Introduction

The privatization drive in developing countries has reached the electricity sector. In Argentina, Brazil, Jamaica, Malaysia, Mexico, Pakistan, Uruguay, and Turkey, just to name a few, private sector participation in the provision of electricity is currently directly promoted or is being considered by government officials. Although there is much interest in promoting private sector participation, however, few of those countries can show major private sector investments in the electricity sector.

The combination of government interest in private sector participation with the lack of actual private sector response, however, is in sharp contrast to the drastic transformation of the electricity sector that occurred in Chile, where in less than a decade the sector moved from being government owned to private provision and ownership, not only of generation but of transmission and distribution facilities as well. Not only has Chile been successful in transferring ownership from the government to private hands, but it has also promoted large private investments in all areas, with current investment projects by private electricity firms amounting to close to US $2 billion.

We claim in this paper that such a contrast is not mere coincidence. Instead, Chile's success is based on a drastic transformation of its regulatory structure and institutions, a transformation that occurred before privatization took place. Most of the countries trying to promote private sector privatization have an extremely ad hoc regulatory system, which not only generates very large inefficiencies but also lacks the assurances of fair play that private investors naturally would require.