Argentina - Reforming provincial utilities : issues, challenges and best practice

This report analyzes the reform needs and options in electricity distribution and water and sanitation services (W&S) in Argentina's provinces. The main focus is on the regulation of private operators since many provincial governments are considering concessioning all or part of these services to the private sector to improve quality and rely more on private financing of the sector's expansion needs. The report examines contract-based regulation, tariff design and institutional concerns in a detailed analysis of the specific regulatory framework of both sectors. This analysis is necessary to show the linkages between: (i) tariff design on one hand, and investment targets and financing on the other hand, and (ii) national and provincial regulatory issues. The report reviews the main general policy issues the provincial governments will have to address, including what is involved in limited credibility, competition, contract-based regulation, and decentralized regulation. It also covers the main issues, including privatization of provincial electricity distribution companies, water and sanitation services, and institutional demands of regulation of privately operated utilities. Several steps are necessary in order to maximize gains from the privatization strategy. They include: (a) making the most of what competition for the market allows; (b) giving incentives to new owners to remain concerned with the public interest; (c) assigning rights and obligations in contracts as clearly as possible; (d) anticipating potential needs for renegotiation; (e) defining the nature and form of property to maximize accountability; (f) not underestimating the importance of tariff design; and (g) carefully preparing and developing the provincial regulatory capacity. The report strongly endorses the general concessioning strategy followed by most provinces. Not all provinces, however, will be able to follow a strategy relying on private investors as there is much variation in potential rates of return and commercial as well as non-commercial risks. For those that are unable or unwilling to transfer the W&S and electricity distribution services to the private sector, the report offers alternatives. It suggests, in the short run, the commercialization of these services, which can serve to establish the credibility of the provincial commitment to reform.