Institutions and Regulatory Commitment in Utilities Privatization

Privatization has become a crucial component of the reform process, not only in Eastern Europe where the economic system is being dramatically changed, but also in many developing countries. While many countries have been able to privatize both small and large industrial enterprises, fewer have been able to privatize utilities , like telecommunication networks (e.g., Argentina, Chile, Jamaica and Mexico), and only Chile, and to some extent Argentina, can show success in privatizing the electricity sector. In this paper we provide a framework to understand the differential privatization experiences across both countries and sectors and use our framework to provide an assessment of the performance of three utilities' privatization attempts in developing countries. The main insight of our framework is that the reason we observe so few successful utilities' privatization is that the successful privatization of utilities requires the prior development of safeguarding institutions. Safeguarding institutions would generally be required because the nature of the utilities sectors' assets (highly specific to the sector) and demand (mostly for widespread domestic consumption), increase the probability of administrative -or even outrightexpropriation by the government of the firm's specific assets. Such institutional development, however, is unnecessary for most other sectors in .the economy, as the nature of their technologies is such that their assets are of a more general purpose, and/or they operate in either export markets or have a more narrow domestic exposure. Thus, it is not that the privatization of utilities necessarily requires large capital investment, nor that foreign investors do not want to invest in highly indebted countries, nor that there is no room for competition in these sectors, but, rather, that few countries have had the political and economic conditions to successfully change their institutions so as to develop the required safeguards for private investment in those sectors to take place. Thus, unless such institutional change takes place, privatization of utilities may either not take place at all, or would they take place, they may fail to generate the potential social benefits expected from privatization, triggering a political backlash against the privatization, with the possibility of a government takeover down the road.