EAP - The Pacific Infrastructure Challenge - World Bank (2006).pdf

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7.1.2 Poor Policy Design and Coordination Infrastructure service provision is complex. Many organizations with conflicting objectives must be brought together to pull in the same direction. This is particularly true of government agencies and elected Cabinets which often operate as decision making “silos”, rather than as policy “integrators”. Difficult decisions have to be made and implemented across many institutions, but they often suffer from fractionation and inconsistency of policy decision making at the political or senior official level. It is also important to have consistent and predictable government policies for infrastructure providers and operators. Creating a predictable policy environment for the private sector, or for state owned enterprises operating in a commercial manner where they face competition and/or statutory or regulatory requirements, is a key prerequisite of obtaining sustainable investment in infrastructure. In this section, we discuss several common coordination problems in infrastructure in the Pacific. 1) Lack of focus on creating sustainable investment in infrastructure: In the Pacific, governments have often focused on building new infrastructure, rather than investing in sustainable infrastructure operations and maintenance. For example, Pacific governments have emphasized construction and extension of road networks to the detriment of operations and maintenance. This has contributed towards higher overall costs. The same is true of ports and airports. 2) Lack of alignment of policy objectives and coordination: Fiscal, regulatory and policy decisions are often not aligned and are sometimes contradictory. This can create problems. For example, a number of Pacific countries have embarked on a policy of corporatization, under which utilities should be paying a dividend to the government to reflect a reasonable return on the capital invested. Nevertheless, in some countries, tariffs are held below true long term operating cost and the dividend payment is waived as a way of meeting the revenue shortfall from consumers. This amounts to an indirect, non-explicit subsidy on services, often without a full understanding of the sustainability ramifications on the underlying infrastructural asset. Instead of being clear about whether to provide a subsidy which is balanced against competing fiscal priorities and then appropriating it in the budget, there is often fudging of the long term sustainability of infrastructure provision. Often institutional structures are put in place to try and deal with the effects of the lack of clear policy objectives. This can result in the true costs of providing infrastructure being hidden, and with this, the true subsidies payable by taxpayers or classes of user are hidden from policy makers and consumers. They are often very large. The Samoa Electric Power Corporation (EPC) provides an example 14 . The EPC has been corporatized for some time. As such, it is required by law to identify any community service obligations transparently. The company is also required by law to file Value Added Tax (VAGST) returns. There are no exceptions for large companies or government corporations. The EPC has paid around 5 – 6 million Tala in GST over the past 4 years, but has not passed this on to the consumer. There has been no tariff increase subsequent to the introduction of VAGST. Although the law states EPC can claim the VAGST it pays back, it has not yet done so and neither has it filed the required tax returns. It is implied that these claims are partly offset by the fact that EPC does not pay Government any dividend. Lack of transparent tax treatment makes it very difficult to establish whether EPC is receiving a subsidy, or is being stripped by the Government. As a commercial entity, EPC should have charged GST on electricity outputs (which would result in higher electricity tariffs), and claimed back GST on inputs. It should also have been held liable for failing to 14 Castalia Interview with EPC 36
file tax returns. A corporatization strategy requires consistency between governance, tax treatment, accounting rules, corporate objectives and fiscal support for corporatized entities. Lack of coordination means that reforms intended to improve performance fail to achieve the desired results. A similar failure of policy coordination occurs when a country adopts a model of sector reform, but does not put in place the necessary conditions to make it effective. Fiji has adopted the ‘Landlord’ model for port operations, but contracts stevedoring operations out to a monopoly, government owned operator. This does not help to bring about the lower costs and improved efficiency expected from this reform. 3) Inconsistencies between different aspects of sector policy: It is important to have consistent regulatory, competition, universal access and investment policies so that providers of infrastructure services – whether they are in the private or public sectors – have a clear and transparent business environment to work within. The expansion of rural electricity services in Vanuatu illustrates the problems which can occur where a consistent policy framework is not in place. Electricity services in the two main centers in Vanuatu are provided by UNELCO, a private firm. Government decided to expand service by inviting private providers to bid to serve two specified rural areas. The intention in holding a tender was to select the operator which could provide services at the lowest tariff. However, the way UNELCO was allowed to interpret the regulatory rules in its existing concessions meant that it could cross-subsidize the new rural concessions from its urban services. There was no way for other firms to do this. UNELCO won the bid in part because of this ability to cross-subsidize. In a country with low capacity like Vanuatu, when an operator is working well, it may be smart to extend service by agreement with that operator, and to fund it through crosssubsidies. This would be a reasonable and coherent policy position. But what does not make sense is to implement a rural service policy based on competition, while having a regulatory policy which ensures that the competition does not take place on a level playing field. The service providers deserve to know what the rules are, and they should be consistent between all players. If they are not, then a government may find it difficult to attract investment in future. Allowing the perception to form in the minds of infrastructure operators that the policy framework is arbitrary or skewed in favor of the incumbent, is a sure and certain way to drive away the private sector, and fungible capital sources. 