Updating report on the World Bank research program (Vol. 4 of 6) : Report of the research review panel on energy, water, and telecommunications

20310 Vol. 4 REPORT OF THE RESEARCH REVIEW PANEL: ENERGY, WATER AND TELECOMMUNICATIONS May 10, 1979 FILE COPY Report of Research Review Panel Energy, Water and Telecommunications Table of Contents Introduction : ET Research Work in Recent Years 3 A. Role and Functions of EWT 3 B. Research Origins 3 C. Fields of Study 4 D. Areas of Major Concentration 4 E. The Quality of the Research 6 F. Relevance to Bank Lending 6 G. Dissemination 7 *q. Future Research 8 A. Introduction 8 B. Proposed Research Program 8 C. Later Research Developments 10 D. Research Implementation 13 E. Conclusions 15 . Recommendations 16 Lnexes 1. EWT Research Projects 1972-78 17 2. Proposed Research Program 19 3. Energy Research 27 4. Electric Power Research 32 5. Water and Sewerage Research 37 6. Telecommunications Research 41 REPORT OF REVIEW PANEL Energy, Water and Telecommunications I. INTRODUCTION The Review Panel, appointed in 1978, consisted of the following members: Mr. M. Boiteux (Chairman) President Electricite de France Prof. A. R. Prest Professor of Economics London School of Economics Mr. Romulo Furtado Secretary General Ministry of Communications Brazil Mr. A. K. Roy Sanitary Engineer SEARO, WHO Mr. Lambert Konan Director General Energie Electrique de la Cote d'Ivoire Its terms of reference were as follows: It is intended that a review of the research program of the Energy, Water and Telecommunications Department over the period 1972 to 1978 should be conducted by a high level panel of experts from outside the Bank. In light of the overall objectives of the Bank's Research Program, the general questions to be addressed by the panel will concern: (a) choice of research topics; (b) the way in which the research has been conducted; (c) operational relevance of the results; and (d) lessons for future research efforts. It was further understood that these terms of reference should be interpreted in the light of the objectives of the Bank's Research Program, i.e.: (a) to support all aspects of Bank operations, including the assessment of development progress in member countries; (b) to broaden our understanding of the development process; - 2 - (c) to improve the Bank's capacity to give policy advice to its members; and (d) to assist in developing indigenous research capacity in menbe, countries. The panel met in Washington DC from October 17-19, 1978 and from February 12-15, 1979. Its report was finalized in February, 1979. A repre- sentative of the panel attended a regional seminar on power tariff policy in Indonesia in January, 1979, in order to gain some knowledge of the fieldwork side. All the members of the panel would like to express their deep apprecia- of the help given by Mr. Y. Rovani, Director of E4T,and Messrs. J.J. Warford, -Economic Adviser, EVT and M. Munasinghe, Economist, EWT, who acted as panel secretaries, as well as many other members of the Bank staff, both inside and outside the Department. Without their help and guidance, this report could s- not have been written. Section II briefly describes the role and functions of EWT, and then continues with an appraisal of its research work in recent years; Section III is concerned with suggestions for the future orientation of research; Section brings together our recommendations. Annexes list the research projects under- taken in the period 1972-78, the details of our proposals for the future and appraisals by panel members of the work in the four main fields covered by the Department, i.e., energy; power; water and sanitation; and telecommunications. -3- II. EWT RESEARCH WORK IN RECENT YEARS le and Functions of ENT The EWT Department evolved from the former Public Utilities Department the Bank, the change in title being a recognition not only of the expanding ole of the Department in lending operaticns but also of the widening range of the aalysis of projects in the traditional utility sectors. In a department which has and should have very close ties with the operational requirements of the regional divisions, it is inevitable that what might be thought in a purely academic context to be research should coalesce with the functions of inter- .reting ideas and imparting knowledge to others. This is all the more so in -at the Department has specific responsibility for operational aspects of :elecommunications and petroleum. It follows, therefore, that we regard it as ,r duty to examine the research activities of the Department, when interpreted i, a broad, rather than a narrow, sense. We note that total research expenditure in EWT, whether Research rcrmittee approved, or not, amounted to some 8.5% of Bank research expenditure -ver the period FYs75-78. We also note that the share of EWT in approved loans and credits in FYs74-78 was quite considerably larger, at 20.4%, a figure which may itself increase in the not too distant future. We understand that in FYs75-78 the actual EWT research expenditure percentage was greater than that originally envisaged, which we interpret to mean that this department was able to plan and execute good research projects during this period. At the same time, the areas cn which attention is focussed in EWT are not ones which occupy a great deal of time in DPS and so there is very little overlap or duplication in this respect. .11 of this suggests to us that the research actf.ities of this department .ave been thriving in recent years. This does not mean, however, that there is already a large body of people spending their time on research. We are informed that there is no single member of staff who is engaged on research full-time and that out of 39 professional staff in the Department, only 2 ½ staff years is devoted to research. Research Origins Part of the research undertaken by the EWT Department (e.g., rural water supply, rural electrification and pricing work) was initiated shortly before or irmediately after the reorganization of 1972, and arose fror discussions connected With the preparation of Bank Sector Working Papers in Power, I'ater and Telecommunications, prepared by the predecessor c: the "irDepartment (i.e., the Public Utilities Projects Department, which was operational at the time). Also the water appropriate technology project was developed by staff directly after assignment to the EWT Department from the region. Since reorganization, research ideas have been developed mainly within NT by staff who had substantial and recent operating experience. These ideas were related to a variety of stimuli including: (a) new policy directions from lanagement(rural and appropriate technology work) ; (b) suggestions by Bank borrowers or outside professionals (studies on telecommunications in Papua-New Guinea and rural electrication in Liberia); (c) outside events such as the 1973 oil price increase (study on assessment of petroleum prospects of certain L,C's\ On the other hand, telecommunications pricing and investment research develope; from within EWT. Much of the effort in the energy sector stemmed from the anticipation of the needs of Bank management for information necessary to dee lending strategy in this sector e.g., energy supply-demand outlook, higher eze costs, and most recently, a survey of petroleum exploration-status and prospe,- Non-Opec LDC's (BEICIP), or management requests, e.g., status and prospects fc- petroleum lending policy and also energy background papers for the World De:e-zt Report IT (not reviewed by the panel). Whatever the origins of the research, *- conclude that any praise (or criticism) of the development of research topics must be Dlaced at the door of the Department. Fields of Studv Annex 1 of this report lists 31 research projects which have been undertaken during the period under review. As can readily be seen, they have a wide spread of coverage of fieLds; and the content ranges from the abstract theoretical to the severely practical. If one looks at the time-distribution of this work, some fairly clear trends are discernible. Whereas in earlier years the main concentratic:: was on public utility pricing principles and investment appraisal, interest has broadened in a number of ways recently. One development has been that considerations of cost minimization have led to more intensive study of alternative technologies, e.g., in water and waste disposal and in the trade- off between costs of electricity suppl, and its reliability. Another has been in the extension of public utility provision (electricity, water) from urban to rural areas, a Zhange of en-hasis which is partly, though not wholl:.. related to increased interest in t1he provision of such facilities for the poorer members of society. Yet another development of major importance has been increased emphasis on energy problems, raising such issues as the examination of the oil and gas potential of oil importing LDC's. It is important to recognize that there have been these major shifts of emphasis in- the Department during the period under review. Areas of Major Concentration The first point is that the research of the Department has not been in the mould of much of today's work in economics, in the sense of constructing large scale models of the economy and/or elaborate econometric exercises. Research in the Department has been much more a matter of fitting individual non-standardized nuts and bolts together rather than constructing the eighth wonder of the world. Within the area of public utility economics, there has been much more concentration on marginal cost pricing principles than on cost-benefit analysis. This has partly been a matter of emphasizing the need for a pricing system which had analytical justification rather than one based on the totally meaningless calculations of bookkeepers. But there has been another reason too. However much one might wish to appraise all investment decisions on cost-benefit lines, the simple truth is that it is quite extra- ordinarily difficult to find any surrogates for benefits in this area. We -5- are impressed by the efforts of the Department to investigate these matters, e.g., by looking into the possibilities of measuring drinking water supply benefits by health improvements or public utility improvements generally by increases in land values; but we are convinced by the failure of these attempts that there simply is no golden key to unlock these mysteries, and no useful purpose is served by pretending otherwise. But as a number of department papers have emphasized (see The Definition and Role of Marginal Cost in Public Utility Pricing, Staff Working Paper 259, May 1977), the inability to develop utility criteria for investment decisions does not imply an absence of pricing criteria. It has been a well known feature of public utility economics for a long time that one could think in terms of either a short-run marginal cost approach to current output decisions plus a separate investment criterion, or a form of marginal cost pricing which incorporates capital costs in some way. What the Department has been at pains to emphasize is that if one takes an appropriate version of the second approach (average incremental cost pricing, in its terninology), one can get a reasonable test of investment decisions by this means--in the sense that if this method of pricing is used and there is excess demand, then there is a general indication that the size of the plant should be increased. Nor does the absence of any convincing measurements of benefits mean that nothing can be said about plant design. The major study into water and waste disposal has brought out very clearly that the differences in annual costs per household between high-cost methods of total disposal and low-cost methods of partial disposal (of the order of 20:1 on one measurement) provide ample room for discussion about investment choice, even in the absence of more refined information. At the same time we should record our view that there is scope for further consideration of the precise way in which charges should best be levied for particular types of services. The point is made in Financing and Evaluation of Sewerage Projects (Public Utility Report GAS 13 of 18.2.77) that there are four methods of recovering sewerage provision costs: Periodic charges on householders based on, e.g., property value; Surcharges on water supply charges; General revenue; Benefit taxation, e.g., special assessment or land value increment taxation. Our view--which will be elaborated in Section 111--is that there is scope for more work in considering the relative merits of these alternatives, and not only in the sewerage field. Given that estimation of the economic benefits of investment decisions has not been a central part of the Department's work, it follows that socially weighted benefit calculations have not been prominent either. At the same time, attention has been paid to the idea of "lifeline" supplies, i.e., the provision of limited quantities of water, electricity, etc., at low prices; the opposite of the usual declining block tariff arrangement. We shall have some further comments to make on such ideas in Section Ii, but simply observe now that social pricing of this kind has not been neglecte- Another point to be noted is that the Department has from time t time made in-depth investigations into the state of knowledge in certain fields. A good example is the survey of low-cost technologies in