial, state or local levels. Unfortunately, in many cases the necessary legislation for deregulation and the establishment of concessions is lacking, and many local authorities do not have the material and financial capacities to run the utilities satisfactorily.

Since 1990, Argentina has gone furthest along the privatization path, restructuring its electricity, gas and water services and handing them over to concessionaires, with the old regulatory measures being abolished and replaced by new forms of regulation.

Table 1.7. Latin America and the Caribbean (17 countries):
Privatization and concessions in the utilities

Country

Electricity

Water

Gas

Argentina

X

X

X

Bolivia

P

P

Brazil

P

X

Chile

X

P

X

Colombia

P

X a

P

Costa Rica

P

P

Ecuador

P

P

P

El Salvador

P

P

Guatemala

X

Honduras

X

P

Mexico

P

P

P

Nicaragua

P

Panama

P

P

Paraguay

P

Peru

X

P

X

Uruguay

X

Venezuela

P

P

X

X = privatization already carried out in varying degrees. P = privatization planned. a = very limited privatization, although intensification planned.

Source: CEPAL, based on official statistics and Privatization International, various issues.

The utility privatization process has also been rapid in Brazil, following the adoption of a new law on concessions in 1995, and a series of projects in the electricity power sector and water services and sanitation is now under way. Chile has been a pioneer in the transfer to the private sector of activities traditionally carried out by the State, while Colombia has passed legislation (Act No. 142 of 1994) which provides incentives for private firms to join together with local authorities in the upgrading of water, sewerage and sanitation services (as in the case of the concession awarded to the Spanish company Aguas de Barcelona to run the water and sewerage services in Cartagena de Indias).
 

Box 1.2
Electricity privatization in Argentina

The Argentine electricity privatization programme which was launched in 1992 was the most recent of a series of privatizations in the country which began in the late 1950s and early 1960s and was followed by a second wave in the 1970s. But the country's inability to resolve the operating deficit of the largest public companies was one of the main factors leading to the adoption of Act No. 24065 of January 1992, which established a legal framework for restructing and privatizing the electricity industry.

Argentina's electricity privatization was based on experience gained in Chile, which had begun to privatize its electricity industry some ten years earlier, and the regulation framework adopted in the United Kingdom. However, unlike Chile, Argentina established full separation between transmission, generation and distribution, as well as the restriction that no single generator would provide more than 10 per cent of the national generation capacity. In 1993, Decree No. 1853 removed most of the remaining restrictions on foreign investment, thus allowing, with a few exceptions, foreigners to own 100 per cent of Argentine companies and to freely repatriate profits and capital.

The electricity restructuring process began in 1992 with the creation of a regulatory body, ENRE, prior to privatization. ENRE regulates all stages of the industry, but most extensively transmission and distribution (generation is considered a competitive market and is essentially unregulated, although a maximum market share of 10 per cent or less of the national electricity sales volume is allowed), and mediates disputes and enforces federal laws, regulations and terms of concessions. It also fixes service standards that distribution companies must meet and sets the maximum price that transmission and distribution companies can charge for their services (the "price cap"). The price cap is to be reset every five to eight years. The first three of the federally-owned electricity companies that were privatized, Segba, Ayee and Hidronor, produced around 80 per cent of the nation's electricity supply.

Following privatization, wholesale electricity prices fell by around 60 per cent from the pre-privatization level of $60 per megawatt hour in August 1992, and have now stabilized at around 40 per cent of the pre-privatization level. Reliability of service has increased substantially in some cases, with marked reductions in the number of outages, in part due to the introduction of improved technology (such as the fitting of generating plants with power system stabilizers, enabling the establishment of an automatic generating disconnection system, which shuts down as little generating capacity as possible in the event of a transmission fault). However, increased productivity did not occur overnight, and many newly privatized companies struggled to introduce changes and make improvements (particularly as regards illegal connections and stolen electricity). Increasing foreign investment was one of the primary goals of the 1992 privatization programme and the Government has expressed satisfaction with the gains achieved. The northern distribution company of greater Buenos Aires made capital investments of around $380 million between September 1992 and 1995, with an additional total investment of $500 million planned for the period 1990-2000. Anticipated economy-wide electricity investment between 1996 and 2001 is $7 billion, most of which is attributed to private investors, with special attention being focused on improved customer service.

Source: Electricity reform abroad and US investment, report prepared by the Energy Information Administration (EIA), United States Department of Energy, Washington, 1997.

The privatization method used in the electricity sector is the so-called "Southern Cone" model, following legislation in Chile (1980) and Argentina (1992) which led to the splitting up of the industry into five functions: generating, dispatching, transmission, distribution networks and supply, with deregulation at bulk and retail levels and the completely deregulated bulk sector open to competition for generating. The process has been virtually completed in Argentina and Chile, and the model has since been applied in Peru (from 1993), Bolivia (from 1995) and Colombia (from 1995). In Chile, 80 per cent of the generating capacity is private, as is all transmission and distribution; ENERSIS, the holding company established following the privatization of the two state electricity utilities, has started to invest in other countries, such as Argentina, Brazil and Peru. Reforms to the same end are under way in Brazil, Mexico and other countries.

In Brazil, over 90 per cent of total power output is hydroelectric in origin, almost all of which is produced by the federal Government and the constituent states, with very little municipal and private sector participation. The transmission lines are almost entirely owned by federal enterprises and state concessionaires. The transfer of electrical utilities to the private sector is being done through the sale of federal and state assets and the award of concessions. Act No.9074 of 1995 and Decree No. 2003 of 1996 open up opportunities for private enterprise by authorizing the generation of electricity for own consumption or for sale, by large consumers, who can thus gain paying access to the transmission and distribution networks.

