ASi" kUCTURE FlOR DEVELOPMENT

government and e strength of the country's un- lation is required. Where free ertry can be allowed
derlying institutions determine the enabting envi- witbin a competitive enviromment, private sector inronment.
Stability of the macroeconomic and sec- volvement would only require regulation to ensure
toral policy limate is critical for attracting long-term. fair business practices and to protect health, &aft
investments, as are supporting institutions and and the environment, which are common to all
structures such as well-functioning judicial and fi- sectors.
nancial systems. The capacity of regulation and The choices are not simple. Poor service proviinstitutions
to promote the public interest (as dis- sion by the public sector often suggests a need for
cussed in Chapters 3 and 4) is an integral compo- more private involvement To the extent that poor
nent of a climate for private involvement Third is public sector performance occurs in natuxal monopthe
private sector's capacty and will to assemble oly activities, private involvement may not be desirthe
resources needed to supply services in the con- able in the absence of adequate reglatory construction,
financng, and operation of infrastructure. trols-but if the public sector agencies lack the
In low-hicome countries, all three dimensions of capacty to administer regulation or, more fondacapacity-technical
capability, the enabling envi- mentally, if credible govemance is lading, a wellronment,
and private sector interest-are typically regulated private sector altemative will not be poslow.
But large countries in this group, such as India, sible If the choice must be between highly
have a greater depth of technical capacity and pri- imperfect options, cotutries must weigh the altervate
sector interest because of their size, a fact that native of a minimally regulated private monopolist
in some ways makes them distinct In formerly so- that can expand service and achieve reasonable op.
cialist economies in transition, technical capability is erational efficienqc against the alternative of a pubhigh,
but an enabling environument for market activ- lic monopolist that delivers inadequate service at
ity is just emerging (and private sector capacity is bhigh cost to the public teasury To minmize risks to
newly developing). In middle-income reforming public welfare in the case of concessions and privacountries,
technical and managerial capabilities are tizations, public sautiny and tran cy are imgenerally
high, and the enabling environment is rea- portant to avoid the granting of "sweetheart" deals
sonably well established. However, in many such that can quicldy sour the taste for private involvecounties,
low growth restricts private sector capac- ment The introduction of competition is in many
ity. High-growth countries-with generally strong ases the mostimportant step in creating conditions
technical capacity, a favorable business climate, and for greater efficiency by both private and public oPkeen
interest from the private sector-are poised to erators, and the performance of the public sector entake
advantage of all institutional options. terpnises that remai an be furither improved
Differences in country capacity affect the choice through such means as contracting out specific serof
reform. Instituttional arrangements differ in the vices. In high-growth countries, public agences
demands they make on government administrative often perform quite well-and, while the capacity
and regulatory resources, as well as in their degree for private involvement in these countries is greater,
of dependence on private sector participation. As the urgency for reform may be less.
discussed in Chapter 3, the choice between conces- The choice of institutional option can affect the
sions and prnvatization depends largely on whether development of domestic capacity. Concessions or
it is more desirable to regulate private sector in- management contracts can be used to obtain specific
volvement through contractual arrangements or expertise not available domesticaly. Thailand has
through a regulatory agency. Where the economic used foreign exetse in developing its irrigation,
environment is uncertain or evolving (as in low- railway, and airline capabilities; C6te d'Ivoire has
income or tmnsitional economies), it may be easier managed a transfer of skills from expatriate to local
to induce private sector entry through contracts- staff in its water supply concession. Contracts and
both because agreements can be detailed in advance contracting out can also contribute to the developand
because ownership does not change. That ment of a healthy domestic construction and con-
* arrangement puts less private capital at risk At- sulting industry and draw on the talents of former
tracting private investment for system expansion is public employees. With appropriate attention to
another matter. As discussed in Chapter 5, private contract design and supevision, competence and
ownership or Iong-lived concessions are usually expence may often be achieved in the domestic
needed to induce private investmernt The adminis- private sector even in the poorest countries. For extrative
capacity necessary for contracts or for pri- ample, road maintenance is now done privately in a
vate sector ownership depends on how much regu- large number of African countries.
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