Structural reform (sector and market)
| The main purpose of reform is to breaking down or unbundling of the existing (state or private) monopoly vertically and horizontally to facilitate competition and reduce potential abuse of monopoly powers or dominant positions. For example, an existing state electricity monopoly can be vertically broken down into three separate companies for power generation, power transmission, and power distribution and marketing. The power generation company and the distribution companies can be further broken down horizontally into smaller companies. Reformed private policy measures may then allow new entrants at any of the three vertical levels - generation, transmission or marketing and distribution for any particular area or region. Further, the marketing and distribution aspects may also be separated. | Unbundling facilitates competition |
It may be mentioned here that private participation may be allowed without breaking down of the public monopoly. However, the existence of such a monopoly could pose a barrier or disincentive to private involvement. Unbundling of existing monopoly helps in three ways:
| • It separates out certain parts that may be a natural monopoly (for example, the gas or electricity transmission lines, which may not be applicable however, for a large country); • It accommodates private investments that are feasible in size and are manageable considering the technical capacity of the private sector; • It allows specialization in infrastructure operation and marketing | Why unbundling may be helpful |
| Another major issue in sector reform concerns removal of sector inefficiencies, particularly those related to technical standards and distortions in resource pricing. Existing technical standards, for example allowable axle loads in the transport sector, could be an obstacle to improve efficiency of operation and thus may be a deterrent to private investment in many infrastructure facilities. | Sector inefficiencies |
| Distortion in the pricing of services by competing infrastructure facilities, such as by two transport modes road and rail, can be a serious problem for the motivation of the private sector in many countries. The transport, water and energy costs paid by the users often do not fully reflect their true economic costs due to the provision of subsidy, etc., and (virtual) non-inclusion of certain cost items in pricing such as the cost of road infrastructure (which may be considered a free public good), or the environmental costs. | Distortion in resource pricing |
| The distortion in pricing may not only become a barrier to private investment in certain facilities (for example, in rail transport), it may also lead to misallocation of resources and thus set a trend of unsustainable development. This situation should therefore be rectified on the basis of correct evaluation of resource costs to ensure long-term sustainable development in infrastructure sectors. In order to ensure allocation efficiency, future allocation of resources, either by the public sector or by the private sector, should be based on a detailed analysis of true costs and benefits including those of externalities. | Pricing is important to sustainable development |
| The benefits of PPPs, particularly in terms of cost and efficiency in service outputs and delivery, could be limited if such projects are undertaken without consideration of necessary sector reforms. It is however not to suggest that sector reforms are a precondition to undertaking PPPs. Reforms may also be considered simultaneously or may follow project implementation. Technological advancement and change in economic environment may also require further reforms at a future date. | Necessity of sector reforms |