ABSTRACT
Lobina 2005), healthcare (Leonard 2002; EHMA 2000; Kumaranayake 1998) and education (Teixeira and Amral 2001; Riddell 1993). In many cases, they have also led to large price increases. What can explain this divergence between the expected results from reforms and the actual results? How did infrastructure markets fail in industrialised as well as in developing countries? What lessons can be learned from this experience? Most importantly, what are the policy responses and innovations that developing countries are constructing to deal with their infrastructure needs? After over two decades of experience with privatisation and deregulation, most scholars accept that where privatisation and deregulation failed it was because of inadequate regulatory capacities and frameworks and bad market designs. For example, market imperfections are pervasive in infrastructure sectors and inadequate regulation can spark a struggle for the rents created by informational asymmetries, which regulatory institutions may find difficult to control. Another difficulty is that privatisation and deregulation involve tradeoffs among competing policy objectives. Mediating and appropriately balancing among these competing objectives also requires institutional capabilities and skills. It is correct but, of course, not enough to conclude only that privatisation and deregulation require better institutional capacities and parallel efforts to increase competition and improve regulation. The difficulties related to creating appropriate and adequate regulatory frameworks are not insubstantial. Moreover, forcing institutional reforms and capacity building to fit into the requirements of a particular pre-defined reform programme is clearly unadvisable because the pre-requisites for such institutional capacity building are often not present in developing countries. Yet, certain dominant models of liberalisation are pervasive for reasons of legitimacy and signalling, and despite their unsuitability for developing countries, attempts are made to tailor regulatory institutions to their requirements. How can these problems be overcome? Theoretical enquiry and modelling provide a good beginning but are of limited utility in predicting appropriate structures and trade-offs because their predictions are probabilistic as well as case-specific. As models alone will be unlikely to provide complete answers under such conditions of uncertainty (Laffont and Tirole 1993), they must be complemented by a body of empirical cases where intuitive inductive reasoning is employed to contrast actual causal-chains against ideal ones and thereby identify the points at and means by which the virtuous causal-chain predicted by privatisation and deregulation proposals are circumvented. Such empirical cases are basically in-depth analyses of policy experiments, and learning from them has been recognised as critical to successfully implementing development policies and projects under conditions of complexity and uncertainty (Rondinelli 1993). Policymaking, therefore, is to be based on a tripod of analyses including historical experience, theory and case studies (Laffont 2005). This chapter presents one such policy experiment as both an analytic and illustrative tool: the case of the Brazilian electric power reforms. Between the mid-1950s and the mid-1980s, Brazil had built one of the world’s largest and
most sophisticated hydroelectric industries based on centralised planning and public investment. This model obsolesced in the 1980s because of a combination of external economic threats and internal economic mismanagement, after which the government embarked on an orthodox reform programme. This programme delivered some quick and positive results but eventually culminated in massive power rationing. After the disappointment with orthodox reforms, Brazilian power planners have sought to revitalise the industry through an interesting institutional mix of centralised planning and competition, which provides several insights on how to avoid the excesses of privatisation and liberalisation in infrastructure industries and to re-integrate state functions in their planning and operation. The rest of the chapter is organised as follows. The following section analyses the causes and consequences of the rise and fall of public sector dominance in the Brazilian electric power industry, highlighting where, how and why its development differed from that predicted by the theories which underpin privatisation and deregulation. Section 3 explains why Brazilian power reforms were unable to provide sufficient investment at acceptable costs. Section 4 focuses on the policy imperatives of the Brazilian government following the failure of its power sector reform strategies and the steps it has taken to re-stabilise the sector, to re-integrate planning tenets to reduce probabilities of catastrophic failure and to increase the effectiveness of reform. Section 5 concludes.
