Infrastructure Regulatory System
- 1. Infrastructure Regulatory System Submitted by: Submitted to: Tsering Ngutuk Gurung Er. Nirmal Prasad Baral Roll No.:076PASMSIEM018 Department of Civil Engineering Paschimanchal Campus,IOE, Pokhara
- 2. A.Context The biggest constraint to growth in Nepal and the developing world is infrastructure. Infrastructure, being a natural monopoly, has traditionally been the responsibility of the government for development. However, capacity (financial and human) deficit in government led to the involvement of private players with greater risk sharing, moving from the traditional contract mode to the PPP mode. The advent of PPPs brought in significant challenges, both for Government and the private players. Roles and mindset needed redefinition, especially on the Government side. Appropriate regulation became more critical. There is need to learn from both successes and failures of PPPs in infrastructure sector to bring in a greater maturity and professionalism in this eco-system by developing competencies and perspectives.
- 3. B.Introduction • Infrastructure is the services needed for a country to run smoothly and for economic and social development to take place in a country. The infrastructure of development are communication, education, health, power, market, commerce, irrigation and leisure facilities.
- 4. • Regulation is the sustained and focused control, normally exercised by a public agency, over activities that are valued by a community. In addition, regulation can either prevent undesirable behaviour, actions and activities or enable and facilitate desirable ones. Regulatory processes generally comprise three stages: 1. the enactment of enabling legislation 2. the creation of regulatory administrations and rules 3. the bringing to bear of those rules on individuals or organizations whose behaviour is Into be influenced or controlled.
- 5. C.Necessities of Regulation In practice, governments may regulate the provision of infrastructure facilities and services for a number of reasons, including: 1. Monopolies and natural monopolies 2. Windfall profit 3. Externalities 4. Information inadequacies 5. Continuity and availability of services 6. Anti-competitive behaviour and Predatory pricing 7. Public goods and public hazard 8. Rationalisation and coordination 9. Planning 10. Unequal bargaining power 11. Scarcity and rationing 12. Distribution and social justice 13. Fair competition and investor confidence
- 6. D. Forms of Infrastructure Regulation There is a wide range of regulation to deal with market failure. They are of following categories:- • Economic regulation : It primarily addresses the problems of natural monopoly power in infrastructure,i.e. 1. Regulation of structure and regulation of conduct 2. Regulation of structure introducing competition 3. Combination of instrument used in a different sectors 4. Comparative competition 5. Objectives of conduct regulation 6. Price regulation 7. Quality regulation 8. Input regulation
- 7. • Social regulation: it addresses problems of market access and affordability, i.e. 1. Effects of infrastructure reform on consumers 2. Common situation of low income consumers 3. Pro poor regulatory mechanism 4. Benefits of of considering social protection policies in the design of pro regulatory frameworks 5. Considering social issues in sector reforms • Other regulations: It defines the regulation that is common to all industries, i.e. 1. Environmental health and safety regulation 2. Balance cost and benefits of regulation
- 8. E.Regulatory Bodies Regulation can be undertaken by a variety of bodies. The nature of the regulatory institutions created can have a significant effect on the style of regulation, the regulatory strategies employed, and also on the achievement of the regulatory objectives. The main types of regulator are: • Self-regulators • Local authorities • Courts and tribunals • Central government departments • Regulatory agencies • Directors General Experience in industrialized countries provides insights into matters such as the expertise required, notions of “independence”, and the optimal location among tiers of government
- 9. F.Institutional Design of Independent Regulatory Agencies The framework for the design process includes: • Ensuring regulatory independence • Selecting,appointing members of the board • Funding • Staffing • Legislative changes: Legal instruments are 1. Primary legislation 2. Secondary legislation 3. Licensing 4. Contracts • Single regulator
- 10. G.Evaluation of Infrastructure Regulatory Systems Evaluation and criticism of regulatory systems began almost as soon as they were first established. Evaluations require benchmarks. The three most common forms of evaluation are: • Cross-country statistical studies • Cross-country descriptive analyses • Single-country structured case studies Any evaluation must examine two basic dimensions of any regulatory system: regulatory governance and regulatory substance.Similarly, the three levels of evaluation are: • A Short Basic Evaluation • A Mid-Level Evaluation • An In-Depth Evaluation
- 11. H.Regulatory Strategies for Infrastructure If the state wants to control an infrastructure provider that possesses a natural Monopoly, it may use a number of different strategies, including: 1. Harnessing markets by use of: • Competition laws • Franchising • Regulation by contract • Tradeable permits 2. Command and control 3. Incentives 4. Informing 5. Acting directly 6. Self-regulation
- 12. I. Self Regulation Self-regulation occurs when a group of firms exert control over their own membership and their behaviour. Examples are found in a number of professions, such as medicine and law, and in industries, such as banking and insurance. Self-regulation may play a part as an element within a scheme of regulation. Cost-benefit analysis :Cost-benefit analysis and other methods of economic evaluation can be used, in principle, to assess the efficiency of a particular regulatory regime.