Little has been done to restructure the gas sector in the region, with the exception of the privatization of Gas del Estado (GdE) in Argentina in 1992, which was split up into ten companies, two in transmission and eight in distribution. In Chile, there has been no privatization of the petroleum industry, which produces gas, although gas distribution has always been privately managed. In Brazil, piped gas is available in only two cities (Rio de Janeiro, Sao Paulo), where the state enterprises COMGAS and CEG were recently privatized, although it is too soon to evaluate their effects and importance. Many industrialists believe, however, that the development of a natural gas grid across much of South America is one of the essential infrastructures required for steady economic growth in the coming decade. The outlines of such a grid are being put in place, with the main element, the Bolivia-Brazil pipeline, due to be completed by December 1998.(23) Gas Natural México Repsol, a subsidiary of Repsol, the Spanish oil company, recently became Mexico's largest natural gas distributor after concluding a contract to supply gas in the city of Monterrey. The company announced plans to invest $220 million in Monterrey, including $180 million for the purchase of the distribution system from the Federal Electricity Commission. Natural gas production is still the exclusive prerogative of Pemex, the state-owned oil company.(24) In Costa Rica, where utilities for the time being remain the responsibility of the State, gas is also a state monopoly; however, it is sold to consumers through the intermediary of three private enterprises (Unigas, Elf and Gas Zeta).(25)

1.5.6. North America

1.5.6.1. United States

Canada has one of the highest percentages of public ownership in the industrialized world, whereas the opposite is the case in the United States, although the utility sector has a much larger share of public participation than other parts of the economy in the latter. The electricity sector in the United States is made up of a mix of public and private ownership; there are still more publicly owned electricity utilities than other forms of ownership, and some of them are quite large -- as in Los Angeles, Seattle and Cleveland -- although 75 per cent of the market in terms of kilowatt-hour load provided is covered by investor-owned enterprises and many small municipal utilities are dependent for supply on larger private generation and transmission companies. Water supply in the United States is predominantly (71 per cent) publicly owned, mostly in the form of some 22,000 municipal utilities, which are responsible for local water distribution and waste-water treatment. Water property rights are a significant issue in the United States, in particular in the context of the assertion of historic indigenous rights on native American reservations.

The utilities industry as a whole has undergone a rapid process of restructuring and regulatory reform in recent years, driven by market liberalization and the effects of globalization, with an increasing use of gas by both end-users and for electricity generation. The Energy Policy Act of 1992 permitted competition in the energy sector, with California being the first state to open up power generation to market forces, through a wholesale pool system in which prices are likely to fluctuate every half hour. End-users will be able to buy their electricity at a tariff governed by the pool price, but will also be able to use "repackagers", i.e. firms which bear the risk by buying in bulk from the pool. Power companies will also be allowed to pass on the whole cost of their "stranded" assets (which are often massive) in the form of price surcharges over a determined period of time. The Act has also led to a large number of mergers, including several involving both gas and electricity suppliers (as well as the pooling of other functions, such as billing), prompting fears of the compromise of public interests. The merger trend has also been accompanied by an internationalization of activities. In addition to the major moves by United States electric companies into the British market, Entergy, one of the major utility companies in the south of the United States, has expanded its activities in Argentina, Pakistan and Peru, amongst other countries, in part through cuts made in its domestic payroll.

Privatization and restructuring are also being increasingly adopted in the water services in the United States in response to mounting environmental concerns, consumer pressures and demands for infrastructure renewal. Although there have been some instances of divestiture, more frequently recourse is made to operation and management contracts, especially in water treatment facilities. Some municipalities, however, have preferrred not to privatize at all, but undertake internal restructuring, often with the successful participation of labour. Others have opted for what has been called "managed competition", under which existing employees are reorganized into semi-independent bodies which compete against outside firms.

Despite certain disincentives to potential private suppliers of water (including the regulatory system, which limits rates of return to 10-12 per cent), there has been a rapid growth in privatization, particularly by the major French and British transnational companies which have established local partnerships and subsidaries.

1.5.6.2. Canada

The Office of Privatization and Regulatory Affairs makes recommendations as to which enterprises should be transferred to the private sector, with the year 2000 being set as a target date for a number of initiatives. So far, this process has hardly affected the utilities sector, with internal restructuring and limited participation by private capital being the preferred options. Around 90 per cent of the country's electricity sector is state-owned, in the form of national and provincial "crown corporations". However, the largest utility in North America, Hydro Ontario, is currently the subject of a proposed restructuring and privatization plan, drawn up by the Macdonald Commission, which argued that there was no longer a need for a single large generator and that most industrial and domestic consumers wanted more choice and flexibility.

Canada's natural gas market has experienced significant deregulation over the last decade, following a 1985 Agreement on Natural Gas Prices and Markets signed by the national Government and three gas-producing provinces, and a 1988 regulation enabling shippers holding transmission rights to sell them to other shippers on a short- or long-term basis, thereby creating a competitive secondary market.

1.6. Technological developments

Privatization and restructuring can act as one of the driving forces of technological innovation and change, with energy research and development (R&D) yielding technological breakthroughs, for example, in renewable energy sources (such as advanced solar photovoltaic and wind turbine power systems), as well as helping to insulate economies from the costs associated with price shocks and disruptions in imported energy supplies. R&D can also provide an impetus for privatization, insofar as the old monopolies have not always been very active on the new emerging markets.

Energy R&D can also lead to reductions in adverse environmental impacts associated with energy production, delivery and use. Approximately 96 per cent of the industrialized countries' public sector energy R&D is carried out in nine countries (Canada, France, Germany, Italy, Japan, Netherlands, Switzerland, United Kingdom and the United States).(26) Research has been focused on developing technologies to achieve a more efficient operation of national electricity grid systems much closer to their theoretical margins through better load estimation, energy balance management and improved metering technologies, while a large part of the increased R&D spending by deregulated utilities has been allocated to the search for new "energy products and services", through the fusion of existing energy products (e.g. metering equipment) and information technologies (e.g. the integration of home security monitoring technology with energy management systems). State-of-the-art information technology will be required for companies to gain competitive advantage, with emphasis being placed not only on typical information systems applications, but on other systems such as automated mapping, facility management, energy management, etc. that must be integrated to improve operational efficiency and offer new services. Advances in computer power and data processing -- which are facilitating the dispatch of electricity across the network and the vertical separation of the electric power industry, as well as developments in more sensitive and efficient regulation and safety devices, solid-state metering and user-friendly remote meter reading, prepayment and billing systems are all areas of increasing importance. This is particularly the case with electricity, which cannot be stored, and where utilities need to track all the management parameters concerning production, transmission and distribution.

