Working Paper
The Social Impact of Privatization and the Regulation of Utilities in Peru

Almost five years after privatization took place in electricity and telecommunications, and major reforms had been carried out in the administration of water, the results is not clear a priori. In order to elucidate the panorama, this research tries to assess the consumption and welfare impacts of privatization on Peruvian urban households. The objective is to determine which type of households bear a greater portion of the burden or enjoy most of the benefits price changes brought about by privatization. To accomplish this objective, three complementary methodologies are followed. The first consists of calculating concentration curves to show how services are distributed among the population. The second methodology, based on the proposal by Waddams Price and Hancock (1998), measures changes in household expenditures associated with changes in structure and price level. Finally, demand equations are estimated for the different utilities under study, by applying a two-stage Heckman methodology to correct for the probability of having access to the service. Using the elasticities estimated with this two-stage procedure, we calculate the welfare changes associated with the consumption of the utilities. The depth of the reforms, however, particularly the extent of privatization, is uneven across sectors. Despite of this variation in reform, the results in terms of improvement on the supply side are positive and very significant, albeit there are still major problems which could explain why welfare impacts are not significant and may even be negative in the case of electricity and water. Furthermore, even though water coverage has increased considerably, the quality is poor and the service erratic. The electricity sector, on the other hand, has shown major improvements, but the positive effects of privatization are yet to reach the important urban regions of Peru. This factor could explain why consumers, on average, are not experiencing an increase in their welfare. In contrast, telephony is the sector with substantial advancement since the transfer to private ownership. Both in terms of supply and demand, the outcome shows positive results, including technological development. However, a significant reduction in household consumer surplus has occurred since 1997. In summary, we believe that the utilities services in Peru still need significant improvements, particularly in electricity and water, where reforms are still incomplete, or even non-existent. Finally, we believe it necessary for the providers to develop better plans to allow both consumers and producers to reap greater benefits in terms of welfare and revenue.