they were able to assemble. The approach taken can, however, provide a useful starting point for further work using a better data set, particularly for regulation.

# **5.2.3 Pargal (2003)**

The Pargal paper discusses private investment in five infrastructure industries in nine major Latin American countries between 1980 and 1998. The strength of the Pargal study is that the data available to her are significantly better than for the previous studies in providing numerical indicators of the key variables at issue. In addition, the data allow her to put _dates_ on major changes that enable much more powerful use of panel data estimation. Even so, the variables on regulation and liberalization are still far from ideal and cause problems in interpreting some of the regression results. Nevertheless, this paper provides much the best study as yet for the effect of independent regulation on electricity industry outcomes – at least for Latin America.

The study combines the high quality Calderon-Easterly data set on Latin American infrastructure investment (public and private) with regulatory variables derived from the Guasch data set on Latin American concession contracts. Since the dates of legislation liberalizing the sector and establishing the regulator are known, each sector can be given a dummy of zero for the years before the change and one thereafter rather than a simple time-invariant zero-one dummy. Standard control variables relevant to an investment equation are also included (eg real GDP, lagged capital stock and real interest rates).

Although the data on regulation and other institutional features is far superior to the BHS and ZKP studies, there are still significant problems in establishing a robust estimate of the effects of regulation (and key governance features. These are general issues but we will concentrate here on the implications for the power sector:

- (i) As Pargal recognizes, liberalization in the power sector was usually accompanied by restructuring of vertically integrated utilities<sup>46</sup> .  Indeed, the same law would almost always establish the regulatory agency.  Hence, separating the effects of regulation from liberalization is extremely difficult when both are dated by the enactment of a reform law.  (Note that this is more likely to be a problem for electricity than for telecoms for which a number of countries have partially liberalized before introducing a regulator<sup>47</sup> .)

- (ii) The regulatory variables are all taken from the legislation.  There are no data on the informal aspects of regulation - how the regulatory system operated in practice.

- (iii) There are no data on the degree of liberalization and the amount of competition in practice (e.g. measures of concentration).

- 46 See Pargal, op cit p.15.

> 47 For Pargal’s 9 country sample, 6 countries had an electricity regulator and allowed private entry.  Of the 6, the gap between the date of allowing entry and the date of establishment of the regulator was 1 year in 3 cases (Brazil, Colombia and Peru), 2 or 3 years in 2 cases (Argentina and Ecuador) and 7 years in the last case (Chile) – where the regulator is by no means fully independent.  (S Pargal:  Private communication,  July 2003).

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