Publication

Reform of utilities in developing countries is often impeded by information problems, including asymmetries and costly production of hidden information. This constitutes a major drawback for privatization due to low commitment, a small number of bidders and a low level of monetary offers. The author argues that the state can extract the highest value from privatization when it goes in for an option cum management contract in preference to direct investment. He presents a tool that formalizes the idea of interpreting some contract clauses as real options as a practical solution.