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 devised constraints 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