Economic institutions: Theory and application

1. Economic institutions: Theory and application Washington DC November 2007 Edvaldo Santana ANEEL

2. Index • The Problem • What are institutions? • Different dimensions institutions • The New Institutional Economics • Economic governance • Different measures of institutional quality • Application of the Brazilian Infrastructure Sector • Consequences

3. The problem • The Brazilian economy is stable; • Very low exchange risk; • Emerging Markets Bond Index Plus (EMBI+) in the lowest level of the history; • Stimulated interest rates for investments in the electrical sector; • In other words, favorable macroeconomics conditions; • But costs for investments in the production of electrical energy still elevated; • Last bidding: US$ 72/MWh, • USA: Price in the wholesale market: US$ 45 to US$ 50/MWh; • Spain: Price in the wholesale market : US$ 50 a US$ 60/MWh;

4. Why? • Maybe the answer is the quality of the institutions; • Maybe the problem is the regulatory infrastructure; • Maybe both come together; • The concepts of institutions and economic governance are essential to comprehend this issue; • Recent studies of World Bank help to comprehend the conceptual aspects; • That is what we will see from now;

5. What are institutions? • “Institutions are the rules of the game in a society; are the humanly devisedconstraints that shape human interaction” (North 1990, p. 3); • Economic, political and social Interactions • Informal institutions -informal constraints:sanctions, taboos, customs, tradition and code of conduct; • Formal institutions -formal rules: constitutions, laws, property rights;

6. Different dimensions institutions (Dixit, 2007) • Purpose of institutions • Protection of property rights; • Enforcement of voluntary contracts among individuals; • Provision of the physical and regulatory infrastructure; • The functioning of the first two categories

7. Different dimensions institutions (Dixit, 2007) • The nature of the institutions • The formal state institutions that enact and enforce the laws: • Legislature, police, judiciary, and regulatory agencies; • Institutions of private ordering that function under umbrella of state law; • Private for-profit institutions that provide information and enforcement; • Self-enforcement within social or ethnic groups and network;

8. The New Institutional Economics (Williamson, 2000) • Institutional environment: formal rules of the game: include: • Executive; • Legislative; • Judicial; • The definition and enforcement of property rights and of contract laws are important features;

9. The New Institutional Economics (Williamson, 2000) • Institutions of Governance: play of the game • The governance of contractual relations becomes the focus of analysis; • A governance structure reshapes incentives; • Transactions costs economics; • Markets; • Vertical integration; • Hybrids;

10. Economic governance • “Process that support economic activity and economic transactions by protecting property rights, enforcing contracts, and taking collective action to provide appropriate organizational infrastructure” (Dixit, 2007, p.1); • Process: • Formal institutions or • Informal institutions;

11. Economic governance • “Study of good order and workable arrangements” (Williamson, 2005, p.3); • Includes: • Institutions that underpin economic transactions; • Protecting property rights; • Enforcing contracts; • Infrastructure of rules, regulation

12. Different measures of institutional quality (World Bank) • Voice and accountability; • Political instability and violence; • Government effectiveness; • Regulatory quality; • Rule of law; • Control of corruption;

13. Application of the Brazilian Infrastructure Sector • Rule of Law and government effectiveness • Governmental attempts to change regulatory policy • Increase in telephone rates in June 2003, in accordance with the concession contracts • Federal Court in Fortaleza imposed the IPCA rather than the IGP-DI (Contract); • Superior Justice Tribunal sustained ANATEL´s decision to use the IGP-DI; • Institutional constraints and safeguards - Court • The president of ANATEL was forced out of office; • Autonomy? • Attempt to change the entire set of rules underlying the regulatory system

14. Application of the Brazilian Infrastructure Sector • Rule of Law • Law of ANEEL was modified more than 70 times between 1997 and 2006; • Changes were proposed by the National Congress • Federal Government; • Pressure of groups of interests; • General Law of Telecommunications had only two changes; • Changes in the concession contracts; • Questioned the Law’s quality

15. Application of the Brazilian Infrastructure Sector • Regulatory quality and Rule of Law • Questionings of the tariff readjustments: • CPI of CELG; CPI of CELPE; CPI of ENERSUL; • Many questionings of Brazilian Court Audit (TCU) related to concepts and regulations; • Conflict of attributions : Government versus ANEEL • Many regulators? • Regulator in the last instance? • Regulatory collapse; • Regulatory vacuum; • Questioned the regulation’s quality;

16. Application of the Brazilian Infrastructure Sector • Regulatory quality and Rule of Law • Environment versus economic governance: • Release of ambient licenses; • Actions of the Public Ministry; • Conflicts of attributions: Government  Public Ministry  ANEEL; • Many enterprises do not conclude or do not start; • Changes in the concession contracts; • Higher costs of transaction; • Higher investors’ requirements; • Questioned the regulation’s quality;

17. Application of the Brazilian Infrastructure Sector • Consequences: • Vulnerability of the regulatory infrastructure; • Risk to increase the unreliability of the investors; • Higher costs of transaction; • Electrical system expands in a non optimum way; • Thermoelectric due to hydroelectric; • Actual macroeconomics advantages are not well explored • More expensive investments; • Release of ambient licenses; • Actions of the Public Ministry;

18. Thank you for your attention! Site: www.aneel.gov.br Phone: (+55) 61 2192-8604 Fax: (+55) 61 2192-8615 E-mail: institucional@aneel.gov.br