Authors: José A. Gómez-Ibáñez, Zhi Liu
Infrastructure requires massive, long-term, geographically fixed investment. As a result, the lowest-cost market delivery model often relies on a single firm for construction, operation and maintenance, creating a market with limited competition — an economic concept known as natural monopoly. How to protect consumer interests under limited competition has long been a heated debate in infrastructure research. The book Infrastructure Economics and Policy: International Perspectives, published by the Lincoln Institute of Land Policy, summarizes academic viewpoints on this topic.
Privatization
In the 19th century, nearly all modern infrastructure facilities — canals, railways, steamship transport, power supplies, tram and subway systems, telegraph and telephone networks, and municipal water utilities — were constructed and operated by private corporations. Most of these assets were nationalized or municipalized around the turn of the 20th century. Some developing countries only carried out nationalization and municipalization of infrastructure after gaining independence in the 1960s and 1970s.
These newly established state-owned enterprises (SOEs) delivered acceptable performance at the outset, yet efficiency gradually declined, triggering consumer complaints about high prices and poor service quality. Meanwhile, governments grew concerned about the fiscal burden of covering massive SOE deficits. These challenges triggered a wave of privatization reforms starting in the 1990s and early 2000s. Later rebranded as Public-Private Partnerships (PPPs), these reforms aimed to highlight anticipated collaborative mechanisms between public and private sectors. They also focused on designing fair price frameworks acceptable to both investors and end users.
Antonio Estache, Professor at the Université Libre de Bruxelles, summarizes global privatization experience in Chapter 11 of the book. His conclusions disappoint both critics and advocates of privatization alike. His estimates show private capital accounts for merely 17% of total financing in a typical PPP project; most funding still comes from government bonds, loans, or grants and credits extended by international financial institutions. By sector, privatization is more prevalent in ports and power generation, while its penetration remains relatively low in power distribution, roads, water supply and sanitation systems.
Estache’s research on how private ownership shapes infrastructure performance yields worrying results. Ownership transformation alone cannot substantially boost infrastructure accessibility and affordability for low-income populations. While private ownership may cut service costs initially, such gains fade once straightforward productivity improvements have been fully exploited. Estache attributes these underwhelming outcomes to deep-rooted governance flaws including corruption, insufficient technical expertise, inadequate resource allocation for regulatory work, and a lack of accountability mechanisms for the above failures.
Regulation
Debates over natural monopolies drove the nationalization of private infrastructure firms in the first half of the 20th century. It is therefore understandable that extensive efforts have been devoted to designing fair pricing frameworks for PPPs that satisfy both consumers and investors. The most widely adopted approach is competitive bidding, which awards fixed-term construction and operation concessions (typically 10 or 30 years). This model only functions effectively if contracts are complete: they must anticipate all major future changes and contain viable contingency plans. Incomplete contracts usually trigger politically fraught renegotiations. Furthermore, infrastructure relies on long-term concessions, so the risk of incomplete contractual terms rises sharply over the contract lifespan.
In Chapter 12, Sock Yong Phang, Professor at Singapore Management University, uses case studies to analyze two regulatory alternatives to competitive tendering: cost-of-service regulation and price-cap regulation. Cost-of-service regulation allows regulated utilities to set prices sufficient to recover verified operational costs. Price-cap regulation caps the maximum permissible price hike over a fixed period (usually five years); operators retain any surplus revenue generated if actual price growth stays below the cap.
Phang argues the choice between the two regimes hinges on regulators’ core priorities. Cost-of-service regulation reflects concern for utilities’ financial stability and their capacity to raise capital. Price-cap regulation prioritizes operational efficiency and continuous innovation. Additional regulatory goals include expanding infrastructure access and affordability for disadvantaged groups, and preventing abuse of monopoly power.
Sir Ian Byatt pioneered price-cap regulation as the lead regulator of the UK water sector in the two decades following its privatization. In Chapter 13, he outlines challenges and lessons from his tenure. Two key themes stand out: first, regulators must maintain political sensitivity and proactive governance; second, beyond routine price cap adjustments, regulators face numerous critical decisions covering corporate capital structure, service quality, auxiliary business operations, and competitive tendering for standalone large-scale facilities. Case studies by Phang and Byatt’s on-the-job experience both demonstrate that regulators face mounting, unavoidable pressures that risk mission creep — the gradual expansion of regulatory mandates beyond original objectives.
State-Owned Enterprises
During the post-colonial era of the 1950s and 1960s, many developing nations regarded SOEs as the engine of economic growth. The private sector then mostly consisted of small merchants and micro-firms lacking the capital and risk appetite for large-scale infrastructure investment deemed essential for national development. Disappointing operational performance eroded confidence in SOEs, spurring reform programs across the 1970s and 1980s, followed by mass privatization in the 1990s and early 2000s. Nevertheless, SOEs remain major infrastructure stakeholders, especially in China and India.
O.P. Agarwal, a former policy specialist for the Government of India, World Bank and World Resources Institute, and Rohit Chandra, Assistant Professor at the Indian Institute of Technology Delhi, examine the evolving role of SOEs in Chapter 14. They map the global landscape of state-owned infrastructure operators and compare performance between SOEs and private firms. Despite relatively lower efficiency, SOEs retain irreplaceable value. For instance, markets alone fail to deliver pure public goods such as local road networks. Over the past decade, SOEs have become more versatile through institutional innovations, refined financial management, PPP arrangements and outsourced private contracting.
No single universal solution has emerged to resolve competition limitations stemming from infrastructure’s capital-intensive, long-lived, fixed-location characteristics. Private infrastructure operators prevail in many developed economies, particularly telecommunications and power generation. Yet SOEs retain critical importance and dominate infrastructure sectors in China and India, the world’s two most populous nations. Governments worldwide have overhauled regulatory systems to replace the standard long-term competitive tender model, with notable progress especially in price-cap regulation. Still, every regulatory framework carries inherent tradeoffs.
About the Authors
José A. Gómez-Ibáñez, Derek C. Bok Professor Emeritus of Urban Planning and Public Policy, Harvard University
Zhi Liu, Senior Fellow and Director of the China Program, Lincoln Institute of Land Policy
Co-editors of
Infrastructure Economics and Policy: International Perspectives
