Regulation and private sector investment in infrastructure: Evidence from Latin America

This paper assesses the importance of the regulatory framework as a determinant of private sector investment in infrastructure, using recently compiled data on private and public sector investment in the water, power, telecommunications, railroads and roads sectors between 1980 and 1998 in nine large countries in Latin America.

We find that the most significant institutional determinant of private investment volumes is the passage of legislation liberalizing the investment regime. This is important because it indicates that the legal basis for reform is probably more critical in determining the quality of the investment climate than specific aspects of the institutional framework governing private sector participation. In accordance with intuition, our results indicate that government action to increase regulatory certainty and minimize the perceived risk of expropriation through the establishment of independent regulatory bodies is a critical determinant of the volume of private investment flows. We also find that the general relationship of private to public investment is one of substitutability.