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Regulation, Markets and Poverty

Edited by Paul Cook and Sarah Mosedale

Regulation, Markets and Poverty incorporates the main policy implications arising from theoretical and empirical research into competition, regulation and regulatory governance in developing countries. This analysis often challenges conventional wisdom and draws on the work of leading experts from a range of disciplines.
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Chapter 8: Problems of Utility Privatization


INTRODUCTION Infrastructure services, such as water and sanitation, power, transport and communications are essential for economic growth and sustainable development. As donors’ support for infrastructure projects has declined, the private sector has got much more seriously involved. Indeed, private sector participation in infrastructure projects in developing countries has risen dramatically since 1990. For more than two decades privatization has been promoted as the best way to solve the problems of ailing public enterprises in developing countries (Shleifer, 1998; Shirley and Walsh, 2001). But how successful has it actually been? DOES PRIVATIZATION WORK? The results from an empirical analysis in the early 1990s looked good (Galal et al., 1992; Megginson, Nash and van Randenborgh, 1994) and the World Bank became fixated on privatization (World Bank, 1992). Of course, these early studies did not cover most of the privatization of utilities that was still to come. But in 1998 a study concluded that there was little doubt that privatization ‘worked’ in the sense that privatized enterprises nearly always became more efficient and profitable, increased their capital investment and became wealthier (Megginson and Netter, 1998, p. 40). Other studies (D’Souza and Megginson, 1999, p. 23) also claimed that privatization worked and, furthermore, that it worked nearly everywhere. This was puzzling because it conflicted with our knowledge that developing countries usually had relatively weak legal and regulatory systems. It also appears to conflict with our more recent econometric evidence that indicates that privatization did not have a significantly positive...

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