Viewpoint Note No. 214 July MTX Promoting Private Investment in Rural

Alejandro Reform of the energy sector and reform of subsidies ideally go hand in hand. Structural, ownership, Jfdrlesic and regulatory reforms aimed at making services more efficient should lead to a rethinking of both the delivery mechanism and the level of subsidy. Chile, one of the earliest and most thorough energy reformers, has also been one of the more innovative in restructuring its subsidy schemes. It has seen electrification as a key measure in alleviating poverty in rural areas-in 1992 about 47 percent of its rural population had no access to electricity. Its rural electrification program includes subsidies designed to be consistent with the broad principles of energy reform-decentralization of decisions to the regional and community level, competition (between technologies as well as suppliers), and a requirement that all partners in the process-users and private companies as well as the state-contribute to the financing of expansion projects. The short-term result: an increase in rural electrification of about 50 percent in the first five years of the program. In the 1980s Chile liberalized its markets. priva- or cross-subsidies from tariffs set ahove cost in lized state-owned electricity companies, and urban areas. Lack of funding and pressure from allowed the private sector the key role in invest- other priorities made electrification slow. ment. Before selling the electricity companies, th