Luigi Manzetti and Carlos Rufin
Historically, Latin American governments have often come under intense criticisms for over-regulating their economies, thus discouraging investment, while providing politicians with plenty of opportunities for the manipulation of market rules to favor their own constituencies and/or clientelistic networks. In this chapter, we will focus only on government regulation affecting public utilities that that were privatized in the 1990s. The reason for such a choice is that the wave of public utility privatization that took place in the 1990s represented a turning point in the development of Latin America. First, by its very nature, it marked the reversal of import substitution industrialization policies and of the establishment of vast industrial sectors (either through nationalization or the creation of brand new companies), which many countries in the region adopted from the 1940s until the late 1980s. Second, given the sheer size of state owned enterprises (SOEs) in public utilities like electricity, telecommunications, transportation, water and sanitation, and their sale had profound repercussions for price-setting, investment, technology transfer, market competition, and customer service for the whole economy. Third, because large segments of the population used public utilities, their privatization had multiple repercussions (possibly better service but also higher tariffs), and generated political controversy. Fourth, public utility privatization meant that the government had to build from scratch regulatory policy in these sectors as, prior to state divestiture, SOEs were monopolies that were left to regulate themselves or be supervised by ministries.
By 1989, when the so-called “Washington Consensus” emerged with its economic recipe to revitalize the ailing economies of Latin America, there was widespread agreement among the academic and policy community that when markets are characterized by natural monopolies (e.g., water, ground and rail transportation) or where competition is hard to achieve, regulation was necessary to avoid rent-seeking behavior by the firms’ new owners.1 In this regard, analysts underscored the importance of establishing good regulatory mechanisms—and strong institutions to enforce such mechanisms—as prerequisites that must be in place prior to the privatization of public utilities. The reason is that regulation can allow a government to formalize and institutionalize its commitments to protecting consumers and investors. Seen in this way, regulation works as a sort of insurance policy. On the one hand, it assures that consumers receive goods and services from the private company at a reasonable price. On the other hand, it protects investors from sudden changes in the rules of the game, by obligating the government to respect the terms of the contract stipulated when the public utility is privatized. At the time, this was a paramount concern to private investors in Latin America, since most countries in the region had a long history of reneging on contracts and expropriating private companies. In short, it was already clear then that privatization per se was only the first step if governments were truly committed to the creation of competition in the marketplace. This was particularly true when state divestiture affected public utilities where little or no competition existed. Thus, regulation was deemed necessary to strike a balance between the need of the private companies to generate good profits and the public’s expectation of benefitting from low-cost, high-quality service. Unfortunately, striking the right balance is both critical and politically challenging.
Not surprisingly, the challenge often proved to be too much to handle. In fact, despite much rhetoric about the virtues of competitive markets and the need of regulation in the absence of competition, both international financial institutions (IFIs), which funded and advised public utility privatization (World Bank, Inter-American Development Bank, and the International Monetary Fund), and Latin American governments paid lip service to all these issues. This is because, on the one hand, by selling vertically integrated SOEs to the private sector (particularly in lucrative industries such as telecommunications and electricity), governments could demand higher prices for these companies. On the other hand, IFIs could get their loans repaid quickly at a time when their financial resources were stretched out thin due to the large amounts of countries asking for assistance after the collapse of the Soviet bloc in 1991/92. The most emblematic examples of this quick and dirty approach were the privatizations of the telecommunication companies in Mexico, Argentina, and Peru, and the electricity privatization in Chile.
Obviously, the transfer of monopolies from the state to the private sector made the establishment of a regulatory framework even more compelling, but in most cases such a framework failed to materialize. Latin American governments often looked at the experience of the United Kingdom, Canada, and the United States in crafting their regulatory agencies as a way to appease critics, but the end result was that in most cases such institutions remained purposely weak. In fact, the executive branch continued to retain a substantial amount of control over key regulatory issues such as tariffs, subsidies for the provision of universal services, investment requirements, and anti-competitive behavior. The irony of it all was that one of the arguments behind the adoption of privatization in the late 1980s was to “de-politicize” economic decisions by getting government out of the direct management of crucial economic sectors. However, by the early 2000s it was clear that post-privatization regulatory policy, within a very weak institutional environment, had created many new opportunities for governments and businesses alike to act in autocratic and collusive manners that defied the very notion of market competition and government transparency.
