Price Caps, Efficiency Payoffs and Infrastructure Contract Renegotiation in Latin America

20 Pages Posted: 22 Jul 2003

See all articles by Antonio Estache

Antonio Estache

Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES)

J. Luis Guasch

World Bank - Finance, Private Sector and Infrastructure Sector (LCSFP)

Lourdes Trujillo

Departamento de Analisis Economico Aplicado; University College of London (UCL)

Date Written: August 2003

Abstract

Twenty years ago, as the United Kingdom was getting ready to launch the privatization of its public services, Professor Littlechild developed and operationalized the concept of price caps as a regulatory regime to control for residual monopoly conditions in those services. Ten years later, Latin American countries, as they embarked into their own infrastructure reforms, also adopted the price cap regulatory model. Relying on a large data base on the factors driving contract renegotiation in the region and a survey of the literature on efficiency gains, Estache, Guasch, and Trujillo assess the impact of this regulatory regime in Latin America. They show that while the expected efficiency gains were amply achieved, these gains were seldom passed on to the users. Instead they were shared by the government and the firms. Moreover, the adoption of price caps implied higher costs of capital and hence, tariffs, and brought down levels of investment.

This paper - a product of the Infrastructure Vice Presidency - is part of a larger effort in the vice presidency to improve knowledge of infrastructure needs.

JEL Classification: D4, L1, L5, L9

Suggested Citation

Estache, Antonio and Guasch, José Luis and Trujillo-Castellano, Lourdes, Price Caps, Efficiency Payoffs and Infrastructure Contract Renegotiation in Latin America (August 2003). World Bank Policy Research Working Paper No. 3129. Available at SSRN: https://ssrn.com/abstract=412941

Antonio Estache (Contact Author)

Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES) ( email )

Ave. Franklin D Roosevelt, 50 - C.P. 114
Brussels, B-1050
Belgium
32 (0)2 6503838 (Phone)

José Luis Guasch

World Bank - Finance, Private Sector and Infrastructure Sector (LCSFP) ( email )

1818 H Street, NW
Washington, DC 20433
United States
202 473 8606 (Phone)
202 522 2106 (Fax)

Lourdes Trujillo-Castellano

Departamento de Analisis Economico Aplicado ( email )

Universidad de Las Palmas de Gran Canaria
Campus de Tafira
Las Palmas de Gran Canaria, Las Palmas 35017
Spain

University College of London (UCL)

Chadwick Building
Gower Street
London, London WC1E 6
United Kingdom

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