 | Around the World in 80 Ideas |
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UTILITY REFORM 42: Competition for power Competition for investment in utility projects The problem: no power in the land Lack of electricity is a cause of poverty in rural areas, holding back agriculture and industry. But governments have other priorities, and are not very innovative when it comes to taking utility services cheaply into remote rural areas. The idea: compete to provide The private sector can be used to develop new utility services. All that governments need to do is to specify the standards that must be met, and then let companies compete to install the new services on a least-subsidy tender basis. They can also make public bodies, such as the local government authorities, compete for the subsidy funding on the basis of demonstrable benefits, so that the public subsidy is explicit and so that it goes to where it is likely to achieve most. Example: power to the community During the 1980s, Chile liberalized its power markets. The state-owned electricity sector was split, along the United Kingdom model, into separate generation and distribution businesses, and prepared for privatization. New private investment was beginning to lead events in the electricity sector. But rural electrification was still dominated by the state, using policies such as direct subsidy, or cross-subsidies (with higher tariffs in the urban areas), rather than private investment and entrepreneurship. Progress was slow: a new approach was needed. The solution was competition for investment subsidies. Companies would present electrification proposals to the regional governments, and if quality and local needs were satisfied, the regional governments could then apply to a central government fund, and the company would get a grant towards their investment. Grants would be available only to projects with negative private returns, but positive social returns. They would allow companies a real rate of return of 10 per cent on the capital invested. Assessment: spreading power The aim was to provide electricity to 75 per cent of the rural population by 2000 (up from 53 per cent in the early 1990s), and 100 per cent by 2010. In fact, this target was exceeded, with, access being spread to 76 per cent by the end of 1999. Although it relies on the disbursement of subsidies for investment, the system is competitive and embraces competition at every stage. The communities compete to show why the new facilities would bring greatest benefit to them; the private-sector companies compete for contracts; the regional authorities compete for funding from the central government subsidy pool. This competitive system promoted considerable innovation in getting electricity to rural areas - for instance, the use of photo-voltaic generators where it was too costly to extend the grid (see the chapter Light work for other examples). In sum, through the use of a competitive -subsidy system, the Chilean government has spread electrification quickly through rural areas, with greater innovation and at lower cost than the state might have achieved For further information:
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