Natural gas has become a major source of power for electricity generation since privatization.(27) The quantity used for electricity generation rose sixteenfold between 1990 and 1995 and is expected to double between 1995 and 2000. The removal of European Union restrictions on its use for power generation has led to rapid expansion. Natural gas has several advantages over thermal plants when used in the most modern combined cycle-gas turbine (CCGT) stations. Medium-capacity turbines (in particular CCGTs) allow plant standardization and economies of scale in power generation and thereby make it easier for independent producers to enter the sector. Natural gas is cheaper per unit than coal or nuclear energy, has environmental advantages (emitting half as much carbon dioxide, two-thirds less nitrogen oxide and virtually no sulphur dioxide and particulate emissions) and supplies are plentiful in the short term. In the United Kingdom CCGTs supplied 21 per cent of electricity in 1996 (compared with 0.2 per cent in 1992) and more stations are planned or under construction by such United States companies as Mobil, AES, Enron and Amoco. In 1994, gas accounted for 29 per cent of West European energy use (and expected to rise to 40 per cent by 2015); the figure was 40 per cent in the United States, while in Asia and Australasia during the same period natural gas use increased by 104 per cent.(28) According to Andersen Consulting's Gill Rider, head of Andersen's North European utility practice, within 20 years the EU will have a single power market dominated by gas-fired electricity generation.

Many natural gas companies already operate in a converged environment on the international front. The Aguaytia integrated gas and power project in eastern Peru was developed to exploit the large gas reserves of the area and to deliver power to the Peruvian electricity grid. A similar situation exists in Sulawesi, Indonesia, where there are enormous gas reserves, a limited pipeline infrastructure and a large population not served by either gas or power facilities. For the first time an independent power plant was recently developed to deliver electricity to the country.

1.7. Environmental issues

The population of the planet is growing by 250,000 persons a day, i.e. nearly 90 million a year. Within the next 35 years, the global population is expected to increase by half, with most of the growth occuring in rural and remote areas of developing countries. Who will provide this incrementally increasing new population with its energy needs? How will these people be able to pay for the minimum services they require? And what can be done to relieve the stress placed on the environment? The average annual world energy consumption per capita in the developing countries is 0.71 tons of oil equivalent (toe). A yearly increase of almost 65 million toe will be required to meet the needs of the growing population in rural and remote areas which sometimes lacks any developed energy infrastructure. An additional $8 billion will be needed every year to satisfy basic energy needs if conventional energy schemes are used.(29)

Privatization and the various forms of restructuring under way in many countries may have beneficial or detrimental effects on the natural environment. Thus the use of new technologies in waste treatment or the clean production of electricity by private enterprises may help to limit further environmental damage. However, competitive pressures may also prevent companies from investing in renewable, energy efficient programmes, and the use of pollution-generation techniques for reasons of short-term profitability will clearly work in the opposite direction.

Of the 71 per cent of the earth's surface which is covered by water, only 2.5 per cent is made up of fresh water, and ten countries share 65 per cent of the world's annual water resources.(30) As the President of Senegal once famously said: "In our Sahelian countries, three problems exist: the first is water, the second is water and the third is water."(31)

In some countries water cannot be bought and sold because religion or the national constitution forbids it; in many countries water is considered a "free commodity" and the idea that it can be an economic good with distribution costs that have to be paid for is sometimes difficult to accept. Over the past 25 years the amount of water available has fallen from 12,500 to 7,500 cubic metres per person, while consumption has doubled. One and a half billion people are without clean water, and 50 per cent of the world's population live without adequate water purification systems. In many poor countries, water is often poisonous, bearing 80 per cent of all diseases. According to the WHO, 30 million people die each year from epidemics and contagious diseases carried by polluted water: in Africa, water contains a lot of fluoride, which can have serious effects on a child's growth, while in Bangladesh, small amounts of arsenic in the water supply can lead to a slow death.(32)

Water is often spoiled by pollution, but the distribution of safe drinking water is in many cases hampered by a lack of infrastructure. According to the World Bank, governments will need to invest some $600 billion over the next decade to support an infrastructure able to supply clean water to everyone. At the World Water Forum in Marrakesh in 1997, the Director-General of UNESCO called for a new "ethics of water which shows awareness of the need for distribution, partnership and ultimately sharing".
 

Box 1.3
"For a few drops of water ..."

Pedalling his creaking bicycle, Devidas Lahane, a 65-year-old pensioner living in a small village near Aurangabad, India, had spent the last ten years on endless rounds to government offices during his campaign to have drinking water distributed to his village. The village used to have around 3,000 inhabitants, but several years ago a large number of wealthier families had moved in and were able to afford private connections from a water supply system which had originally been intended for the local inhabitants.

Lahane had used every tactic he could to wage his ten-year campaign -- writing countless memoranda to government officials and letters to the newspapers, organizing public marches and hunger strikes. In a final memorandum dated 1 September 1998, addressed to Chief Minister Joshi, he vowed to set himself alight on 5 October if water services were not provided to his village. On 5 October, at 11.30 a.m., Lahane rode up to the gates of the government offices on his creaking bicycle, carrying a can of kerosene, and set himself on fire. He died the same evening in hospital from the 95 per cent burns which covered his body.

Source: The Indian Express (Mumbai), 13 Oct. 1998.