water and waste disposal. This is another subject to which we shall return. The Quality of the Research Any assessment of research quality in general terms must of necessz. be very subjective in the social sciences. One can ask leading questicsC71 the originality of one contribution or the acceptability of another for publication, but in the end a great deal of individual judgment is invc'ved. Our own overall view about EWT research is a fa%orable one. Some of the .c been oublished in book form by the Bank (e.g., Saunders & rarford, Villase -. Supply - Economics & Policy in the Developing World; Turvey & Anderson, Electricity Economics - Essays & Case Studies), but it is our view that suc. works would have been readily accepted by commercial publishers. This is supported by the favorable reviews afforded to them (see, for instance, Journal of Economic Literature, December 1977. and Land Economics, February- on the first; and Journal of Public Economics, October 1978, on the seccnd). Many of the papers issued by the Department show a hi.hlv commendable acquaintance with developments in the literature and an ability to focus o the asnects most relevant for Bank :urpose,. For instance, the discussic in Working Paper 259 op.cit.of four concepts of marginal cost--two textbook versions, the present value of incremental cost approach and the average incremental cost one--together with the simulation exercises comparing the differenc versions is an extremely thoughtful exposition and a model of discerning judgment on the choice between the alternatives. Naturally, there were particular aspects of particular projects which drew criticism from the relevant experts on the Panel. These observations are to be found in the technical annexes. It should also be recorded that there has been a sensible and catholic choice of consultants for helping the Department in its work. It may often be that consultants from developed countries have a higher level of technical expertise and can discharge their duties more expeditiously, but those from less developed countries may benefit from the training and also have a most important role to play in helping to disseminate ideas in their own countries. The Department has been very much aware of these pros and cons and has tried hard to get a best of both worlds solution. Relevance to Bank Lending A number of examples testify to the infiltration of economic ana7ySiS into Bank lending to public utility organizations. In the power area, we understand that whereas in only 4 out of 10 projects receiving approval in FY73 was mention made of marginal cost pricing, the corresponding figure for FY75 18 out of 18. Similarly, in FY77 all 14 water projects receiving approval embodied these principles. Similar examples can be given about individual countries. One example we encountered was that whereas in power projects in Thailand, cost recovery was the only consideration in 1969, the abolition of subsidies and the construction of a tariff on marginal cost lines was paramount in 1977. In short, we can say that EWT has performed the task of translating general pricing principles into forms suitable for incorporation in practical decision-taking and thereby intrcduced a far more rational base ;or such operations. If these principles have sometimes had less effect in influencing the thinking of members of regional departments than they should ave done, this is not basically a deficiency of the work of EWT. issemination Dissemination inside the Bank h .s been helped appreciably by the document series initiated by the Department in 1973. Since then the following books and papers have been or are about to be published: World Bank Research Publications 10 EWT Department Reports 70 Books 3 Research Series 14 Policy Paper 1 Guideline Series 15 Reports 3 Public ULilities Notes 41 Staff Working Papers 3 together with a number of other miscellaneous research papers. We regard this as an admirable exercise in that the Department's thoughts are made available at an early stage, thus informing other people of new developments and enabling them to make comments if they so want before views are too firmly crystallized. As far as dissemination outside the Bank is concerned, there have been many seminars on pricing policy, such as the one in Indonesia in January 1979. The objective of much of this work is to encourage borrowers, with Bank guidance, to conduct their own tariff analysis based upon marginal cost principles but with systematic recognition of local economic and social objectives and constraints rather than, as is often the case, simply relying upon a traditional public utility approach to tariff policy put forward by foreign consulting firms. Technology seminars and meetings with relevant professional bodies have also been frequent, e.g., the World Bank Seminar on Sanitation Project Planning in London in December 1978 when discussions were held at the Institute of Civil Engineers on rural water supply, urban water distribution, excreta disposal, sanitation alternatives, water supply and health, the role of economic assessments in such matters, and so on. Some of these meetings have been in developed countries but the great majority have been in LDC's. The members of the panel from LDC's also collected some information of their own about the impact in their own countries of the economic principles elaborated by the Bank. The crucial point seems to be that Communication has to take place with the right people. Conferences, for instance, need to be aimed both at people currently enjoying administrative responsibili-y and at the younger executives who will subsequently make the! mark in public utility operations in developing countries. Publication of or distribution of discussion papers by the Bank is a necessary but not a sufficient condition for effective dissemination. More specific methods of inculcating ideas need to be adopted to make any marked impact. Perhaps the best indication of the effectiveness of the World B efforts is that marginal cost pricing orinciples in water and electricity supply are more often known in LDC's than in the USA. II, Fu Re ? search Introduction In sketching a program -or future research, we cannot start in vac..- but must bear in mind all the time t'e particular skills already available the Department, the comparative advantages of EWT relative to other departmen.:s in the Bank, the research guidelines supplied to us, and so on. Quite apart from recognizing these constraints, we must also beware of a number of other considerations. The first is that the problems of the developing world do not stand still over time; nor does the subject of economics. So whatever we think may be appropriate in the way of research at present may be much less so in a few years' time. This in turn implies that one needs to think of some mechanism for ensuring that research topics and techniques respor.d over time to changing co=mitments. It would after all be the height of irony that a departrent concerned with appropriate technologies should itself use inappropriate methodology in investigating these choices. We shall return to this point later. Two further observations need to be made. One is that good basic research is not something which can be produced to order; anyone who pro- tests that it can is a fool or a knave or both. All that we, or anyone else, can do is to make general suggestions which may or may not bear fruit in the shape of original or illuminating research work. Furthermore, we do not subscribe to the proposition that the quantity of paper resulting from a research project is a meaningful indicator of its quality. The second observation is that we have to be a little careful about the proposition that all worthwhile research must be of a multi-disciplinary character. Whilst fully recognizing that inputs are needed from a variety of dis- ciplines in many research projects one has to be careful that this does not lead to a lowering of standards all round. With these general observations behind us, we shall now examine a series of suggestions about future EWT research and express tentative judgements about their importance. Then we s..all say something aobut researc" organization. Finally, we shall come to our overall conclusions. Proposed Research Program A large number of suggestions were made to us by the Department. We rejected some on the grounds that they did not fall within our concept of research; and others because we did not think them appropriate for EWT. Of the remainder, we accepted some more or less as proposed but we scaled others down quite considerably. So what follows is a program for the immediate future -9- 3greed by the panel after considerable discussion. Those projects deserving the highest priority are marked with an asterisk. Further details of the proposals ,re given in Annex 2. (i) Energy: General We feel that there is here a new field of major importance and that the Department has very considerable comparative advantages in studying it. The following topics are extremely important, badly in need of further work and highly appropriate for the Department to concentrate on: LDC energy outlook (annual consideration of energy developments); * Energy and development (interrelation of energy consumption and development; Energy demand management and conservation (possible savings and the means of effecting them); Non-conventional energy (better utilization of traditional sources such as firewood and examination of new ones such as solar heating). We make these recommendations in full recognition of the existing division of labor in the Bank, on energy research between EWT and DPS. We have in fact studied the energy research of DPS and have commented on it in Annex 3. Given the continuance of the present division of labor we do not, for instance, suggest that EWT should do work on the world energy outlook. But if all Bank applied energy research on both the supply and the demand sides were to be concentrated in EWT at some future date, we should recommend that topics of that kind be then added to this -rogram. The above recommendations would absorb some 64 staff-weeks and 40 consultant-weeks of time per annum initially (all subsequent figures of manpower should be interpreted as initial requirements). (ii) Energy: Oil and Gas Many of the remarks under (i) apply in this case too. Two particular subjects seemed to us to have priority. They were: * Natural gas issues (e.g., flaring of natural gas and potential domestic markets for gas in LDC's); Inter-fuel substitution (appraisal of substitution possibilities). The resources involved would be 8 staff-weeks and 35 consultant-weeks per annum. (iii) Energy: Electric Power This area, unlike the two previous ones, has been a mainstay in the epartment for a long time. However, there are still a number of issues which call for further research effort. We suggest the following: * Standards of rural electrification (apprcpriate engineering standards for rural systems); * Power pricing seminars (dissemination of power tariff pricing principles); * Power/energy pricing (optimum energy pricing policies); Autogeneration, cogeneration, technology monitoring, methods of power supply to remote areas (small pilot type studies in each of these fields); Energy transmission costs (case studies for electric power, gas, et It is estimated that 64 staff-weeks and 77 consultant-weeks per annum woulde needed. (iv) Water Suvply and Sewerage Like electric power this has been a staple part of EWT activity i, the past. Some of our recommendations spring direczly from this previous * Technology dissemination (communication of the outcome of the ma.- recent investigation into water supply and waste disposal technol: * Follow-up research on technology (e.g. , methods of reducing water consumption). * Resource recovery (technical and economic evaluation of the ma4cr reuse technologies). Multicity and multipurpose projects (special problem of water supply, etc., when it is not confined to one city or one purpose'. Fifty four staff-weeks and 102 consultant-weeks per annum would be involved. (v) Telecommunications We are still of the opinion that in the past this area has not recei:e: the research attention which it justifies. We should like to commend two resear- areas: * Nature and characteristics of telephone usage (analysis of telephone usage; transport usage/telephone usage tradeoffs); * Pricing policy (e.g., pricing issues raised by decreasing costs). Thirty six staff-weeks and 88 consultant-weeks per annum would be needed. (vi) Multisector Studies We endorse the following proposals which have been made: * Alternative financing of infrastructure (financing by local property tax, drainage levies and land betterment taxation); Asset revaluation (incorporation of appropriate principles of asset revaluation in public utility operation in LDCs); Appropriate institutions for decentralized services (e.g., should cne authority be responsible for all utilities in a local area?) Twenty-four staff-weeks and 31 consultant-weeks per annum would be involve. The overall resource total of these recommendations is 250 staff-weeks and 373 consultant-weeks per annum. We shall come back to the significance ot these figures later. Later Research Developments The topics listed above are those to which we give priority in the next year or two. However, there are a number of possible later developments to which we should like to draw attention. These ideas could be pursued after the immediate priorties have been taken care of. Reference is made to some - 11 -- .