Notwithstanding the clear impact of politics in crafting post-privatization regulation, the academic literature in the Latin American case continues to be dominated by economic and public administration analyses. In general, these works focus on the cost-effectiveness of regulation and the pros and cons of government intervention. Some see regulation as a means to protect consumers from the abuse of private monopolies. Others emphasize the importance of institutional factors like the establishment of “independent“ regulatory agencies and anti-trust legislation to prevent private firms from gaining undue influence on the regulator (regulatory capture) and prevent price gouging and other non-competitive practices. A third line of research sees regulation as the best method to enforce contracts that safeguard the interests of both customers and producers.
Why then only a handful of political science analyses on regulatory policy in public utilities exist to date, as opposed to the large number of studies devoted to privatization in the 1990s? Part of the answer rests on the complexity of regulation, both from a technical and economic standpoint, which makes it difficult for political scientists to master. Moreover, different economic sectors require different types of regulation, thus complicating cross national and industry analyses. For instance, since the 1990s, rapid advances in telecommunications and electricity technology allowed unprecedented levels of competition, thus lessening the need for regulation. Conversely, technological change remained very limited in water supply, making it the purest form of natural monopoly and thus demanding a high degree of regulatory supervision when privatized.
Over the years, the topics related to regulatory policy have also changed. In the early days of privatization, some studies looked at the impact of financial pressure from IFIs and policy diffusion in shaping regulatory policy. More specifically, during the mid-1990s the few studies that analyzed utility regulation concentrated on the role of the World Bank, the IMF, and Inter-American Development Bank in creating strong incentives to speed up privatization in return for financial assistance. Likewise, some works stressed the importance of these institutions in inducing Latin American countries to adopt regulatory frameworks based upon the United States and the United Kingdom experiences through the hiring of international consultants from North America and Europe who were attuned to the IFI’s policy goals. Others looked at the influence within many reforming administrations of domestic “technopols,” or economists and other highly trained professionals coming often from the private sector and mostly trained in the United States, who served the purpose of carrying out “sound” market reforms and shelter them from public contestation. Since these early works were grounded on the assumption that privatization had to de-politicize utility regulation, much scholarly attention focused on normative issues. That is, how to best craft regulatory institutions that not only were technically competent, but also sheltered from political interference once the state divestiture euphoria was over.
However, as time went on, it became apparent that the “best practice” approach in creating regulatory institutions had often failed. In many instances, government-designed state divestiture policies left governments themselves with the authority to undermine the role of what were supposed to be “independent” regulatory agencies. Another factor that compounded the problem was that the “best practice” approach in regulatory institution building can only work well if supported by pro-competition policies and a legal system that protects property rights and restrains government encroachment. Unfortunately, by the early 2000s both conditions were still sorely missing in most countries in the region. Indeed, as the Latin American economies suffered a downturn in the late 1990s and early 2000s, public opinion became increasingly disillusioned with the way public utilities delivered their service. These resulted on occasions in conflicts pitting private utilities against new administrations that had no commitment to the market reform agenda. In several cases, these heated disputes led to either international arbitration or ended in outright renationalization (Argentina, Bolivia).
This point brings us to the political science contribution to the study of utility regulation. Research on institutions in both economics and politics has long pointed out how political actors (parties, interest groups, and grassroots organizations) and government institutions may impose significant transaction costs on business activity by affecting the willingness of governments to uphold laws and contracts. Likewise, it is clear that best practice models that may work in advanced industrial societies face entirely different constraints in developing countries, which must be understood and addressed for the successful application of such models. There are several transaction costs of a political nature that can significantly alter regulatory policy, which we will group into (1) government and company opportunism, and (2) electoral cycles.
