Free Entry in Infrastructure

Abstract

In most countries, a single firm has a legal monopoly on the supply of water, electricity, and sanitation in any given area. No one else is allowed to supply such services. Why do such rules exist? Do they make sense, or would it be better to allow anyone who wished to supply these services? With a policy of free entry, individuals, firms, or community groups who wish to supply power, water, and sanitation services can do so with minimal legal restrictions. Free entry is the opposite of exclusivity or legal monopoly. Free entry is allowed in most industries, but governments usually allow only one provider of power, water, and sanitation in any given area. This is supposed to prevent wasteful duplication and ensure a supply of essential services to poor and marginal areas. But monopoly water and power utilities often operate at high cost, lack funds to invest, and provide low-quality, unreliable service. Worse, poor and marginal areas are often unserved. When the monopoly model doesn't work, it is time to look at alternatives. Ehrhardt and Burdon provide examples of alternative solutions in developing countries: In Karachi, Pakistan, the Orangi Pilot Project provides sanitation in an unplanned settlement. Roughly 800,000 working class people lived in an area where sanitary conditions were medieval and a long-hoped-for sewerage system never came. Starting in 1980, a charitable group developed a low-cost approach to piped sanitation, explained the technology to the community, and catalyzed community action. Householders and neighborhoods funded the construction of household pourflush latrines and sewerage lines. In Paraguay, 300 to 400 private individuals and aguateros supply good quality piped water to areas unserved by the public water company. Unlike the public company, the aguateros allow payment of connection fees on installment, making it easier for low-income consumers to connect. In Yemen, small-scale electricity providers innovatively meet the rural and village demand for electricity that the public utility does not meet. These entrants seldom duplicate investments, although some government intervention to ensure interconnection could improve efficiency. Limitations on entry may sometimes be justified for environmental reasons or to promote private sector investment, but those cases are rare. Legalizing alternative providers will allow them to expand and meet new needs. Limits on their entry may be needed sometimes, but limits should be the exception, not the rule, argue Ehrhardt and Burdon. Generally, free entry should be allowed in power, water, and sanitation. This paper - a product of Private Participation in Infrastructure, Private Sector Development Department - is part of a larger effort in the department to analyze issues relating to private participation in infrastructure.