Infrastructure and Public Utilities Privatization in Developing Countries

Should governments in developing countries promote private ownership and deregulated prices in noncompetitive sectors? Or should they run publicly owned firms and regulate prices at the expense of rents to insiders? A theoretical model is used to answer these normative questions. The analysis focuses on the tradeoff between fiscal benefits and consumer surplus during privatization of noncompetitive sectors. Privatization transfers control rights to private interests and eliminates public subsidies, yielding benefits to taxpayers at the cost of increased prices for consumers. In developing countries, where budget constraints are tight, privatization and price liberalization may be optimal for low profitability industries but suboptimal for more profitable industries. And once a market has room for more than one firm, governments may prefer to regulate the industry. Without a credible regulatory agency, regulation is achieved through public ownership.