Privatization and regulation of transport infrastructure in the 1990s - successes...and bugs to fix for the next millennium

Governments should increasingly be able to rely on the private sector for help supporting (and financing) the transport sector - especially infrastructure support services for which there is heavy demand - but first they must improve their regulatory tools and sort out the institutional mess surrounding the regulatory process. Some countries have put together creative restructuring models and financing designs that tap potential in the private sector. Roads will continue to need significant public funding, but there are innovative ways (including shadow tools) to attract private financing for road maintenance and investment. Partnerships between public and private sectors have remained largely untapped at ports and airports. To attract more private capital to the sector, regulators must know the cost of capital, know how to be fair to captive shippers, and have a better handle on demand - so they have more credibility when conflicts arise. Governments have overemphasized making deals and have generally underestimated the difficulty of taking on their new job as regulators. They are increasingly switching to contract-based regulation, to firm up the commitments of all parties involved, but are not adequately emphasizing contract design that anticipates problems and addresses unpredictable situations. This increases the risk of arbitrary regulatory rulings, which increases regulatory and political risks, which raises the expected rate of return required by potential investors. And all that makes future projects costlier or more difficult, adding to the effects of the 1998-99 financial crisis. As a result of increased risk, the two groups most interested in the sector are: 1) Large, strong operators in the sector - typically in tandem with local construction companies - that feel confident they can take on regulators in case of conflict. 2) Risk-takers carving a niche for themselves. Either way, taxpayers and transport users are exposed to government, regulator, or operator failures that result in contract re-negotiations (the norm, rather than the exception, in transport infrastructure projects). Gains from privatization might not reach consumers, simply because governments are ignoring the importance of ensuring fair distribution of long-run gains through the early creation of independent and accountable regulatory institutions that work closely with effective competition agencies.Banks&Banking Reform,Public Sector Economics&Finance,Municipal Financial Management,Decentralization,Environmental Economics&Policies,Banks&Banking Reform,Municipal Financial Management,Environmental Economics&Policies,Public Sector Economics&Finance,Health Economics&Finance

PPI partnerships versus PPI divorces in developing countries (or are we switching from PPPI to PPDI?)

Thirty years ago, in 1974, Chile launched the first large-scale privatization in a developing country. About 15 years later, Argentina provided a new model of global infrastructure management. Since then a variety of public-private partnerships in infrastructure have been adopted throughout the developing and transition world. These experiences add up to a large and heterogeneous enough sample of experiences from which some fairly robust conclusions on who benefited from the reforms and who did not. Because many of these experiences are also turning sour and the"privatization"fad of the 1990s seems to be turning into an"anti-privatization"fad, it seems important to separate facts from emotions. The author argues that the wide differences in interpretations of the facts can be explained by wide differences in the assessment criteria used by analysts, including the definition of the baseline data chosen to assess the incremental effect of reforms. It is also driven by the sectors, the regions, and probably most important, the actors on which the analysis tends to focus. Once all these factors have been considered, a relatively fair and quantitative assessment of the prospects of the public-private relationship in infrastructure is possible.Environmental Economics&Policies,Banks&Banking Reform,Payment Systems&Infrastructure,Decentralization,Public Sector Economics&Finance,Environmental Economics&Policies,Public Sector Economics&Finance,Banks&Banking Reform,National Governance,Municipal Financial Management

Emerging infrastructure policy issues in developing countries - a survey of the recent economic literature

The author reviews the recent economic research on emerging issues for infrastructure policies affecting poor people in developing countries. His main purpose is to identify some of the challenges the international community, and donors in particular, are likely to have to address over the next few years. He addresses six main issues: (1) the necessity of infrastructure in achieving the Millennium Development Goals; (2) the various dimensions of financing challenges for infrastructure; (3) the debate on the relative importance of urban and rural infrastructure needs; (4) the debate on the effectiveness of infrastructure decentralization; (5) what works and what does not when trying to target the needs of the poor, with an emphasis on affordability and regulation challenges; and (6) the importance of governance and corruption in the sector. The author concludes by showing how the challenges identified define a relatively well integrated agenda for both researchers and the international infrastructure community.Health Economics&Finance,Decentralization,Banks&Banking Reform,Public Sector Economics&Finance,Environmental Economics&Policies,Banks&Banking Reform,Health Economics&Finance,Public Sector Economics&Finance,Environmental Economics&Policies,Poverty Assessment