Government opportunism is based on strategic calculations, which figured prominently in the way elected officials privatized public utilities and designed regulatory frameworks. Those political executives that privatized on pragmatic grounds did so in order to boost their domestic support with key political actors. Consequently, the concession contracts benefited friendly domestic companies and the vested interests of the affected unions. Using various excuses, including retaining national control over strategic sectors, ensuring universal service coverage for poor consumers, and protecting jobs, governments that privatized this way usually created artificial monopolies under private control (telecoms in Argentina and Mexico; electricity in Chile), or severely limited competition. This pattern also coincided, not surprisingly, with the establishment of weak regulatory frameworks. In return, companies often bankrolled the electoral campaigns of the political parties that enacted privatization. In several cases, this pattern coincided with collusion and corruption, which undermined the credibility of utility privatization over time, particularly in situations where high tariffs did not correspond to steady service improvement and customer service.
Time inconsistency refers to the lack of coherence in public policies across time, and in particular the pursuit of policies that are directly contradictory with previous policies. For instance, a government decides to balance the budget. It decides to do so by a mix of policies cutting expenditures and raising taxes at the national level. However, it leaves the state and local government to pursue independent policies that create deficits which must be covered by the national government. As a result of this contradictory government behavior, the budget ultimately cannot be balanced. In the case of utility regulation, we can distinguish two broad categories of time inconsistency problems resulting in opportunistic behavior.
The first type is what experts label company opportunism. This becomes a possibility because, as just noted, future governments might find it expedient to hold utility rates down knowing that they could do so with impunity (as was the case). For this reason, some private public utilities demanded high tariffs as a condition for acquiring the capitalized companies (high tariffs could shorten the payback period for the investment or increase returns commensurately with the risks involved) and displayed a preference for direct negotiations with the government, bypassing the formal channel of the electricity regulator (the government being the key decision maker). Unfortunately, these strategies increased the likelihood of time inconsistency by creating more backlash (against high rates) and by undermining regulatory agencies’ credibility, leading to a vicious cycle of opportunism. When companies opt to strike direct bargains with the executive power in the initial stage of the privatization process, as a way to ensure government commitment, they may gain in the short run but not in the long term. As governments change, chances are that a company may not have the same kind of rapport with the new administration, leaving the private operator with no recourse mechanism. Having ignored regulatory institutions from the beginning, these are unlikely to be sympathetic to the private company when the political climate turns for the worse.
The second type is political opportunism. Within this category, electoral cycles are a major source of time inconsistency problems.2 Indeed, their consequences on regulatory policy cannot be understated. Even those administrations that were most committed to pro-market reforms were susceptible to disaffected constituents before and after privatization. As the economic crisis reached its peak in the late 1990s, it became increasingly difficult to mute the misgivings of powerful electoral allies. A good rule of thumb is that the more precarious the economic situation became, the more privatized utilities became an easy political target. If a government was committed to concession contracts, changes to appease critics from within and outside the government coalition were likely to penalize utility companies. However, the worst case scenario was the election of an anti-privatization candidate. As noted earlier, the weak regulatory and legal environment in many countries provided an opportunity for such candidates to turn the table against private utility companies in the 2000s. Typical examples of these patterns were Argentina, Bolivia, Ecuador, and Venezuela, where “populist left-wing” politicians made public utilities, particularly foreign-owned ones, major targets of their nationalistic campaigns.
The common denominator that has allowed the development of these different patterns is the weak regulatory institutional environment that has emerged in the post reform era. It has turned out to be a double-edged sword by providing the opportunity to governments to either act collusively with utility companies (mostly at the outset of the privatization process) or opportunistically by penalizing private operators when macroeconomic conditions and the public mood turned sour between the late 1990s and the early 2000s.
