37547 noTE no. 11 ­ JUnE 2006GRIDLINES Sharing knowledge, experiences, and innovations in public-private partnerships in infrastructure How to improve regulatory transparency Emerging lessons from an international assessment Lorenzo Bertolini M anaging the different and often · To reduce corruption. Requiring regulators conflicting interests and expecta- to publish and justify their decisions helps tions of stakeholders--the govern- ensure that they will reach well-reasoned ment, consumers, service providers--is a decisions and reduces corruption as well as demanding task for infrastructure regula- suspicion that it is occurring. tors. Transparency can be a big help. A core principle of good regulatory governance, Measures to enhance regulatory transparency transparency creates credibility for regu- have been or are being adopted in many coun- latory decisions and helps foster sustain- tries worldwide. The United Kingdom's move able investment in infrastructure. How toward regulatory transparency occurred can policymakers and regulators best initially under pressure from companies and improve regulatory transparency? A recent consumers, then through new laws introduced PPIAF-funded review of international experi- to improve regulation. But many regulators ence identifies emerging lessons. voluntarily adopted transparent processes to Regulatory systems vary across industries and foster investment and competition. That was countries as well as over time. Even so, the the case for Peru's telecommunications regu- characteristics of good regulatory governance that lator, for example. It was also the case for really matter are increasingly recognized: clar- Botswana's, which started with a basic but ity, predictability, autonomy, accountability, effective package of measures. participation, and open access to information. Key dimensions of transparency Each of these aids in making a regulatory system transparent in the eyes of stakeholders, helping How can policymakers and regulators best attract investment and enhancing the benefits go about enhancing transparency? A PPIAF- of public policy. funded study in 2005 reviewed international experience to identify a core set of guidelines Regulatory transparency evolved over time to (PPIAF and World Bank 2005). Endorsed by fill three primary needs: the African Forum for Utility Regulators, the guidelines include a set of proposed tools as · To reassure investors. When deciding where well as tradeoffs that need to be weighed in to invest, investors seek legal and regulatory considering them. frameworks that most clearly and predict- ably define their rights and obligations. Clarity The roles and objectives of institutions respon- · To build legitimacy around sensitive deci- sible for regulation need to be clearly set out in sions. Consumers are more likely to accept primary legislation and in instruments such as PUBLIC-PRIVATE INFRASTRUCTURE ADVISORY FACILITY socially sensitive decisions as legitimate when contracts. To minimize policy confusion and they can participate in the regulatory process and have open access to regulatory rules and Lorenzo Bertolini is PPIAF's regional program leader for agreements. West and Central Africa. Helping to eliminate poverty and achieve sustainable development through public-private partnerships in infrastructure PUBLIC-PRIVATE INFRASTRUCTURE ADVISORY FACILITY overlapping or contradictory responsibilities, appointment and tenure of regulators, stag- the economic regulatory function should be gering the appointments of commissioners). kept as separate as possible from policy func- tions (for example, deciding what should be But autonomy needs to be balanced by account- regulated or determining subsidies for access ability. Legal and regulatory instruments (laws, to lifeline services). contracts, licenses, regulations) should allow stakeholders to challenge regulators' decisions The rights and obligations of the regulated enti- and obtain redress. Accountability can be ties also need to be clearly stated, in regulatory enhanced by publishing and discussing draft instruments such as contracts and licenses-- regulatory decisions--which can also reduce preferably using specific measures and targets the costs of arbitration and appeal procedures for output and quality. When data for that down the line--and by providing justifica- purpose are not readily available, a transition tions and explanations once final decisions period could be used to confirm or collect data, are made. and targets could be set in terms of annual percentage improvements. Since excessively Participation detailed rules and functions can end up being Stakeholders--including regulated entities, ignored and can be expensive for the regulator nonregulated ones, consumers, policymakers, to implement, imposing a few simple regula- and other public authorities--should partici- tory obligations, stated clearly and in as much pate actively in the regulatory decisionmaking detail as possible, is generally best. process, to provide regulators with as much information as possible about their views (and Predictability about the impact that a regulatory decision To reassure stakeholders, regulatory decisions would have on them). Consultations impose must be made according to established rules, costs in both time and money, however, and methodologies, and processes. That calls for these need to be weighed against the potential setting out in openly available regulatory benefits and in considering