To what extent do infrastructure and financial sectors reforms interplay? Evidence from panel data on the power sector in developing countries

The main goal of this study is to demonstrate the existence of a significant empirical link between infrastructure and financial sectors reforms the effects of which are reflected in infrastructure sectors performance. This paper reports on the findings of an exploration of this issue for the case of the power sector in developing countries. We estimate the impact of the four main components of the power sector reform in these countries, namely, the creation of an independent regulatory agency, the unbundling of generation, transmission, and distribution, the introduction of competition and the implementation of privatization programs in the generation and distribution segments, on some of this sector’s performance outcomes, and attempt to assess the contribution of the domestic financial systems’ reforms to these outcomes. In a dataset on 42 developing countries covering the 1990-2005 period, we find that private participation in generation and distribution has significantly improved power supply as reflected in higher electricity generation per capita and technical and labor efficiency in the distribution segment. The unbundling of generation, transmission, and distribution has contributed to improving productive efficiency through a better use of the labor factor in the distribution segment. We find that the creation of a separate regulatory agency has boosted the generation segment in terms of both capacity and sales and has generated better incentives for a more efficient use of labor input in the distribution segment. We also find that regulatory experience has significantly contributed to improving access to electricity. The results suggest that while the power sector, in particular, its generation segment, has significantly benefited from the introduction of independent regulation, the beneficial effects of (good) regulatory practices have been exacerbated by the modernization of the financial systems. More specifically, improved financial systems have eased access to capital for operators allowing them to upgrade their networks and decrease power losses in distribution. The overall results obtained in this paper strongly recommend that along with reforming the power sector, policy makers in developing countries should implement the financial reforms that would deepen their domestic financial systems thus allowing them to recover the full benefits of these systems’ positive externalities on the performance of the sector.