So far we have introduced a conceptual map to understand the major problems plaguing Latin American utilities after privatization. However, to have a comprehensive understanding of regulatory policy, it is important to examine the fate of utility reforms over time and across the region. In this way, we can better comprehend how politics have affected Latin American utilities after the reforms. If the extent of pro-market reforms in public utilities showed significant differences across the region (with few reforms in Ecuador, for instance, contrasting with comprehensive reform in Argentina, and much more privatization in telecoms than in water supply), the evolution of the reformed sectors has also displayed an increasing divergence over time. In fact, the observed divergence goes beyond Murillo’s (2009) “market controlling” and “market conforming” typologies. It is fair to say that reform came to a halt throughout the region by 2000. Over the last decade, no major privatizations have taken place in the energy sector, and no country has undertaken any significant deregulation or deepening of the role of market forces. To a large extent, this was due to the completion of reforms through the enactment of deregulation and the privatization of state-owned companies. Yet the stabilization of reforms in some countries contrasts with the reversal of reforms in others. On one hand, Chile and, to varying degrees, Brazil, Colombia, El Salvador, Guatemala, Mexico, Panama, and Peru (in no particular order), have retained the changes introduced by pro-market reforms.3 In these countries, private ownership is still in place, as is independent regulation and use of market mechanisms for resource allocation. On the other hand, Argentina, Bolivia, Dominican Republic, Nicaragua, and Venezuela, have experienced significant retrenchment from pro-market reforms, with extensive government intervention—particularly in the form of price controls or price freezes for utilities—and, in many cases, renationalization of assets or at least significant impairment of the value of privately-owned assets as a result of government intervention.
In all cases of reversal but the Dominican Republic’s, the retrenchment from pro-market reform in the energy and utilities sectors has of course been part of a much more ample process related to the rise of political forces hostile to market forces or of reactions against the perceived failings of those forces. Nevertheless, the divergent paths invite explanation, particularly as they involve fundamental economic policy issues that have a major impact on Latin America’s economic development. It is interesting to note that, while the analysis of pro-market reforms has attracted considerable scholarly attention, there is as yet a very limited amount of published research focusing on the post-reform period. The edited volume by Millán and von der Fehr (2003) explicitly considers political responses to pro-market reforms in several Latin American countries. The volume offers a sobering assessment of the aftermath of reform. Finding a balance between the mobilization of private investment, which requires high rates of return and hence high energy prices, and political survival, which calls for low prices and moderate or no price increases, turned out to be a major challenge for Latin American governments. The result has been the alternation between attempts at keeping energy prices low or steady, and supply crises that lead to sharp price rises as governments try to restart private investment in energy supply. Murillo and Le Foulon (2006) analyze one such crisis that severely threatened the post-reform model in the region’s pioneer reformer, Chile. Although the crisis exposed a left-of-center government to the limitations of policy decisions made under Pinochet’s dictatorship, the reform model emerged largely unscathed from the crisis. Lastly, Millán (2007) reflects on the region’s experience with pro-market reforms, noting that the obstacles encountered in the reform process turned out to be greater than expected, and that the reforms came to be viewed negatively in many places. Nevertheless, Millán backs Murillo and LeFoulon’s conclusions by arguing that, despite all the problems, the public monopolies do not represent convincing alternatives for many policymakers in the region, so that left-oriented governments in countries like Chile or Brazil have not sought to reverse the reforms even after these countries confronted major crises in the reformed sectors.
Still, other left-leaning governments have carried out major reversals of the reforms in public utilities. Why, then, did reforms survive crises in some countries, such as Brazil (2001–2002) or Chile (1998–1999), but not in others, such as the Dominican Republic (2004)? The standard explanation, in the context of the renewed emphasis on institutions of the last two decades, focuses on the congruence between the requirements posed for the state by privatization and pro-market reform, and the capacity of domestic institutions to meet those requirements (Millán, 2007). One can point, in fact, to the structure of political institutions in the region, and more specifically the absence of veto points or checks and balances in the region’s “hyperpresidentialist” political systems. Such an institutionalist explanation certainly has much to offer. With weak judiciaries and with legislatures beholden to patronage dispensed from the presidential palace, presidents have been able to overturn reforms where political expediency or ideological hostility made it desirable. Thus the fate of reforms can be said to depend on the political will of the executive. As the reformist administrations have been replaced by new ones not bound by previous commitments, the newcomers have been able to renege on the promises made by their predecessors without incurring in any major costs, at least in the short term. Thus the Peronist administrations that followed de la Rúa’s fall from power in the midst of Argentina’s economic and political crisis in 2002–2003, were able to invoke emergency conditions to impose price freezes for all energy products. In conjunction with the severe devaluation of the Argentine currency, such price freezes represented a substantial expropriation of the assets of foreign investors in the energy sector. International arbitration and guarantees turned out to offer little redress for the investors, most of which have exited Argentina after writing off their investments there.