**these in the technical annexes but it may be helpful here to illustrate them by f,erence to multisector topics. As will be seen, the multisector proposals have endorsed above represent only a small part of the potential fields of enquiry. (i) Public Finance Aspects There are two areas here which we deem to be of importance. The irst is to emphasize that charging mechanisms which lead to surpluses of ,evenue over costs have a great deal to be said for them in developing countries. r instance, when there is a situation of excess demand in the face of charges a marginal cost basis, as appears to be the position with telephone systems in number of countries, there may well be a case for increasing charges so as to ,.iminate excess demand and generate much larger surpluses than at present. We " "may well be" as we are acutely aware that at present there is a veil of .Znorance over the character of consumers, the part played by telephone communica- :ions in economic development and so on. That is a primary reason why we recommend ,.Kansion of research in the telecommunications field. The second public finance area is investigation of the effectiveness nd effects of different methods of levying charges on consumers. It is a itandard approach to charge for public utility supplies by reference to amounts :onsumed. But there may well be arguments of administration and equity for considering :ther methods in whole or partial substitution. Thus a system of charging ?roperty owners for water and sewerage improvements has a lot of points in its favor. One is that effective charges for water consumption (taking a.-ount of those leakages which owe more to human ingenuity than to defective 'ater mains and the like) may be very difficult, or prohi_bitively expensive to enforce. Another is that water and other site-specific improvements such as sewerage must be expected to work themselves through into property values :ia increases in rents. Very similar points apply in rural electrification where one is liable to have a considerable excess of average cost over zarginal cost in the initial stages. Even though it may not be possible :0 capture all the benefits accruing to property owners by this route at the very least cost of utility provision could be recovered. One or two other ideas have been put forward in this area. One is that `-e argument that property owners would experience cash flow difficulties !n meeting such charges could be met by allowing deferment (with interest) "'ntil the property is sold or otherwise transferred. Another is that schemes 1t this sort may be a vehicle for self-help - in the sense that if a large ?tOportion of the property owners in a given area voluntarily agree to ask the authorities for help in making such improvements, this is an unambiguous gain to all concerned. We do not assert that research should necessarily be oriented towards this Particular charging device. There are clearly other alternatives (e.g. additions to annual property taxes) with differing merits and demerits. A'hat we are saying is that there is a case for investigating in depth a whole 7ariety of methods of cost recovery. - 12 - (ii) Inflation Accountine Another financial problem is that of the appropriate system of public utility pricing under conditions of 'permanent' inflation. There are at least three separate issues. One is the pricing of fixed capital costs. It may or may not be necessary to think in terms of replacement costs, depending on the exact way in which plant costs enter into the charging process e.g. in so far as they only enter on an incre- mental basis, this automatically takes care of inflation. Inventory accounting is another problem - LIFO v. FIFO methods et hoc omne - but its importance clearly depends on how long stocks are normally held by public utilities and how rapid is the rate of inflation. The third component is capital gains (losses) arising from decreases in the real value of monetary liabilities (assets). It may be the case that none of these three elements is of critical importance for public sector pricing but it is, to say the least, worth trying to find out. (iii) Data Collection and Organization Although we do not see a primary role for extensive data collection analogous to the ideas put forward by the Panel on Income Distribution and Employment, we nevertheless feel that the EWT Department has a role to play in acting as a storehouse and centre for classification for selected subjects. There has already been a very useful exercise in surveying low cost water disposal technologies; and similarly in the sampling survey of rural household electricity consumption in El Salvador. It is for this reason that, as already explained, it would be an important contribution to knowledge to conduct a similar major survey using both qualitative and quantitative evidence of telephone usage in some selected LDCs. In addition to collection of new data in specific cases of this sort, we :u that, as is now proposed, better use might be made of existing data which the Department presently has, by organizing and classifying this information, and making it available to operational staff, borrowers and researchers. In particular a good starting point could be effectiveness of particular public utility charging schemes which have been recommended by. the Department, and the systematic consideration of the sorts of pricing techniques most relevant for countries at different stages of development (e.g., is it appropriate that country y, a laggard in the development process, should adopt the system operating today in country x - a country which is well ahead of country y - or that operating 20 years ago in country x?) (iv) Social Pricing We recognize the necessity of paying adequate attention to the social aspects of public utility pricing but nevertheless have some reservations about the likely distributional advantages of 'lifeline' pricing or increasing block tariffs. First of all, there seems to be no very good reason for singling out one group of poor people rather than another. And in any event with telecommunications it is difficult to construct sensible tariffs discriminating between, say, urban and rural poor. Second, it is all too easy to assume that poverty relief is synonymous with income redistribution; this may or may not be the case depending on which other groups gain or lose in the process. Thus a 'lifeline' system might work in such a way that the poor gained, the middle - 13 - income groups lost and the rich gained, even if total consumption of the utility remained unchanged. And once the possibilities of output changes are taken into account there are unlimited consequences for income distribution depending on, for instance, the relative distribution of pre-tax incomes generated by the industries which grow and contract. We must also revert to our earlier point that improvements in public utility provisions may increase property values. If so, we could have a situation where people at low income levels may gain through cheap electricity, water or whatever, but lose through rent increases. Finally, it is an old story that once subsidization of particular interests begins, it is virtually impossible to remove it and almost as difficult to prevent it from spreading. The fact that we deem it difficult to pin down the distributional benefits of social pricing in the public utility area does not mean that we think them unworthy of research. Quite the contrary. There clearly is a case for some sustained thinking about such matters to see whether the 'lifeline' systems referred to in the Department's papers can really -e justified on distributional grounds. (v) Benefit Calculations We saw earlier that the Department has not been able to make much headway in the estimation of benefits. There may be possibilities here for further investigation of benefits flowing from telecommunications provision or different sanitation schemes, but we cannot really see that there is much likelihood that even extensive research by EWT is going to add much to knowledge in this area. This does not mean that there is no scope for research into benefits construed in a much more general way but rather that any such investigations would fall outside the province of ET. (vi) Institution Building Although we fully recognize that the particular structure developed in one country will be unlikely to suit tha traditions and political conditions of another country, we nevertheless think that the Bank has a most important role to play in setting out appropriate principles for the efficient management, pricing policies and investment policies of public utilities in very different countries. This is why, for instance, we strongly endorse the existing efforts and new proposals for eleztric power dissemination seminars, the issue of guidelines relating to sewerage technology and the investigation of appropriate institutions for decentralized services. Research Implementation An appropriate organization is not a sufficient condition for the generation of high quality research but it may be a necessary one. We shall divide our comments into three categories: those relating to matters inside EWT, those involving EWT and other Bank departments and those relating EWT to borrowing countries. Inside ENT, we have two points to make. The first is that there are very close links between research studies in oil, gas and electricity and the organization of research in the Department should reflect this connection. Secondly, we saw earlier that there is no one person who spends all his time on research. - 14 We wonder whether there is a case for staff members spending pericds of, a- year fully on research alternating with periods fully assigned to other duties may be that the nature of the department's work does not permit such a clea division but it is one which has been found immensely useful in different n in different parts of the world. Relations between EWT and other parts of the Bank could be finr-Pe: variety of ways. The most important is that much more research impetus cuz 7. come from the regions. Perhaps the process of operational requirements to research proposals would be helped if there were more formal and more e meetings between regions and the appropriate members of ETT. But we sus*.Ec-t the root cause may well lie in the pressure of operational work and the lc : opportunity to think about the research implications of operational req long enough or deeply enough. Whatever the precise cause, we feel conf-=-- that this is a matter requiring attention in the regions rather than in Although the regional relationship is the most important point, the only one. We were surprised to find a relati:e absence of joirt researz- between departments. We find it hard to believe that more issues do not ar. :. are of common interest to EWT and say, Transport or Agriculture. e reccnize collaborative efforts already take place, e.g. , the feedback from E.T to ir:g:: water charges policy paper, inter-departmental steering committees and ravie-, groups, etc. But we think that the quality of research all round would be improved by still more collaboration. The same argument does not apply nearly so much to relationships between DPS and EWT but there are areas, pre-eminer:17 energy, where as already discussed in the Proposed Research Program there is sect for more clear cut division of labor and/or possibly fuller integration thar.a been evident in the past. -7Ten we turn to EWT in rnlation to borr-:-g councries, there seaa.: be less amiss than with relations inside the Bank. We were impressed with the-: real efforts made to communicate research findings to the relevant people in o:.er countries and we fully endorse the present and proposed methods of communicating this intelligence. There are one or two suggestions for improvement (e.g. regular circulation among interested parties of the lists of documents by EWT, on-the-jb training for LDC personnel through exchange programs with developed countries an- more cooperation with other international agencies) but these are marginal devel::- ments only. We approve of one recent innovation, in which a staff member of a borrowing power authority worked in the Bank for 3 months in order to familiarize herself with Bank policy toward power tariffs. One small point might be made, however, and this is really one of internal Bank organization. We were inforet that dissemination is impeded by the very long time taken for the translation o research findings into French or Spanish. Anything which could be done to speEC up this process would clearly be desirable. - 15 - cuicns Our overall recommendations can be most readily appreciated if e.ressed in tabular form: Research Manpower -----FY74-78 (av.)