infrastructure SOE reforms. Although traditional wisdom and practical anecdotes tend to favor privatization over state ownership, economic theory does not seem to provide clear‐cut arguments in favor of private ownership (see Box 1).

# **<mark>Box 1</mark>**

# **<mark>The irrelevance of ownership</mark>**

<mark>Under complete information the early contribution by Barone (1908) proved the equivalence between the two ownership modes. More recently, Sappington and Stiglitz (1987) extended the equivalence result under asymmetric information.</mark><sup>5</sup> <mark>However, the setting and the stringent assumptions under which the result holds, which include the possibility to enforce complete contracts, are hardly met in real world cases. This make the theoretical framework of limited practical relevance in the case of developing countries, where privatization and regulation opportunities are far from meeting these stringent conditions, since contracting opportunities may be severely limited, many events, risks and choices can hardly be</mark> _<mark>ex ante</mark>_ <mark>fully anticipated, so that are not likely to be described and then enforced in contracts. Accordingly, practical approaches should be developed to take into account of informational and incentive issues, especially in the area of implementation. Yet, little work has been done beyond the normative assumptions, neglecting the relevant implementation issues.</mark> _<mark>Source:</mark>_ <mark>Vagliasindi (2007)</mark> In the standard normative assumptions used in the theory of public economics, the public sector has generally been modeled as a single benevolent planner with clear social objectives, a large set of feasible policy options to draw from, and full commitment abilities. In practice, SOEs strategic goals are difficult to define, due to the presence of multiple and sometimes conflicting objectives and multi principals; namely, different control organs within the public sector with different priorities and perceptions of what the strategic goals should be. SOE management finds itself accountable to and monitored by a shifting coalition of interest groups, consisting of politicians, bureaucrats, labor unions, and a plethora of other stakeholders.

Let us first consider the presence of multiple goals. The basic efficiency goals include providing services that consumers value and producing those services efficiently and at an affordable price. Productive and allocative efficiency cannot be reached by relying only on unregulated market forces, apart from very specific market structures (e.g. perfect competition) which are rarely found in the context of infrastructure service provision.<sup>**6**</sup> Namely, in the absence of regulation, a private monopoly would restrict the output (leading to too high prices) and provide a too low level of quality. On the other hand, guaranteeing allocative efficiency (in the theoretical case reaching marginal cost pricing) can require a substantial amount of public funds. This may lead to increasing 5 See the recent survey by Martimort (2006) deriving the conditions under which ownership does not matter under asymmetric information. Hart (2003) provides an excellent application of the theory of incomplete contracts and Martimort and San Zantman (2006) provides some interesting insights on the design of delegated management to public utilities. An earlier survey by Shirley and Walsh (2000) also shed some light on the debate in the theoretical and empirical literature on ownership. See Megginson (2001) for a review of the empirical literature on privatization.

6 See Kirpatrick et al. (2004) for a review of why the water sector is one of the most problematic to be privatized in developing countries.

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