other options. documents, in as much detail as possible, the factors feeding into the regulator's decision. Open access to information Primary and secondary legislation, regulatory Stakeholders These include definitions of parameters (such as the rate base), price adjustment formulas, decisions, consultation papers (issues papers, should and timetables of events (timelines for submit- draft decisions, consultant reports for rate reviews, and other documents prepared by regu- participate ting information, a calendar of decisions, and the like). lators to seek feedback from stakeholders), and actively the like need to be made readily available to in the The tradeoff between a degree of detail that stakeholders in a timely, though cost-effective, reduces uncertainty and a degree of flexibility way. The characteristics of stakeholders (literacy regulatory in setting out parameters and methodologies rates, use of technology) need to be taken into process may need to be handled carefully. Not all account in deciding on the best way to dissemi- elements of uncertainty can be predicted and nate this information. documented, so specifications may be needed for emergency measures or conditions for What a survey of regulators found renegotiation (for example, events affecting As part of the PPIAF-funded study, a survey of a certain share of costs or revenue). When regulators was conducted to analyze the types regulators need to change regulatory methods, of tools regulators use to improve transparency, the changes should be introduced gradually their views on how effective the tools are, and where possible and through a process involving the barriers they face to improving regulatory stakeholders. transparency. A questionnaire sent to 167 regu- lators worldwide generated 39 responses across Autonomy and accountability regions, mostly from regulators established in Regulators need to be shielded from undue the past decade. interference by policymakers and special inter- ests. Different safeguards have been designed Findings from the survey are not a definitive to protect the autonomy of regulators (provid- assessment of practices in regulatory trans- ing earmarked funding from levies on service parency (because of the small size of the providers, adopting clear criteria on the sample, for one thing). Still, they highlight How to improve regulatory transparency Figure 1 Almost all regulators maintain Web sites and How many regulators provide open acces publish annual reports with information about to information? the regulator, the regulated entities, and the regulatory decisions made in that year. The Percentage of respondents content of annual reports varies substantially, 100 reflecting the wide range of requirements for 80 information disclosure. Most regulators (80 60 Percentage of respondents percent) publish the reasons for their regula- 100 tory decisions, but the majority (54 percent) 40 do so voluntarily.1 How satisfactory such 20 Tools for 80 explanations are to stakeholders is difficult to 60 0 judge. Contracts Regulatory Consultation Legislation introducing 40 & licenses decisions papers There is evidence of stakeholder participation, regulatory 20Source: PPIAF and World Bank 2005. but its focus is too narrow, with views solicited transparency 0 on the details of regulation rather than on the Contracts Regulatory Consultation Legislation Percentage of respondents & licenses decisions papers regulatory regime as a whole. The majority of need to be 100Figure 2 respondents indicated that they disclose consul- How many regulators take steps to make tailored to tation comments and take them into account in 80decisionmaking processes predictable? their decisions. Companies are the stakehold- the country 60 Percentage of respondents ers most often involved in regulatory decisions, setting 100 40 followed by consumers and such bodies as governmental organizations, special consumer 20 80 groups, and nongovernmental organizations. 60 0 Set out Set out tariff Publish Publish 40 tariff review method- timetable of results of A third of the regulators had received complaints procedures ologies in regulatory consultations about transparency. Many reported severe finan- 20in regulatory regulatory events documents documents cial and other resource constraints that limit 0 Set out Set out tariff Publish Publish their ability to regulate transparently. Most tariff review method- timetable of results of regulators are new, small organizations, lacking procedures ologies in regulatory consultations in regulatory regulatory events the staff and experience to organize adequate documents documents consultation throughout the regulatory process. Source: PPIAF and World Bank 2005. Regulators also face the challenge of building the demand, awareness, and capacity of consumers some approaches regulators use, and provide and other stakeholders to participate effectively. an initial framework for evaluating regulatory Strategies to meaningfully involve consumers transparency. need to be calibrated to the general education level and to the awareness of and involvement in The survey shows that regulatory functions are public policy decisionmaking. Achieving trans- usually defined in primary legislation (which parency is particularly difficult if a large share of is generally published) and that changes to the population is illiterate. Situations like these regulatory functions are often implemented call for developing specific tools aimed at increas- through