18713 Viewpoint Note No. 153 September 1998 Utility Regulators Supporting Nascent Institutions in the Developing World Philip Gray The wave of infrastructure privatizations sweep- of character to head the agency. But technical ing the world over the past decade or so has expertise alone is not enough. Utility regulation given rise to a new category of professional- is not undertaken in an academy. Regulators the specialist utility regulator. These regulators, must contend with pressures and demands from charged with administering regulatory frame- diverse stakeholders. Perhaps the most visible works that seek to balance the interests of con- and predictable pressure in most countries sumers and investors in technically complex and comes from political authorities, who, to meet politically sensitive industries, can have a major short-term political objectives, are often tempted impact on the performance of privatized firms, to renege on tariff and other commitments given on the cost of investment capital (and thus on to investors. This risk is one of the most com- infrastructure tariffs), and on the sustainability mon rationales for providing regulators with of reforms. For this reason the development of safeguards on their independence.2 But regula- professional, capable utility regulators should tors can also face a range of pressures to favor be a key part of reform efforts. While new regu- regulated firms or other interests, whether lators in any country can expect to face many through bribes or more subtle forms of cap- difficulties, the challenges are particularly daunt- ture. And as if this were not enough, regula- ing for regulators in developing countries. This tors of newly privatized industries must often Note reviews those challenges and presents try to assert and defend a new role in an envi- some of the main strategies for supporting new ronment where they are often seen as directly utility regulators in the developing world. responsible for long-overdue tariff increases and subsidy reductions and where the efficiency and The regulation challenge service improvements privatization offers may take some time to become evident. Regulating private infrastructure firms can in- volve a variety of complex and sensitive tasks. Challenges of this kind arise in all reforming Depending on the design of the regulatory countries, industrial and developing alike. But framework, regulators may be responsible for developing countries usually face much greater granting licenses and permits, administering tar- challenges. Most developing countries lack a iff adjustment rules, dealing with interconnec- strong pool of professionals with relevant tech- tion disputes between firms, monitoring and nical expertise. Many also have a much more enforcing compliance with quality standards limited tradition of independent public institu- and other obligations. and performing other tions; indeed, the governance traditions in some regulatory tasks.' developing countries make it particularly diffi- cult to avoid problems of political interference Maanv of these tasks require regulators to draw and corruption. And finally. infrastructure pri- on expertise in economics. finance. lawv. and vatization in manv aeveloping countries re- engineering. Indeed. one of the first crucial tasks quires regulators to preside over substantial in establishing a regulatory institution is appoint- tariff increases for utilities that lhave a long his- ing the right people. with the appropriate bal- tory of unsatisfactory performance and dissat- ance of technical ability. integrity. and strength isfied customers. Newlv appointed regulators LIM a The World Bank Group * Finance, Private Sector, and Infrastructure Network Utility Regulators-Supporting Nascent Institutions in the Developing World In all countries, regulating private infrastructure can involve decisions that are both technically complex and politically sensitive. Supporting regulators In OECD countries difficult disputes have arisen: * In theC coUntritedes, di hereuft diplFtos have arisen: involveStrategies to enhance the sustainability of regu- • In the United States, where regulators have been involved in latory regimes and thus potentially depoliticize difficult decisions in quantifying the size of stranded costs, which such thorny issues as tariff increases have re- utilities argue are created as a result of the transition to a ceived relatively little attention. Indeed, it is competitive market in electricity. sometimes tempting for a government or its * In the United Kingdom, where an electricity price review had to be advisers to conclude that the hard work is over revisited as a result of soaring share prices and new information once new laws have been passed and assets that emerged as a company defended itself egeinst a hosfile transferred to the private sector. But high-pro- file regulatory disputes in a growing number takeover bid. of developing countries counsel against such In developing countries the heat can be particularly intense where a short-term view (box 1). there is a short track record of private investment in infrastructure and where there is substantial involvement by foreign investors Newly A large part of the answer lies in designing appointed regulators often find themselves embroiled in bitter disputes regulatory systems that, while drawing on good between investors or between investors and the government Here are practices from elsewhere, are properly adapted to the conditions in the country. The uncritical some examples of particularly difficult recent disputes: import of models from other countries and the * The energy regulator in a Central European country has been caught pursuit of "cookie-cutter" approaches are des- between private investors who were promised tariff increases and a tined to failure. But under almost all conceiv- govemmentthat would preferto avoid its earlier conmnitments. able regulatory structures, some authority will * Telecommunications regulators in many developing countries must have at least some discretion to perform some deal with contentious disputes between incumbent operators and regulatory taskst How can these people be sup- new entrants, particularly over interconnection pricing and terms. cess? Experience in a growing number of * A provincial water regulator in Latin America has been entangled developing countries suggests that a well-con- in a major dispute between foreign investors and the provincial ceived strategy will have three main elements: governmentovertariffsandservicestandards. support by external consultants, training, and arrangements to foster contacts and informa- tion sharing between regulators. can be seen struggling under this yoke through- Support by external consultants out the developing world. The early years of a new regulator's job can be If regulators are to succeed, they must establish expected to be particularly demanding. To help credibility with investors and legitimacy with regulators deal with the challenges they face, it consumers and other stakeholders, and they is common to provide them intensive assistance must produce results that enhance efficiency for for a period through an international consulting the economy as a whole. Failure to meet these firm. This usually involves having one or more tests can have dire consequences. Concerns foreign experts (often former regulators) work about political interference create risks for in- as resident advisers to provide support on a vestors that will be reflected in reduced invest- range of technical iand broader issues, and bring- ment at higher prices. Concerns about capture ing in other experts from time to time as re- by regulated firms or other interests can lead to quired. Arrangements of this kind usually begin the discrediting of privatization reforms and with efforts to help establish the agency and pressures to intensify state control. And serious often extend for a year or more. While this form errors in either direction can threaten the of assistance can be expensive, the right con- sustainability of private infrastructure reforms.3 sultants can have a major beneficial impact. The BOX 2 THE INTERNATIONAL FORUM FOR UTILITY REGULATION World Bank and other multilateral and bilateral The World Bank established the Intemational Forum for Utility donors are increasingly supporting and funding Regulaion (IFUR) to promote improved utility regulation in develop- these projects as part of stand-alone technical ing countries. It launched IRJR at an intemational convocation of assistance loans or of broader reform programs. regulatory experts in May 1996, where the broad lines on which IFUR Training was to operate were established. IFUR pursues four main activities: * Providing training. The two-week Intemational Training Program Newly appointed regulators and their staff can on Utility Regulation and Stratgy is hold twice a year in conjunc- derive great benefit from specialist training in tion with the Public Utility Research Center (PURC) at the the art and science of utility regulation. This University of Florida. Further information and application packets involves detailed training in technical topics canbeobtainedfromPURCbytelephone(3523926148),fax(352 such as designing tariffs and defining quality stchandards.uttrigning cariffsand alsoicor quald 392 7796). or email (purcecon@dale.cba.ufl.edu). or at the Website standards. But training can also cover a broader' range of topics relevant to the regulator's role, httpl/www.cba.ufl.edu/ecoapurc. such as managing relationships with political Prodxcing dirctodi The hnetional Directory of Ulity authorities, investors, consumers, and other Regulabto,yhitn contains desriptions of mdy NOregulatory stakeholders. To be effective, such training agenciesinmorem ianUIcomuries. TheSn_miDkctby of should usually be undertaken as long as pos- leguda Slht2 D _ o n e_ Ca_ sible before the regulators must take on their pro s -i wWaUtu e new responsibilities. This underlines the im- portance of appointing regulators well before w Bdb_silnbhthSWod privatization-something governments too BuCsWSU-NbothM/. rarely do when consumed by the demands of * DOgimgpdcy b hig iq mu lsems frome imrastiuc- managing major transactions. t- In O i aa - _ co_iens aW secor the briefs seek to Uttows =.istmdiqg on such matters as the scope for competi- Until recentlyT there was a dearth of training tieO in imdastncte provision, choice of regulatry rules, tailored to the needs of newlv appointed regu- m arrements, choisk ocatory poles, lators in developing countries. Regulators could istional arrangements, and risk allocaton. (The policy briefs attend existing programs for U.S. or U.K. regu- are publishedthroughthisseriesand are available on-line athttpl/ lators operating in very different social, politi- www.worldbank.orgtml/fpd/notes/notelisthtml.) cal, legal, and economic contexts. Or courses - Supporting oder ventures to improve uilityregulaton in develop- could be developed on a country-by-country ing countries. Activities include cosponsoring conferences and basis, with all the costs this involves. But the bsitt wis i oving. events and providing support to other initiatives. For more information about IFJR orfor copies of the directories While country-specific courses still play an im- contactlFURbytelephone(2 24736566),fax (2025222029),oremail portant part-particularly where language bar- (IFUR@worldbankorg). riers