- 13. J. Principle of Good Regulation Benchmarks Criteria Problems Legislative mandate Authorisation from elected legislature Parliament’s intention may be vague or contain conflicting objectives Excessive delegated discretion Accountability and control Evidence of effective control and accountability Lack of representation of body holding regulator to account Due process Fair, accessible and open procedures Establishing an acceptable trade off between openness, accessibility and efficiency Expertise expertise Specialist knowledge, skills and experience General distrust of experts Expert may be subject to `capture’ or self-interest Efficiency Productivity of procedures and investigations Value for money with efficient and effective outcomes Limited ability of public to judge efficiency Auditing complexities To decide whether a system of regulation is good, acceptable, or in need of reform, it is necessary to be clear about the benchmarks that are relevant to such an evaluation. Table 1 sets out a number of criteria or benchmarks, that may be used in evaluating a regulatory system, how they may be assessed, and associated problems. Table 1. Benchmarks for regulation
- 14. K.Enforcing Regulation The bringing to bear of regulatory rules on persons or organizations they are intended to influence or control is vital to the success of regulation. Failures to identify and deal with breaches of rules will undermine any regulatory system.Regulators need to consider the following issues in enforcing regulation: 1. Styles of enforcement 2. Rules of enforcement 3. When to intervene 4. How much to enforce 5. How to control corporations
- 15. Command regulation Insistent strategy Persuasive strategy Enforced self-regulation Criminal prosecution Notices: improvement and prohibition Warnings: written and verbal warnings Persuasion: shaming; deadlines; education and advice Figure 1.The enforcement pyramid Figure 2.The sanctions pyramid
- 16. L. Challenges and Problems with Utility Regulation in Developing Countries 1. Lack of regulatory commitment: political expediency and the limits of independence 2. Lack of transparency , participation and accountability 3. Institutional fragility 4. Regulatory substance compromised: lack of capacity and competency 5. Regulatory contacts also under stress
- 17. M.Regulating for The Poorest Regulatory principles developed from experience in the industrialized countries should be compatible with the aspirations of developing countries concerned about the welfare of their poorest citizens. But there are some special challenges associated with reaching the poorest than can lead to important differences in emphasis and approach. • Speacial challenges: 1. The acess priority 2. Affordability concerns 3. Constrained administrative regulatory capacity 4. Political and regulatory risk management
- 18. • Implications of regulator rules 1. Controlling market entry • Extent of market to be liberalized • Extent of relaxation of entry controls • Other public barriers to entry • Private barriers to entry 2. Controlling prices • Extent of market to be leberalized • Extent of relaxation of price controls 3. Controlling quality • Implication for regulatory bodies 1. Expertise 2. Independence 3. Tier of government • Implication for regulatory process
- 19. N. A Range of Regulatory Models The range of possible regulatory models with varying levels of regulatory discretion include: • Regulation by government : 1. National regulation 2. Regional regulation 3. Local regulation • Independent Regulation • Outsourcing regulatory functions • Advisory regulators and expert panels • Hybrid and transitional models
- 20. O.Improvement for Regulatory Performance Regulatory performance can be improved through better regulatory design. Investors, operators, and consumers will benefit from regulatory governance systems that match regulatory discretion with levels of regulatory commitment and institutional endowment. Regulatory performance can also be improved through: • Mandatory, periodic, independent reviews of regulators • Building the demand side for regulatory transparency and participation • Capacity building
- 21. P. Regulatory Risks Regulation is centrally concerned with the control of risks -such as the risk that infrastructure facilities and services will be inadequate or prices will be excessive. • Defining and assessing risks: Assessments have to be made to identify potential risk in terms of its cost impact and probability of occurrence. • Risk management: involves regulating risks in an effective and acceptable manner. • Legitimacy of risk regulation: regulators face problems of legitimacy in their regulatory decision-making.
- 22. Q.Mitigating Measures for Regulatory Risks Regulatory risk may be mitigated through regulatory governance systems that constrain regulatory discretion. Regulatory risk may also be mitigated through following measures to improve regulatory performance. • Partial risk guarantees for regulatory systems • Other risk mitigation measures 1. Political risk insurance 2. Investment partial risk guarantees/partial credit guarantees 3. Additional financial security measures for investors 4. Change of law exemption in contracts 5. Bilateral investment treaties 6. Appeal, arbitration, and other dispute resolution mechanisms
- 23. R.Conclusion Infrastructure regulatory systems are very essential to develop robust and resilent infrastructure through strategic evidence based investment in a infrastructure system that will underpin the strong economics to drive good standard of living not for today only but also for same right for future generation.