ASi" kUCTURE FlOR DEVELOPMENT

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Using arkets -in infrastructure
provision
Market forces and competition can improve the ever, where extreme underprovision of services is
production and delivery of infrastructure services, common, as in many developing countries, con-
That is the consensus emerging from a reevaluation cerns about a private monopolst restricting output
of the sector based ont experence, technological -to boost.prices and profits may have less force than
change, and new insigh-ts into regulatory design. where networks are better developed. Thus, thie reg-
This new consensus is displacing the long-held ulatory apparatus needs to foDst-er efficiency and inview
that infrastructure services are best produced vestment both. by elimiinating outdated restrictions
and delivered by monopolies. Because the unit costs on the right to provide service and by assuring fair
of delivering an -ifrastructure serce-a galon of terns of network access to new entrants.
water, a kilowatt-hour of electricity, a local tele-. In the move from a goverrunment montopoly to a
phone call-typically decline as service output in- more competitive system. enforceable contracts are
creases, provision by a single entity seemed to make required to.balance the inter~ests of various per!Iies in
economic sense To limit the undesirable exercise of specfic projects and to provide the stability needed
market power, government was. expected to be the for long-term investment Also required are cornsole'supplier
or to closely regulate the private prehensive, transparent, and nondiscriminatory
monopoly.
rules of the game. Although these are desimble in
Technological change and, even more important, thie long ran, the evidence shows that the move to
regulatory innovationd are makig competition private supply and competition does not have to
possible in many forms. The economies from large-. wait for the rules. to be embedded in a fully devel-.
scale production and delivery although stiU ispor- oped statutory regulatory systemv
tant in some infrastructure activities, have dimin- Regulation itself is imperfect because the
ished, especrially in telecommunications and power "right regula r mechanisms ayr not always evigeneration.
Regulatory innovation has made possi- dent It is also imperfect because effective impleble
the unbundling of activities-the separating of mentation of economic regulation requires an inactivities
in which economies. of scale are niot incpor- formation base atd sophistication tat axe rarely (if
tant from those in which they are Unbundling pro- ever) attainable. Regulators are therefore vulneramates
competition by detaching activities that were ble to manipulation. Regulation can also have perearlier
performed in monolithic organizations and verse, unintended consequences when competition
opening them to various forms of competitive pro- from substitute goods and services is possible. A
vision. Even when infrastructure service is provided greater appreciation of reguatory failure has led to
most economicall by a single supplier-making progress in the design of simple rules to which regcompetition
in the market asaexor even hifea- ulators can precommnmt and that produce presibe-competition
from alternative suppliers for dictable and consistent outcomes. Moreover, inthe
right to supply the market can spur efficiency volvement of other interested parties, esperially
Market forces do not eliminate the need to regu- consumers, can make the regulatory process more
late prices and profits to protect consumers. How- effective.
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