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

While private sector involvement may provide good incentives for improved
performance, Pacific countries face some challenges to implementing this
successfully.
1) Pacific countries are small and remote: Small countries with small markets, far away
from major trading ports are less attractive to the private sector due to lower
revenues. This could make it more difficult for some Pacific islands, such as the
Micronesian or Polynesian countries, to attract sufficient private sector interest to
make this a reform option.
However, we in fact observe considerable private sector interest in many Pacific
markets, including in smaller nations. Private operators are providing services in the
telecommunications sector in Tonga, shipping services in the Marshall Islands, and
port and airport services in countries like Samoa, Vanuatu and Palau. In Kiribati at
least three private operators have indicated interest in producing power as
Independent Power Producers (IPPs) and there are already IPPs operating in the
Federated States of Micronesia and in Fiji. This suggests that private sector interest
exists even for small countries, and may eventuate if only it was encouraged.
Clearly small countries are less attractive to big international operators than large,
high profile countries like China. But the evidence shows that in many cases private
firms would gladly take the opportunity to provide service. We recommend that
rather than assuming that there is no private interest, Pacific Governments should
actively pursue PSP opportunities, preferably with the help of experienced
transaction advisors.
2) Private sector involvement may raise already high unit costs of providing service: Since private
operators need to earn profits, some policy makers are concerned that costs will
increase, or that if the market is small, a private provider will be able to charge
monopoly prices. In fact, the evidence from both the Pacific and the Caribbean
shows that private providers are generally more efficient than public companies.
Vanuatu’s electricity prices are lower than Tonga and Kiribati’s, both of which
provide service through a publicly owned utility.
Allowing publicly-owned utilities not to earn a commercial rate of return on their
capital is equivalent to providing them with an implicit taxpayer subsidy. If the same
level of subsidy was explicitly applied to private providers, their prices would be
correspondingly lower.
In any case, there is no evidence that publicly-owned utilities are any less prone to
taking advantage of their monopoly status. The difference, typically, is that public
utilities dissipate this through inefficiencies, while private entities see to maximize
profits for their owners.
Regardless of whether subsidies are provided or not, governments will need to
ensure appropriate oversight mechanisms are in place to keep prices at reasonable
levels.
3) Private participation may not be politically feasible: Governments are often unwilling to
involve the private sector, fearing loss of control. Private participation may lead to
disruptive job losses. It may also reduce the government’s ability to control the
distribution of benefits in society, such as determining which communities get
services, who does not have to pay their bill, who is awarded construction contracts,
and the like.
Well designed private participation should create enough benefits to be politically
attractive, but the reality is that private participation is risky, and governments are
often not willing to risk changes to systems which, even if they do not work very
well, are at least familiar and controllable. If this is the case, the only option available
will be public sector involvement.
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