LIS Market Initiatives and the Public Sector

In current discussions of market initiatives oriented towards low-income populations around the world, the government is often like the empty chair around a table. We all know its occupant exists, but choose to ignore its existence. To some extent, this is understandable. It is precisely the failure of many governments to alleviate extreme poverty that creates the urgent need for alternatives. Yet, the government will make its presence felt whether we like it or not. Market initiatives for low-income sectors ignore the government at their own peril.

The role of governments in market initiatives can range from active opposition to active collaboration. Therefore, participants in such initiatives must secure at least the government’s neutrality. Let us consider each role in turn.

The government as opponent.

The targeting of the poor by the private sector is fraught with issues that can bring companies into conflict with the authorities. One major source of potential conflict involves concern for the vulnerability of the poor in regards to the private sector, especially multinational corporations. A second source has to do with the contrast between political logic and business logic.

There is no question that the role of market forces and multinational corporations in the economic development of Latin America continues to be contested terrain. Many Latin Americans are disappointed and even angry with market-oriented reforms, at least in some countries. Opponents of market forces in Latin America, like opponents of globalization in Europe and North America, argue that markets and corporations exploit the poor rather than help them. When market forces are let loose, according to proponents of this view, global corporations can wield superior technological, financial and marketing resources to push expensive yet unnecessary products on the poor, at the same time creating a global pool of cheap labor by fostering competition among workers around the world. Businesses that seek to reach the poor may find themselves attacked by governments acting under pressure from opponents of markets and private enterprise.

Water supply is a clear example of an area in which private sector control has been challenged. The fact that water is an essential element for human well-being is used to argue that piped water should be supplied free of charge, which in practice means that it should be paid for indirectly by taxpayers rather than by users. One of the best-known and most controversial cases is that of Aguas del Illimani in Bolivia. In 1997, this subsidiary of French multinational Suez was awarded a 30-year concession to provide water to the residents of La Paz and its poor suburb of El Alto. Community organizations in El Alto demanded and obtained, after violent protests, the termination of the concession contract by the Bolivian government in 2005. The conflict stemmed from the company’s high prices , which left many families unable to obtain service. However, the controversy also had an ideological component. Protesters demanded that water be provided free of charge and rejected private ownership of utilities, threatening that the area’s electricity distributor, Electropaz, owned by Spanish multinational Iberdrola, “would be next” to be expelled, as Alana Libow wrote in World Indigenous News.

In many Latin American countries, the political logic of clientelism is still pervasive, creating or increasing political risk for business firms. Clientelistic practices arise when voters “trade” their votes for private or local benefits. These voters decline to vote for party platforms promising improvements for broad segments of the population. Instead, the voters prefer to trust politicians or parties that can deliver handouts, have the neighborhood’s streets paved, or get a government job for a relative. In Latin America, as elsewhere, it is the poor who are typically most responsive to clientelism. For people who struggle everyday to survive, the value of a pair of shoes or a few pounds of rice may exceed the value of general promises of job creation and economic growth whose impact on the poor is quite uncertain. It may also be that for those with a low level of education, the promise of bricks and concrete to replace a cardboard house in the shantytown is far easier to grasp than talk about cutting the foreign debt or national sovereignty.

The effects of clientelism for companies targeting the poor are serious. First, their efforts may fail simply because the government is willing to supply the products at a lower price or even for free. Soluz Dominicana, which rented and sold solar panels to families lacking access to the electricity grid in the Dominican Republic’s rural areas, saw its business undermined by giveaways of free solar panels by the government during the last presidential election campaign in 2004. Water and energy—basic needs that have often been supplied by state-owned companies—are among the most common currencies for clientelistic exchanges. However, vote-buying giveaways are by no means limited to these items. Reports of giveaways include anything to which the poor attach a high value—food, medicine, jobs, construction materials, clothing and even motorcycles!

Second, companies may attract the hostility of politicians for undermining party electoral bases. Seven years after privatization, electricity supply in the Dominican Republic is expensive and erratic. A major reason is the unwillingness of past and current Dominican governments to make people pay for electricity, including residents and businesses in low-income communities around the major cities, where electricity is in most cases not even metered. Political parties actively seek votes in these communities, leading to high levels of political mobilization and even violent protest over issues that affect the residents. Not surprisingly, distribution companies often prefer to either negotiate government subsidies or simply tack on the charges to higher-income consumers, rather than try to charge low-income residents directly for the electricity supplied to their communities. Unfortunately, rising oil prices and a depreciating currency can rapidly deplete government financial resources, leading to blackouts as utilities run out of money to pay for fuel.

