Viewpoint
The World Bank Group                                                                      May 1997
Note No. 114   Designing Regulatory Institutions for
Infrastructure-Lessons from Argentina
Antonio Estacbe   As in many aspects of infrastructure reform, Argentina has been a leader in experimenting with
the design of regulatory agencies. This Note describes the essential elements of good regulatory
agency design-independence, autonomy, expertise, and accountability-and rates Argentina's
performance against these benchmarks in the gas, power, water, and telecommunications sec-
tors. The Note concludes that the biggest challenges to design are achieving political indepen-
dence and establishing rules to ensure regulatory accountability.
What the doctor would have ordered'    Independence. Ideally, regulators should oper-
ate independently from political pressures-from
Most regulatory experts would argue that there   ministries and from the regulated enterprises,
are some common elements that designers of   private or public. Here, most experts would ar-
regulatory agencies need to address. First, gov-   gue that as a minimum for ensuring this inde-
ernments must decide on breadth of regulatory   pendence, regulators should be appointed on
authority. In principle, regulatory authorities can   the basis of professional rather than political
be industry-specific with separate agencies for   criteria and should have formal protection from
gas, water, electricity, and so on, as in the United   arbitrary removal during their term. In addition,
Kingdom. They can be sector-specific with sepa-  the appointment process should involve both
rate agencies for groups of related industries,  the executive and the legislature, to ensure
such as for gas and electricity combined, as in   proper checks and balances.
Colombia and Hungary. Or they can be multi-
sectoral with a single regulatory agency for all  Autonomy. To be autonomous, regulatory agen-
or most infrastructure sectors, as in the case of   cies must first have their own resources-from
state-level regulators in the United States and   their own funding sources. Relying on budget-
national regulators in Jamaica. Most experts  ary transfers controlled by politicians is often
agree that a multisectoral agency offers advan-   viewed as a threat to regulators' independence.
tages over the alternatives. It pools regulatory   Cutting their allocation would be an easy way
resources (regulatory economists and lawyers,  to reduce their effectiveness. The most common
for example), especially important in countries   method of funding is through levies on the regu-
with limited regulatory capacity. And by pitting   lated firms or the consumers of the regulated
interest groups against one another, it tends to  services. These levies can be viewed as user
increase resistance to regulatory capture and   fees for the protection services provided by the
political interference and to improve the con-  regulators. But autonomy must go beyond fi-
sistency of decisions across sectors.     nancing. Regulators should also have autonomy
in staffing, so that they can recruit staff with
Next, the designers face a set of interrelated   high levels of expertise. The tasks of the agency
issues to do with independence, autonomy, and   should determine the size of the staff-not po-
accountability:                           litical considerations such as how many people
Private Sector Development Department * Finance, Private Sector, and Infrastructure Network



Designing Regulatory Institutions for Infrastructure-Lessons from Argentina
~~~~~~~~~ ~~~~~~~Rules setting deadlines for decisions
'Rules requiring detailed justifications and
nonpolitical reviews of decisions
* Processes to ensure that all concerned parties
reip   ~~~~~~~~~~~~~ ~have the opportunity to express their views
7 1                                                             Argentin public hearings and to appeal decisions
~whic~h4iste&tJi~ee.            ~(eneroy                    * Rules to permit the removal of regulators in
setec*;&tbe                          dw o             n       : lcases of proven misconduct.
staff~ing the agency caeaonereeneAnother key factor in accountability is the num-
theommercial oper.   thaner of regulators. Generally, a regulatory com-
mission made up of three to five members is a
AchievingIOfl~K                                better choice than a single regulator, because
cies often requires exempting them from civil  Geach member of the commission ends up moni-
sv   salary     t  and recruitm ent rules. Itmayalso toring the others, increainng accountability. The
advantage of regulatory commissions is now
widely recognized even in the United Kingdom,
which originated the single-regulator approach.
could bArgentina's experience at a
~~~~~~~~ ~~~~~~national level
Accountability. AccunabliyrquIn Argentina responsibility for infrastructure ser-
vices is divided between the national and the
provincial goverments. The national government
initiated a privatization program in 1989 for all
for many bureaucrats. It alsorequiresclear,   hutilities under its purview-mainly gas, electric-
simple  proceduralrules.Mostimportan e         ity generation and transmission, and water and
electricity distribution in the Buenos Aires met-
~ Isuau~t~eOr~<afutT.cmfl#subOrsioIiinropolitan area. Like the United Kingdom, the
national government created industry-specific
iitwe~~~~~s .aeeeL ~~~~agencies for the four main utilities: electricity
(ENRE), gas (ENARGAS), telecommunications
(CNT?l, and water and sanitation (ETOSS). But
have lost their jobs throuigh privatization. Over-   unlike the United Kingdom, Argentina has opted
staffing the agency can lead to interference with   for regulatory commrissions for each agency rather
the commercial operation of regulated firms,   than a single regulator.
