Economic institutions: Theory

and application

Edvaldo Santana Washington DC

ANEEL November 2007
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
 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;
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;
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;
 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
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;
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;
 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;
 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;
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

 Different measures of institutional quality (World Bank)
Voice and accountability;
Political instability and violence;
Government effectiveness;
Regulatory quality;
Rule of law;

Control of corruption;
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
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
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;
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;
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;
Thank you for your attention!
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