Market Structure and Competition

Allowing private participation and competition in infrastructure to the extent economically efficient has been the two key themes in sector reform.  Private participation offers a number of potential advantages, including better focused management, improved efficiencies, better risk allocation and management, access to capital markets, decreasing fiscal burden, etc.  However, evidence suggests that the most substantial benefits are made through reforming market structure and introducing competition.  These reforms are often related, since significant government-ownership often translates into the risk of below-cost pricing and political intervention in the market, which discourage new entrants and investments.

The main lessons from the past infrastructure reforms can be summarized as follows:

• The policy framework needs to be consistent with the government’s objectives and to facilitate competition across the corresponding sectors because there is often inter-linkage among the corresponding sectors that require an integrated approach to reform.  For example, it is difficult to introduce competition in electricity sector if the source fuels sector (coal, gas) remains closed for competition. 
• Regulatory institutions must have clear legislative objectives and prescribed processes designed in a transparent way before privatization takes place, and regulatory agencies must be credible and accountable;.
• Unbundling (breaking down the original monopoly into various private or possibly public entities) can often be the best option to introduce competition for many previously monopolistic sectors, while the remaining natural monopoly components are subject to appropriate oversight.
• Pricing must provide investors with the right incentive to operate, while access by the poor can be supported by well-designed subsidies and targeted safety nets.
• The telecommunications sector has been shown to be the easiest sector to liberalize, and electricity, water and transportation sectors can be improved through the introduction of competition (including competition “for the market”) through concessions and leases, along with appropriate public oversight.

Designing effective regulatory systems for different sectors is an important task as decision are based on respective countries’ policy objectives, the effectiveness of competition policy, and respective sector characteristics.  The World Bank provides guidance on designing policies to facilitate competition, particularly in the provision of public services to lower income communities.