1. Cross-Border Infrastructure: A Toolkit Do We Need Regulation? Session on Regulation & Accountability Max Bradford Castalia The views expressed here are those of the presenter and do not necessarily reflect the views or policies of the Asian Development Bank (ADB), or its Board of Directors, or the governments they represent.

2. Cross-Border Infrastructure: A Toolkit What Do We Mean by Regulation? Differnt types of regulation:  Environmental  Safety  Consumer protection  Social objectives  Economic Rules + Institutions Monopoly Service Provider: Tariffs + Service Standards set monitor enforce change

3. Cross-Border Infrastructure: A Toolkit Inefficient tariff levels + Inappropriat e service When Is Regulation Needed? Ideal situation:  Competitive market  Many providers  Full information  Low risk Incentives for appropriate level of service + Efficient price = Minimal Regulation Reality for most infrastructure services:  Often involves (natural) monopoly or oligopoly  Large capital investments required  Service provision highly politicized  Minimum service standards required

4. Cross-Border Infrastructure: A Toolkit When Is Regulation Needed? Problems of congestion Problems of non-excludability Barriers to entry  Market failure is real but, Regulatory failure also occurs Competitive markets with anti-competitive protection = best Issue is not only identifying market failures, but of identifying large market failures where there is a scope for welfare enhancing interventions (Stiglitz)

5. Cross-Border Infrastructure: A Toolkit What Does Regulation Control? Tariffs “Too low”?  Provider may not be able to operate sustainably (need to recover full cost + return on capital)  Service standard suffers/ Government forced to subsidize  Consumers may ‘over-use’ “Too high”?  Provider may earn economic rent  Consumers may be unable to afford Service standards “Too low”?  May be threat to safety/ health  Customers may be dissatisfied “Too high”?  Costs may increase (‘gold-plating’)

6. Cross-Border Infrastructure: A Toolkit How Is Regulation Implemented? “Regulation by institution” Used in: UK Caribbean Australia New Zealand Government Utility Regulator Consumers Services Sets tariffs and service standards Tariffs Appoints Accountability?

7. Cross-Border Infrastructure: A Toolkit How Is Regulation Implemented? “Regulation by contract” Used in: France Africa Vanuatu Government Consumers Contract sets tariffs and service standards Services Utility Tariffs Accountability?

8. Cross-Border Infrastructure: A Toolkit When Does Regulation Fail? Inadequate information Political interference Rules poorly designed / unclear (especially for dealing with ‘shocks’ such as dramatic change in input prices) Rules not correctly applied (lack of competence / understanding?) Personal incentives not aligned with institutional incentives (personalities matter)

9. Cross-Border Infrastructure: A Toolkit Is Regulation Only for Private Providers? Governments are often monopoly service providers Governments are ‘accountable’ to consumers - but may not have incentives to operate efficiently Regulation of state-owned companies also important