Achieving staffing autonomy in regulatory agen-
cies often requires exempting them from civil   Gas and power. Most successful have been the
service salary and recruitment rules. Ir may also   two agencies covering the power sector, ENRE
mean allowing them to recruit external consult-   (Ente Nacional Regulador de la Electricidad)
ants. Where economic, accounting, and legal   and ENARGAS (Ente Nacional Regulador del
expertise is in short supply, banning subcon-   Gas). These agencies are addressing many is-
tracting can constrain regulatory capacity.     sues that are similar or strongly related and it
could be argued that the two should be amal-
Accountability. Accountability requires transpar-   gamated into one (see box for structure and
ency in the regulatory agency's decisionmaking    functions of ENRE). Still, they have generally
process, something that is often counterintuitive   been extremely effective in carrying out most
for many bureaucrats. It also requires clear,   of their responsibilities. Both are reasonably
simple procedural rules. Most important are:    independent, autonomous, and accountable.



They have their own sources of funding and    There may be too many staff and they lack
sufficient funding to perform all their tasks-   many of the skills required for effective regu-
though some would argue too much funding.   lation, indicating that the agency may not have
Both have a small, technically competent, well-   sufficient autonomy or accountability. Over the
paid staff (less than 100, including regional   past year or so, ETOSS has begun to fix these
offices), and the regulators on their commis-   problems, hiring international consultants to
sions are accountable to both the legislative    deal with specific issues. But as a result of ini-
and the executive branches of government.      tial failures in resolving problems with the con-
cessionaire, ETOSS still operates under heavy
But both have been criticized for the absence of   scrutiny from the media and other interest
any systematic external scrutiny of their practices   groups. This shows the importance of getting
and administrative processes and for the lack of   things right at the start. Once lost, credibility is
transparency in some of their decisions. This lack   hard to rebuild-especially when there is a lack
of transparency increases the risk of capture-   of transparency in decisionmaking.
and the risk that regulatory costs may be too high
and that users may be overcharged. There is   Telecommunications. The weakest performer
public concern about the power that the energy   has been CNT (Comisi6n Nacional de Telecom-
secretary still retains over some aspects of the   municaciones). It was created by a 1990 ex-
regulation of the gas and electricity sectors. The   ecutive decree that divided the regulatory
secretariat is the first administrative step in ap-   responsibilities for telecommunications between
peals of regulatory decisions, implying that in   CNT and the Secretariat of Telecommunications.
conflicts between a regulator's decision and the   Creation by executive decree tends not to be
government, the regulator is likely to lose. (In   conducive to independence, because it makes
other countries, the appeal will often be straight   the regulator accountable to the executive
to the courts.) And both agencies still lack a key   branch, not the legislative. The decree creat-
regulatory tool-a set of accounting standards   ing CNT has already been modified twice,
and procedures. Consistent regulatory accounts   reducing the agency's regulatory role and ex-
across all firms, with detailed cost information    panding the executive's.
for each type of service, are essential for effec-
tive economic regulation, particularly for revis-   CNT's operation is supposed to be financed
ing prices and monitoring whether regulated   through a 0.5 percent sales tax on telecommu-
firms are using cross-subsidies.               nications firms and payments by broadcasters
for radio spectrum. But it has not yet managed
Water. The water regulator, ETOSS (Ente   to achieve autonomy in decisionmaking or ex-
Tripartito de Obras y Servicios Sanitarios), has   pertise. The problem stems in part from the ex-
been less effective. Although its performance is   ecutive branch's influence on some key decisions
improving, it has taken about two years to start   and in part from the way regulatory responsi-
to come to grips with its problems. Some issues   bilities have been divided between the ministry
will be hard to resolve. For example, a poten-   and CNT. For example, end-user rates and ac-
tial problem for the agency's independence is   cess rates need to be harmonized, but the min-
that its commission represents the interests of   istry is responsible for the first, and CNT for the
three different levels of government: the national   second. The costs of the division have been high-
government (as owner of the assets), the mu-   lighted recently in the controversy over rebal-
nicipality of Buenos Aires, and the province.   ancing the rates to correct a distortion between
All three layers of government may be controlled   long-distance and local rates and between com-
by different political parties, which could lead    mercial and residential rates. This controversy
to political tensions that might affect decisions.   also exposes the cost of CNT's staffing prob-
lem: CNT has not yet assembled in-house the
ETOSS is funded by a fee the concessionaire   skills required to address the complex issues it
levies on consumers (2.67 percent of the bill).   faces. But it has begun to hire consultants to



Designing Regulatory Institutions for Infrastructure-Lessons from Argentina
address the rebalancing issue, and staff training    That would have led to conflicts reflecting the
is on the regulators' reform agenda.                new  regulators' resentment at not being kept
on by the private company taking over the utility.
