Institutions and regulatory commitment in utilities privatization

While many countries have been able to privatize both small and large industrial enterprises, only Argentina, Chile, Jamaica, and Mexico have succeeded in privatizing utilities such as telecommunication networks. Only Chile and to some extent Argentina have demonstrated success in privatizing the electricity sector. This paper provides a framework through which to view different privatization experiences within each country and within each sector. It then uses the framework to provide an assessment of the performance of three utilities" privatization attempts in developing countries. The main insight gained through the framework is that the successful privatization of utilities requires the prior development of safeguarding institutions. This is generally required because the nature of the utilities sectors" assets (highly specific to the sector) and demand (mostly for widespread domestic consumption) increases the probability of administrative expropriation or even outright expropriation by the government of the firm"s specific assets. Such institutional development, however, is unnecessary in most other sectors 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 they 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. Rather, few countries have had the political and economic capacity to develop institutions that are capable of safeguarding private investment in utility sectors. Unless institutional change takes place privatization of utilities may either not take place at all or if achieved would possibly fail to generate the social benefits. As a result, failed attempts at privatization would possibly result in a government takeover. (Author abstract, modified)