REGULATION IN THE INFRASTRUCTURE SECTOR

REGULATION IN THE

INFRASTRUCTURE SECTOR

Stephane Jacobzone

Counsellor

OECD

Public Governance and Territorial Development

The evolution of regulatory

frameworks

• Impact of regulatory reform to foster efficient markets & Good governance

• Synergistic effects amplify gains in individual sectors (Telecommunications, Transport, Energy)

• Benefits to consumers quality, choice, cost and price

• Establishing markets for the private sector to provide services previously supplied directly by the state;

• Strengthening product market competition, and easing the adoption of innovative technologies;

Implications for economic

efficiency and accountability

• The assessment has to take into account the impact of three different policies :

 New regulatory frameworks fostering competition

 Privatisation: transfer of property rights to the private sector  Public Private Partnerships

 Reforms have many potential pitfalls

 New regulatory frameworks can be inefficient: monopolistic aspects, regulatory capture , lack of a regulator

 Privatisation may not be optimally managed from the public purse

 Public Private Partnership need to be well managed to avoid inefficient transfer of risks

 All this requires strong governance and accountability, where

performance assessment and Supreme Audit Institutions can play a useful role

Relations to OECD work

• Analytical national studies on regulation and governance

 Country reviews (e.g. Brazil, Mexico, Italy), (24 reviews in total)

 Analysis of the role of the regulators (regulatory authorities), including in Brazil  Analytical work on Public Private Partnerships : “Public Private Partnerships in

pursuit of risk sharing and value for money “

 Comparative benchmarks and standards

 Principles for Regulatory Quality and Governance

 Reference standards for private sector investment in infrastructure, and possibly PPPs (Senior Budget Officials)

 Comparative data: government at a glance

 Inputs from Supreme Audit Institutions is a very useful tool for OECD analysis (e;g. Sweden, Norway, Switzerland, Brazil, etc… )

The Brazil Review in the context of the

OECD Country Reviews of Regulatory Reform



Independent assessment  Multidisciplinary approach :

Competition Chapter, High Quality Regulation

Regulatory Authorities in four core sectors, including 3 in infrastructure:

Supplemental Health Insurance

Telecommunications Electricity

Land Transport

 Extensive consultation

– government officials and parliamentarians

– business and union representatives, consumer groups, and academic experts

Role and interventions of the SAI

in infrastructure regulation

1. Assessing the use of public funds for

infrastructure and/or the conditions of

privatisation

2. Assessing the regulators

3. Intervention when there is no clear

regulator, for example in case of concessions,

PPPs

(e.g. highways, local public service utilities, water) 4. Assessing regulatory reform more broadly

1. Assessing the use of public funds

for infrastructure

• Expenditure on Road and transport infrastructure

(e.g. US GAO’s assessment of the Recovery Act,

efficient use of public funds, reports by the French CC (Cours des Comptes) on transport investment,

• Costs of nuclear energy (French CC working group) • Australian National Audit Office assessment of the

Broad band network (cf OECD review of Australia)

• European court of Audit assessment of EU Rail

2. The challenges of understanding and

assessing regulators

• Need to take into account new institutional

framework

– Majone’s approach, delegation of regulatory powers in

Europe, democratic deficit

• Need to invent some new paradigm for

CONTEXT

• The choice

– Self-regulation and competition framework – Direct Ministerial Oversight

– Independent Regulators

• The rationale

– Delegating power to a regulator at arms' length from the political system

– Improving the protection of consumer interest in case of market failures or other failures

– Improving transparency and stability

Assessing quality

and the performance of

regulators

• Seminal work by the economist JJ. Laffont and lawer

Frison roche for the French Cour des Comptes

• Three dimensions:

– legal, judicial review – accounting/auditing

– overall economic assessment:

• Self assessment • Official audits • Academic work

Regulators as part of the

"Regulatory State"

• Clarifying the functions of the State

– Public Ownership General rule making (general rules) – Enforcing regulation (applying the rules)

– Consumer protection (quality/market)

(and moving away from naïve notions of the General Interest).

• A challenge to the executive and

parliamentary powers

– A regulator entrusted with regulatory powers, including

sanctions, licences, and even some rule making

– A Government in Miniature?

