Can reforms be made sustainable?: analysis and design considerations for the electricity sector

Electricity reforms may be considered as a redistribution of property rights under a new set of rules which are not always consistent with the cultural beliefs of the country and the ability of its human capital to implement the reform process. This paper analyses the evolution of reforms in the electricity sector in Latin America. It also discusses and proposes a new framework to improve the quality of programmes supporting such reforms.

The paper starts by presenting a number of problems that became apparent during the initial period of electricity reforms. It stresses the incompleteness of the default approach to reform which is limited to the change in ownership and to incentive regulation.

The study then presents a summary discussion of three new conceptual frameworks that are useful to analyse and design microeconomic reforms:

• the transaction-cost politics approach which argues that the scope and presence of transaction costs are more marked in political relations than economic ones
• the new institutional economics which stresses the support of customers and the role of complementary institutions in the reform sustainability
• the new political economy which stresses the need of permanently assessing the net balance of political support at each instant of time so as to calibrate the depth of reform changes.

The report concludes with a list of themes that should be considered when designing electricity reforms. These considerations include:

• introducing reform sets that includes not only the definition of rules, but also their application and change
• maintaining credibility through the enforcement of rules
• evaluating whether the introduction of a reform is consistent with the technological constraints, the traditions of redistributive politics and the availability of human and organisational resources.