The selection of a service provider to operate under a concession contract is perhaps the decision-making process that is most vulnerable to corruption. The selection will often take place through competitive bidding, while the concession contract will contain many regulatory elements in order to meet various welfare goals. A multiplicity of regulatory goals may open for corrupt or populist political influence, however.<sup>16</sup> Contracts that are supposed to meet multidimensional achievements – on price, various components of quality, reliability, speed, reputation for honesty, financial stability of the contractor and more are difficult to evaluate in terms of performance (Tirole, 1994:15). The more criteria included in decision-making processes, the more opportunity for discretion, and the easier it will be to influence the processes, including through corruption.<sup>17</sup> The nature of corruption will be causally linked in both directions to the process of awarding concessions or licenses, negotiations between governments and firms during that process, and also firms’ influence on regulatory decisions during operation. In particular, information about _ex post_ operational terms will have impacts on _ex ante_ choices in the award of licences, and in terms of incentives and vulnerability to corruption in the two processes are interlinked. The problem of contractual incompleteness in regulatory law has been much debated, by lawyers as well as economists. Disputes and questions without a solution offered by the contracts are and should be subject to renegotiation. On the basis of data from Latin America, however, Guasch, Laffont and Straub (2003) point to significant risk of manipulation of the renegotiation processes in infrastructure concession contracts.

# _iv. At the government level –political economy and rent-seeking literature_

Political risk and lower trust in legal institutions are viewed as common consequences of corruption, and important constraints for firms that wish to invest in and operate a utility. With infrastructure in particular, long-term contracts are considered less secure, and firms bear the risk of facing changes in operational terms once investments are sunk (Svensson, 2003). In turn, informal agreements and corruption may themselves be ways in which firms try to reduce political and institutional risk, and bribery itself may be part of a strategy to reduce the overall impact of corruption on outcomes (Wells and Ahmed, 2007).

Because grand corruption in utilities involves very large transactions and senior government officials, the question of how political decisions are made and how political parties retain power is important to understand corruption in relation to private sector utility provision. Political agency models predict that the accountability to voters is stronger when politicians can be reelected, and honest procedures and welfare-enhancing results are more likely in the first period of a political regime than in the second (Besley, 2006; Drazen, 2005).<sup>18</sup> 16 Consequences of a multiplicity of goals are well described by Tirole (1994), including in the context of regulation of utilities.

17 Simple award criteria and strict focus on industry performance are the often suggested tools for reducing the risk of corruption in face of weak regulatory institutions. In real life the advice is difficult to follow, however. Rather than a strict focus on the quality of services and prices, regulators are often asked to consider 'the best package' for the society at large, and encouraged to make assessments of other factors than prices and service provision, such as employment issues, district politics, environmental concerns, and so on. It is difficult to know what works when it comes to regulatory complexity: Simple regulation is presented as a tool to combat corruption in utilities. Scandinavian countries are characterized by heavy regulation combined with low levels of corruption, however. See Estache, Goicoechea and Trujillo (2006) for results of liberalization reform and impacts on corruption in utilities.

18 On the basis of audit reports in Brazil, Ferraz and Finan (2005) find the incidence of corruption and fraud to be significantly higher municipalities with political leadership in their second term; i.e. when the 14