Regulating Infrastructure Monopoly, Contracts, and Discretion

• Author: Daniel A. Benitez
• Position: Economist, World Bank

Harvard University Press, Cambridge, Massachusetts, 2006, 448 pp., $26.95 (paper).

Network utilities-such as electricity, telephones, transport, and gas-have undergone wide- ranging reforms over the past decade, with many governments restructuring, and sometimes even privatizing, entire infrastructure industries. The reforms have aimed at securing private participation in industries that have traditionally been dominated by the public sector. These changes have been accompanied by the creation of regulatory agencies and supervisory frameworks to manage the provision and quality of services and pricing policies. Sector performance has thus become intrinsically linked to the effectiveness of the regulatory framework and to contract design. Using a combination of theory and practice, José Gómez-Ibáñez evaluates the impact of these changes.

In the first part of the book, the author describes the relationships between the government, regulators, firms, and users and analyzes how these often complex dynamics shape the regulatory frameworks and the behavior of the participants. Using case studies, he assesses the effect of regulatory capture (when state laws give rise to monopolistic behavior), contractual problems, and asset expropriation on prices, quality, and investment. In one example, he recounts how uncertainty over contracts led to a series of renegotiations in the privatization of Argentina's railroad industry, resulting in serious delays-and in some cases even cancellation-of vital investments. He also discusses how the threat of expropriation may deter private sector investment, using examples of both direct and indirect expropriation in Latin America's electricity industry to illustrate this set of problems.

In the second part, Gómez-Ibáñez examines...