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.