Water, like electricity, is a service which is essential to social and economic development; but its social importance necessarily involves a financial cost. Although water cannot be be reduced to just a matter of business, paradoxically one of the ways of overcoming what Andras Szollosi-Nagay, of UNESCO's International Hydrological Programme, has called "the ridiculously unequal access to water" would be its monetarization, i.e. making it an economic commodity. In this way, major distributors of "blue gold" would be encouraged to invest in the poorest parts of the world and develop their infrastructure.(33) The Final Declaration of the International Conference on Water and Sustainable Development held in Paris in March 1998 underlined that "the development, management, use and protection of water should be promoted by a partnership between the public and private sectors, thus mobilizing good practice and long term financing". Throughout history access to water has been at the origin of countless disputes and wars, and remains a potential source of conflict in many parts of the world today. But it can also be a catalyst for regional cooperation and development, as was emphasized by a recent international meeting organized in Petersberg (Bonn) by the Development Policy Forum of the German Foundation for International Development (DSE), in collaboration with several federal bodies and the World Bank.(34)

Because of its controversial nature, nuclear energy is an important feature of the debate on the privatization of enterprises and the liberalization of the electricity sector. The reluctance to allow private enterprises to use nuclear plants to generate electricity is easy to understand. A series of policy decisions and incidents has cast many clouds over the nuclear power industry over the last decade.

Public hostility to nuclear energy has led many States to abandon this option (such as Italy, in a referendum of 1987) or to put its further development on hold (Sweden, Germany in 1990). The United Kingdom has no further plans to build nuclear plants and in the United States a practical moratorium remains in place. More recently, the Swiss Government decided in October1998 to renounce nuclear energy, and five nuclear plants will be gradually shut down by the year 2025.

The establishment of coalition governments with ministers from the green parties (France in 1997, Germany in 1998) has resulted in the freezing of certain programmes and the launching of a general debate on the subject (France) or a total renunciation of nuclear energy without any precise timetable (Germany). In the last mentioned country, an "ecological tax reform" was agreed in October 1998 as a means of financing the transfer of some state pensions and social security costs away from businesses and individuals. Germany is also planning to reorganize its electricity system, which is made up of around 1,000 enterprises, and to redeploy gradually the 40,000 employees currently working in the nuclear energy sector.

Increasing attention is being focused on the use of renewable energy schemes, in particular solar and wind technologies and biomass production and conversion energy. In addition to well-documented environmental reasons, renewable energy technologies, which are now mature and well known, are particularly suited to the challenges of sustainable energy utilization in rural areas. More than a billion people live in rural areas not connected to a national grid or any local electricity system, and where such systems exist, consumers often have very low consumption rates (less than l kWh/day), making the supply uneconomical.

Kenya offers an interesting example of the realities of solar electricity in Africa.(35) There are 50-70,000 households in this country which use solar energy as an electricity source, i.e. l to 2 per cent of the rural population. Most of these systems are due to private sector market development. A similar percentage of households is connected to the national grid under the rural electrification programme -- leaving more than 95 per cent of rural households without electricity. Although most people would prefer connection to the grid, the rural electrification programme has neither the capacity nor the capital to satisfy the demand. Many Kenyans have thus seen solar electricity as a kind of pre-grid electrification solution, despite the high taxes and duties levied on solar systems (increasing their prices by as much as 44 per cent). Solar infrastructure is growing steadily and already extends to rural areas in many parts of the country.

Renewable energy technologies are an effective means of stretching the energy supply base without heavy investment, help reinforce local industry capacities and contribute towards a solution to unemployment. Much of the technology does not require expensive high-tech installations or highly skilled experts for operation. The possibility of creating small-scale energy installations which are run by the local community is one of the most valuable by-products of the technology for both rich and poor countries. This decentralization of energy supply could also contribute to the growth of small and medium-sized industries and businesses in rural areas, where populations are often dependent on subsistence-level income from the land. If properly managed, such small-scale production could form the basis of income for rural populations.

Other potential benefits include the revitalization of rural communities, improvements in the quality of life, education and health of the populations concerned and a reduction in mass migration to the cities. Renewable energy technologies can also be used for water pumping for irrigation, crop drying and as a source of power for communications systems. Utility-scale generation, distributed power generation, off-grid installations, electric vehicles, satellites, portable electronic equipment and photovoltaic building materials are just some of the rapidly growing applications for solar energy technologies.

The World Solar Programme 1996-2005, included in the World Solar Declaration of the Summit held in Harare in 1996, established 300 high-priority regional, national and strategic projects deemed to be of universal value, with a view to providing a "solar highway" towards sustainable development. The worldwide market for renewable energy technologies is estimated to have a direct turnover of almost $40 billion a year and the photovoltaic market, for example, has grown steadily over the last 15 years (equal to annual shipments of almost 70 MW in 1996).
 

Box 1.4
Solar energy and water pumps

The Regional Solar Programme of the Intergovernmental Agency for Drought and Development (IGAAD), which groups together Burkina Faso, Cape Verde, Chad, Gambia, Guinea-Bissau, Mali, Mauritania, Niger and Senegal, has launched a photovoltaic cell water pumping project in which village involvement and payment for water used are two of the main features. To date 626 pumps have been installed under a 34 million ECU grant under the Lomé lll regional programme and national programmes, which provide not only water, but lighting, refrigeration and energy for more than 900,000 rural inhabitants.

A photovoltaic cell uses semi-conductor materials to transform light into electrical energy. In receipt of a photon flux (solar radiation), the cells become a valuable source of current. The cells are connected and assembled in modules, each of which is hermetically sealed and produces 50 watts of power. A generator is made of a series of connected modules, with an inverter being used to generate the current which drives the motor of a centrifuge pump placed in a borehole. The pumped water accumulates in a tank and is distributed by gravity to a fountain or water trough. At night, the energy stored in a battery can be used for lighting, refrigeration or television sets.

One of the main difficulties to be overcome in the project was changing people's attitudes to paying for water. User contributions are essential to ensuring that equipment can be renewed when required and to cover service costs. When a village has sold enough water to cover these costs and fulfil its maintenance contract, it starts to generate profits.

However, although the project has clearly been successful, there are certain weak points of an organizational and institutional kind, including cash flow problems at both regional and national levels. The level of water payments is generally insufficient for the systems to be self-financing, a difficulty which is compounded by the absence of a sufficiently large market in many places.

Source: "Water from the sun", in The ACP-EU Courier (Brussels), No. 161, Jan.-Feb. 1997, pp. 68-70).