Information, accounting, and the regulation of concessioned infrastructure monopolies

Economists often characterize the regulation of monopolies as a"game"(between the regulator and the service provider) in which the two players do not share the same information. The regulator is assumed to have poorer information than the service provider about the scope of future efficiency gains and the size and timing of future investment plans. Over time, the regulator must increase its information base so that regulatory targets become more realistic - but this is a costly process. The authors examine the ways such information can and should be generated, especially throughthe accounting requirements a regulator can impose on private operators of infrastructure concessions. (They view concessioning and regulation as complementary, not substitute, activities.) Concessionaires should provide regulators with the information they need to: 1) Compare outcomes with expectations. 2) Evaluate the cost of adverse shocks that may warrant relaxed regulations. 3) Evaluate whether lower costs than expected are the result of better performance or diminished output. 4) Properly evaluate the asset base and charge for the consumption of capital. Information that regulators get from private operators of infrastructure monopolies should be used to make both regulators and concessionaires accountable. In Chile, for example, the privatization of monopolies led to significant efficiency gains, but it took a long time for these gains to be passed on to users because neither the firms nor the regulators were held accountable - until Congress expressed reluctance to endorse further privatization because earlier waves of privatization had not benefited consumers. In other words, information should be used to make regulatory decisions more transparent and to reduce the risk of the private providers"capturing"the regulators.Labor Policies,International Terrorism&Counterterrorism,Environmental Economics&Policies,Economic Theory&Research,Decentralization,Financial Intermediation,Environmental Economics&Policies,Economic Theory&Research,International Terrorism&Counterterrorism,Banks&Banking Reform

Current debates on infrastructure policy

This paper provides an overview of the major current debates on infrastructure policy. It reviews the evidence on the macroeconomic significance of the sector in terms of growth and poverty alleviation. It also discusses the major institutional debates, including the relative comparative advantage of the public and the private sector in the various stages of infrastructure service delivery as well as the main options for changes in the role of government (i.e. regulation and decentralization).Transport Economics Policy&Planning,Public Sector Economics&Finance,Debt Markets,Non Bank Financial Institutions,Infrastructure Economics

The Needs of the Poor in Infraestructure Privatization. The Role of Universal Service Obligations. The Case of Argentina

El cambio estructural derivado de la privatización y regulación puede inducir una reconsideración de las regulaciones definidas al momento de iniciar el proceso privatizador. El cambio en la organización vertical del mercado y los tecnológicos, entre otros, cambian las reglas de formación de precios y de asignación de recursos. Las características d ela distribución personal y factorial del ingreso y la estructura social son también datos que influencian el diseño tarifario y la especificación de los planes de inversión necesarios así como la definición de las obligaciones de provisión de carácter social por parte de los prestadores. En general, las obligaciones sociales se refieren a los requerimientos de provisión de un conjunto de servicios bajo ciertos términos y condiciones los cuales en muchos casos en forma de transacciones involuntarias.Privatization; regulatory

Where do we stand on transport infrastructure deregulation and public-private partnership?