such legislation. Many regulators ing participation, such as customer surveys, but place regulatory documents and decisions in these are seldom used. the public domain--including through Web- based access (figure 1). Regulatory documents Tailoring tools of transparency are fairly comprehensive: they usually set out to the country procedures for tariff reviews, the intended Tools for introducing regulatory transparency methodology, and requirements for the need to be tailored to three aspects of the coun- consultation process--the elements that can try setting: the regulatory governance model be considered the bare minimum that should and broader institutional context, the strength be publicly available (figure 2). Yet less than of government institutions and the legal frame- 30 percent of the regulators reported publish- work, and the cost and benefit tradeoffs in ing a timetable of regulatory events. increasing transparency. Transparency across regulatory governance models cultural reasons), transparency in utility regula- Models of regulatory governance vary in insti- tion is particularly important because of lack tutional setup, decisionmaking processes, of confidence in the public service and fears of responsibilities, and level of discretion granted "regulatory capture" by politicians or private to regulators. These features determine the companies. But there may be a need to foster the level of transparency required to reassure stake- development of consumer groups to contribute holders and build legitimacy around regulatory meaningfully to the regulatory process. National decisions.Greaterregulatorydiscretion,forexam- legislation or regional agreements to harmonize ple, generally calls for greater transparency in policies on regulatory transparency can also decisionmaking. encourage good practices. In the "regulation by contract" regime, used by Tradeoffs between costs and benefits France in its water sector since the late 19th If implemented blindly, regulatory transpar- century, transparency with general stakeholders ency can prove ineffective and impose costs has traditionally received little emphasis. The on the stakeholders least able to afford them. reason is that the regulatory regime is largely In Australia and the United Kingdom-- set out in a contract, with general administra- where regulators publish consultation papers, tive rules protecting the interests of the two comments to those papers, and their responses parties to the contract and the public party to those comments--regulatory costs have representing the public interest. Still, in the risen significantly in recent years, in paral- 1990s the French government adopted a series lel with improvements in transparency. This of measures to enhance transparency (such intensity of effort may not be required every- as requiring mayors to publish an annual where. In some countries consultations through report about their municipality's water and public hearings may be a good first step if the wastewater service). hearings are well organized and held periodically. The traditional U.S.-type regulatory regime, where utility rates (tariffs) are set through a Note process known as a rate review, puts much more 1 A World Bank survey of telecommunications regulators in 2001 emphasis on broad transparency. In the quasi- found that only 54 percent were required to provide written judicial process leading up to the review, any explanations of their decisions (see World Bank 2001). information can be requested as evidence and References all parties can be asked to testify. These reviews PPIAF and World Bank. 2005. "Regulatory Transparency: greatly enhance transparency, but they can be International Assessment and Emerging Lessons." Report costly and cumbersome. prepared by NERA Economic Consulting in association with Sophie Tremolet and Farrier Swier Consulting. Washington, D.C. The "regulation by agency" regime, as devel- oped in the United Kingdom, strikes a balance World Bank. 2001. "Survey of Telecommunications Regulators in Developing and Transition Economies." Development Economics between the French and U.S. regimes. But Group, Competition and Regulation Unit, Washington, D.C. transparency has generally increased over GRIDLINES time, and countries following this regime now set a benchmark for transparency in utility regulation. Gridlines share emerging knowledge on PPP and give an overview of a wide selection of projects from various regions of Transparency in weak institutional the world. Past notes can be found at www. environments ppiaf.org/gridlines. Gridlines are a publication Where institutional envi- of PPIAF (Public-Private Infrastructure Advisory ronments are weak or Facility), a multidonor technical assistance PUBLIC-PRIVATE INFRASTRUCTURE ADVISORY FACILITY facility. Through technical assistance and transparency in government knowledge dissemination PPIAF supports the efforts has traditionally been limited of policymakers, nongovernmental organizations, (for political, economic, or research institutions, and others in designing and implementing strategies to tap the full potential of private involvement in infrastructure. The views are those of the authors and do not necessarily reflect c/o The World Bank, 1818 H St., N.W., Washington, DC 20433, USA the views or the policy of PPIAF,the World Bank, the World Bank, PHone(+1) 202 458 5588 FAX (+1) 202 522 7466 or any other affiliated organization. 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