Infrastructure Privatization and Regulation: Promises and Perils

Abstract

aspect of a utility-facilities, operations, and administration-and determined which services to provide to essentially captive customers. The past decade has seen a dramatic change in views about how network utilities should be owned, organized, and regulated (Newbery 2000a). The new model calls for increased reliance on private infrastructure to improve efficiency, promote innovation, and enhance services. But after a series of financial crises, corporate scandals, and stock market collapses; the California electricity crisis; and blackouts around the world, clear guidance is needed on what to do about infrastructure-as well as reassurance about (or qualifications of) earlier, more confident messages. What are the promises and perils of the new model? What principles should guide future efforts to restructure, regulate, and expand infrastructure? State-Owned Monopolies Often Exhibited Poor Performance... The performance of state-owned infrastructure monopolies varied considerably. In many developing and transition economies, these monopolies suffered from low labor productivity, deteriorating fixed facilities and equipment, poor service quality, chronic revenue shortages and inadequate investment, and serious problems of theft and nonpayment. Public utilities pursued multiple poorly defined and conflicting objectives, and their managers were often appointed on the basis of political loyalty, not competence. Large portions of the population lacked services in developing areas-though not in transition economies, many of which achieved fairly high service coverage. Prices varied considerably across sectors. They were typically high in telecommunications, whereas underpricing was common in electricity and certain segments of transportation and was especially serious in water. Infrastructure performance was generally much better in advanced industrial countries. Still, in the electricity sector, high construction costs (caused by delays and changing environmental and safety requirements) and expensive, politically driven programs led to problems. In telecommunications, state-owned entities were forced to adopt inefficient pricing structures and were used to generate revenue for the government and support excessive employment-delaying investment and modernization and undermining efficient operations and universal service. In almost all countries railroads failed to earn adequate revenue, had difficulties adjusting to changes in markets, experienced declining market shares for passenger and freight traffic, and exhibited poor productivity relative to technological opportunities. In developing and transition economies, a main cause of deteriorating infrastructure performance was underinvestment, due largely to the failure of governments to prescribe cost-reflective tariffs, especially during periods of high inflation. Under state ownership prices fell to levels that could not cover the investment needed to meet growing demand. This problem was deferred as long as governments were able

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