Private Enterprise and Financial Markets > Infrastructure and Financial Markets > Infrastructure
Can Reforms be Made Sustainable? Analysis and Design Considerations for the Electricity Sector
By Juan Benavides (04/03, IFM-134, En, Es)
Electricity reforms unfold as a redistribution of property rights under a new set of rules. These rules may or may not be consistent with the cultural beliefs of the country, its human capital endowment to implement and guide the reform process, the backing of the judiciary and other organizations to enforce the regulatory contract, and the active defense of welfare gains by the coalitions of reform supporters. A reform is a deeply political process in real time, with plenty of surprises and prone to mistakes and backlashes, as the ?losers? may be long-lived and will keep continuous pressure to recover the rents or benefits they enjoyed under the previous regime.
This study starts by presenting a collection of archetypical problems that became apparent during the initial period of electricity reforms, stressing the incompleteness of the default approach to reform (change in ownership and incentive regulation). A broader context to examine and design sustainable reforms is needed. The study presents a summary discussion of three new conceptual frameworks that are useful to analyze and design microeconomic reforms: the transaction-cost politics approach, the new institutional economics and the new political economy. The transaction-cost approach puts forward the idea that an instantaneous switch to a first-best world is a chimera. A trade-off between the political feasibility of the reform and the elimination of rents is likely to exist. Multiple interests will put the new order under contradictory pressures, thus reducing the scope of the original goals or altering their intended direction. Regulation encompasses much more than the rules of the game ?which can be skewed, skipped or modified? and the regulatory office itself. The new institutional economics characterizes institutions as crystallized beliefs. It stresses the support of customers and the role of complementary institutions (the judiciary, the antitrust bodies, etc.) as the two ultimate pillars of reform sustainability. Finally, the new political economy stresses the need of permanently assessing the net balance of political support at each instant of time so as to calibrate the depth of reform changes and its sequence.
The report concludes with a list of themes that should be considered when designing electricity reforms. The author explicitly warns about the incompleteness of the proposal. This is an attempt to turn powerful economic ideas that are still in the making, into aids for project design. Further debate, reflection and experimentation should be pursued to further enhance these tools.
This publication can be obtained from:
IFM
Publications
Infrastructure and Financial Markets Division
Mail Stop W-0508
Inter-American
Development Bank
1300 New York Avenue, N.W.
Washington, D.C. 20577
E-mail:
sds/ifm@iadb.org
Fax: (202) 623-2157
Last updated: 01/29/07