----- ------ Proposed------ Staff Consultant Staff Consultant (weeks p.a.) (weeks p.a.) (weeks p.a.) (weeks p.a.) nergy (gene- ral plus oil and gas 15 (16%) 27 (10%) 72 (28%) 75 (20%) E1ectric Power 54 (56%) 92 (35%) 64 (26%) 77 (21%) 'ater Sewerage 17 (17%) 141 (53%) 54 (22%) 102 (27%) Telecco=unica- tions 11 (11%) 6 ( 2%) 36 (14%) 88 (24%) yultisector nil( 0%) nil( 0%) 24 (10%) 31 ( 8%) Total 97 (100%) 266 (100%) 250 (100%) 373 (100%) It can be seen that, on a 1,0 weeks per annum basis, it is proposed that the staff complement be increased from about 2 ½ person years to almost 6 ½, :nd consultant employment from 6 ½ to almost 9 . Several points need to be made about these recommendations. The first is to remember that we are defining research in the broad sense of including dissemination and related activities as well as research study, strictu sensu. Given the scale of future Bank lending in these fields, we do not regard the research effort proposed as anything other than modest. The second is that although there is an approximate two and a half fold increase of staff the increase in consultant time is less than 50%. We deem it to be an advantage to place the greater weight on the expansion of the permanent staff; and we conclude that research funding would not increase in anything like the same proporation as staff time. Nor should we regard it as too difficult for the Department to absorb this increase in permanent staff, since much of the additional research time would be taken up initially in mastering the literature and developing research skills. Thirdly, the expansion suggested owes a lot to the development of energy studies. The percentage increase in both staff and consultant time would be markedly less were it not for this fact. But we regard energy as a very special case entirely justified by the dramatic changes in the importance of this subject in recent years. It should also be noted that the expansion of research narrowly defined is less than the overall percentage figure because of the increased emphasis on dissemination. Finally, it will be seen that there are some important changes in the percentage distribution of staff and consultant time, e.g., a substantial fall in electric power consultancy time and a substantial increase in that for telecommunications. - 16 - To conclude, we feel that the research activities of the departmen tave been understaffed in the past, its previous record shows that it is Vert .apable of turning out very worthwhile research and that there is a whole str if important projects awaiting investigation in the near future. IV. RECOMMENDATIONS In view of the Department's record and performance to date and otentialities for the future, we recommend: (1) An expansion of the Department's research staff from the current very low level of the equivalent of 2½ person years per annum to, say, the equivalent of 6½ person years in the first instance, this figure to be reviewed after experience has been gained of operating at this expanded level. Consultant capacity should be increased :i- 6, to 9½ per annum. (2) There are strong grounds for expanding activity in the area of oil and gas, etc., and, to a lesser extent, in telecommunications. (3) Items such as rural electrification and the dissemination of power pricing and water/sewerage technology will necessitate some expansic7. . Guidelines for later research are as follows: a. New methods of charging, their practicality and their advantages, need to be explored in depth. b. Public utility pricing under conditions of inflation needs to be investigated in LDCs. c. The Department could play a useful role in organizing existing dat and gathering new information in selected cases. d. Research into social pricing is necessary to determine the exact implications for income redistribution. e. We do not see a great deal of scope for work in benefit calculaticn- f. Institution building must continue to be of major concern. EWT internal organization needs to be re-examined with an eye on the further integration of power work with other energy work; and on allowing staff to have longer periods of full time research. . We hope that methods can be evolved to generate more research stimulation from the regions. We should also like to see more inter- sectoral research collaboration between EWT and other departments, and a more clear cut allocation of responsibilities for energy research. Some improvements might be made in the process of communicating research results overseas, and collaborating with other relevant agencies. - 17 - ANNEX 1 Page 1 of 2 EWT RESEARCH PROJECTS 1972-78 (General Plus Oil and Gas) oil and Gas Potential of Oil-Importing Developing Countries An Approach to Planning and Implementing Rural Energy Projects (Report on Pilot Exercise in Colombia) .nergy Demand Forecasting: A Critical Review of Current Approaches Energy Supply-Demand Forecasting: A Critical Review of Current Approaches Energy Supply-Demand Outlook, 1980-85 Potential of Non-Conventional Energy Sources for Northeast Brazil and a Recommended Research and Development Program Cse of Solar Water Heaters in India Energy for Development Coal: State of the Art An Assessment of the Petroleum Prospects of Certain Developing Nations Dominant Issues in Nuclear Safety Electric Power Analysis of Problems and Issues in Village Electrification Pricing and Investment in Electricity Supply Standards of Reliability of Urban Electricicy Supply Sectorial Adjustments to Higher Energy Costs-Power Public Utility Pricing and Investment(including water supply component) Rural Electrification in Liberia ,ater and Sewerage Village Water Supply Appropriate Technology for Water Supply and Waste Disposal Design of Low Cost Water Distribution Systems Rural Water Supply Wastewater Reuse (Agricultural and Industrial) Fabrication of PVC Well Screens Pipelines Reduction of Unaccounted for Water Domestic Water Meters Reduction in Waste Water from Public Hydrants Testing of Wood Bearings for Hand Pumps Measurement of the Health Benefits of Investments in Water Supply A Hand Pump for Rural Areas of Developing Countries - 18 - ANNEX 1 Page 2 of 2 Telecommunications Pricing and Investment in Telecommunications Economics of Telecommunications in Papua New Guinea - 19 - ANNEX 2 Page 1 of 8 PROPOSED RESEARCH PROGRAM Note: It should be fully understood that these figures are no more than rough approximations and that they relate a to the scale of activity in the initial years. *=Priority Project Weeks per annum Project Staff Consultants faruz: General LDC energy outlook 25 Nil *Energy and development 10 40 Energy demand management conservation 5 Nil Ncn-conventional energy 24 Nil Sub-total 64 40 EnerRv: Oil and Gas *Natural gas issues 3 20 Interfuel substituton 5 15 Sub-total 8 35 Enry: Electric Power *Standards of rural electrification 12 25 *Power pricing dissemination 20 Nil *Power-energy pricing 20 24 Autogeneration, cogeneration monitoring technology and remote area power supplies 8 16 Energy transmission costs 4 12 Sub-total 64 77 Hater Supply and Sewerage *Technology dissemination 24 36 *Technology follow up research 6 24 *Resource recovery 18 36 Multicity and multipurpose projects 6 6 Sub-total 54 102 - 20 - ANNEX 2 Page 2 of 8 Project Staff Consultants Telecommunications *Nature and characteristics of telephone usage 20 60 *Pricing 16 28 Sub-total 36 88 Multisector Alternative financing of infrastructure 9 12 *Asset revaluation 6 10 Appropriate institutions 9 9 Sub-total 24 31 Total 250 373 BRIEF DESCRIPTION OF RESEARCH TOPICS I Energy: General a. LDC Energy Outlook This will be an annual update of energy developments in LDCs. It will become increasingly a country-by-country report with a summary discussion on aggregate supply/demand/trade outlook, development issues and policy questic: *h. Energy and Development This will be a sustained effort to gain a better understanding of t's interrelation of energy and development. During the first year an atte-pt will be made to carry out a comparative analysis of energy consumption patterns of some five to six LDCs with a view to interpret the reasons for differences among them. (A similar study was carried out by Resources for the Future on OECD countries which proved very illuminating.) C. Energy Demand Management and Conservation The potential for action in this area in LDCs needs to be examined more systematically. Possible savings of energy in industry, transport, agri- cultural mechanization, commercial and residential buildings, cooking, etc., should be investigated. Institutional, fiscal and other incentives needed to encourage conservation and efficiency in LDCs should be identified. ANNEX 2 - 21 - Page 3 of 8 Traditional and Non-conventional Energy This includes work on the better identi',catio.. itilization of both traditional energy sources (firewood, agrici,tural wastes, windmills, small hydro, solar dryer, etc.) and newer renewable zesources (solar heating or cooking, solar pumping, solar electric, etc.). Much of the work is to be done in and with the participation of LDCs and financed as components of Bank loans for rural development, forestry and science and technology--the UNDP may also be a source of finance. Study will be closely coordinated with research project III d (decentralized energy sources for remote areas). * Energy: Oil and Gas *a. Natural Gas Issues Many LDCs are currently flaring associated gas and not using existing non-associated gas. In addition, other countries may be facing t1ese prob1ams in the future. A better understanding of the pctential domest.c -arke-s rcr natural gas in LDCs and the economics of this resource in itsElf End in re aticn to substitutes is desirable. b. Inter-fuel Substitution A systematic review of substitution possibilities and associated technical, econcmic, environmental and other problems is desirabla to improve our capabilities in the area of demand management, energy pricing and appraisal of industrial and other energy-using projects in agriculture or transportation. .A. Energy: Electric Power *a. Standards of Rural Electrification The power lending program which has averaged around $900 million per year over the period 1974-78, will increase to a level of about $1.5 billion during the next five years. The fraction of power loans devoted to rural elec- trification (RE) has increased from a very small level prior to 1974, to approx- imately 5 percent in the last five years, and it is estimated that this rising trend will continue, with up to 15-20 percent of total power lending being allocated to RE projects over the period 1979-83. The Bank (and its borrowers) now routinely hires a variety of engineering consultants to help in the design and analysis of RE networks. How- ever, there are wide variations in engineering practice associated with RE net- work planning. In some cases, engineering standards originally developed for the electrification of North America and Europe, especially the high load density urban areas, may be inappropriately applied in RE schemes in the developing countries. Accordingly, this research project seeks to provide the Bank and our borrowers with guidelines for evaluating the engineering standards associated with the planning, design and construction of rural electric transmission and distribution systems in the developing countries, and the impact of different standards on demand and on the benefits of electricity use. - 22 - ANNEX? Page 40of *b. Power Pricing Seminars/Dissemination These seminars are designed to disseminate the results of past s ongoing work in power pricing. Two pilot seminars of this type have alrea been held in Thailand (June 25 to July 2, 1978) and Indonesia (January 7-11 1979). Twelve ccuntries in the East Asia and Pacific, and South Asia re Burma, Fiji, Indonesia, Korea, Malaysia, Nepal, Pakistan, Papua New Guiea, Philippines, Singapore, Sri Lanka and Thailand participated. The main rationale for these seminars was that during the past 7em several borrowers in the East Asia and Pacific and South Asia regions have requested technical assistance an4 advice in power tariff setting. The pe:- formance of foreign consultants hired to provide such suppcrt has often.ber - unsatisfactory. Furthernore, several borrowers have recently undertaken i- house tariff studies, and others have the ca:acity to do so, with some et:et., guidance and encouragement. :herefore, a series of two seminars was to assist those borrowers who have already undertaken pricing studies, acqu-o others with the basic concepts involved, and facilitate the exchange ot ifu with a view to prcmoting the formation of tariff groups within the various power utilities involved, and reducing undue reliance on foreign cor.sulta-.:Z. "Learning by doing" would clearly be an important element in this process. The participants indicated that the-; were pleased with the seminar results. At the closing sessions it was unanimously agreed that they wou,: organize the power tariff seminar on an annual basis, to exchange ideas and: maintain the momentum and interest built up on- the topic within the Asian They also resolved that the proceedings of the first two seminars be cre:are:. and requested the Bank to assume responsibility for this task. Similar seminars will be organized in the other regions. *c. Power/Energy Pricing The primary objective of this research is to develop guidelines for energy pricing similar to the power pricing policy guidelines developed earl-e: A general analytical framework for examining optimum energy pricing policies -s being developed, followed by several case studies of specific countries to apply and test the methodology empirically. One case study for Thailand has already been carried out, and the analytical framework is being refined for application in other countries. hts program is responsive to the increased Bank activity in the energy area and will also provide valuable inputs to ongoing operational work, energy sector studies, and so on. It is also a logical extension of the power pricing work, and underlines the fact that prices for all fuels and energy sources should be studied in an integrated- framework. d. Autogeneration/Cogeneration, Monitoring Existing and Emerging Technologiel. and Remote Area Power Supplies The research project on autogeneration will include case studies to investigate the incidence, causes, and economic rationale for maintaining CaP- tive power plants, particularly for industrial use, in situations where central grid supplied power is available. ANNEX 2 - 23- Page 5 of 8 Currently, new work on cogeneration is being carried out by other researchers in the industrialized countries, to explore the full range of possibilities for the interchange of electric pcwer and heat between the cen- tral power grid and large industrial or commercial firms. The results of such studies would, hopefully, be adaptable to developing countries, and would be fitted into the overall context of the above research on autogeneration. Monitoring existing and emerging technologies will help the Bank keep abreast of the latest developments in energy technology, including improvements to conventional technologies such as for power generation, as well as the development and applicability of newer ideas such as wind power, solar conversion fuel cells and so on to supplement central grid supply. Iz will allow the Bank to also provide relevant information to borrowers and advise them in these areas. An in-depth study will also be made of the alternative methods of supply electric power in remote areas where central grid supply is uneconomic. Bot.