A recent breakthrough at the National Renewable Energy Laboratory in the United States Department of Energy was the application of a thin film of copper indium-selenium to a glass backing, making it into a semi-conductor which, when exposed to sunlight, becomes active and converts the sunlight into electricity. The new technology costs up to ten times less than the crystalline silicon-based cells now on the market and could shortly cost as little as 6 cents per kilowatt-hour to produce electricity (competitive with the 8 cents per kilowatt-hour for electricity now generated from nuclear, coal and oil fired power plants). The project leader believes that by the year 2005 photovoltaics should compete for at least 10 per cent of the world's energy markets. Similarly, more than 1,300 MW of new wind energy capacity was installed in 1995, equal to a 35 per cent jump in world capacity in comparison to 1994. The strong growth in international wind energy markets is expected to continue, according to official projections from the American Wind Energy Association (AWEA), which has called wind power "the world's fastest growing electric power technology". According to projections, the total installed wind power capacity will surpass 18,500 MW by the year 2005, representing a market of more than $18 billion.

The sea is another potential source of environmentally friendly energy which is attracting attention. A British company, IT Power, was recently awarded a $1.1 million grant from the EU to build the world's first full-sized marine current turbine connected to a national electricity grid -- a kind of underwater version of wind farms which exploits the currents around channels and headlands. Research by the United Kingdom Government indicates that tidal currents around the country's coasts could potentially meet up to 20 per cent of national power needs. Although tidal current schemes have faced difficulties due to the building of equipment that can withstand the sea's buffeting, the offshore tidal industry has pioneered engineering methods which now make such structures more durable. The IT Power scheme is the most advanced of its type, but Blue Energy of Vancouver also has an ambitious plan to build a $100 million plant driven by currents in a channel between islands in the Philippines.(36)

In the industrialized countries, the promotion of solar energy technology is often included in the policies which have opened up the electricity market to competition. Thus all the draft legislation in the United States dealing with electricity deregulation contains provisions to promote renewable energy. The decision by the Arizona Corporate Commission to open up the state's electricity market required all providers to derive some of their electricity from solar sources (0.5 per cent of the amount sold in 1998, increasing to 1 per cent in 2002). Arizona Public Services (APS), the state's largest energy services provider, recently teamed up with Cavco Industries Inc. to provide solar technology to customers living in remote areas.

Although there are a number of practical considerations which appear to limit the renewable resources that can be used, the main constraints to the wider use of these environmentally friendly energies include the lack of relevant legal, technical and innovative financial mechanisms. Solar costs have fallen 75 per cent since the early 1980s but still remain high; wind costs have fallen 70 per cent.

Environmental concerns and auditing at the national and international levels are therefore clearly essential ingredients of the restructuring and privatization process. In the United Kingdom, the National Rivers Authority (NRA) set up under the Water Act of 1989 to regulate the operation of water supply and sewerage, was subsequently integrated into the New Environment Agency established on 1 April 1996 under the Environment Act of 1995. The Environment Agency has the same responsibilities in respect of water management and conservation of the environment as the former NRA, but combines these with responsibilities in respect of environmental concerns relating to air and land. Similarly, in Portugal, from 1986, water resource management ceased to be the responsibility of the Ministry of Public Works and was initially placed under the authority of the Secretariat of State for the Environment and Natural Resources and, since 1990, the Ministry of the Environment.

In the case of public utilities, environmental regulation can be combined with economic regulation. For example, regulation of pollution control in electricity generation or in the disposal of sewage and waste water can also be built into price regulation, designed not only to protect consumers but to provide incentives for investment in environmentally sound technologies.

1.8. Structural change and diversification

1.8.1. Unbundling

Technological developments, particularly in electricity, have made it possible to unbundle infrastructure services and, in some cases, even to supply them competitively. The unbundling of electric utility generation, transmission and distribution systems allows electric and gas companies to form alliances to develop economical, integrated projects, a process which has led to an unprecedented number of mergers and acquisitions among natural gas and electric companies in recent years. Furthermore, consolidating the skill areas of two separate utilities allows each to expand its market niche by adding expertise in complementary areas. Many of these alliances take the form of outright purchases of gas or electric companies. However, companies are also forming project-specific joint ventures enabling them to gain a toehold in the converging energy marketplace. Natural gas and electric utilities are merging to cut costs, to expand their service territories and to offer new multi-fuel services, as in the case of the planned merging of operations between Baltimore Gas and Electric (BG&E), which provides gas and electric service to the city of Baltimore and ten surrounding Maryland counties, and Potomaic Electric Power Corporation (PEPCO), which provides electric service to Washington, DC, and two surrounding Maryland counties. Similarly, Houston Industries Inc. is acquiring NorAm Energy to facilitate its entry into gas distribution markets in six states as well as its entry into gas and electric wholesale marketing and gas transportation. The unbundling of the services of power generation, transmission and distribution is expected to result in greater customer choice, lower electric rates and the introduction of new energy-related products and services.

As utilities become a market-driven industry, brand name identification will become important in gaining market share in the retail arena. Utility offerings have not changed substantially in decades, but companies will now be required to develop distinct products and services to establish differentiation from competitors.

Within this unbundling process, electricity generation is often divided up among several companies, while high-voltage transmission and regional electricity generation companies are allowed to remain natural monopolies, whether public or private.

1.8.2. Multinationals and multi-utilities

The increasing privatization of the utilities industry is being accompanied by another major phenomenon: the increasing role played by multinationals in domestic economies in general, which has exacerbated power imbalances between labour and capital, particularly in the utilities market, where production and labour cannot be "delocalized" as in other sectors, and has raised a number of labour relations questions (including whether companies should bring with them their own industrial relations practices from their home countries, or adapt to the standards of the host country). Faced with greater competition in their home markets, utilities are looking to diversity, as well as increasing their international activities. In the United Kingdom broadly based energy groups such as British Gas and Eastern Energy are now offering their customers dual fuel, electricity and gas contracts. Scottish Power offers gas, electricity, water and telecommunication services to its customers. Tractebel, the diversified Belgian utility and industralized group which owns 39 per cent of Electrabel, the country's main electricity producer, controls more than 11,000 megawatts of international capacity, almost as much as inside Belgium.(37)

In addition, Tractebel has controlling interests in Distrigas and so together with its interests in Electrabel controls 85 per cent of Belgium's electricity and gas markets. Through its control of Coditel, it has 60 per cent of Belgium's cable television market. It also controls Watco which has 50 per cent of the industrial waste market. It is active in water distribution as well, although to a much lesser extent. Tractebel in turn is owned by the giant company Suez-Lyonnaise des Eaux.