In sum, government opposition is both common and damaging for pro-poor initiatives. Companies may have no choice but to convince and earn the trust of the population and the politicians as part of any effort to reach the poor, in order to subdue ideological hostility and clientelism.

The government as facilitator.

Government’s facilitating role is perhaps the most obvious one, often as much through absence as through presence. Governmental institutions underpin the development of markets, from the provision of basic security—which ensures that the gains from market transactions are not appropriated by violent means, or destroyed by violence—to the adjudication of disputes and the enforcement of common “rules of the game” for economic exchange. Developing countries typically suffer from the absence or deficiency of such institutions. In the slums of many Latin American cities like Rio de Janeiro, the government is effectively absent. There is no property register to grant legal rights to slum residents over the investments they make in their houses; rough justice is meted out by drug gangs because the police do not dare patrol the slums.

As a result, a major component of the efforts of business targeting low-income populations lies precisely in overcoming governmental limitations. To work in Latin America’s slums, electric utilities often have to seek permission from local gangs rather than from municipal authorities. In the absence of a well-developed financial system, Mexican cement giant Cemex works with Mexican immigrants in the United States to enable their relatives in Mexico to use U.S. remittances to finance the purchase of construction materials.

Yet the fact that governments in Latin America are often so deficient does not mean that business should simply write off the government. First, the capacity of governments varies widely across countries, and even across areas within a country and among government agencies. Companies can seek opportunities where sufficient government capacity is present to make private initiative viable. Since its privatization in 1997, the electric utility of the Brazilian state of Bahia, COELBA, has successfully harnessed resources from a variety of Brazilian government agencies and programs to reach poor communities in the capital city of Salvador. For example, it uses the funds from a federally-mandated energy efficiency surcharge on electricity rates to help its poorest customers install more efficient appliances and lightbulbs, thereby reducing their electricity consumption and, in turn, their electricity bills. In contrast, other utilities in Brazil use the funds to finance energy efficiency programs without a focus on the poor.

In addition, business firms can pressure and help governments to do a better job. They often have the contacts with government officials or the visibility to put pressure on governments to fulfill their obligations. In Buenos Aires, privatized electricity distribution companies faced the unwillingness of local, provincial, and federal authorities to do anything about electricity supply for the poor. When the companies began to curtail supply to illegal and non-paying users, public pressure got the authorities to agree with the utilities on a successful plan to help poor communities obtain legal and affordable access to electricity.

The government as partner.

A proactive stance by business towards government can, in fact, yield additional fruits. The government can be engaged as a partner or collaborator in the efforts to reach low-income populations. In addition to the facilitation of market exchange, the government can bring other resources to bear, from public funds to expertise or even credibility. AAA, a privately-owned water utility on Colombia’s Atlantic coast, makes good use of this strategy. In an area notorious for both poverty and corrupt politics, AAA enhances the credibility of its efforts by working with one well-regarded federal agency, the Superintendencia de Servicios Públicos Domiciliarios (SSPD). SSPD ensures the compliance of utilities with government regulations, by handling consumer complaints. Its fairness and dedication to dealing with these complaints and discharging its function have earned it the respect of both companies and consumers. AAA does not hesitate to invite SSPD staff as impartial witnesses to hearings in the poor communities in which it works. The presence of SSPD makes AAA’s commitments all the more credible among local residents, as they know that the company faces penalties from SSPD if it fails to honor its promises.

In fact, governments around the world are increasingly turning to public-private partnerships for the provision of basic infrastructure as they grapple with growing demands on limited public resources. This means that private companies are likely to find a positive disposition in many governmental agencies. To harness the potential of governmental partnerships, companies need to gain intelligence about potential allies in government agencies at all levels and departments. They need to understand the motivations and constraints of government officials in order to hammer out viable relationships. For example, attempts to offer products to the poor at lower prices may require approval from competition authorities or regulators, as a multinational telecommunications company found when trying to make telephone service more affordable for the poor. Companies thus need to convince these officials that the pricing schemes have great poverty alleviation potential and are in the public interest. Moreover, they need to structure their initiatives in ways that do not conflict with existing laws.

To conclude, there are several good reasons to pay attention to the actions of Latin American governments when it comes to market initiatives for the poor. Governments can pose formidable obstacles that need to be addressed before any initiatives can succeed, but they can also make markets at the base of the pyramid more attractive by facilitating market exchange, and even become valuable partners for companies and other organizations engaged in these initiatives. Companies, NGOs and other actors wishing to extend the reach of markets to the poor cannot afford to neglect governments.

Carlos Rufín is Assistant Professor of Management and Faculty Director of the Institute of Latin American Business at Babson College. He received his Ph.D. from Harvard University. His current research explores the strategies of multinational companies for managing political risk and addressing the needs of the poor in developing countries.

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