4) Lack of coordination in development strategies across sectors: It is equally important to coordinate infrastructure development or expansion between sectors. Although some Pacific countries develop infrastructure master plans, our observation from visits to Fiji, Samoa and Kiribati was that the implementation of infrastructure development, upgrades and maintenance is often uncoordinated 15 . For example, it would make sense to try to coordinate maintenance or upgrades to water pipes and telecommunications lines, which are buried along the same stretches of road. This could also be coordinated with road works. This would optimize the labor and time spent digging up the same area several times in succession. Some countries outsource activities in more than one sector to private operators. In Fiji road maintenance and operation is performed by private operators, outer islands shipping services are operated under competitively tendered contracts, and the private sector also undertakes independent power production on a contract basis. In Samoa a number of port services, like stevedoring, are performed by private operators as is road construction and maintenance. Although these activities are very 15 In the Pacific countries visited, Ministry personnel, utilities and private individuals all commented that capital works projects and general maintenance was uncoordinated and requires more focus. 37
Page 2 and 3: The Pacific Infrastructure Challeng
Page 4 and 5: Table of Contents 1 Acronyms and Ab
Page 6 and 7: Figure 8.4: Annual Per Capita Inves
Page 8 and 9: Box 7.9: ECTEL - Regulatory Coopera
Page 10 and 11: kWh MDG MIAA MIPA MNOC MOTCA MOU MP
Page 12 and 13: 2 Executive Summary This discussion
Page 14 and 15: Fiscal, regulatory and policy decis
Page 16 and 17: Figure 2.2: Estimated Annual Invest
Page 18 and 19: 3 What’s the Purpose of the Discu
Page 20 and 21: Box 4.2: Improving Infrastructure f
Page 22 and 23: 5 How well are Pacific Countries Pe
Page 24 and 25: Figure 5.1: Access to Electricity 1
Page 26 and 27: Water tariffs are often too low In
Page 28 and 29: Table 6.1 shows that in addition to
Page 30 and 31: These characteristics mean that Pac
Page 32 and 33: 6.2 Challenges to Institutions and
Page 34 and 35: 6.2.2 Demographic Issues in the Reg
Page 36 and 37: These high rural populations mean t
Page 38 and 39: Figure 6.3: Comparison of Defining
Page 40 and 41: Lack of legal and regulatory suppor
Page 42 and 43: 7 Challenge: How do we Lift Perform
Page 46 and 47: different, some efficiency may be g
Page 48 and 49: Figure 7.1: Accountability in Infra
Page 50 and 51: Box 7.3: Expert Panels can Improve
Page 52 and 53: Some of these reforms have already
Page 54 and 55: 7.2.2 Choose an Appropriate Reform
Page 56 and 57: Box 7.5: Public Sector Reforms in t
Page 58 and 59: Pacific countries, management salar
Page 60 and 61: There are three classic types of pr
Page 62 and 63: While private sector involvement ma
Page 64 and 65: Air services would also benefit fro
Page 66 and 67: 7.2.5 Regional Coordination One opt
Page 68 and 69: 8 What’s the Size of the Challeng
Page 72 and 73: Figure 8.5: Mainlines Trend 0.600 N
Page 76 and 77: Figure 8.11: Total Annual Per Capit
Page 78 and 79: 9 How do we meet the Challenge This
Page 80 and 81: Box 9.3: Can private sector involve
Page 82 and 83: Box 9.6: How can the public sector
Page 84 and 85: The proportion of mainline access a
Page 86 and 87: Box A.2: Introducing Telecommunicat
Page 88 and 89: Universal Access Universal access r
Page 90 and 91: good example of this. The Kiwi Shar
Page 92 and 93: Figure A.7: Reported Faults per 100
Page 94 and 95:
Table A.1: Institutional Indicators
Page 96 and 97:
and there have been calls to recons
Page 98 and 99:
A.2 Electricity Sector Analysis A s
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Figure A.10: Average Electricity Ta
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Figure A.11: Economies of Scale in
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interest rate relief on a US$9m loa
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As Figure A.14 shows, Vanuatu perfo
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Table A.3: Industry Structure and G
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Regional Cooperation in Electricity
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A.3 Water and Sanitation Sector Ana
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Figure A.17: Availability of Water
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Figure A.20: Staff per 1000 Connect
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including full operating expenses a
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Corporatization is often employed t
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operating costs, collections levels
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Figure A.25: Road Network Density v
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Federated States of Micronesia at b
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In Samoa: Samoa’s Public Works De
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Many Pacific countries already outs
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4. Domestic and Pacific Island serv
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Figure A.31: TEU Throughput Levels
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system reduces cargo handling effic
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Economies of Scale Port operations
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The landlord model is the most comm
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Fiji 84 Ports The Maritime and Port
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Apia Port has become one of the bes
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Kiribati 90 Ports The Kiribati Port
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In Shipping: Services are considere
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Figure A.36: Total Passenger Throug
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Airline Services Figure A.38 illust
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establishment period. For the offic
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Vanuatu 101 Airports Vanuatu Limite
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Samoa 104 The Samoa Airport Authori
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Institutional Arrangements in Aviat
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Summary of Aviation Analysis The Pa
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Fiji Kiribati Marshall Islands Micr
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Barbados Dominica Grenada Jamaica M
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Samoa Solomon Islands Timor-Leste T
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Samoa Solomon Islands Timor-Leste T
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“A-Z World Airports Online” www
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