There are at present nine internationally active water companies on the world market, including three French groups, Suez-Lyonnaise des Eaux, Générale des Eaux (Vivendi from May l998) and SAUR/Bouygues, one Spanish company, Aguas de Barcelona, and five United Kingdom companies: Northumbrian, North-West, Severn-Trent, Thames and Welsh Water.(38) There are none from Japan, Germany or the United States. However, as a result of bidding combinations formed for financial reasons between these groups, the world market is in fact divided between two large groups, the Lyonnaise/Aguas de Barcelona group and the Générale/Thames alliance and three smaller ones (SAUR, Severn-Trent, and North West Water). Générale des Eaux, for example, supplies 25 million people in France and some 40million in other parts of the world. It wholly owns two water suppliers in the United Kingdom, as well as being the majority shareholder in three others and owns minority interests in three others. It also wholly owns water distributors in Australia, Czech Republic and Hungary. In the energy sector, there is a wider range of companies: France, Germany, Spain, United Kingdom and the United States, with the latter now owning more than 60 per cent of the electricity and supply companies in England and Wales. Oil and gas giants are also moving into the electricity and renewable energy industries. Shell recently announced that it would start investing billions of dollars in the electric power industries. Electricité de France, the world's biggest power company, remains under the control of the French Government but owns plants and distribution utilities in more than 30 countries. Similarly, United States companies have taken over seven out of 12 regional electricity companiesin the United Kingdom, and have expanded elsewhere in Europe, Latin America and Asia-Pacific.

Although some of these companies specialize in one particular sector (as occurs, for example, with computer companies), others are active over a wide range of services. RWE, the German multi-utility, has mining, energy and telecommunications businesses. The Générale des Eaux is one of the most dramatic examples: in the United Kingdom, its activities include water companies, hospitals, refuse collection service, waste-to-energy plants, cable television and mobile telephones, while in France, the list also includes catering, motorways, electricity generation and railways.

The picture is further complicated by the large number of new subsidiaries being added to each network, the takeover of existing private or public operators and the establishment of new ventures. Mergers have also resulted in a tendency towards the reassembly and consolidation of familiar elements along unusual lines, in a process which seems to be market-driven. According to a recent report in the Financial Times, "the old state monopolies were formed when the producer was king. Everything was scarce, and the important thing was to make each service available universally. Now, the customer is in charge. No longer are pylons and telphone wires the chief asset of the electricity or telecoms company. It is access to customers and information about them".(39) Companies, such as supermarkets, which have a large customer database are in a good position if they wish to enter the utilities markets. Thus in the United Kingdom, the Saga Group, a holiday company for the over 50s, which had no previous involvement in the energy industry, recently signed a supplier contract with Northern Electric to supply Saga's 100,000customers with gas at a discount of 25 per cent. The process is leading to the emergence of so-called "super utilities" supplying not only gas and electricity, but water and telecommunications (as when Scottish Power took over Southern Water which, with Manweb, led to the creation of a multi-utility company).

However, as a recent Financial Times editorial on the decision by Entergy, a United States energy company, to cut back on its worldwide activities, including its sale of London Electricity, pointed out, being a global utility is harder than it looks. There are cross-border advantages in the utilities industry, as in other sectors, but they do not apply to every segment or to every market. "The culture and financial model of the traditional utility business -- engineer-dominated, regulated, debt-laden -- are inappropriate to the new era. As the electricity industry moves from its historic pattern of central control towards one in which capacity is traded minute-by-minute, there are gains to be made by companies that can master this skill and export it ... (but) having the cash to go abroad doesn't necessarily mean that you should."(40)

1.9. The regulatory framework

The World Development Report 1997 emphasizes the importance of well-designed regulatory systems in the wake of privatization and restructuring and the new role of the State in a changing world. "Regulation can help protect consumers, workers and the environment. It can foster competition and innovation while constraining the use of monopoly power ... Making the best use of the new options emerging for private provision of infrastructure and social services will also rely, often, on a good regulatory framework."(41)

Privatization alters control, most obviously in the form of reduced state control and greater control by private investors.(42) The privatization of natural monopolies requires governments to take special care to ensure that the monopoly power of the firm is restricted and cannot be abused by the private sector. This may require the preparation of the sector for deregulation, and the establishment of regulatory policy and machinery to address issues such as opening the market to new entrants, interconnection charges to be paid for access to the fixed network or transmission system (the "natural monopoly" in the case of electricity) and economic regulation. Various forms of profit regulation have evolved to reduce the market power of private monopolies. The traditional approach to regulating utilities in the United States is through profit regulation, with the utility calculating, and the regulator reviewing, the expected operating costs for a normal year. An alternative form of regulation, by "price cap", emerged during the privatization of utility industries in the United Kingdom, where the focus is on the future adjustment of prices relative to changes in the consumer price index. The flexibility and relatively greater ease of administration have made price caps a preferred form of regulation for both utilities and governments. However, regardless of the regulatory form adopted, it is important for governments to establish some form of regulatory structure prior to privatization. The telecommunications sector offers one example of a successful formula for monopoly privatization, particularly for emerging markets.

