Creating incentives for private infrastructure companies to become more efficient

The privatization of infrastructure companies is expected to bring about gains for customers by increasing the efficiency of the privatized company. Because many infrastructure industries are not competitive, attention has focused on the development of regulatory regimes that replicate the operation of competitive markets and so lead to efficiency gains. Less attention, however, has been paid to other institutional factors that encourage firms to operate efficiently. The authors study three institutional factors that can, in general, encourage efficiency: the threat of bankruptcy; internal controls brought about by executive remuneration schemes and the ability of shareholders to remove underperforming management; and external disciplines brought about by the operation of the market for corporate control and the threat of hostile takeover. Applying these three aspects of corporate governance to monopolistic infrastructure firms is not simple. Infrastructure regulation may allow privatized firms to avoid financial problems by raising prices, for example, thus sheltering them from the threat of bankruptcy. And shareholder control may be hindered by restrictions on the proportion of the shares that can be owned by any one shareholder. The authors offer examples of the ways in which different regulatory, institutional, and governance systems work in different countries, especially in relation to infrastructure companies; and provide a checklist of options that should be considered when designing the involvement of the private sector in infrastructure position.