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Private Utility Supply in a Hostile Environment

Thursday March 22, 2007, at 15:30
Sala Seminario - Planta Baja IBEI
Luigi Manzetti (Southern Methodist University)

Privatization of public utilities has gone a long way over the past fifteen years. The countries of Latin America have played a pioneering role in this regard. However, the viability of private utility ownership is threatened by serious prob-lems of theft and nonpayment, as well as politi-cal opportunism, as regulators and governments face intense pressure to hold utility rates down. Sustaining privatization over time has proven to be a challenge extending well beyond the trans-fer of ownership from the public to private sec-tor.

The theoretically attractive models of private ownership and independent regulation, follow-ing the experiences of developed countries and especially that of the United States, have not proven to be robust when applied to emerging markets. In theory, the profit motive would lead privately-owned utilities to crack down on theft and to improve collection; in turn, improved per-formance and the efficiency gains brought about by private ownership and regulatory incentives were to reduce utility costs sufficiently to allow the gradual reduction of rates (other things, such as fuel prices, being equal). Furthermore, fiscal constraints were supposed to limit the amount of subsidies that governments in the region could provide for utility service, leaving no alternative to increasing collection levels as well as rates when costs went up. All of this would make it easier for private utilities to obtain adequate re-sources to finance not only their current opera-tions but network maintenance and expansion too. The reality, however, is that this virtuous circle has often stalled. Weak political and legal checks and balances provide fertile ground for the executive branch to act unilaterally and change utility rates to maximize electoral goals. If we want to correctly address the problems plaguing utility regulation in Latin America today, we should try to under-stand why politicians change existing utility rate agreements for political goals, and why people consider water and electricity as an entitlement and refuse to pay market prices for them. By the same token, understanding these problems will be fruitless if we cannot come up with possible solutions by identifying the factors behind suc-cessful experiences. Indeed, this second aspect is crucial for the sustainability of infrastructure sectors and reforms in the region.