Building trust in regulation: A global study of operator-regulator relationships

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KPMG International commissioned the Economist Intelligence Unit to write Bringing trust into regulation. The report is based on the following research activities:

The Economist Intelligence Unit conducted a survey, completed in February 2009, of 213 executives who are closely involved with the regulation of current and former utilities. The survey brings together practitioners from both sides of the commercial operator-regulator divide, including 165 respondents from operators and 48 from regulators. All are closely familiar with their organisation's key regulatory relationships, and they hail from five heavily regulated industries—telecommunications, power, water, transport and post. The survey sample is global, with 36 percent of participants based in Europe, 23 percent in North America and 20 percent in Asia-Pacific. A total of 77 respondents—36 percent of the sample—are based in developing countries.

To supplement the survey, the Economist Intelligence Unit conducted a programme of interviews with senior executives of both commercial operators and regulators in the aforementioned industries. We are grateful to the survey participants and interviewees for sharing their valuable time and insights.

The views and opinions expressed herein are those of the Economist Intelligence Unit and do not necessarily reflect the views and opinions of KPMG International or KPMG member firms. The KPMG comment sections were written by professionals from KPMG member firms.

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Building trust in regulation: A global study of operator-regulator relationships

  1. 1. ECO N O MI C S & R EG U L AT I O NBuilding Trust in RegulationA global study of operator-regulator relationshipsADVI SO RY© 2009 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliatedwith KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMGInternational or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind anymember firm. All rights reserved.
  2. 2. © 2009 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliatedwith KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMGInternational or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind anymember firm. All rights reserved.
  3. 3. 5 BUILDING TRUST IN REGULATION Contents 1. Foreword 1 2. About the research 2 3. Executive summary 3 4. Introduction 5 5. The state of relationships 7 6. KPMG Comment: Working more constructively together 11 7. The consequences of mistrust 13 8. KPMG Comment: Emerging issues in emerging markets 20 9. The mechanics of trust 21 10. KPMG Comment: Building firm foundations for the regulatory process 25 11. KPMG Comment: Tackling uncertainty, safeguarding investment 27 12. The people factor 29 13. KPMG Comment: Converged data, improved performance 31 14. Conclusion: A positive outlook for trust 33 15. Appendix: Survey demographics 35 © 2009 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  4. 4. 1 BUILDING TRUST IN REGULATIONForeword Trust is the glue that holds relationships together but also the lubricant that keeps things moving. This study, from the Economist Intelligence Unit, commissioned by KPMG International examines the current state of trust between regulators and the industries they regulate around the globe. Many of the findings relate to the need for better communication and ensuring that regulators and operators can establish a common understanding between one another: concerns that KPMG firms care deeply about and work with many clients to address. While it is encouraging that levels of trust seem to be improving, these relationships can be extremely fragile. Moreover, as global economic uncertainty continues, the potential cost of related regulatory uncertainty is an unnecessary burden at a time when investment and revenues are under threat. Now, more than ever, trust between parties is critically important. This is not to say that we all ‘hug a regulator’, or that we throw away robust regulatory strategies, or that regulators shouldn’t take decisions that might negatively affect certain stakeholders, but it’s the environment in which you communicate those decisions that is important: one characterized by respect. We hope that the findings stimulate further thoughts in an area of consistent change and challenge and would be delighted to talk with you about what KPMG firms are doing to help our clients build levels of trust that enable better regulation and benefits to the economy. Finally, I would like to thank the survey’s participants and interviewees for their time. David Thomas Global Head of Communications Regulation, KPMG © 2009 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  5. 