traditional provision, PPP, regulated privatization, and liberalization (i.e., deregulated privatization) as possible organizational forms (Table 7). It is assumed that private firms build, operate, and maintain the infrastructure under all forms. Hence, the benefits of each organizational form stem from the incentive structure and not from the degree of private participation.

**The three main features that define each organizational form are** : _(i) bundling of finance, construction, operation, and maintenance; (ii) ownership (such as type and duration); and (iii) whether prices are regulated or determined by the market_ . In many infrastructure projects, operation and maintenance costs depend on investments made during construction. Thus, a firm delivering finance, construction, operation, and maintenance internalizes the long-term nature of an infrastructure project, which gives the firm the incentive to invest in life-cycle cost reductions. Ownership rights grant the firm, either permanent or temporary, control and autonomy in managing assets and the right to retain the gains stemming from its decisions. Thus, a firm holding ownership rights on a project has strong incentives to make innovative and cost reducing investments. The longer the tenure of ownership rights, the stronger the incentive to make optimal cost cutting investments. For example, when ownership is temporary the firm does not care about the assets the day after its rights expire; hence, it might invest in low cost assets that deteriorate fast. Some cost cutting investments might have unwanted effects – such as lowering service quality, which reduces consumer welfare. Hence, there is a trade-off between productive efficiency and quality considerations.

**Table 7:** **_Possible Organizational Forms_**

|||**Characteristics**<br>||
|---|---|---|---|
||Bundling|Ownership|Regulated prices|
|**Traditional**|no|public|yes|
|**PPP**|yes|private, temporary|yes/no|
|**Regulated privatization**|yes|private, permanent|yes|
|**Liberalization**|yes|private, permanent|no|

_Source:_ Engel et al. (2009) and authors _Note:_ For Engel et al. (2009) regulated prices is a characteristic of PPPs, however, we believe that is not the case.

# 7.1.1 Benchmark

**Depending on the features of each infrastructure service, one of the four organizational forms brings the highest social welfare.** Applying the framework developed by Engel et al. (2009), we select the optimal organizational form for different infrastructure services (see Table 8). This framework is based on the idea of a benevolent and efficient government that does not suffer any of the normal failures of real governments and aims to maximize social welfare.

**_When market liberalization is optimal._** Power generation is an example of an infrastructure service that is produced under constant or decreasing returns to scale, and for which user fees can be charged. In cases like this, the optimal organizational form is market liberalization (that is, privatization plus price deregulation). Competition together with private ownership induces firms to select optimal life-cycle cost saving investments and provide the optimal service quality, thereby solving the trade-off between productive efficiency and quality considerations.

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