Autonomous regulatory commissions originated in the United Kingdom and the United States in the nineteenth century in the form of advisory railway commissions.(43) In the developed countries, the power of regulators in the different sectors may vary enormously, with the "capture" of the regulator by the dominant undertaking not being uncommon.(44) Similarly, some analysts in these countries have argued that the increasingly competitive nature of the regulated sector removes the need for separate regulatory agencies. However, the establishment of such commissions requires well-established legal practices and traditions which are not often to be found in many developing and transition countries, where the difficulties of designing an appropriate regulatory framework are compounded by civil service regulations and salary scales, political intervention, the weakness of the judiciary and the lack of trained human resources. Autonomous regulatory agencies with decision-making powers are therefore not necessarily appropriate for all countries, especially where the main challenge of regulation is to help close the gap between supply and demand and to ensure that operators meet minimum performance standards. In such cases commissions with an advisory mandate may prove more effective.

The institutional framework of regulation reveals a wide range of variations. In some cases, preference is given to ministerial regulation, as in Indonesia, Japan, Malaysia and several European countries, such as France and Germany, although the overall trend is now towards separation from goverment ministries. In other cases, there may be a single body covering all infrastructure sectors (which is well suited for countries with insufficient human, financial and administrative resources) or specialized regulators for each sector, as in the United Kingdom (see figure 1.3) and Argentina; other countries have set up a single agency for closely linked sectors, such as gas and power (as in Hungary and the United States (at the federal level, the Federal Energy Regulator Commission (FERC)); in other cases, there is one multisectoral agency for all or most infrastructure sectors (Bolivia and the United States (public utility commissions at state level)). In some countries, there is no special regulatory body at all, as in New Zealand, where the Commerce Commission, the national competition agency, is responsible for the economic regulation of infrastructure on the basis of the country's competition rules. In Guinea and Côte d'Ivoire, the use of detailed and relatively rigid concession agreements, coupled with international arbitration procedures, has been preferred to the establishment of an autonomous regulatory body.

Source: F. Neto, "Water privatization and regulation in England and France: A tale of two models", in Natural Resources Forum (United Nations, New York), Vol. 22, 2 May1l998, p. 110.

Concessions seem to bring particular risks with them. The French Cour des Comptes recently published a critical report on the way water concessions operated in France. François Logerot, the author of the report has said: "There is a high degree of concentration. This is not to say competition is absent, but it is organized competition." The report also makes another relevant point on public procurement. The authorities avoid the evaluation of bids according to public criteria and use a negotiated procedure. Other problems include the long-term nature of the concessions, the tendency to extend existing contracts, the lack of transparency, the ambiguous nature of contracts, driving up prices through subcontracting to sister companies in the same group. The report concludes that this has led to abuses and highlights cases of corruption. The increase in prices has to be seen in relation to the privatization of services. There is also a disparity between local authorities and the large transnational companies, with public authorities having to deal with conglomerates that have immense political, economic and financial power.(45)

In the United Kingdom model, the single regulator for each sector is headed by a director-general, whereas in the United States the system takes the form of collegial regulatory commissions, i.e. public service commissions which exist in most states, as well as the Federal Communications Commission and the FERC. Regulators are sometimes appointed by the executive, as in Bolivia.(46)

The functions of the regulatory framework include the harmonization of a number of different objectives concerning the profitability of the operator, the continuity and quality of the general interest services provided, compliance with commitments entered into, the implementation of the necessary infrastructure investment, the management of externalities and environmental concerns (pollution of water sources, overpumping of groundwater, etc.) and the need for flexibility to allow adjustments to be made as and when required. Recent developments in the United Kingdom, where the regulatory model is being re-assessed, have shown how difficult it is to achieve such a balance, with the high profits and generous salary and benefits packages of senior staff in the water industry (where the price cap formula has led to significant tariff increases) sparking public protest (see Chapter 3.1.3 below).

Infrastructure investments tend to be of a long-term kind and good regulation is an important incentive and source of guarantees for investors, as was made clear during the attempts to privatize the Hungarian power industry. The lack of a clear regulatory framework addressing such fundamental issues as market structure and price regulation adversely affected the Government's privatization plans in 1993, when the small number of bids received resulted in the abortion of the project. A new Electricity Act was passed in 1994, which addressed several of the regulation issues, but private investors still felt that there was an unambiguous commitment to cost-covering tariffs. In 1995 six distribution companies and two generating companies were finally privatized.(47)

Regulation is a delicate and political undertaking, especially in the case of monopolies, and is itself the product of a bargaining process involving not only government departments, private companies and financial institutions, but political parties, trade unions and consumer groups. Furthermore, much of the work carried out by regulators, which involves complex functions that need to be performed professionally, can itself be contracted out to private experts, a solution which should be taken into account in cases of limited administrative capacities, provided that strong guarantees are provided as regards independence and neutrality. Finally, it can be noted that reputation can be a source of self-regulation for international infrastructure companies, in the case where public black or grey lists exist which hold information on companies that violate environmental, health and safety and other labour standards or have engaged in corrupt activities (see below in Chapter 6). The European Commission, the European Parliament and the European Federation of Public Service Unions have called for such lists.(48)

As with privatization strategies as a whole, there is no single blueprint for ensuring the success of the chosen regulatory system. Although infrastructure privatization is a relatively recent development, making it hazardous to venture any definitive conclusions in the field, the growing trend towards privatization, restructuring and de-monopolization is however not likely to be a passing fashion. One of the prerequisites for the success of a given infrastructure privatization project is the establishment of a sound regulatory framework which is tailored to the needs of the sector and the country concerned. As the companies increasingly operate on a transnational scale to provide public utility services, thought will have to be given to mechanisms to regulate the activities of transnational companies across borders. In Europe the European Commission has established the European Electricity Regulatory Forum where regulators meet to consider cross-border pricing and operations, and APEC has established its Energy Regulators Forum.

1. P. Guislain: The privatization challenge, World Bank, Washington, DC, 1997, pp. 203 ff.

2. The privatization network -- the multinationals bid for public services, Public Services Privatization Research Unit (PSPRU), London, 1996, p. 1.

3. cf. Privatizing state-owned enterprises: Experiences of Asia-Pacific economies, Asia Productivity Organization, Tokyo, 1996; S. Ramnarayan; I.M. Pandey (eds.): Strategic management of public enterprises in developing countries, Vikas, New Delhi, 1997; Privatisation et développement, Caisse française de développement, Paris, 1997; S.A. Samad; J. McMaster (eds.): Privatization in Asia and the Pacific: Profiles, strategies, results, Asian-Pacific Development Centre, Kuala Lumpur, 1996.

