Developing Sustainable Regulatory Institutions in Developing Countries: Some Long Term Considerations for Investors

Abstract:

A discernible, and potentially destabilizing, irony has emerged in the pattern of infrastructure
privatizations and establishment of regulatory regimes in developing countries. Investor and
lender fears of political and regulatory risk may well be leading to risk mitigation strategies that
may, in the medium to long term, exacerbate the very risks to which investors were adverse in
the first place. While there are clearly risks besides political and regulatory matters with which
investors need to concern themselves, it is in seeking to protect themselves against those two
categories of potential problems that investors may do more harm than good to themselves and
the framework within which they operate in the long run.
The context of the irony is two fold, conceptual and historical. The conceptual aspect is the
appropriate equilibrium between investor, consumer, and public interests. The historical aspect
is the spectrum of past events within which the current wave of infrastructure privatizations are
occurring.
[...]
The first, and the most obvious, step to take is to provide a high level of service, a higher level
than had heretofore existed in the predecessor, publicly owned enterprise. One of the arguments
that proponents of privatization almost always make is that private ownership is more efficient
and more responsive to consumers than parastatal companies. It is simply foolhardy to behave in
ways that disprove those arguments. That is particularly the case where privatization has been
accompanied by reductions in staff and/or increases in rates. The private investor is well advised
to view itself as having a fiduciary obligation to increase efficiency. Merely cutting costs may be
good for the bottom line in the short run, but it is a perilous course politically and regulatorily if
it is not part of an overall program to increase efficiency in delivering a higher quality of service
to consumers. It is very difficult, if not impossible, to establish a pricing regime for newly
privatized entities that makes the subtle distinction between incentivising efficiency and
incentivising mere cost cutting. It is incumbent, therefore, on the investor to see the “big picture”
and produce a better product at lower cost rather than simply reducing its own costs regardless of
the consequences. In short, the investor needs to see the overall public interest in high quality service as being its own enlightened self interest.