The standard explanation begs, however, for an answer about the apparent lack of checks and balances in some countries but not others in the region. Surely part of the political calculus of a government hostile to the market, or besieged by angry voters, must be its assessment of the feasibility of major policy changes. Brazil’s PT, in power since 2003, was historically much more hostile to markets and private property than Argentina’s Peronists, and took over from the previous government in the aftermath of a major electricity supply crisis; yet it left the electricity reforms largely untouched, and preserved Petrobrás’ ability to operate as a de facto private corporation. What explains these differences?
If hyperpresidentialism and political will do not provide a full explanation for the observed differences, we must consider two possibilities: the consolidation of democratic institutions, making it harder for new governments to alter the policies and institutions created by previous governments; and the development of a consensus among major social forces, particularly political parties and voters, favorable to market forces as mechanisms for the allocation of societal resources even in sectors as sensitive for economic development and for societal welfare as energy and utilities.
Recent research on political transaction costs (Dixit, 2003; Ardanaz, Scartascini, & Tomassi, 2010) suggests that consolidated democracies are characterized by the ability of policy makers to undertake inter-temporal transactions, i.e., to commit credibly to future policies in exchange for specific actions by the transaction counterparts at the present time. Such an ability allows governments to pursue more complex or innovative policies involving non-contemporaneous exchanges or distributions of costs and benefits. Credible commitment depends, in turn, on the existence of veto players that can block attempts at reneging on past agreements. The question, then, is to explain the emergence of such players in the countries that have not abandoned pro-market reforms. We leave this question for others, as it amply exceeds the scope of this chapter.
The other explanation for the divergent paths observed in Latin America’s energy and utilities sectors is the presence or absence of a consensus about the role of market forces, private ownership, and foreign investment in these sectors. Where such a consensus has arisen, it is probably the result of practical considerations as much as political interest or even ideological preference. Of course, the demise of the Soviet bloc and the traditional left has also facilitated the emergence of a consensus, but as the cases of Bolivia, Venezuela, and other countries in the region show, there is still plenty of fire left in the opponents of capitalism in the region. What is thus of equal interest is the fact that in other countries, the electoral appeal of statist policies has not made much headway. This would suggest that even where anti-capitalist forces are prominent, as in Peru, the skepticism about market forces among voters and policy makers is tempered by even stronger skepticism about the ability of governments to improve upon market outcomes. The heavy investments required by the energy and utilities sectors to build additional infrastructure, find new sources of supply, and maintain technological capacity, would place heavy demands on governments under the pre-reform public ownership structures. After the heavy costs of fiscal profligacy borne in the “lost decade” of the 1980s, most Latin American governments have been loath to take on heavy spending burdens again, particularly when democracy has meant renewed pressures to attend to social demands for redistribution, leaving limited funds for the capital account of government budgets. Thus, even governments ideologically committed to public-sector primacy, such as Brazil’s PT government under Lula, have continued to rely heavily on private investment to ensure that energy supply keeps up with demand. Even in countries where the initial wave of private investment in the energy sector foundered on the imposition of price freezes by governments, such as the Dominican Republic and Argentina, it is striking to observe that those governments have not necessarily pinned their hopes on renationalization, as in Venezuela or Bolivia. Instead, governments have either placed the originally privatized companies in the hands of their cronies (Argentina), or have made it very clear that they regard renationalization as a temporary expedient and have sought to compensate the previous owners fairly (Dominican Republic).