The evolution of transport public-private partnerships (PPPs) in developing and developed countries since the early 1990s seems to be following a similar path: private initiatives work for a while but after a shock to the sector takes place the public sector returns as regulator, owner or financier; after a while the public sector runs into problems and eventually finds a hybrid solution to ensure the survival of the sector. This paper reviews the effectiveness of transport infrastructure deregulation from three angles: efficiency, fiscal and users'viewpoint. The paper emphasizes the difficulties and strong political commitments required to make the reforms sustainable and argues that governments willing to make corrections to the reform path are faced with the need to address recurrent and emerging issues in transport systems: tariff structure, quality (timetable, safety, environment), access rules for captive shippers, the trend toward rebundling and decrease in intrasectoral competition, multimodalism and the stimulus through yardstick competition.Decentralization,Banks&Banking Reform,Environmental Economics&Policies,Health Economics&Finance,Municipal Financial Management,Banks&Banking Reform,Health Economics&Finance,Municipal Financial Management,Environmental Economics&Policies,Public Sector Economics&Finance

Pollution control in a decentralized economy : which level of government should subsidize what in Brazil

Subsidies in Brazil essentially serve three purposes: (i) if assigned to the right level of government, they could reinforce the effectiveness of pollution taxes in reducing pollution; (ii) they offer an opportunity foradditional combinations of instruments and hence more flexibility in dealing with specific institutional characteristics of every state; and (iii) they can serve a purely"public relations"affect by showing that the federal government does not always rely on"sticks"but can also provide"carrots."The authors have four main messages of relevance to the Brazilian economy. First, carrots will not work without a stick. Subsidies of any type will not work without a coexisting pollution tax. Second, some carrots are better than others at achieving the government's objectives. In general, a state abatement subsidy is the more effective instrument to combine with a pollution tax. But when federal or state inspection capabilities are limited, monitoring subsidies may be an effective substitute. Third, increasing abatement subsidy rates can be counterproductive - tending to increase firm investment more than necessary and hence reduce the pollution tax base, while increasing subsidy costs. This can worsen the monitoring and inspection efforts and fiscal revenue. Finally, it is more effective to keep subsidy rates low if they are to be effective and sustainable and at the same time get the endorsement needed from state and federal fiscal administrations.Environmental Economics&Policies,Water and Industry,Pollution Management&Control,Public Sector Economics&Finance,Taxation&Subsidies

How widespread were private investment and regulatory reform in infrastructure utilities during the 1990s?

This note provides a snapshot as of 2004 of the share of countries with an independent regulatory agency and with at least some private sector financing of its sectoral investment needs for electricity, water and sanitation, and telecommunications. Among other things, they show that: For respectively, electricity, water and sanitation, and telecommunications, 51 percent, 21 percent, and 66 percent of the developing countries in the sample have an independent regulator, that is, an agency separate from a ministry and from the operator. For respectively, electricity generation, electricity distribution, water and sanitation, and telecommunications, 47 percent, 36 percent, 35 percent, and 59 percent of the developing countries in the sample have at least some private sector financing. The shares of both agencies and private sector involvement tend to increase with income levels. Latin and Central America and Eastern Europe are outliers among regions as almost systematically they have among the highest shares for both indicators across sectors (except water).Health Economics&Finance,Town Water Supply and Sanitation,Earth Sciences&GIS,Environmental Economics&Policies,ICT Policy and Strategies

Procurement efficiency for infrastructure development and financial needs reassessed

Infrastructure is the engine for economic growth. The international donor community has spent about 70-100 billion U.S. dollars on infrastructure development in developing countries every year. However, it is arguable whether these financial resources are used efficiently, particularly whether the current infrastructure procurement prices are appropriate. Without doubt a key is competition to curb public procurement costs. This paper analyzes procurement data from multi and bilateral official development projects in three infrastructure sectors: roads, electricity, and water and sanitation. The findings show that the competition effect is underutilized. To take full advantage of competition, at least seven bidders are needed in the road and water sectors, while three may be enough in the power sector. The paper also shows that not only competition, but also auction design, especially lot division, is crucial for reducing unit costs of infrastructure. Based on the estimated efficient unit costs, the annual financial needs are estimated at approximately 360 billion U.S. dollars. By promoting competition, the developing world might be able to save at most 8.2 percent of total infrastructure development costs.Transport Economics Policy&Planning,Investment and Investment Climate,E-Business,Debt Markets,Infrastructure Economics