- technical and economic aspects will be studied with particular emphasis for uses in rural electrification. This study will be closely coordinated with research project TI d (nonconventional energy sources). e. Energy Transport Costs Comparison This work will consist of case studies of costs of transmfssion of power versus transport of gas via pipeline or shipment of coal in several countries, to determine guidelines and issues involved in optimum location of generating stations. V. Water Supply and Sewerage *a. Appropriate Technology/Dissemination Dissemination and implementation of the results of the Department's largest research project (R.O 671-46) occupies the bulk of the future research effort proposed for the water and wastes subsector. A start has already been made in the production of reports which detail research results and the partic- ipation of EWT staff in seminars in the UK, India and Egypt. In addition, the UNDP has agreed to finance the design of several prototype water and sanitation projects over the next 18 months, and an EWT staff member has been seconded to manage that effort. The lessons from these experiences are reflected in the table of staff and consultant time requirements. Research dissemination includes both written and oral channels. Most of the staff time indicated will go towards finalizing the research manuscripts for publication and supervising consultants who will prepare supporting workshop materials such as visual aids for linguistically diverse audiences. The work- shops themselves will be conducted by one, or on occasion two, EWT staff and two to four consultants. In order to speed the integration of research findings into Bar. projects, EWT should provide design assistance to projects earlY in their - ect cycles and prepare prototype project components to accompany advanced ects which have a high potential for follow-up loans. One of the impora. aspects of this work is the promotion of linkages with small industries informal sector to locally produce the components of the chosen water tation technologies. Again, the bulk of the work will be carried cu- by sultants, with ET staff involved primarily -with developing appropriat - mentation and monitoring methodologies. Requests frc- the regions for - type of assistance greatly exceed out cipaci.- to provide it, and the l.,a suggested in the accompanying table wouid allow for direct assistance to to three additional projects per year. *b. Appropriate Technology Follcw-Up Research Two important avenues for follow-uo research have been suggested. The first is the exploration of ways to reduce water consu=pticn and dispos of sullage economically and without sacrificing health cbjectives. i:se involve testing water saving appliances in developing councry conditions a. monitoring various methods of sullage disposal to determine percornance oce: . cients with respect to soil and climactic coditons, sullage volume and strength, mosquito breeding potential, etc. 7he second area for follow-ue research is in the development of evaluation methcdolcgies for healta non::::- ing, handpump performance and soc-al acceptability. Many agencis h expressed interest in imple=en:ing the teh:2.:ogies proo5ed by RPO -C and a consistent monitoring approach would greatly aid in the learnz : of all. The Bank's technical and economic mechodologis alreacy are '.re: accepted and used by consulting firms and other development agencies, a- is felt that the Bank has a comparative advantage in this important area '.;nC. is a prerequisite to a careful comparative evaluation. *c. Resource Recovery The third main area of research-resource recovery from waste--wcul attempt to provide a comprehensive technical and economic evaluation of the major reuse technologies. The integrated approach to the creazment, disprsa. and reuse of human, agricultural, and solid wastes has been regarded as havir- high potential for providing economic and financial benefits which the sing project approach has failed to generate. Hcwever, the few economic evaluatcS of existing reuse schemes have produced widely -:arying ccnc.lusions ar. have serious methodological faults. This research project would include a careful economic and technical analysis of reuse technologies as they exist or could be adapted for develop- ing countries. It has the potential to create a new industry which could sub- stantially lower a community's waste disposal costs and produce valuable products ranging from energy to food to pharmaceuticals. d. Evaluation of Multicity and Multipurpose Projects An increasing proportion of the subsector's lending is being chan- neled into multicity projects, sometimes involving over 50 communities throU9b a single loan. In addition, the Department is often called upon to advise o1 the economic evaluation of multipurpose projects which are initiated by -ANNEX 2 Page 7 of 8 irrigation or agriculture divisions in additicn to those of water and power staff. Both of these areas require further analyzical input to irsure that sector investments are optimal in their macroeconomic contexts. The major output of this research would be one or more guidelines for Bank staff working on these projects. Because of this o7erational orien- tation, any of the work which is entrusted to consultants -ust be 1er- closely supervised, and considerable E.<T staff input le q hrghout the project. Expenditure of staff time at this stage, however, can yield large benefits in the future as these types of projeos become more comon. Telecommunications *a. Nature of Telenhone Usage/Users In order to assist pricing and investment decisions, the nature of telephone usage and users needs to be investirated. 7his would involve the analysis of telephone traffic and applications for service. It might also entail, inter alia, an examination of communication oatterns of business and government offices in two different telephone exchange areas of a city: one with relatively good telephone services and the other with an inadequate quan- tity of telephones and significant business hour telephone traffic con.estion. Another element of the study would consist of an nXainctic onf thc a ent to which messages and information are conveyed cy', hand or throuzh the use of transport in an urban area in which the demand Eor telephone services far exceeds supply and in which significant business hour telephone craffic con- gestion exists. This would be acccmpanied by an estimation of the costs of the alternative communication rodes. Analysis of the telecommunications needs of various sectors such as education, transportation and agriculture, would aim at ensuring that telecom- munications investment programs, and the implied pricing policies, are geared to overall development objectives. *b. Pricing Study of pricing policy with special reference t: pricing issues raised by economies of scale/decreasing costs, joint cost allocation, and willingness-to-pay of consumers in the presence of supply shortages, con- gestion and so on. V1Multisector a. Alternative Finanding of"Intrastructure Problems have often occurred when water and sewerage sectors' projects have been partly financed from municipal taxation. A research study on the problems and issues raised in financing drainage and other infrastructure proj- ects from municipal property, drainage and betterment taxation would be most helpful to the Bank and its borrowers. - 26 - b. Asset Revaluation Where borrowers are operating under inflationary conditions it is important, particularly for a test of financial performance, that assets ,e appropriately valued. Business and academic institutions, in making stu4t on accounting for inflation, have put forward various methods for the tion of assets. However, invariably problems arise with out borrowers c. choice of methods to be used. As a guide for both the Bank and its br- it would be invaluable to have a study made of the methods available for - revaluation of EWT sector assets and the issues involved, particularly vi - reference to developing countries. c. Appropriate Institutions for Decentralized Services It is well known that a major problem involved in supplying p services in rural areas (which from a technical point of view have to be physically decentralized) is the determ.nation of the appropriate institu:ies framework for managing them. This problem is often highlighted in an e-:tre:e form in terms of financial viability and poor operation and maintenance. Si.::! managerial capacity is so scarce, it is worthwhile to consider, inter alia, a: institutional form in which responsibility for management of local water, sa:.:- tation, energy and possibly other services is vested in one local authorft-:. A case-study approach should be used to determine those circumstances in fr.ic centralized or decentralized institutions are appropriate, and the form: should take. including financial, managerial, sociological and technical as:e: 27 - ANNEX 3 Page 1 of 4 ENERGY RESEARCH 1. Scope of analysis An "official" series of documents was submitted for review in September 1978. (1) Dominant issues in nuclear safety 03/74; (*) (2) Prospects for the developing countries 07/74 (..) (3) Nuclear power: its significance for the developing world 07/75 (..) (4) Non ccnventional energy sources in North-East Brazil 11/76 (*) (5) Energy demand forecasting: a critical review 02/77 (*) (6) Minerals and energy in the developing countries 05/77 (..) (7) Rural energy projects (Colombia) 01/78. We have added on our own initiative a recent study by the Department: (8) Energy and development 08/78. (*) The Department's list of energy research projects includes a further five tonics on which documents were not available to us: (9) An assessment of the petroleum prospects of certain developing nations (74); (*) (10) Energy supply-demand outlook (74); (*) (11) Coal: state of the art (74); - (*) (12) Oil and gas potential of oil-importing developing countries (76);(*) (13) Use of solar water heaters in India (77) (*) II. Status of research The first point to note is the smallness of the energy research budget: US$280,000 for 1972 to 1978 -- an average of less than US$50,000 a year. Moreover, US$160,000 of this total went on two projects: (7) and (12); the other eight projects took only US$120,000 (only an average US$15,000 per project). Energy research accounted for only about 0.5% of the Bank's total research budget (corresponding to the proportion of energy operations in the Bank's loans). Since the sector performed under the major constraint of a strict limitation on its research budget, what evaluation are we to make of its work? The overall impression is mostly favorable. Of course, some research projects were not undertaken or were not carried out in sufficient depth, but the main reason lies in the paucity of the financial resources. There can be no question that th-.e best use has been made of a tight budget. ) Package of 10 projects comprising the Department's 1972-78 "energy" research program. ANNEX 3 - 28 - Page 2 of 4 which has been managed efficiently, while the quality of the work is genera'- high. III. Choice of topics In spite of the low volume of resources deployed, a varied Prograt of research has been developed: 10 projects (one-third of the Department', total number of projects) have been taken up, covering a very wide range or concerns. On the other hand, this has involved some risk of dispersion and fragmentation of effort. At the same time, this research has had to remain highly specia1iZ, no doubt for lack of funds. Oriented almost exclusively towards technical/ economic concerns, it has been confined to the conventional fields of inves- tigation: investment policy and forecasting. There has been little work particularly on systems analysis (energy chains or interactions with the related sectors: ecology, socio-cultural factors, etc.), little attention to horizontal development aspects: multipurpose projects, or