viewpoint, the potential or realized efficiency gains are a good approximation of the extent to which prices could drop in the sector without threatening its financial viability. For passenger services, where tariff continue to be controlled in many countries of the world, they can be used to assess the maximum subsidy the government should be willing to pay.

For developed countries, the decision to deregulate and restructure may have been less of a pragmatic solution to pressing problems and more of an ideological choice supported by the majority of the population through elections. They are nonetheless expected to be important as well, in particular in countries where long traditions of political interference with the management of the sector, including input and output prices, tended to distort investment and production decisions.

Despite its importance for the monitoring of the effectiveness of reforms in their sectors, few regulators in developing as well as in developed countries (with the notable exception of the UK and Australian regulators) have taken on the challenge. There are however a number of studies to draw to get a sense of the potential efficiency gains and of the impact of reforms.

The recent relevant literature is reviewed in Coelli _et al._ (2003) and more detailed surveys on ports and railways, including an evaluation of the literature on European case studies are available from Gonzalez and Trujillo (2003). Overall, efficiency has tended to improve on average according to most studies although the difference across operators continues to be sometimes very significant. Most of this literature is however not centered on the impact of a reform on the efficiency levels. It tends to focus instead on comparative assessments which do not account as well as expected for differences in institutions, ownership, regulatory regimes or overall political and economic conditions. One of the few exceptions is a recent paper (Friebel et.al., 2003) that estimates the effects on efficiency that the European Commission’s Directive<sup>16</sup> imposed on the railways industry. Using a World Bank’s database<sup>17</sup> , this paper argues that reforms -- separation of infrastructure and regulation, third party access and independent regulation -- increased efficiency. However, a striking result is that multiple reforms introduced simultaneously have neutral effects but sequential reforms improve efficiency. For developing countries, the estimation of efficiency and production frontiers is seriously limited by data restrictions. Two exceptions are studies of Latin American reforms. Estache _et al_ . (2002b) shows that the Argentinean and Brazilian railways generated significant efficiency gains. Estache _et al._ (2002a), estimated average annual efficiency gains in the Mexican port sector, since the reforms were implemented, of around 3%. This paper highlights the fact that efficiency estimation is feasible and transport regulators have much to win from it. Especially because it allows the promotion of yardstick competition which is crucial to ensure that whatever short term gains are achieved from reform can be sustained and reinforced over the long run.

In sum, the evidence suggests that the efficiency gains have been significant. Their specific source is however less documented than one would have expected.

# **4.2. Fiscal**

From a fiscal viewpoint, whenever a reform includes a privatization component, in general, the fiscal impact has been positive, simply as a result of payment from the sale in case of divestiture or 16. EC Directive 91/440

> 17. Railway Performance Database, The World Bank Transportation, Water and Urban Development Unit. <u>http://www.worldbank.org/transport/rail/rdb.htm. Countries covered are: Austria, Belgium, Denmark,</u> Finland, France, Germany, Italy, Netherlands, Portugal, Spain, Sweden and the United Kingdom.

15