5. BUILDING TRUST IN REGULATION 2About the research KPMG International transport and post. The survey sample is global, with 36 percent of participants commissioned the based in Europe, 23 percent in North Economist Intelligence America and 20 percent in Asia-Pacific. Unit to write Building Trust A total of 77 respondents – 36 percent in Regulation. The report of the sample – are based in developing countries. is based on the following research activities: To supplement the survey, the Economist Intelligence Unit conducted a program of The Economist Intelligence Unit conducted interviews with senior executives of both a survey, completed in 2009, of 213 commercial operators and regulators in the executives who are closely involved with aforementioned industries. We are grateful the regulation of current and former to the survey participants and interviewees utilities. The survey brings together for sharing their valuable time and insights. practitioners from both sides of the commercial operator-regulator divide, including 165 respondents from operators and 48 from regulators. All are closely familiar with their organization’s key regulatory relationships, and they hail from five heavily regulated industries – telecommunications, power, water, The views and opinions expressed herein are those of the Economist Intelligence Unit and do not necessarily reflect the views and opinions of KPMG International or KPMG member firms. The KPMG comment sections were written by professionals from KPMG member firms. © 2009 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  6. 6. 3 BUILDING TRUST IN REGULATIONExecutive summary Recent revelations of than others. It also makes clear that, even where relationships are good, trust is an failures in regulatory extremely fragile commodity which does oversight have helped not take much to undermine. Mistrust to put regulation under often breeds uncertainty, which can have the microscope. tangible negative consequences for market players. Effective regulation resulting in efficient Following are the main conclusions of markets, however, is the result not only the research: of the regulator’s performance but also of the quality of interaction between the • Operator-regulator relationships are regulator and the market’s commercial evolving for the better. This is players. In heavily regulated sectors encouraging in a global context that has where existing or former public utilities are seen renewed calls for a more vigorous dominant – telecommunications, power, approach to regulating competitive water, transport and post1 – and where markets. More executives in our survey policy reforms over the past two decades characterize the level of trust between have created new regulatory bodies and operators and regulators in their sector competitors, relationships between as “high” than those who think the regulator and regulated have frequently opposite, and more participants believe been troubled. Trust is the foundation of that operator-regulator relationships any good relationship; it has arguably been are improving than those who see in shorter supply among market players in deterioration. Operators are less these sectors than others, and the lack of it satisfied than regulators with the levels has stifled aspects of market growth even of mutual trust, and operators in in fast-growing economies. developed economies are not as positive in their assessments as their This study of operator-regulator2 interaction counterparts in the developing world. in five heavily regulated sectors reveals, But majorities of both operators and perhaps surprisingly, a large percentage regulators in our survey expect of regulatory relationships in which the improvement in their mutual parties deem the level of trust to be “high”. relationships in the coming years. However, the research – based on a global survey of 213 operator and regulator • Breakdowns in trust often result from executives, as well as a series of one-on­ regulatory uncertainty, which can one interviews with practitioners – also negatively impact industry suggests that relationships in some development. Uncertainty and a sectors and parts of the world are weaker resulting loss of trust carry a variety of 1 This study’s coverage of the power sector includes electricity and gas utilities. In the transport sector the research focuses on railways, airports and other ports. 2 The term “operator” is used in this report to refer to commercial service providers in the five sectors covered by our research. Other terms, such as “utility” or “company” are also commonly used in different parts of the world to describe , these entities. © 2009 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  7. 7. BUILDING TRUST IN REGULATION 4 potential consequences for market and regulators highlight licensing as a • Processes and frameworks are players, from direct financial losses to largely problem-free area of interaction, important, but people and personal an increase in litigation. Operators in the with monitoring and compliance, relationships are the critical survey cite the most frequent outcomes consumer protection, and data transfer ingredients in building trust. Asked to of regulatory uncertainty to be direct also proceeding relatively smoothly. identify the most important contributors increases in cost, lost revenue, to an effective operator-regulator • Industry consultations, a key tool in cancelled or postponed investments, relationship, both groups of survey building trust, will widen the trust business initiatives put on hold or respondents point with equal emphasis gap if they are more form than increased litigation. Taken at overall to good personal rapport between substance. While the survey revealed a market level, the uncertainty can senior executives from both parties. consensus on the need for consultations quickly translate into slower market Strong personal relationships help on key issues, several operators voice development and service penetration. to smooth potentially antagonistic concern with the consultation process relationships by offering each side• Achieving genuine trust between itself, complaining that regulators treat some visibility into the motives and operator and regulator hinges on consultations as no more than a constraints of the other, and they the development of a mutual