Where the privatizations of the 1990s have not been reversed, the regulatory institutions and the privatized companies that emerged from the reforms have had unexpectedly positive impacts on the region’s young democracies, although this link has received scant scholarly attention in the case of the energy sector. It would not have been unreasonable to expect that utility reforms, like those in other sectors of the economy, could work at cross purposes with democratic principles. Most scholars who have examined the relationship between democratization and reform in Latin America during the 1990s have concluded that this was an unhappy coincidence for the region (Weyland, 2002). In a region of profound social inequality, especially with regard to access to basic education and control over natural resources, the pro-market reforms embodied in the Washington Consensus were bound to increase inequality by rewarding those in control of the region’s sources of comparative advantage—natural resources and, to a lesser extent, education—and punishing low-skill labor in the face of competition from Asia. Not surprisingly, growing economic and social inequality has hardly been compatible with the very notion of democracy, built as it is around the idea of political equality of a country’s citizens. In some Latin American countries like Venezuela, Bolivia, or Argentina, the tensions provoked in part by this incompatibility have eroded the quality of democratic institutions and even led, arguably, to the breakdown of democracy in the most extreme cases. But even where democracy is not under threat, growing inequality has fostered an extraordinary and unprecedented rise in criminal violence that has also impacted democratic institutions negatively. Growing crime and violence has been met by gross abuses of human rights by the police, and by the loss of public space as people have retreated behind guarded compounds and heavily policed shopping malls to protect themselves from crime.
Surprisingly, however, the record of utility privatization offers a more nuanced picture and even some grounds for hope about the compatibility of markets and democracy in the region. The positive impacts stem from two specific aspects of reform: regulation and access to energy. For all the problems of regulatory capture by politicians and companies pointed out elsewhere in this chapter, as agencies and stakeholders have gained greater knowledge about economic regulation and a greater understanding of the impact of regulatory decisions, they have been increasingly able to monitor the work of agencies, demand participation in regulatory processes, and effectively respond to the demands of the regulated companies, which would otherwise be the privileged “insiders” by virtue of their technical capacity and access to information. Economic regulation may thus be fostering throughout the region the democratic governance of a key sector like energy, offering in the process a model that could be implemented across a wide range of other policy-making processes, from land use and development to environmental regulation, to the management of river basins. Unfortunately, there is as yet little data, especially of a cross-national nature, to ascertain the development of participation in utility regulation, with the exception of Rhodes’ (2006) comparative work on consumer movements in the aftermath of telecoms privatization. This important question deserves additional research by political scientists.
The other remarkable consequence of privatization for democracy has been increased access to critical products like energy and utilities for a larger share of the population. Access to these products has profound effects on the quality of life of families and the productivity of economic activities, and is thus rightly regarded as a key element of social inclusion. Electricity, for example, not only provides access to entertainment and information, but also to education—through lighting that allows study after dark, and more recently by facilitating access to the Internet—and it can have dramatic impacts for women and girls through the mechanization of physically demanding tasks like laundry. Utility bills also often provide proof of residence, and with it the ability to demand other basic services provided by the state, such as enrollment in local public schools, which has often been denied to the inhabitants of informal urban settlements.
In this regard, the risk of privatization was that it would make access to utilities harder for the poor. Historically, foreign-owned utilities in Latin America had cared little for increasing access by the poor to their services, as limited capacity to pay meant limited profits from this segment of the population. In fact, the historical record shows this to have been a major reason for the nationalization of utilities throughout the region after 1945. In addition, utility privatization entailed bringing energy prices in line with costs of supply, which were in all cases much higher than prices under public ownership, when utilities could charge low prices at taxpayers’ expense. The low profitability of serving low-income consumers, and an international context of rising energy prices, did not bode well for making energy and utilities more available to the poor.
These fears, however, have not materialized as expected. The fact that pro-market reforms have taken place, in most cases (Chile being an exception), in democratic settings has encouraged regulators and governments to worry about access, and spurred privately-owned utilities to search for viable business models to provide affordable services to the masses, creating a virtuous cycle of mutual reinforcement between democracy and privatization. Throughout the region, reform has led to significant increases in the coverage and availability of electricity networks, much as in the case of telecommunications but more remarkably so, since electricity supply has not experienced the dramatic decrease in costs associated with wireless telephony. In Buenos Aires and Lima after 1994, and Bogotá after 1997, to cite only three examples, a combination of government subsidies, regulatory incentives, and company initiatives led to the extension of electricity distribution networks to the large informal settlements (favelas, villas miseria, pueblos jóvenes, and so forth) in these metropolitan areas, and the replacement of informal connections by formal ones; more recently, pilot programs and city-wide efforts have been undertaken in some of Brazil’s largest cities, including Salvador, Belo Horizonte, and São Paulo. Privately owned utilities have responded well to government programs, subsidies, and regulatory incentives to expand the coverage of utility networks among poorer segments of the population, leading to significant rural electrification increases throughout the region (see Millán, 2007, and the case studies in Márquez, Reficco, & Berger, 2010, and in Márquez & Rufín, 2011).
