Regulation and Development: Overview of regulatory issues

Introduction This book focuses on public utilities, telecommunications, electricity, gas, water, transportation (roads, railways, buses, ports, airports, …) and the postal service which are sometimes referred to as “economic infrastructures.” It does not concern itself with the so-called “social infrastructures” such as education and health, or with financial infrastructures. This chapter will discuss the specific questions surrounding the regulation and liberalization of public utilities in developing countries. We first review the characteristics of developing countries that have a bearing on the analysis of regulation and competition policy. An essential concept is the marginal cost of public funds – that is, the social cost of raising 1 unit of funds. This cost includes in particular a deadweight loss because governments raise revenues by means of distortionary taxes. It is estimated that this deadweight loss amounts to around 0.3 in developed countries, meaning that it costs citizens 1.3 units of account every time the government raises 1 unit. The inefficiency of tax systems in developing countries, coupled with the corruption that is sometimes also present, makes it extremely difficult for governments to invest in infrastructures and affects the cost of all types of public interventions, in particular, regulation and competition policy. According to World Bank data, the deadweight loss in developing countries is well beyond 1.0. It has been estimated at 1.2 in Malaysia and 2.5 in the Philippines, while in Thailand it ranges between 1.2 and 1.5 (Jones, Tandon, and Vogelsang, 1990).