integration of energy into overall planning (linkages with agriculture, urbanization, indus:- transportation or modes of development). Thus, preferential attention has been given to the traditional approaches. The origins of the studies are in fact very diverse: - instructions by the Bank's management: (1), (3), on nuclear energy; - proposals by the countries: (4) Brazil, and (13) India; - responses to events: topics generated by the oil crisis, (2), (10), (11), (9) and then (12) and suggestions by the United States Government, (6); - policy orientations of the Bank, particularly the stress on rural development; (7), (8). Thus, the degree of freedom of choice of research topics was limit It is reflected chiefly in projects (5), (7), (8) and (12). In spite of everything, the research does appear to be well adapted to current develoPmer*5 Taken together, the topics cover fairly well the fields of major interest to the developing countries. Efforts have been concentrated mainly on conventional energy supply. New energy sources have been dealt with only in project (4), though they were touched upon also in (7) and (8). Very little work seems to have been done on energy demand: forecasting methodology in (5), and medium term estimations in (2) and particularly in (8). IV. Conduct of the studies The studies have been essentially pragmatic, which is consistent with the Department's avowed goals. ANNEX 3 - 29 - Page 3 of 4 Liaison with regional staff and borrowers has remained small. W'hile there have been informal contacts, the research is relatively isolated, perhaps because of lack of interest by the Department's natural partners in dialogue. This point is one of the greatest causes for concern. V. Operational tpact of the studies The studies understandably vary in interest and value considering that it was difficult to gc beyond certain obvious priorities because of budget constraints. The studies imposed by current events no doubt supplied answers to the cuestions of Management (1, 2, 3) and of the borrowers (4, 13). Anyway, these studies do not appear to be the most valuable ones from the "research" standCpoint. The series of basic studies on oil (9, 6 and 12) resulted in a very important breakthrough in Bank policy in the area of exploration and prospecting. Similarly, project (7) has had direct repercussions on the organi- zation of the Colombian energy system. Project (8) can be expected to provide a useful framework for later studies and is a rich fund of information. In contrast, the most "theoretical" project (5), on demand forecasting models is rather disappointing. The impact of the studies is no doubt dampened by the lack of contact with the operational sectors (regions and countries). If the regions (and the borrowers) do not instigate research projects and participate in them only from a distance, they are hardly likely to be greatly excited by them. The almost total lack of loan operations in the sector has certainly not helped to stimulate their interest in research. This situation could, therefore, change rapidly. Overall, we note that the more positive studies (2,6, 7 and 8) have contributed to real progress in understanding development mechanisms and the definition of policies. We note also that they account for 70% of the research budget and are the most recent of the studies. VI. Recommendations for the future It is clear that the research capacity of the sector deserves to be strengthened. A total of four man-years of staff time plus four man-years of consultant time was proposed Cy EWT). It is difficult to evaluate the validity of these estimates in absolute terms. We note, however, that the proposals contained in the research program all appear to be valid: support for hydrocarbon loan operations; monitoring of the current energy situation of the Third World, compilation of energy data demand, management, study of conventional and non-conventional energy sources -- these are all topics that merit attention. - 30- ANNEX 3 Page 4 of 5 However, some of them reflect more an effort of internal training or of routine information follow-up than research in the true sense (e.g., world energy outlook, traditional and non-conventional energy, and risk analysis of petroleum projects). Others are not necessarily specific to the developing countries' (e.g., world energy outlook, energy demand management and conservation, and analysis of petroleum/gas agreements). Still others are very pertinent to the Bank's comparative advantage (e.g., LDC energy outlook, energy and developmenz, and natural gas issues). But should world ener2y outlook and analisis of Dezroleum/gas agreements be dealt with by the Bank? n the whole, a budgetary allocation of 2 staff-years and 2 consultant years appears to be appropriate (in comarison, the corresponding figures for the period 7?L-78, were 0." staff-years and n.7 consultant-years). There is anyway a very clear need to integrate the research proje-t, into a medium-term program with the object of coordinating efforts, establis"- ing priorities, mobilizing forces and monitoring the progress of the work without throttling creativity. Action could be taken to strengthen thinking (and is that not a topic for study?) about the comparative advantage of the Department (and of the Bank) in the sector, with the object both of avoiding unnecessary dupli- cation and of defining more clearly the specific nature of the research projects to be undertaken. 'i7ith greater resources available, it should be possible to widen the field of thinking to include systems analysis, horizontal aspects and overall planning of the sector, and to study more thoroughly the problem of demand: sectoral analysis, data collection, basic needs and need-formation mechanism, elasticities, and so on. It is essential that appropriate action be taken to remedy the relative isolation of the sector by encouraging collaboration at all stages of research with the regions, the other departments and the borrowers. In this context, we have also examined energy studies carried out elsewhere in the Bank; in particular the work of the Economic Analysis and Projections Department (EPD), which devoted a part of its efforts to energy. The studies are, in general, interesting. They are clearly influence by the fact that they have been carried out within a department whose main function is to produce numerical projections relating to commodities. Consequently, this work is essentially repetitive in nature and appears to be based more on the compilation and cross-checking of data (for consistency), rather than on actual research. Beyond such numerical forecasts, there is very litt2e analytical work on the role of energy in the LDC's. - 31 - ANNEX 3 Page 5 of 5 The methodology generally used in the EPD studies is rather conventional, i.e., simple econometric models for forecasting by extrapolation. Although such models have been previously applied mainly in the industrialized countries, their use in the LDC's by EPD may be justified as an essential first step to determine a preliminary frame of reference. This analysis confirms the need for developing within the Bank, original work on important and relatf.vely unexplored topics such as: traditional energy, alternative scenarios to study the impact of variations in oil prices, demand estimation by type of usage, comparative analysis of energy and the development process, and so on. An investment in research to establish specific methods of analysis in these areas will not only correspond to the Bank's comparative advantage, but also help to provide valuable answers to crucial questions. Finally, the energy research as a whole appears to be needlessly dispersed within the Bank for purely historical reasons. The bulk of the studies on supply are carried out in EWT, but demand belongs to the DPS and coal to the Industry Department. It would make for increased coherence and efficiency if all energy studies were brought together in a single unit. -32- ANNEX 4 Page 1 of 5 ELECTRIC POWER RESEARCH A. PRICING EWT has made an excellent choice in retaining marginal cost pricing mcong i,s areas for research. However, as the department's researchers corre-'ly interpreted the scope of the task, it was an ambitious objective which recuired considerable resources. Although the value of results obtained from J s efforts was not in all cases commensurate with this ambitious objec`ve, especially from the theoretical point of view; it should, however, be considered as a first step. E7T should have more resources available in the next few years, not to extend the concepts and methods but to ensure the training of local exerts and to assist them in their work. Marginal cost pricing (MCP), considered as an area of research and study associated with Bank loans, especially to electricity companies, corres- ponds particularly well to the concerns of the World Bank. Indeed, conceived as it must be, which it is in this case, the develozment of MCP involves a global analysis of management, including opera- tions as well as investment policy. By working in this way the Bank can evaluate the competence of the managers and assure itself of the viability of the facilities it proposes to finance. The comparison of the results obtained with financial or social (in the income redistribution sense) constra -ts, requires taking into account the distortions introduced in cr:er to satisfy these constraints, and to weigh the consequences. The necessity to fully engage the managers of the companies in the studies leads to a beneficial training effort for the borrowers. As for conducting the studies, the essential thing is to have the companies understand that the calculation of tariffs is not an activity of accountants but has fundamental -olicy implications. It should also be understood that in a developing country where the markets, either internal or external, often fail to generate prices which reflect real scarcities, it is more realistic to take into consideration approximate but meaningful shadow prices, rather than market prices, which are precise but distorted. in this respect, EWT has tackled the problem well; certain approaches studied by EWT, such as the cost of power outages, should be used more fre- quently not only in the developing countries, but also in many developed countries, where the very notion is not always known. However, the lack of means has undoubtedly not permitted EWT, in practice, to go as far as desirable in passing from principles to implemen- tation. In the beginning, shadow prices used for developing the tariffs were not used in the choice of equipment - a.practice which could lead to regret- table inconsistencies. Because of the lack of good data, the efforts made to determine the marginal cost of distiribu tion still appear to be much weaker than those made at the generation level. - 33 - ANEX 4 Page 2 of 5 Anyone who has actually carried out a marginal cost calculation in a country where nothing was known about this technique, cannot blame EWT for these deficiencies; it is a long and exacting work. The weakness of local data, the lack of previous training of counter- part local staff, the scarcity of international consultants really competent in this area, certainly did not allow perfect results to be achieved in such a short time, and in a number of countries simultaneously. Having stated this, should we doubt zhe operaticnal value of the results obtained? Relative to the purely accounting practice traditionally used, the results are certainly positive, although not perfect, since a minimum of simulation will have been done to assure that the new tariffs will generate at least the desired revenue. If, in applying the MCP methodology, the data which needs to be improved and the problems to be studied have been identified, if the effort undertaken to think comprehensively about the management of the company has created the need to see more clearly, if local experts have been trained who will be able to absorb the principles and subsequently improve their application, the calculation of marginal costs vill have been worthwhile. However, these efforts must be followed up. The subject of MCP continues to deserve an important place in the future work of EWT, and sufficient resources should be provided. It is not so much a question of more study of concepts and methods as one of improving their implementation. The department has issued documents which already constitute a very good base for teaching and practical training. Undoubtedly, some points merit further study - notably (a) to widen the area of application of MCP to include the entire energy policy of the developing countries, and (b) in the area of social tariffs - but this is not the problem. Very remarkable results have been accomplished during the past few years with very small resources. if one wants these efforts to be followed up, as deserved, it is necessary to enlarge considerably EWT resources in order to: - make the responsible regional staff of the Bank more aware of the value of MCP; - train local experts in the countries where the Bank is lending; - assist borrowers in carrying out their own studies. - 34 - ANNEX 4 Page 3 of 5 With the present state of competence of international consultants in this matter, the emphasis must be placed more on strengthening the EWT staff - and possibly the Regional staff of the Bank as well - rather than on increasing funds for outside consultants, in order to accomplish the