Using covenants in loan agreements to promote tariff reform

Abstract

This paper evaluates efforts made by development banks to promote tariff reform using covenants in infrastructure loan agreements. These covenants are evaluated within the broader context of tariff regulation in the water supply and sanitation sector. The paper outlines prerequisites for effective tariff regulation and reviews the experience with tariff regulation in developing countries and the current thinking regarding regulatory reform. Efforts by development banks to promote tariff regulation using loan covenants are often misdirected in light of the complexity of tariff regulation and the regulatory reform process.