exist-there are a growing number of international courses tailored to the circum- stances of developing country regulators. One of the first was launched by the World Bank in the course, which draws heavily on cross- January 1997, in conjunction with the Univer- sectoral and cross-country examples. The Eco- sity of Florida, under the auspices of the Inter- nomic Development Institute of the World Bank national Forum for Utility Regulation (IFUR). has been complementing this program with a This two-week program, offered twice a year, series of sector-specific and regional initiatives has already trained more than 320 regulators and is also boosting indigenous regulatory ca- from more than seventy-nine countries (box pacity through support to regulatory research 2). Regulators from OECD countries and pri- and training institutes in such countries as Ar- vate sector representatives have also attended gentina, Brazil, and C6te d'Iv-oire. There are Utility Regulators-Supporting Nascent Institutions in the Developing World also a number of commercial offerings for de- important forum for sharing experience on com- veloping country regulators. Funding for atten- mon regulatory problems and also supports a dance at these courses, as well as for the dedicated regulatory research institute. Common institutions' start-up budgets, often comes from to all these efforts is an attempt to allow greater multilateral and bilateral donors. contact between regulators and other stakehold- ers and to build up a knowledge base for the use Contacts and information sharing with other of members of the network with sector statistics regulators and details on regulations, legislation, techniques, and best practices. Like other professionals, regulators can learn a great deal through contacts with peers dealing To facilitate contacts between regulators, the with similar issues in other jurisdictions. In World Bank's IFUR initiative publishes the In- addition to disseminating technical information ternational Directory of Utility Regulatory Insti- and practical insights, such exchanges can con- tutions, which contains contact details and brief tribute to the development of professional descriptions for nearly 800 regulatory agencies norms that help to support regulatory indepen- in more than 180 countries. dence. Contacts can be fostered in many ways. Key lessons One way is through study tours and participa- tion in international conferences or training pro- Policymakers and their advisers ignore the need forim intended to grams. An important outgrowth of the IFUR to build regulatory capacity at their peril. Hard- encourage dissemina- training program, for example, is a strong and won reforms can be quickly unraveled by tion of and debate on growing alumni network sustained by, among poorly administered regulation. The private ideas, innovations, and g best practices for ex- other things, an electronic discussion group sector should be strongly supportive of gov- panding the private ("Infrareg") moderated by the University of ernment efforts to train competent and well- sector. The views pub- Florida. trained regulators, because of the benefits in lished are those of the authors and should not depoliticizing regulation and ensuring greater be attributed to the Contacts between regulators can also take a more certainty in regulatory decisionmaking. World Bank or any of formal structure. At the bilateral level there is its affiliated organiza- tions. Nor do any of the growing experience with twinning arrangements, While there is no simple way to rapidly de- conclusions represent under which an experienced regulatory body velop indigenous regulatory expertise, there is official policy of the provides support to a less experienced body growing consensus that strategies incorporat- World Bank or of its Executive Directors through regular visits, staff exchanges, and other ing all three elements-adequate training, sup- or the countries they contacts. But there are limits to this strategy: new port by external consultants, and contacts and represent. regulatory bodies far exceed bodies with long information sharing between regulators-offer To order additional experience, and few of the experienced regula- the best prospects of success. To take full ad- copies please call tors have the resources to sustain intensive rela- vantage of each approach, however, policy- 202-458-i 11 or contact tionships. Regional approaches are also being makers and their advisers must begin the Roon FS,P- et, developed. For example, the Asia-Pacific Eco- process early, and ensure that adequate re- The World Bank, nomic Conference (APEC) has established the sources are dedicated to the task. 1818 H Street, NW, Electricity Regulators Forum to foster exchanges Washington, D.C. 20433, between r or Internet address bregonat regulators, and efforts have See Warrick Smith. Utiliry Regulators-Roles and Responsibilities" ssmith7@worldbank.org. been made to launch a Hemispheric Energy Regu- (viewpoint 128, October 1997). The series is also lators Conference under the auspices of the Sum- 2 See Warrick Smith, UTtility Regulators-The Independence Debate' available on-line (Vievpoint 127, October 1997). lwww.worldbank.org/ mit of the Americas. Within federal systems it iS See Michael Ylein and Neil Roger. "Back to the Future: The Poten- html/fpd/notes/ increasingly common to establish networks of tial in Infrastracture Privatization" (Viewpoint 30, November 1994). notelist.htmi). national and state regulators. In the United States, @ Printed on recycled for example, the National Association of Regula- Philip Gray, Private Participation in paper tory Utility Commissioners has grown into an Infrastructure Group