1 Institutions for Commitment in the Brazilian Regulatory System * Bernardo Mueller bmueller@unb.br Dep. of Economics Universidade de Brasília February 2000 Abstract This paper starts by arguing that the Brazilian privatization program and the concurrent establishment of a new regulatory system has been a successful process. Success is defined in the sense that investors have competed to purchase the concessions and have subsequently followed a pattern of investment that suggest that they do not have expectations of any form of administrative expropriation by the government. Given that at the time of most privatizations the regulatory system and many of the more general rules of the game were not yet clearly established, it is remarkable the process has evolved so smoothly. This is even more so given the high degree of discretionary power that the executive in Brazil holds over Congress. This paper attempts find an explanation for this by looking for forms through which the government could commit in advance not to pursue policies that lead to administrative expropriation of the concessionaire’s investments. The paper identifies and explains several forms of commitment that are argued to have contributed toward generating positive expectations for investors. Some of these are institutional factors, such as an independent judiciary (in specific types of issues) and the coalitional nature of Brazilian politics, but others are non-institutional, such as the government’s need to keep a good reputation so as not to frighten investors from future privatizations. The paper employs a simple spatial model to illustrate how these factors have acted to reduce the government’s discretion and thus provide commitment. Section 1 - Introduction The beginning of the current privatization movement in Brazil can be dated as far back as the mid-1970’s, yet it was only after the implementation of the PND (National Plan for Privatization) in 1990 that the this process really started to make progress. 1 Brazil was a relatively late comer to this worldwide trend. Although ten years later the process is far from complete, it is already possible to look back and assess what has been achieved. Notwithstanding the difficulty of defining objective criteria for evaluation, it is a premise of this paper that, to date, this process can be considered successful. Successful in this context does not mean that there aren’t any problems, nor that things could not have turned out better. It means simply that the process has been implemented in a form that has been well accepted by society and * The author gratefully acknowledges Carlos Pereira and participants at the XXII International Congress of the Latin American Studies Association (LASA 2000) in Miami and at the II Meeting of the LACEA Political Economy Group in Cartagena, 2000, for comments. 1 For an overview of the Brazilian privatization program see Pinheiro, A. C. and F. Gambiagi (1999). The Macroeconomic Background and Institutional Framework of Brazilian Privatization. Privatization in Brazil: The Case of Public Utilities . A. C. Pinheiro and K. Fukasaku. Rio de Janeiro, BNDES. 10 ..