What is remarkable about these experiences is the range of solutions and approaches followed by governments and companies. Brazilian utilities have used subsidies for energy efficiency to actually help low-income electricity consumers decrease their energy use, since this reduces their expenditure on energy and thus increases their ability to pay for electricity. This has been achieved by relatively simple procedures such as the replacement of light bulbs and appliances, or improvements in internal wiring inside homes, which actually make them safer and enhance consumers’ quality of life. Buenos Aires utilities have taken a page from South Africa, installing prepayment meters that allow consumers to manage their spending on electricity in the same way that they manage their cellular telephone airtime. In the Dominican Republic, a new program is adding a subsidy for basic electricity consumption to the country’s successful conditional cash transfer (CCT) program. Since eligibility for the program is carefully targeted at poor households, this avoids the inefficiencies of traditional energy subsidies, which have tended to benefit middle-class consumers too and thus increase their cost to governments.
Although the energy prices paid by poor households may be higher than before reform in real terms, particularly for those who obtained electricity through informal connections, the high willingness to pay encountered by practically all utility companies that provide good-quality service shows that poor households throughout Latin America find it in their interest to pay for formal connections. The reason is that formal connections provide many benefits, while subsidy schemes often lower the average effective price faced by poor consumers. Many governments in the region off er a basic subsidy covering a volume of energy consumption for essential family needs, particularly lighting. In addition, field research has revealed that in fact, informal connections are costly for poor households, because they are often carried out by local “electricians” who charge a monthly amount for keeping the connection in place. And for many poor households, the price of electricity prior to reform was effectively infinite, since cash-strapped utilities lacked the financial resources to provide service to all comers and connections were instead provided on a clientelistic basis or to the highest bribe payers, as happened with other utilities and telephone service. Informal connections have other costs, too, particularly the increased danger of electrocution and fire associated with shoddy equipment, and the damage to appliances caused by the poor quality of informal supply. A formal connection, by contrast, not only gives consumers the right to demand good service, but is often also a proof of residence which can open the door to a variety of citizenship rights, such as local school registration and even legalization of informal property rights, under the land titling programs enacted in response to Hernando de Soto’s hugely popular proposals. In Bogotá, the local utility offers credit for appliance purchases based on electricity consumers’ record of payment of their electricity bills on time; lacking other sources of formal (and hence much cheaper) credit, poor households in Bogotá have made the company, CODENSA, the second largest retailer of household appliances in the city (see the chapter by Francisco Mejía in Márquez and Rufín, 2011).
In short, the extension of formal access to energy is rapidly bringing inclusion and extending citizenship to poor households throughout the region. Moreover, this is being carried out largely by private utilities operating under commercial criteria, in contrast to the clientelistic and corrupt criteria that often prevailed prior to reform. This is an important difference as regards social and political inclusion of the poor, for access to a basic necessity like electricity is no longer the result of a political bargain, but the result of a commercial transaction universally available to all households and organizations within a utility’s service area. The implications for democratic governance in Latin America remain to be explored by scholars.
1 A rent is defined as the part of the payment to an owner of resources over and above what those resources could command in any alternative use. In other words, rent is receipt in excess of opportunity cost. In one sense, it is an unnecessary payment required to attract resources to that employment.
2 Murillo (2009) showed how electoral cycles were instrumental in shaping the pace and content of regulatory reform prior and after utility regulation.
3 We omit here Costa Rica, Ecuador, Honduras, Paraguay, and Uruguay, as energy and utility privatizations were very limited in these countries.
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