When the Argentine government announced plans to sell the national telephone company to private investors early this decade, Néstor Vázquez, a 30-year-old Buenos Aires psychologist, had a few concerns.
"I wanted to know who would make sure that the waiting period for getting a new phone line would be shorter under the new owners," recalls Vázquez. He also wondered if the private owners would be allowed to raise long-distance rates at will, and, in essence, whether the old "public monopoly" would simply be replaced by a "private monopoly."
Such concerns are typical among citizens who have witnessed the massive transfer of industries from public to private hands that has occurred in many Latin American and Caribbean countries in recent years. Whether the privatizations affect telephones or services such as electricity, gas, transportation, water or pension funds, the question is usually the same: who will ensure that the new owners won't take advantage of consumers?
These fears are not entirely unfounded. After all, it was in order to protect consumers that most countries nationalized industries in the first place. Equitable access to services and consumer protection were once invoked as the justification for state control over almost every aspect of the typical Latin American economy: from the price of bread and gas to the interest rate on savings accounts and the size of a pension check.
But consumers aren't the only group wondering who will stand up for their interests when governments hand control of a service to the private sector. Private companies themselves, particularly those assuming the financial risk of running such a service, have a keen interest in knowing who will insure that they are able to do business and recoup their investment without excessive government intervention.
NEW RULES, NEW ENFORCERS
Increasingly, both companies and consumers in Latin America are getting answers to these questions from independent regulators. These public servants have the crucial task of interpreting and enforcing laws that govern a particular area of activity in a market economy. Like referees at a soccer match, regulators are supposed to monitor business activity and ensure that players abide by the rules of the game. In doing so, they must balance the frequently conflicting interests of companies, consumers and the government itself.
In state-dominated economies, independent regulators tend to be rare or irrelevant. The state sets prices and quality standards for goods and services that it also produces and distributes; there is little competition, and hence little need for "referees." The economic rules of the game are usually set by government appointees, and rules tend to change frequently to suit the needs of the current administration. Key regulatory decisions take place behind closed doors, with companies and consumers having relatively small input into the process.
The legacy of this approach, in many countries, has been a tangle of inconsistent or even contradictory rules that can be interpreted in widely divergent ways. This regulatory uncertainty has had a devastating effect on long-term investment by the private sector, because companies know that sudden rule changes down the road can ruin years of effort and expenditure. "When prices and fees for public services are set by the state, it is practically impossible to attract private investment," says Claude Besse, general superintendent of Bolivia's General System for Sectoral Regulation. "We think one of the fundamental factors in Bolivia's success in attracting capital investment in recent years was the creation of a clear, precise and consistent regulatory framework that is not susceptible to political meddling."
Claudia Piras, an idb economist who is studying regulation in the region, agrees. "Credible regulation is a crucial condition for companies that are thinking of investing in sectors where there are large initial ‘sunk costs' that are recovered over many years," she says. "These companies need an assurance that the government will not arbitrarily renegotiate contracts or decree rate cuts after the investments are made."
CALMING INVESTORS
To gain credibility with companies and attract investors, governments across the region have been simplifying and modernizing laws and regulations that affect specific business and service sectors. As they put state enterprises on the auction block, most countries have also been creating new regulatory entities and giving them unprecedented authority to regulate the industry after it is privatized. Before Bolivia auctioned its electricity system, for example, it established a legal and regulatory framework for competition and named an independent "sectoral regulator" to oversee and enforce the framework.
While privatized utilities are among the most visible targets of autonomous oversight, regulators are also taking center stage in numerous other areas where the Latin American governments are transferring control to private companies. Hoping to prevent the bank failures and financial crises that have plagued the region in years past, many Latin governments are strengthening regulators of the banking, securities and insurance industries. These regulators, often known as supervisors, enforce laws designed to prevent everything from politically motivated lending by banks to fraudulent use of investors' money by stock brokers (see "Shareholder rights," in the December 1997 issue of IDBAmerica). Countries that have fully or partially privatized their social security systems have also created regulators to make sure that private fund managers don't take inappropriate risks with money that will pay for future retirements, among other things.
In a few countries, even environmental protection has been strengthened through independent regulators. In Chile, for example, companies must submit environmental impact studies on proposed construction projects to the National Environmental Commission (known as conama), which has the authority to reject studies and plans that it considers deficient. In the past two years unfavorable rulings by conama have temporarily halted several mayor industrial projects, proving that environmental laws cannot be circumvented--even by the country's most powerful companies.
WHAT ABOUT CONSUMERS?
But the regulators who best illustrate the new importance of independent oversight in Latin America are those who monitor competition itself. Although laws throughout the region have long included statutes designed to encourage free competition and prevent monopolies, such regulations had limited relevance in state-dominated economies. Now, "competition policy" is suddenly a hot topic.
Consider the example of flour producers in Peru. Since the price of flour had traditionally been set by the government, few knew whether flour mills were actually competing with one another. But in 1996, following a sudden increase in the price of bread, officials at Peru's competition regulator, known as Indecopi, became suspicious. Investigations revealed that 10 different flour mills had colluded in raising the price of flour, which was forbidden by Peruvian law. The companies were fined --a first in Peruvian history-- and Peruvian consumers were guaranteed the right to choose among baked goods with a variety of prices.
This role as mediator between companies and consumers practically guarantees that regulators will be controversial. A decision allowing for a slight increase in telephone rates, for example, will usually be criticized by telecommunications companies as being insufficient to allow for profits and expansion. But consumer groups will almost certainly denounce the same decision as an assault on the pocket-books of the working class. Even the government might protest the decision--particularly if the rate increase occurs in the months leading up to an election.
And yet the inherently contentious nature of independent regulation is precisely what makes it a necessary fixture in democratic societies. In the cycle of complaints, investigations, rulings, appeals and public protests that accompany a major regulatory decision, interest groups are forced to openly argue the virtues of their position--and support them against opposing arguments. "This process is much more transparent than in the past," says William Savedoff, an IDB economist who is studying regulation of water services in the region. "Before, no one knew who exactly was running the water or gas service or how prices were being set. So there was very little accountability and the most powerful interest groups could manipulate decisions to their benefit."
By contrast, an effective regulatory process exposes the agendas of every player in a decision--be it companies, consumers or the government--making it much harder for one group to impose its wishes on another. Because of this, effective regulators can go a long way toward ensuring that free markets operate fairly and don't disproportionally benefit businesses and wealthy elites. This is a crucial point in societies that are still adjusting to increased competition and where the social benefits of privatization policies are not immediately apparent.
According to Beatriz Boza, an attorney who is president of Peru's Indecopi, "effective regulatory activity gives citizens confidence in the market economy, because they can see that when consumers are cheated, we are capable of imposing sanctions that ultimately give them more options and better prices than had in the past."