formality. Generally speaking, operators ultimately help build trust among understanding of each side’s also tend to value informal consultations the parties. objectives and constraints. With each over the public variety. By contrast, party’s perception of the other shaped regulators seem more wary of such by its own experience, culture and informal exchanges, which they see as market interests, the ability to contradicting the need for transparency. understand the influences and motives • Trust suffers without strong driving the other side is a vital factor in mechanisms to share relevant and building trust. Operators are adamant accurate information. The provision that regulators must achieve a greater of relevant information is another appreciation of business operations and important rung in the trust-building risks. Regulators, for their part, insist ladder, but information-sharing remains that operators gain an improved an area of friction between operators knowledge of regulatory and policy and regulators. There is a substantial objectives. gap between the regulator’s need• Transparency of processes and clarity of information to fulfill its mission, of the regulatory framework increase and operator willingness to share levels of trust. The trust gap widens on information, owing to concerns around issues that are susceptible to political confidentiality and relevance of influence and unpredictability, while information. Ultimately, the parties must routine, process-oriented interaction work together to make the information- tends to proceed more smoothly for the sharing process productive. parties. For example, both operators © 2009 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  8. 8. 5 BUILDING TRUST IN REGULATIONIntroduction The role of industry Even prior to the global downturn, however, the fundamental nature of regulation across the world market regulation was already evolving in a has risen in prominence with number of industries. Rapid technological an economic crisis brought change and increased competition broke about – at least in part – by the traditional, silo-based structure of the telecommunications market, for example. regulation in a number of In many countries, increased environmental sectors that appears to have concerns refocused regulation in the been inadequate to the task. energy and water sectors even as they were being opened to competition. Security considerations led to an expansion, in some parts of the world, of the regulatory purview in the transportation sector. “ a consequence of the economic crisis, we are in a As To societies and governments, the effective fundamentally different place than we were five years regulation of certain industries is a ago, according to Lord Carter, former UK Minister for ” necessity in order to ensure that the latter’s services or products are made available toCommunications, Technology and Broadcasting, speaking the population in as affordable, safe and of the challenges facing regulators and policymakers in efficient a manner as possible. This is today’s environment. Rapid response to problems posed particularly the case when it comes to services provided by existing and former by the crisis is imperative, he says, but existing policy “public utilities” such as telecoms, water, , frameworks do not necessarily allow for this. power, post and transport. The suppliers of these services and products also benefit from good regulation in many ways, but many of the largest suppliers tend to view regulation less as a virtue than as an unavoidable aspect of doing business. Over the past two decades, markets for these services have been liberalized to some degree in many parts of the globe, resulting in the emergence of competitors to erstwhile monopoly providers. This has not only made the regulatory agencies’ tasks more complex, but has greatly © 2009 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  9. 9. BUILDING TRUST IN REGULATION 6expanded the scope for potential conflict operator is a crucial requirement ofbetween regulators and regulated. In many regulatory effectiveness. Operators needheavily regulated industries, the numbers to trust the regulator’s ability to maintainof people employed to deal with these distance from both policymakers and otherissues – both at regulators and commercial operators, to deliver consistent, timely andproviders (here termed “operators” for transparent decisions, and to have theconvenience of use) – have expanded in requisite authority to oversee the sector.a like manner. Conversely, regulators need to trust operators to abide by established rules andThis expansion reflects a recognition on be co-operative. As this study makes plain,the part of both regulator and operator that the ability to build trust in regulationsmooth and effective interaction usually requires enormous patience and fortitudebenefits both the industry as a whole from regulators and operators alike.and most of the players that operate in it.In turn, effective regulation is now widelyacknowledged as a core foundation of asustainable industry growth framework.Even as regulators become more engaged,however, their effectiveness in increasinglycompetitive environments has become afunction of their ability to act as – and beseen to be – independent arbiters. In thiscontext, trust between regulator and© 2009 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliatedwith KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMGInternational or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind anymember firm. All rights reserved.
