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Where U.S. companies seek regulation
The San Diego Union Tribune
July 25, 1997

Latin America's infrastructure markets will be worth $60 billion over the next five years, according to the World Bank. Countries in the region are hungry for foreign capital and technology, and San Diego-based companies

such as Qualcomm and SDG&E -- an Enova Company -- are anxious to get into the game.   But unless the region provides reliable regulatory frameworks necessary to reduce investor risk, great opportunities could be missed.

Regulations are demand-driven.   Although U.S. companies have criticized over-regulation in the U.S. domestic market, those firms going abroad to invest in developing countries' infrastructure markets now are demanding transparent rules of the game.   Investors want to know how the new private markets will work, how competitive they will be and what barriers to entry will exist or be dismantled, among other things.

Developing countries' utility markets offer great opportunities for U.S. business, but the lack of defined regulatory schemes is keeping American investors at bay.   To be sure, investors dread overregulation, but the absence of proper regulation in overseas markets can translate into big losses due to prices kept below costs or, in the extreme, expropriation of property rights by governments.

This cautious attitude has been shaped by past experiences in developing countries in the 1950s, '60s and '70s, when governments nationalized foreign utilities, oil companies and banks.   Recent experiences with deregulation in the U.S. and European markets also inform American companies' preferences.   In utility markets, regulations make all the difference.

Without appropriate regulations, privatization and market liberalization will not catalyze sufficient interest.   Witness the Latin American story, where weak regulatory arrangements have been a factor in the region's slow, unstable growth in the 1990s.

The existence or lack of solid regulatory schemes already accounts for important differences in levels of investment in infrastructure among various countries in Latin America.   For instance, Argentina and Chile built reliable regulatory frameworks for electricity and have privatized most of their state-owned power plants.   Brazil lags behind on both regulation and privatization of electricity.   The outcome is that Argentina has started to export power to energy-hungry Brazil.

In telecommunications, the situation is similar.   Latin America's teledensity -- the number of telephone lines per hundred inhabitants - is low.   But Chile has the highest rate (28 telephone lines for every 100 inhabitants), thanks to a solid pro-competition regulatory scheme.   In long-distance and international calls, Chile has one of the most competitive markets in the world.   "People call China just to hear some Chinese on the other side of the line," says a Chilean scholar.

Argentina (19 telephone lines for every 100 habitants) and Brazil (8 for every 100) lack the same sound regulatory arrangements for telecommunication that Chile enjoys.   Argentine and Brazilian consumers also pay higher prices for telephone services than Chileans do.

As 1993 Nobel Prize winner in economics Douglas C. North, management guru Peter Drucker and others have suggested, markets indeed require rich institutional environments to flourish.   Latin American democracies face the challenge of developing pro-business regulatory schemes to create incentives for investments in infrastructure.

Weak regulations are constraining the functioning of market economies in the region.   Failure to provide the right institutions could slow economic growth, increase unemployment and social tensions, bringing about political instability in key countries of Latin America.

Today, agencies are being created to address regulatory problems in most Latin American countries.   All are called "independent," but some are more independent than others.   There are genuine efforts to do it right, even though sometimes they are unsuccessful.   In San Diego and elsewhere in the United States, companies are watching these developments.

The lesson is that firms thinking about doing business abroad do not want to be burdened by excessive regulation, yet, at the same time, do want clear rules of the game which allow competition and profit -- exactly what markets are supposed to do.