ambitious task that the department has so rightly undertaken. - 35 - ANNEX 4 Page 4 of 5 B. RURAL ELECTRIFICATION As a factor in economic development ana social progress, ruraL electrification can contribute significantly to the eradication of regicna disyarimies. Unfortunately, however, the obstacles to be overcome are enormous -- high cost of plant, low iemand from lower-income subscribers, exorbitant operating costs, difficulties in training personnel whose lazic juMlfications still leave much to be desired. in the final analysis, these obstacles result in a financial Vulin that is difficult to pare down. Certain soluticns are available, either in the area of yricing (cross subsidies, concessicary rates, etc.) or in nth: of technology (simplification of generating sets -- usually diesel, lighonefFh: networks, type of utility poles chosen -- wood in preference to concrete7 single-§hase distribution, regrouping of generating sets so that they suIly surrounding MV networks -- thus relacing small lut more costly diesel sais, etc.) But although the quest for simplified, suitably adalted nechnclzjo may lead to lower plant costs, cross subsidies can be justified only on -i of national solidarity (which are clearly not jusnifiable economically), sinw= such subsidies oblige the population of towns whcse electricity is supplief under economically viable conditions to bear the burden of rural groups sugglY from decentralized diesel sets. It is nevertheless important and enccuragin; to rote that the cank has decided to confront the problems of rural electrification and io assiEi in its general implementation and development. The studies carried out by mhe Energy, Water and Telecommunications Department are of great interest and shco'd be pursued and broadened within a framework of closer contact with regionaL staff. It is equally encouraging to see that regional staff research efforts coincide with the,action program formulated by the Study Committees of (Union des Producteurs, Transporteurs et Distributeurs d'Energie Electrique en Afrique), one of whose main concerns is rural electrification. We have aLso noted with satisfaction that the Bank intends tc rely on what it calls the ?7 "forum" in providing support for a number of allropriate studies on this nuesli. as it relates to the African continent. One manifestation of the realitT :f this policy is the study the Bank has carried out on the rural electrificaticn of Liberia, a choice made in conjunction with UPDEA, while another is the forula- tion of terms of reference for the interconnection of the Western and CeraL African networks, the financial costs of which were met by the Bank and C::A. In concluding, we should like to put forward the following recommendations, which are discussed in greater detail in the secioral report on rural electrifi- cation we have been commissioned to draw up: (1) It would be desirable in the sphere of rural electrification for the Bank to refine a methodology for alyropriate appraisal, since it is clear that the approach taken in this sphere must be different from that now used in the appraisal of classic projects in relatively developed regions of the Third World. (2) Following the same line oV reasoning, regional staff should as far as yossible be nationals of the particular country or re.:icn to they are assi6ned for the purpose of rural electrification stualaw. - 36 - ANNEX 4 Page 5 of 5 oros should -o ahead -o train borrower-country personnel in Ban -, tcds of proJect apraisal an in an attendant rate setting operations. ) ualiie local uersonnel s::ould be associated with project studies. While obvious-_y meani`g tnat nore tire aust be levoted to suc_. studies, this prccedure wouln have the advantane of contributing to Iccal training. Seriars deaIinj -it` -:ery sDecializei ;uestions sco.ld e focused more d :artici.ants who are e:----erenced and involve in the roLleUs uder uscussIon. 1) ?e:icnal staff experts shoul i be ivcc broader opoortunities in the field zo iniziate research -ro.jects that have been identified as necessar- during the course of an ir-raisal mission. The general review carried out b- reionl staff during the project study procedure should as far as possib_e be interspersed withn advice on both technical and managenen: questions. (3) The Lp.nk should devote attention to training the personnel who will be enSaUed in the oreration of a project it finances. Its role here woul be to advise the aZency responsible for training. (9) The availability of a significant data base is essential if the duration of project studies is to be reduced. It would therefore be desirable for the Bai`k to stress to the enterprises involved the need for data which will facilitate its research and apraisal work, advising them if necessary on categories of data which need not be norediately required but which are eventually essential for uroject appraisal. - 37 - ANNEX 5 Page 1 of 4 WATER AND SEWERAGE RESEARCH 1. Introduction The UN Water Conference (1977), in which the World Bank played an active role, named the decade 1981-1990 as the "Drinking Water Decade" and resolved to provide safe water and improved sanitation to every person in the world by the end of 1990. From the mid decade report (1976) of WHO, it is concluded that by the end of 1990, about two billion people will have to be provided with safe water and sanitation facilities in the developing countries. It has been experienced that hardly any provision is made in the national budgets of most of the developing countries for research on water and sanitation, as these two subjects are primarily the responsibility of the local authorities. The latter have neither the funds, nor Ln most cases, the capability of suggesting any research programs. The orivatp sectors which in many commercial enterprises are prepared to share the research and development activities of a country are very little intereteA in this field. Thus the World Bank's invc*lvement, particularly in the research on low cost technologies would increase immensely in the coming years. 2. Choice of Research Topics, Conduct of the Research and Operational Relevance of the Results 2.1 Twenty research papers have been listed on water supply and waste disposal covering a variety of aspects. Subject-wise all these seem to be of functional interest with varying degree of importance. The panel had been requested to review the five major projects on water supply and waste out of which the document on the "Reuse of Waste Water" is of great significance but is still under preparation. A few smaller pro4ects financed by the EWT Department have also been reviewed. The studies have however all been completed very recently and it would be unEair to comment at this stage as to how far the Bank's objectives have been achieved. 2.2 Views on the projects examined can be summarized as below: (i) Village Water Supply (March 1976). This is a unique document of its kind considering the wide range of coverage and the analysis of various complex problems in rural water supply. However, a more formal transfer mechanism of the idea contained in it is necessary and should be further explored. (ii) The project entitled "Observation of Rural Water Supply and Sanitation Programs in Eight Developing countries" is a "brief overview rather than an exhaustive study on water supply and sanitation activies," and is nonetheless a very informative docunent. However, the paper would have been more useful if the author had commented or expressed his views and made a critical analysis on the various aspects of the rural water supply and highlighted them in his conclusions. - 38 - ANNEX 5 Fag9e o f 4 (iii) The document on "Appropriate Technology for Water Supply and Sanitation in Developing Countries (1978)" is an outstanding contribution by the Research Division in the field of waste disposal and sanitation. The manual prepared has presented the alternative sanitary methods of excreta disposal suitable for different developing countries where socio-economic conditic the behavioral pattern and the cleansing methods of communities differ widely. The greatest contribution this manual has made i by suggesting inexpensive scientific methods for spot disposal c human excreta eliminating the laying of sewers which cost almost 80% of a sewerage system. (iv) What has been reported up to date on the research on "Design of Low Cost Water Distribution Systems" does not seem to be of much assistance to the field staff and the utility of the findings is very limited. Further work is needed to make the mathematical model universally applicable. (v) The document on "Hand Pump for Rural Areas of Developing Countrie (1978)" suggested use of PVC well casings and modification of other parts of the pumps. This is a follow up of the earlier paper of 1976. What is needed now is a comprehensive research an development protocol on the proposed pump design and including accelerated laboratory endurance tests and field trials. (vi) The document cn "Development of Well Screens for Lccal Fabricatio: in Developing Countries" requires further investigation. Extrude- ribbed PVC pipes have been proposed to be used. A comparative study including the cost of the screens made from ribbed pipes as well as ordinary pipes used in other countries would be of greater interest. (vii) The document on "Composting of Night Soil" is meant for the guidan of the Bank staff. Night soil compost with garbage could provide economic return with its usage in agriculture. A field manual for use by all those interested in this field would be more useful. 3. Lessons for the Conduct of Research Projects 3.1 Dissemination of Research Results (i) The research staff should visit the countries for the purpose of explaining the research findings to the country staff for adoption in the field, and also for studying the drawbacks in the research results where they are being practised. (ii) Association of research staff in the Bank's project preappraisal or appraisal missions would enable the research staff to advise both the national as well as the regional staff of the Bank about the least cost solutions and other aspects of economy in the proje - 39 - ANNEX 5 Page 3 of 4 (ii) The active involvement of the regional staff in the research program is necessary for the following reasons: (a) They have direct knowledge of the problems in the field which require research and investigation. (b) They could examine whether appropriate technology has been adopted for finding the least cost solution. (c) They would provide feedback to the results of the Research Division. (d) If the majority of the research projects initiate from the regional staff for solving their problems, both national and regional staff would take active interest in the research programs. (iv) Holding of seminars, workshops and short courses and circulation of the publications are popular methods of dissemination. However, emphasis has to be laid on the selection of the right persons for attending the seminars. 3.2 It seems that budgetary limitations at times have made it obligatory for the research work to be completed within a definite period which has resulted in incomplete reporting. 3.3 Bank's Financial Support in Project Execution This makes it easier for the Bank to propagate new ideas of low cost technological development by not supporting the traditional costly measures, which is also in the interest of the country itself. 3.4 Communications Gap and Collaboration with Other Agencies (i) Communications between the Bank's research staff and the national and international organizations conducted research on similar topics need to be improved. (ii) WHO and UNICEF are both significantly involved in this sector. WHO has provided sanitary engineers to large numbers of developing countries; thus the Bank could take the assistance of WHO and UNICEF in the collection of basic information and dissemination of research results. (iii) The IBRD/WHO Cooperative Program which is now decentralized in the various regions of WHO could be of assistance in the dissemination of the research results and help in their assimilation by the national authorities. - 40 - ANNEX 5 Page 4 of 4 (iv) Some research institutes and universities in the developing countries are involved in the research work in this sector. Some of the research work could be carried out by these institu- tions at a much lesser cost and would at the same time train the researchers in these countries. Perhaps the result of their studies might be more realistic and aonveniently applicable in the developing countries, as they are well aware of the socio- economic needs of the countries. For similar reasons, involve- ment of individual nationals from the regions in the research program would be more helpful. (v) Some international organizations, e.g., the Bank, WHO, UNICEF, and LNDP, could form a research coordination committee to avoid repetition of the research programs. The Bank could lead the work of such a committee as it could help the countries with financial assistan for applying the research findings in the field. 