4. It should be noted, however, that the concept of strategic services varies over time, even within the same country. In Peru, for example, the Fujimori administration has argued that the privatization of utilities would not endanger national security or strategic interests, as had been previously claimed, and that on the contrary, those interests were threatened most of all by the huge losses and liabilities built up by state-owned enterprises (SOEs), in Financial Times (London), 17 Mar. 1996.

5. L. de Luca (ed.): Labour and social dimensions of privatization and restructuring (public utilities: water, gas, electricity), ILO, Geneva, 1988, p. 11.

6. P. Guislain, op. cit., p. 204.

7. cf. F. Neto: "Water privatization and regulation in England and France: A tale of two models", in Natural Resources Forum (United Nations, New York), Vol. 22, No. 2, May 1998, pp. 107-117.

8. L. de Luca (ed.): op. cit., p. viii.

9. Substantial use is made in this section of data contained in L. de Luca (ed.), op. cit.

10. Information provided by the Norwegian Union of Electrician and Power Plant Workers (NEKF).

11. International Gas Report (London), 29 May 1998.

12. Report of the European Commission to the Council of Ministers and the Parliament on the state of liberalization of energy markets (Brussels-Luxembourg), COM 1998, 212 fin.

13. Directive 90/377/EEC.

14. Council Directive of 29 Oct. 1990 on the transit of electricity through the transmission grids (90/547/EEC) and Council Directive of 31 May 1991 on the transit of natural gas through grids (91/296/EEC).

15. Directive 96/92/EEC of the European Parliament and of the Council of 19 Dec. 1996 concerning common rules for the internal market in electricity (Official Journal (Luxembourg), No. L.27/20 of 30.1.97).

16. European Commission, XXVIIth report on competition policy, Brussels-Luxembourg, 1997, SEC (98), final.

17. Financial Times (London), 9 Mar. 1998.

18. Cahiers juridiques de l'électricité et du gaz (Electricité de France/Gaz de France, Paris), No. 532, May 1997, p. 176.

19. cf. ILO: Structural and regulatory changes and globalization in postal and telecommunications services: The human resources dimension, Geneva, 1998, pp. 23-29.

20. D. Musco: "Task Force Environment-Water", in The ACP-EU Courier (Brussels), No. 161, Jan.-Feb. 1997, p. 55.

21. Information from ESCOM Workers Union (EWU).

22. Information from the Federation of Electric Power-Related Industry Workers Unions of Japan (DENRYOKU SOREN).

23. R. Corzine: "From Caracas to Terra del Fuego the future will be gas-fired", World Energy Survey, Financial Times (London), 6 Nov. 1998.

24. Financial Times (London), 19 Mar. 1998.

25. Information from the Trade Union of Petroleum, Chemical and Related Workers (SITRAPEQUIA).

26. J.J. Dooley: "Unintended consequences: Energy R&D in a deregulated energy market", in Energy Policy (Oxford), 1998, Vol. 26, No. 7, p. 548.

27. Deregulation of the UK Gas and Electricity Industries, report prepared by UNISON for the Utility Workers Union of America Conference, Washington, DC, 1997, p. 15.

28. Gulf States Newsletter (Crawley, United Kingdom), Vol. 21, No. 534, 22 Apr. 1996; cf. K. Bray, "Why burn champagne?", in GEC Review, Vol. 12, No. 3, 1997, pp. 138-145.

29. World Solar Summit: Preparatory processes and results. Final Report (UNESCO, Paris), 1997.

30. C. L'Homme: "The real price of water," in UNESCO Sources (Paris), No. 101, May 1998, pp. 4-6.

31. "Water from the sun", in The ACP-Courier (Brussels), op. cit., p. 68.

32. C. L'Homme, op. cit.

33. C. L'Homme, ibid.

34. "Globale Wasserpolitik -- Kooperation für grenzüberschreitendes Gewässermanagement Bulletin der Bundesregierung (Bonn), No. 18/5, 193, 12 Mar. 1998, pp. 193 ff.

35. R.J. van der Plas and M. Hankins: "Solar electricity in Africa: A reality", in Energy Policy (Oxford), Vol. 26, No. 4, Mar. 1998, pp. 295-305.

36. Financial Times (London), 22/23 Aug. 1998.

37. A. Taylor: "Race for pole hots up as EU light goes green", World Energy Survey, Financial Times (London), 6 Nov. 1998.

38. The privatization network -- The multinationals bid for public services, op. cit., p. 8.

39. Financial Times (London), 18-19 July 1998.

40. Financial Times (London), 4 Aug. 1998.

41. World Development Report 1997: The State in a changing world, World Bank, Washington, DC, 1997, p. 6.

42. M. Bishop; J. Kay; C. Mayer (eds.): Privatization and economic performance, Oxford University Press, 1994 and 1996, p. 6.

43. P. Guislain: The privatization challenge, op. cit., pp. 258 ff.

44. J.A. Rees: "Regulation and private participation in the water and sanitation sector", in Natural Resources Forum (United Nations, New York), op. cit., p. 103.

45. "La gestion des services publics locaux d'eau et d'assainissement", Rapport Public Particulier, Cour des Comptes, janvier 1997. As reported in Privatisation News, No. 44, Feb. 1997 and Le Monde, 28Jan.1997.

46. Section 4 of Act No. 1600 of 28 Oct. 1994 on the establishment of SIRESE, the regulatory body for the infrastructure sector.

47. Financial Times (London), 6-8 Dec. 1996; cf. Republic of Latvia. Renewal of Latvian infrastructure through private participation, World Bank Report No. 16364-LV, Washington 1997, p. 14.

48. Communication of the Commission on Public Procurement: "The way forward", Mar. 1998; European Parliament opinion of Mr. Tappin, Member of the European Parliament, to be voted 26 Jan. 1999; EPSU position on Communication of the Commission of Public Procurement, May 1998.

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