Doing Business Blog - The World Bank Group

Doing Business and the Commodity Boom

Open a newspaper these days and chances are you'll read about the price of one commodity or other just having set a new record. Most analysts will point to growing demand from large emerging markets such as China and India. An aspect less commented on in this commodity crunch is the supply side of the equation.

Trade efficiency may matter, as large commodity exporter rankings on the Doing Business Trading Across Borders indicator suggest. Kazakhstan, a commodity superpower, comes in at 178 out of 178; the Democratic Republic of the Congo lingers at 154; and Brazil, a mining giant, is at 93. Even Australia, a top 10 country in the overall ease of doing business, only manages 34th place when it comes to trade.

Bureaucracy and inadequate transportation infrastructure mean supply may not always be as responsive to increases in demand as it could be. Poor roads, delays at borders and port congestion all constitute serious obstacles to export growth. Add to that the power shortages in countries such as South Africa (see a recent blog post) - through which a sizable part of commodity exports from southern Africa passes - and you could argue we are also going through something of a supply crunch.

Romania: E-Procurement Remedy

Public procurement plays a major role in most economies. In OECD countries, public procurement accounts for 15% of GDP and in the new EU member states like Romania the number is approximately 16%.

Contracts for public works can comprise large, long-term infrastructure contracts, such as building utilities and roads, but also smaller, shorter contracts like supplying public institutions with goods and materials. Given the extent and complexity of public procurement, this activity is particularly vulnerable to abuses.

Special tools such as e-procurement can increase transparency, efficiency and lower costs of government activities, assuming that the necessary legal framework and technology infrastructure are implemented. Taking into account the importance of public procurement, Doing Business is currently developing a new set of indicators to reflect procurement practices in the electricity sector around the world.

What Would You Do With $400 billion?

As with so many things related to China, the numbers are just staggering. The Chinese government intends to invest $400 billion in trade logistics infrastructure by 2010. A sizeable amount of this will be used to improve port infrastructure in cities such as Dalian, Tianjin and Qingdao.

These infrastructure investments are timely and sensible. With the ongoing growth in Chinese trade - exports increased by more than 21% for the first three months of 2008 - port capacity has to keep pace. The Chinese clearly understand that to pursue a strategy of export-led growth, trade logistics have to be in order. In an integrated global economy, supply chains have to be reliable and fast. It is therefore not surprising that all of the so-called Asian tiger economies - which succeeded through export-led growth - score in the top 30 on the Doing Business Trading Across Borders indicator.

Copper, The New Gold

We have been dazzled by gold since the dawn of civilization - partly because it polishes up to a nice shine, partly because it is so rare. Compare that with copper - which has, with much less fanfare, also reached its own record price in the past few weeks, at nearly $4 a pound.

It doesn't sound like a lot, but tell that to the two dozen people that have been killed in America in the past two years while engaged in copper theft - daredevil attempts to strip mobile phone towers and motorway lighting of copper cables. Or the passengers on the hundreds of trains disrupted in Britain every year because of stolen copper cables - described as the most serious threat to their railways apart from terrorism.

Copper crime is not yet the stuff of glamorous heist movies, but it has become widespread worldwide and has become the cause of enormous losses to electric utilities.

Why? The price of copper has quintupled since 1999, reflecting the world's - and in particular China's - need for such a useful metal. Its talent is for conducting things, like heat or electricity, and as a country's living standards improve, its need for copper grows, unlike gold - the demand for yellow baubles goes up only when people feel insecure about the economy or their love life.

Sometimes When the TV Blows....

Electricity is needed everywhere –sometimes giving rise to corruption and inefficiency in the electricity sector. It ranges from petty corruption at the level of meter readers and linemen, to grand larceny by the political executives who award lucrative concessions or require state-owned utilities to sign unfavorable power purchase agreements (PPAs). Utility managers are often in the middle, getting their share from suppliers and contractors.

Doing Business is currently developing a new indicator on the importance of electricity for businesses in countries across the world, and its findings might provide incentives for governments to enact necessary reforms to improve transparency and efficiency in the electricity sector.

Theft of underground electric cables in Zimbabwe took a toll on households in Harare's Kambuzuma suburb, damaging domestic appliances worth billions of dollars. Households lost electrical appliances, including television sets, decoders, radios, stoves and refrigerators after a sudden surge in voltage.

What Eskom Can Learn

South Africa’s power crisis is in the news these days. With demand levels high compared with the supply capacity, and a reserve margin of 4% well below the internationally recommended minimum of 15%, the state-owned utility Eskom has resorted to adopting a rationing policy: Eskom’s customers have to accept that they currently get 10 to 20% less electricity than before the crisis. Hotels, large offices, and commercial customers will carry the biggest burden.

As the power crisis deepens, the country is looking for lessons to learn from other countries that have been in similar situations. Doing Business is currently developing a new indicator on the importance of electricity for businesses in countries across the world. Once the new indicator is out, countries like South Africa will be able to learn from more than 100 other countries’ practices. In the meantime, lessons have to be drawn from selected cases. Let us have a closer look at the short-term strategies that can be adopted.

When Cold Winter and Energy Shortage Meet

Crossing streets in Khudjent, the northern capital of Tajikistan, can be a risky enterprise. One has a dilemma of either freezing in cold that runs down to as low as 20 below zero, or being run down by cars. “This year's cold is unbelievable. One thing is to come from freezing weather outside and warm up inside the house. But when you come home into a yet worse cold, that is devastating,” claims Rahim Aka – a taxi driver.

Unprecedented winter made people start using more electricity thus overloading the old Soviet infrastructure. Politicians decided to introduce a so-called “fan blackout”. “It is bad enough coming home in the evening and having barely an hour to feed oneself before electricity is turned off at 9pm. But also, we have only one hour of power in the morning between 7-8 am, barely enough time to shower and heat a cup of tea,” continues Rahim Aka.

Stealing Electricity - Risky Business in India

In India, as in many other countries, there is a nexus between power company employees and those (often commercial establishments) who would steal electricity (either through tapping of overhead transmission lines, meter tampering or under-billing). In the past, most of these culprits, with or without political and financial clout, used to get away with it. Not so anymore. Stealing power has now become a punishable offense in India, and power utilities are now pulling out all the stops to prosecute the culprits.

Electricity theft has long been rampant in most parts of India (the annual losses due to electricity theft is estimated to be US$ 4.5 billion, about 1.5% of GDP) and the capital city of India, Delhi is not far behind.

Until 2002, Delhi's power supply came from Delhi Vidyut Board (DVB), a state-owned power enterprise, which was known for its less than robust customer service and inefficient staff. This was in addition to transmission and distribution losses of 50% thanks to a large number of un-metered and illegal customers, under-billing and poor collections.

Can Electricity Be Weighed in Gold?

There are very few businesses that do not depend on electricity. Shoe-shiners and rickshaw drivers are such rare exceptions. Pretty much every other business needs electricity. Some businesses, however, need enormous amounts of electricity: aluminum smelters, for example, or mines.   

In South Africa, the gold and platinum mining industry alone accounts for 15% of the national electricity consumption. On January 25th the sector experienced a huge shock when the state-owned electric utility Eskom informed the big mining companies that it could only provide for 50% of the mines’ usual needs for the months to come. The consequence? Mines had to be shut down. You don’t want your miners stuck hundreds of meters deep below the surface and see the light suddenly go off.

Repercussions could also be felt outside the country. South Africa being the largest producer of platinum in the world and the second largest gold producer, prices for those two metals went through the roof at the Bullion Market in London.