The structure of this paper is as follows. Section 2 describes the infrastructure developmental goals and the extent to which they can be assessed and measured. Section 3 considers corporatization as one of the options to increase SOE performance and separate the efficiency and equity objectives. Section 4 introduces the governance arrangements and the institutions that represent the ownership function with a focus on the experience of OECD countries. Section 5 develops a simple theoretical framework, whereas section 6 reviews which external governance models have been more dominant in practice, highlighting their advantages and disadvantages. Section 7 considers internal mechanisms to incentivize management. Section 8 concludes.

# **2. SOE reforms and performance assessment**

The concern about SOE performance is not new. As part of a first wave of reforms during the 1970s and 1980s, policymakers, donors and international financial institutions (IFIs) made a major effort to improve SOE performance while maintaining public ownership. This effort, however, generally failed.

This failure led to a second round of reforms, through the sale, licensing or concession of enterprises to private investors. The key belief, reinforced by the then prevailing economic theory, was that private ownership (under complete information) can achieve the socially most desirable ( _first best)_ results, as long as the government can bind private firms competing for the contract and regulate them with appropriately designed contracts. Despite the fact that this second round of reforms was more successful than the first one, at least from an economic efficiency perspective, it was limited in geographic and sectoral coverage (as discussed above). It generated a sense of distrust in the private sector, as confirmed for instance by the results of opinion polls run in many countries, such as the Latin American Barometer.<sup>**4**</sup> We are now getting into the third wave of reforms, and the focus seems to be shifting back to the improvement of SOEs while maintaining public ownership. The key idea is that in the presence of _market failures_ , the public and not the private sector can get closest to the achievement of social and developmental objectives, in terms of _productive_ , _allocative_ and _distributional_ efficiency. Unregulated or misregulated private ownership can bring about different forms of performance failures in both developed and developing economies in infrastructure and network industries. This is because they are characterized by several idiosyncrasies, including: _i)_ sunk investment cost and capacity which might lead to monopolistic elements; _ii)_ production of intermediate goods characterized by public g oods features; and _iii_ ) additional external benefits and costs, such as environmental impacts.

At this conjuncture, the main dilemma is that ‐‐ as experience has proven ‐‐ it is not only the market that can fail. The existence of a number of _governmental and regulatory failures_ , due to informational asymmetries, high transaction costs and collusion and/or regulatory captures is well documented.

How do we get out of this dilemma? One way is to revisit the progress in theory. We now know better how to analyze the issues related to the presence of information asymmetries in SOEs as well as in private operations of the infrastructure sector. To improve our understanding of these issues and draw new insights and lessons on the design of infrastructure SOE reforms, a good starting point is to explore the main incentive problems and constraints underlying the design of

> 4  See Nellis (2006).

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