Private provision of infrastructure is becoming the norm in much of the developing world, particularly in Latin America and southeast Asia. Most new facilities -- such as new expressways, sewage treatment plants, or power stations -- are now built by private companies as "build-operate-transfer" (BOT) concessions, usually because governments are unwilling or unable to issue public debt to finance them. Many existing facilities -- such as railroads, water systems, or telephone companies -- are being sold or leased for long terms to private companies in the hopes of improving the efficiency and quality of the services provided and because governments are unwilling to finance needed modernization or expansion.
This wave of privatization is occurring without sufficient attention to the long-term relationship between the private infrastructure providers and the government. Some of the newly privatized facilities enjoy substantial market power or are natural monopolies. Most also provide basic services -- such as electricity, water or public transport -- whose prices and service quality are matters of widespread popular concern. The most common strategy to ensure that the public receives fair prices and reasonable service is to award infrastructure concession of 10 years or more on the basis of competitive bidding. But the rapid changes in developing economies often make these concession contracts obsolete long before they expire, so that the concessionaire, the government, or both soon want to renegotiate or unilaterally break the contract. These renegotiations often damage both public and investor confidence because they are often perceived as less fair or transparent than the original competitive awards.
Indeed, the failure to consider carefully the relationship between the infrastructure providers and the government may ultimately undermine the entire privatization effort. Private provision of infrastructure was common throughout the world in the first decades of the twentieth century, for example, but conflicts between the concessionaires and governments eventually led to nationalization in many countries by the 1950s. The obvious danger is that history could repeat itself.
José A. Gómez-Ibáñez is studying the experience of developing countries in regulating privatized public utilities in the hopes of providing practical guidance on when and how to regulate. As part of this effort, he and several colleagues at the Kennedy School of Government have developed a series of teaching cases that examine some of the key options and problems. These cases are currently being used in a two-week executive program for utility regulators that Gómez-Ibáñez chairs, and he hopes to publish them as a series of articles.