The Challenges and Risks of Creating Independent Regulatory Agencies: A Cautionary Tale from Brazil

By Prado, Mariana Mota | Vanderbilt Journal of Transnational Law, March 2008 | Go to article overview

The Challenges and Risks of Creating Independent Regulatory Agencies: A Cautionary Tale from Brazil


Prado, Mariana Mota, Vanderbilt Journal of Transnational Law


ABSTRACT

Between 1996 and 2002, the Brazilian government established independent regulatory agencies (IRAs) for electricity, telecommunications, oil, gas, and other infrastructure sectors as part of a very ambitious privatization program. Following the formulas advocated internationally, Brazilian IRAs have institutional guarantees of independence, such as fixed and staggered terms of office for commissioners, congressional approval of presidential nominations, and alternative sources of funds to ensure their financial autonomy. This Article analyzes the design of IRAs in Brazil and asks whether their institutional guarantees of independence were effective in insulating them from the political sphere. The Author's general conclusion is that these guarantees--typical of developed countries, especially the United States--failed to insulate Brazilian agencies. The Article indicates a number of episodes of political influence over agencies, and it applies detailed institutional analysis to explain what went wrong. The Brazilian experience illuminates the difficulties that many developing countries face in trying to realize the ideal of regulatory independence and the benefits that would supposedly flow from this. Thus, it might serve as a cautionary tale for policymakers and for developing countries contemplating similar reforms.

TABLE OF CONTENTS

  I.  INTRODUCTION
 II.  THE CREATION OF INDEPENDENT REGULATORY
      AGENCIES IN BRAZIL
III.  PRESIDENTIAL INFLUENCE ON INDEPENDENT
      REGULATORY AGENCIES
      A. Increases in Electricity Rates
      B. Increases in Telecommunications Rates
      C. More Recent Instances of Presidential
         Influence on Regulation
      D. Investors'Perceptions of Presidential
         Influence on IRAs
      E. Conclusions
 IV.  THE POLITICAL ECONOMY OF THE CREATION OF
      INDEPENDENT REGULATORY AGENCIES
  V.  THE INSTITUTIONAL DESIGN OF INDEPENDENT
      REGULATORY AGENCIES
      A. Appointment Process and Removal Power
      B. Chairmen
      C. Approval by the Senate and Partisan Balance.
      D. The Commission and Its Structure: Design
      E. The Commission and Its Structure:
         Effectiveness
      F. Financial Autonomy: Funding and
         Budgetary Allocations
      G. Institutional Guarantees of Independence
         in Brazil: A Summary
 VI.  LESSONS FROM THE BRAZILIAN EXPERIENCE
VII.  CONCLUSION

I. INTRODUCTION

Intuitively, it always seems better to have more options than fewer. There are many circumstances, however, in which this intuition is wrong. In Homer's Odyssey, for instance, Ulysses chose to tie himself to the mast of his boat, and to seal his seamen's ears with wax, so as not to succumb to the temptation of luring his boat to destruction by hearing the Sirens sing. Without tying himself, Ulysses would have had two options: succumb to the song of the Sirens and destroy his boat, or resist the temptation and sail safely to his destination. Ulysses knew that sailors on previous trips had not been able to resist the temptation and was afraid that he would meet the same fate. So, he chose to tie himself. For Ulysses, eliminating one of his options was the best strategy to reach his destination safely. (1)

During the privatization process, Latin American countries have encountered a situation very similar to the one faced by Ulysses. After a decade of negligible levels of economic growth and enormous fiscal deficits, Latin American countries were advised to sell their state-owned companies, especially those in infrastructure sectors. (2) Selling these companies would reduce spending of fiscal resources, increase efficiency in the delivery of infrastructure services, and attract much-needed private investments to these sectors and to the country as a whole. (3) Privatization of key infrastructure sectors would be an easy way out of the trap that Latin American countries found themselves in at the end of the 1980s, except for one important detail: private investors were not willing to sink large investments in fixed, unmovable infrastructure assets without having some guarantees that they would not be expropriated by opportunistic governments. …

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