# **7. CONCLUSIONS**

This paper contributes to the literature that explores the link between regulatory governance and sector performance. We develop indexes of regulatory governance and using cross country data about regulatory agencies and sector performance, we have shown that regulation matters and in particular that the governance structure of regulatory agencies matters significantly. We use two unique databases: (i) the World Bank’s recently published Electricity Performance Database (World Bank, 2007) that contains detailed data for 26 countries and 250 utilities that represent 88 percent of the electricity connections in the Latin American and Caribbean region. The compiled data on the electricity distribution sector includes information on output, coverage, labor productivity, input, operating performance, service quality, and tariffs; and (ii) we have used also Electricity Regulatory Governance Database (Andres _et al._ (2007b) for the development of the governance indexes. Based on an analytical framework to assess the governance of electricity agencies we designed a survey which was submitted to most of the regulatory agencies of the LAC region. The questionnaire was composed of 97 questions reflecting the four variables of agencies’ governance and both formal and informal aspects of their functioning.

In assessing this relationship, we developed a methodology where we ran different models to explain the impacts of the change in ownership and different characteristics of the regulatory agency on the performance of the utilities. The results suggest that the mere existence of a regulatory agency, independent of the utilities’ ownership has a significant impact on performance. Furthermore, after controlling for the existence of a regulatory agency, the ownership dummies are still significant and with the expected signs. We also proposed an experience measure in order to identify the gradual impact of the regulatory agency on utility performance. Our results confirm this hypothesis. In addition, this paper explores two different measures of governance; we used the ERGI, an aggregated measure of regulatory governance and then we decomposed the regulatory governance indexes into three main principal components related to informal and formal aspects of the agencies’ governance, also considering the regulation of tariffs by agencies as an independent variable of their governance. The results suggest that governance matters and has significant impacts on performance when we simulated a standard deviation in each of these indexes.

In summary, we have shown that regulation matters for sector performance, on three aspects. We have shown that the existence of a regulatory agency matters, that the experience of the regulatory agency matters and that its governance matters as well. The results are consistent with the literature on the impact of private sector participation and show the relevance of the existence of a regulatory agency and its governance, defined as the agency’s institutional design and structure that allows it to carry its functions as an independent regulator. Our results indicate a significant improvement in utility performance through the involvement of a regulatory agency even in the case of state owned enterprises. The results strongly support that the highest achievements are reached with the combination of private sector participation regulated through a regulatory agency that exhibits good governance.

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