CNT's accountability performance has also been
under the spotlight. With no time limits for    Regulatory agencies are addressing training
making decisions or resolving conflicts, CNT    needs for their staff. But salaries are not always
has typically been slow. And review of CNT's   high enough to retain the most qualified staff or
activities has been less transparent than it   to attract new staff. Funding seems secure-all
should be, even though CNT reports directly    provinces have introduced a regulatory user fee.
to the president's office. Overall, the regula-    But as at the national level, processes are not
tory experience in telecommunications has    yet adequately defined, raising concerns about
shown the tough political consequences that   accountability. In the cases of Cordoba and
failures in institutional design can have for    Tucman the problems led to the cancellation of
policymakers. But it has also provided useful    privatization processes.
lessons for regulators in other sectors.
Conclusion
The provincial regulators
The biggest challenges for regulatory design
Provincial governments began to follow  the    are achieving political independence and in-
national government's privatization lead in the    troducing rules to ensure accountability. Po-
fiewporum   is an open  mid-1990s. Seven provinces have granted con-    litical independence requires a commitment by
forum intended to    cessions for water and sanitation services, and    the government early on in the process. And
encourage dissemina-  eleven provinces concessions for electricity dis-    accountability requires robust procedural and
tion of and debate on  tribution. The privatization process and the con-    sound accounting rules. However, ensuring the
best practices for   cession contracts in electricity, prepared with    independence of the regulatory agencies is
expanding the private  technical assistance from the National Energy    likely to be more complex because politicians
sector. The views    Secretariat, have been fairly standard across    often have a hard time giving up control over
published are those of  
the authors and should    provinces. There is more variation in the wa-    resources considered politically sensitive.
not be attributed to the    ter concessions, which differ in award criteria,
World Bank or any of its   contractual obligations, and tariff design.    Argentina's experience shows that even the
affiliated organizations.
Nor do any of the con-                                                    most innovative reformers can have problems
clusions represent   The institutional arrangements adopted by the    ensuring the independence, autonomy, and
official policy of the  national and provincial governments have much    accountability of regulatory agencies. But these
lxecutive Directors  in common and the provincial regulatory insti-    problems, even in the case of telecommunica-
or the countries they  tutions, just now  getting off the ground, face    tions, have not yet been serious enough to off-
represent.           problems similar to those at the national level.   set the short-term  gains of privatization. The
To order additional  Most provinces are following the national    Argentine public is receiving better utility ser-
copies please call 202-    government's lead, opting for industry-specific    vices-and often at lower prices-than before
458-1111 or contact  agencies-though some, such as Catamarca,    privatization. Whether these gains can be sus-
Suzanne Smith, editor,
Room G8105, The World    have opted for the preferred public utility com-    tained in the longer run depends on the
Bank, 1818 H Street,  mission approach. Most of the focus at this early    strength of the regulatory agencies and on their
NW, Washington, D.C.  stage centers on staffing. Some provinces have    capacity to deliver on their responsibilities.
20433, or Internet
address ssmith7@     fallen short in ensuring the political indepen-    Time is the test for these institutional issues.
worldbank.org.       dence of commission staffs, with some staff
The series is also   political appointees. Staff numbers are reason-        For a recent overview of best practice in utility regulation, see
available on-line                                                           'Utislity Regulators: Creating Agencies in Reforming and Dievelop-
(www.worldbank.      able, however (ranging from  seven to forty).         ing Countries." W. SmitL (1996), a paper presented to the Interna-
org/html/fpd/notes/  The regulatory agencies avoided an important          tional Forum for Utility Regulation, Oxford, England, June 1996.
notelist.html).      misstep early on, rejecting suggestions that they
@Printed on recycled  hire much of the personnel of the public utili-    Antonio Estache, Economic Development
paper.               ties declared redundant by the concessionaires.    Institute (aestacheWworldbank.org)