– Establishing the legitimacy of a "non majoritarian"

Recent Trends

Independent Regulatory Authorities in OECD Countries

0 5 10 15 20 25 30 35 40 1926193119361941194619511956196119661971197619811986199119962001 Financial Regulators Telecommunication Regulators Energy Regulators

Analytical framework for OECD reviews

Independence and accountability

(cf governance audit by TCU)

Horizontal architecture

Coordination with Competition Authorities Coordination among regulatory authorities

Coordination across levels of government

Powers

Performance assessment

Self assessment

International organisation NGOs (consumer groups) SAIs

Performance assessment is a

condition for accountability

n

A condition of success

"non majoritarian" institutions (Majone) Political credibility of the regulator



No explicit mechanism for reporting and

establishing legitimacy



Procedural and political aspects

Often demanded by the independent regulators themselves (cf dialogue with Parliament)

Ensuring Accountability: How?

Systems of checks and balances



Transparency and procedural requirements

Administrative procedure laws



Substantial judicial/legal review:

n

Appeal mechanisms depend on the legal system :

Common Law  courts

Roman or German law  administrative courts, special courts

Ensuring Accountability

n Dialogue with citizens and Parliament

Annual report, dialogue with Parliament (expertise) Links with consumers' associations

n High quality regulation

Clear Regulatory Impact Assessment, Transparency Predictability

n Key for industry and for credibility (and

Mandatory Release of Periodic Assessment Reports

on Achievement of Objectives

24 14 10 52 52 8 0 40 52 24 3 21 0% 20% 40% 60% 80% 100% Percentage Energy Telecommunications Financial Yes, in annual reports only Yes, other No n.a.

Lessons from the Brazil study on regulators

 Economic impact

 reduction of regulatory risk (energy)

 Cleaning the market (health insurance)

 Telecommunications

 Regulatory framework benefits from healthier macro

 Impact in relation to objectives  Which objectives

 Trade offs

 Governance impact  Gaps still to be covered

SAIs’

Interventions in other cases

Sectors activities with no clear regulator,

Case of concessions, PPPs

(e.g. highways, local public service utilities, water, rail)

Local public services (utilities)

High exposure

 Highly technical topics vs. high political impact

 Significant impact for public finances of accounting rules and

amortisation

OECD’s Contributions

PPP Work : 2008 publication

Some analytical chapters

Italy study on local public services Chapter on land transport in Brazil

Reference guidelines

(new guidelines in preparation for PPPs, Senior Budget Officials) Area under watch (debt debate)

Economics of PPPs

Initial assessment

Budget sccoring and accounting treatment

Governance framework: PPP unit, procedural tools, managing the risk of corruption, transparency

Need to have an integrated approach

Long term contracts:

Require long term view and monitoring The beginning isn’t everything

Opportunity cost of delays impact cost of infrastructure, compounded by legal system (e.g. Italy)

Capacity in government

PPP units

Local government issues

Filling the gaps

Cost of water, Highway tariffs

Example: Roads in Brazil

One of the largest networks in the world (1.6 mi.km) Involvement of private capital in road construction:

concessions (comparisons with selected OECD and latin american countries)

Full deregulation of road freight: drop in prices but issues of safety with smaller companies

Quality of the roads: case fatalities Two waves of concessions:

Improvements on private roads Bus services: stagnating activity

Challenges ahead

Pre olympic issues

Need for long term transport planning

(GEIPOT, PNLT)

Lessons from other olympic ventures

Model of EPE for transport ?

Need to rethink articulation: integrated

approach to transport, vs fragmented

institutions

4. Overall assessment of

regulatory reform

NAO, GAO, ECA, Sweden

Assessment of regulators

Assessment of government regulatory

policy: evaluation of impact assessments

US UK, European assessment of RIA

Cost versus expenses in burden reduction

initiatives and their outcomes

Broader economic debate than just

infrastructure

Conclusions

• Daily bread of SAI and core area of business

• Designing independent and effective regulators :

The need for high quality regulation in a broad sense

• Analysis need to respect national institutional settings while adopting international standards

• In the developed economies, the new fiscal situation of public finances will require closer scrutiny

• In the emerging economies, rapid growth is creating opportunities which should not be wasted