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# **1. Introduction**

Utility reform has been a common feature of developing countries’ economic adjustment programs since the early 1990s. While the reforms have covered a wide range of policy areas, their most visible dimensions, and certainly the most debated, have been: (i) the increased autonomy of regulators of the sector, (ii) an increased role for the private sector in the delivery of infrastructure services, and (iii) the opening of infrastructure markets to competition. The main motivation for reform was often the need to cut fiscal deficits rather than a concern for performance. However, reformers also promised improved efficiency and social benefits, such as wider access, more affordable services, and better service quality.

A lower level of corruption in the sector was another expected benefit. That expectation was supported by the theoretical modeling of corruption as the “nonbenevolence of government” by authors such as Shapiro and Willig (1990), Shleifer and Vishny (1993), and Boycko, Shleifer, and Vishny (1996). Their intuition was that privatization could reduce the control of government over the rents offered by the direct operation of public services.<sup>2</sup> For utilities, the message from this research was simple. Privatize as soon as possible and increase the independence of regulation of public and private monopolistic operators to increase their transparency. Doing so would increase the political accountability of the regulatory role and thereby reduce corruption.

Now, 15 years after the first large-scale utilities reforms were launched, the pendulum is swinging back. The value of private sector participation and of regulation at arms length no longer appears to be favored by newly elected governments, often with the support of their electorate, in developing countries. Critics of the 1990s reforms currently dominate the media with a plethora of anecdotes pointing to reform failures, including a large number that suggest that corruption remains a problem in the sector.

At this turning point in political support for past reforms, it seems useful to try to get a quantitative sense of what the reforms actually achieved in developing countries. There is little quantitative, cross-country evidence in the literature. Most cross-country studies deal with specific aspects of reform; studies that consider all dimensions of reforms jointly, on the other hand, tend to focus on specific countries. A few crosscountry studies have focused on a single sector—generally telecommunications but occasionally electricity or water.<sup>3</sup> There is also a large literature on the effects of privatization in general, but most studies do not distinguish between regulated and unregulated industries and hence are of little relevance here.<sup>4</sup> Moreover, assessments to date generally have failed to systematically address the relevance of the many dimensions

> 2 These models imply two major assumptions. First, they assume that it is easier for corrupt politicians to control public firms than private firms. Second, they assume that reforms make political interference costlier or at least more visible.

> 3 For a recent review of the impact of reforms, see Kessides (2004).

> 4 See Chong and Lopez-de-Silanes (2004) or Bortolotti and Siniscalco (2004), for instance.