3.5 Choice of Research Topics and Settling of Priorities (i) Priority among the research subjects could best be developed with the assistance of the regional staff based on their experience in the field. (ii) Hardware (pipes) and other components of water supply and sewerage projects constitute nearly 50 to 80% of the total cost. Yet little research has been carried out to find out the less expensive materials which could meet the specifications of the developing countries. Thus research programs have to concentrate on these aspects in particular in future. (iii) Answers to many simple problems which would affect the cost of production as well as capital cost, for example, the use of chemically treated water on slow sand filters, require investigation. (iv) Investigation and research on the toilet pans and the connecting pipes suggested in the field manual have to be carried out to find the least cost which could be borne by the urban and rural poor. Similarly the effect on water quality of intermittent piped water supply prevailing in the developing countries by adopting "spot disposal" of excreta needs investigation. (v) Governments have been adopting different measures to mobilize funds from different sources andhave established different institutional patterns for the management of the utilities. Some case studies in different countries on these aspects to prepare guidelines providing different institutional patterns that could be adopted by different countries both for the urban and rural systems are needed. Similar guidelines should be prepared on the various alternatives which have been found to be successful in different countries on the methods of resource mobilization, the method of repayment, possible variations in the interest rates, payment schedules, relationship between cost and pricing, combination of rates and taxes, structuring of tariff schedules and tax levies. -41 - ANNEX 6 Page 1 of 5 TELECOM MUNICATIONS RESEARCH Two World Bank research works in the telecommunication field are :-jects of analysis of this report, which is a summary of a more complete report presented to the Bank: Access to Calls - A Perspective on the Economics of Telecommunications in Papua-New Guinea, by David A. Evans and Elizabeth B. Byron. Telecommunications, Economics and Policy in the Developing World - by Robert J. Saunders, Jeremy J. Warford and Michael Tyler (Consultant). The following comments apply to each one of the works analyzed: 1. Access to Calls The research work Access to Calls, although addressing the specific problem of telecommunication in Papua-New Guinea, represents a very interesting and useful contribution to the understanding of telecommunication problems in general and in developing countries, in particular. It is my belief that it is a useful contribution for overcoming the existing gap in the understanding of benefits and constraints associated with .he supplying of telecommunication services to developing countries. The lack of a convenient or even reliable Eata base represented an obstacle to the conduct of the research work. but the discussion of the different themes involved in the research is certainly a major contribution to general 'nowledge of telecommunication problems. The methodologies and approaches adopted seem to be original and adequate for the stated purpose, but it must be pointed out that in applying such method- Ologies and approaches to policy orientation in other developing countries, care should be exercised in properly assessing real prevailing conditions especially under conditions of repressed demand that might invalidate efforts to provide services to low income classes before meeting the more important requirements of business and government. The access framework derived in tha study is an interesting concept but is mainly concerned with individual use of telephones and it is very important to stress that the most general and basic problem in deAreloping nations is not that of individual use of telephones, but rather the more important need of providing such services, with adequate quality, for business and government purposes, which are at the very basis of the economic activity in the country. The operational relevance of the research work is in the fact that it discusses some methodologies and proposes some strategies which are appropriate, in general terms, for the establishment of investment policies for telecommunication Sectors in developing countries. ANNEX 6 Page 2 of 5 lcoAcations: Ecorcmics and Policy in the Deveiopir 7 The work "Telecommunications: Economic Policy in the Developing World" is very definitely an important contribution to the understanding of the influence of telecommunication in the development process, and the role telecommunication can play in developing countries. The work reveals a very intimate knowledge of the prevailing situation of telecommunication services in developing countries, identifies problems and suggests strategies which seem to me very appropriate. The fundamental discussion on benefits of telecommunication programs is quite extensive and illustrative. It must be pointed out that, due to peculiar characteristics of telecommunication systems and the special situation in developing countries (excess demand, poor service quality), the models discussed to assess such benefits, as recognized by the authors, are unable to appropriately meet their objectives. As a matter of fact, telecommunication services benefits are quite difficult to quantify due to their characteristics of being essentially a means for transmission of information--the value of telecommunication services is then closely correlated to the role information can play in the developmen: process. .Telecommunication benefits are then predominantly indirect rather than direct. I think an analogy can be drawn between the telecommunication systea of a country and the nervous system in the human body. While, for instance, the circulatory system in human bodies brinzs direct benefits transporting necessary nutrients to cells, a benefit that can be quantitatively measured, the nervous system transports the necessary signals (information) that will cause the raising of an arm, the movement of a leg, allowing the individual to move, to perform an activity. It is clear that in this case there is not a measurable direct benefit to the human body as in the previous case, but an indirect one concerned with the activity whose performance was ordered through the nervous system. I think telecommunication plays quite a similar role in the develop- ment process: the efficiency of productive activities is significantly increased through use of telecommunication, and this then generates benefits to society in terms, for instance, of lower cost of products. Such increases in efficiency make telecommunication services an important instrument to fight inflation, nowadays a worldwide problem, especially in developing countries. ANNEX 6 Page 3 of 5 Although they explore the possibility of applying marginal cost pricing to developing countries, they recognize the deviations from the ideal .odel are so great that such a method would basically serve to esta-lish a :inimum service price level. The use of pricing policy to reduce excess demand, to increase system ,se efficiency and to generate resources for system expansion is qui:e realistically proposed by the authors. The work proposes strategies, especially in connection with pricing and investment, which can be considered of general interest and application for developing nations. Experimental research works to develop new evidence and check theories and strategies proposed in the specific environment of developing countries :ould be an important additional contribution to the excellent work oresented by the authors. i my opinion this book should be published and disseminated among r specialists as well as among Posts and Telecommunications entities, especially those of developing countries. Suggestions on Policies The analysis of the research works just listed and my personal experience on developing countries telecommunication problems show that a very ::portnnt set of dr?ctions and policies have to be adopted if telecommunication oli ue: is co tE achieved in such countries. A telecommunication expansion program in a developing country will be of very little use if not integrated to a set of measures designed to overcome the most important deficiencies on the institutional, managerial and operational levels, which are some of the basic difficulties of developing countries in the telecommunication field. It is very important though that public sector agencies, when financing telecommunication programs in developing nations, give special attention to such Subjects--a careful appraisal of prevailing conditions in such fields, at least, should be made. Precise definitions on which authorities regulate, supervise and operate telecommunication services are very important to the success of tele- COMnunication expansion programs. The whole organization for providing telecommunication services in eveloping countries should be carefully studied as part of any telecommunication ePansion program to be financed and appropriate measures adopted. Unification of 'telephone companies into a single entity or their aubordination to a single coordinating, supervising and planning authority is ety important. It is also very important that the power to establish tariff be Ccentrated in one single federal government entity. - 44 ANNEX 6 Page 4 of 5 Investment priorities should take into consideration the fact that the part of the society where economic activity is concentrated represents the bulk of unsatisfied demand in developing countries and should be considered as the first investment priority. Provision of good telecommunicaticn service to this part of the society will meet the needs of economic activities and will provide fast generation of revenues to be reinvested, allowing faster expansion of the whole system. Appropriatn priorities to different types of service should also be adopted in such a way as to concentrate investments into more profitable services. In this respect, investment in tha following order should be adopted: international services, long distance services among large cities, urban services of large cities, long distance for smaller cities and urban services of smaller cities. It is clear that rural areas as well as less developed urban areas should not be left entirely deprived of such services and resources should be derived to meet their most essential needs. An appropriate policy for public sector international financing agencies operations in developing countries, as I have mentioned before in this report, would be: (i) finance long term (10 years for instance) system expansion plans; and (ii) social investment content of the expansion plan (rural and other) would be small in the beginning, increasing progressively as basic telecommunication needs are met and the rate of return on capital increases. Pricing, as also mentioned before, should be used as an instrument to reduce excess demand, increase system use efficiency and generate high revenues. Adoption of market clearing prices as proposed by the authors is an appropriate policy that will lead to the abovementioned objectives. The charging of inscription fees, exchangeable for bonus or shares, is another very important policy that should be adopted in developing countries to reach the same objectives. Appropriate pricing policy, associated with an adequate level of inscription fees, will limit demand to those mostly ,*n need for telecommunications services (normally business and government), will produce more efficient use of the existing system (especially when time metering and time/distance metering pricing system are respectively adopted for urban and long distance calls) and will increase system revenue, allowing its faster expansion. The adoption of such policy will also increase the demand for residential telephones. - 45 - ANNEX 6 Page 5 of 5 As a consequence, the implementation of increased public call office (PCO) programs should be adopted to compensate for the decreased number of residential telephones. Support to local industry should also be a very important objective f public sector financing agencies. Priority should be given to the use of locally produced equipment in Celecomnunications programs as a means of consolidating industrial activity in the country, thus contributing to its socio-economic development. 5ugestions on New Research The effective role telecommunication plays in the development process and the establishment of methodologies to measure its benefit to socio-economic development are fields of research to be further explored. The two works anlayzed in this report are valid efforts in this direction. More research effort should be addressed to derive experimental evidence that could enrich the conclusions of both works and confirm the validity of policies and strategies suggested or help in the establishment of other policies or strategies. Research work could be addressed to the telecommunication-transportation trade off and to telecommunication as a production factor rather than a consumer's good. Telecommunication as a substitute for capital and labor and telecommunica- tion as an input to other productive activities would fall in this latter category. Research on institutional subjects concerned with telecommunication in developing countries would be a very important contribution to the improvement of such services in those countries. A very important contribution telecommunication systems can bring to social objectives in developing countries is its use for transportation of radio and TV signals to be broadcast in different regions of the country. I think this would be an important subject of research.