  10. 10. 7 BUILDING TRUST IN REGULATIONThe state of relationships The level of operator- Lord Carter, for one, is not surprised by the improvement in relationships and the regulator trust in the five relatively high levels of trust registered in industries researched in this the survey. One reason for this, in his view, study is surprisingly strong is a vast improvement achieved in the in light of the expanding quality of regulatory execution in recent decades. “In the UK and elsewhere in role of regulation across Europe, we have seen a ‘professionalization’ industries and countries of the regulatory discipline in the last 25-30 over the past ten years. years. An increasingly professional and ” thorough approach on the part of regulators helps also to engender respect – and trust More executives in our survey characterize – from operators. the level of trust – between operators and The assessments of trust are not uniformly regulators – in their sector as “high” than positive across all groups of executives. those who think the opposite. Similarly, Operators, for example, are more guarded trust-building seems to be moving in the than regulators in their appraisal of existing right direction: more participants believe levels of trust. Among operators, views that operator-regulator relationships are also differ between executives based in improving than those who see developing economies – where 42 percent deterioration. While by no means glowing of operators say relationships are assessments of the mutual relationships, improving – and those in developed these findings are encouraging in a global economies – where only 23 percent say context that has seen renewed calls for they are. a more vigorous and potentially more intrusive approach to regulating competitive markets. © 2009 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  11. 11. BUILDING TRUST IN REGULATION 8 How would you characterize the overall level of trust that exists between operators and regulators? 1% Very high High 4% 8% 10% 8% Neither high nor low 15% Low Very low 21% Don’t know 33% 39% 61% Operators Regulators Source: Economist Intelligence Unit 2009 How, if at all, has your operator–regulator relationship changed in the past year? 2% It has improvedIt has remained the same 10% 12% It has deteriorated Dont know 30% 42% 48% 56% Operators Regulators Source: Economist Intelligence Unit 2009 © 2009 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  12. 12. 9 BUILDING TRUST IN REGULATIONThe varying assessments may be Pacific electricity provider points to the is particularly the case in areas of operator-explained by different levels of maturity of clarity of the regulatory framework in his regulator interaction that are process-driventhe relationships or sector dynamics at a national market and the clear demarcation and clearly outlined. “The level of trust isgiven point in time, among other factors. that exists between those who make the higher when an issue is subject to global,Operators, moreover, who do not benefit rules and those who enforce them. While objective analysis and scrutiny, says Sean ”from all regulatory decisions, may be this contrasts with many markets where Williams, Managing Director, Retailexpected to display a slightly more critical responsibility for both regulatory rules and Strategy, with BT, the United Kingdom’sperspective on relationships. Still, the their implementation lie with a single body, largest fixed-line telecoms operator.larger point remains that regulator- clarity as to where accountability lies “Lower levels of trust exist, he maintains, ”regulated relationships appear to be remains key. “concerning issues that are susceptible toevolving for the better. political influence and unpredictability.” More transparency of regulation, at least in “Routine functions tend to go smoothly, ”What’s going right? some markets, is contributing to better agrees Julie Veach, Acting Chief of the relationships. Patricia De Suzzoni, DirectorPrecisely what is working better will also Competition Policy Division at the US of Markets with France’s energy regulatorvary in line with individual and institutional Federal Communications Commission CRE, believes that regulator efforts toexperiences, but there are some common (FCC), “while larger policy issues bring increase the levels of transparency havethreads. The regulatory manager of an Asia- tougher discussions. 3” contributed positively to building trust. This In which operational areas does interaction between operator and regulator work smoothly? (Top responses) 0 10 20 30 40 50 60 70 80 49% Licensing 65% 42% Monitoring and reporting on regulatory compliance 52% 41% Consumer protection issues 44% 37% Transfer of operational data 50% 36% Tariff regulation 42% 35% Quality of service issues 58% 31% Policy consultations 54% 21% Market definition 29% 19% Resolution of disputes with competing operators 38% 6% None 4% Operators Regulators Source: Economist Intelligence Unit 2009 3 Julie Veach’s remarks, here and elsewhere, reflect her personal views only and are not necessarily the official position of the FCC © 2009 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  13. 13. BUILDING TRUST IN REGULATION 0The survey findings support these views. suspicious of the drivers of and the A modicum of structural stability is alsoBoth operators and regulators, for example, influences on decision-making. ” important in building trust. The tenure ofhighlight licensing as one area that has the regulator, a track record of reliability Important though they may be, marketbenefited from largely problem-free and – as already discussed – transparent dynamics are only one part of ainteraction, with monitoring and processes are critical foundations. Ofgem, complicated equation. Trust is also in thecompliance, consumer protection issues, for example, has been regulating the eye of the beholder, with each player’sand data transfer also cited as areas of British energy sector for the past twenty perception of the other party shaped by itsrelatively smooth interaction. years, a tenure that has built some own experience, culture and market goodwill for the regulator.The impact of market structure interests. “Trust in the regulator is largelyon trust an issue of corporate culture, says Ms De ” More broadly, trust in the regulatoryThe ability of market participants to develop Suzzoni. Some operators may regard process is also often an extension ofand maintain a relationship of trust is also a regulation more favorably if they are set market participant trust in the political andfunction of the dynamics that shape the to benefit from it, while those that stand to policy processes. Regulatory bodies are aoverall operating environment. Operators in see their position negatively impacted by reflection of the institutional frameworkmarkets with high competitive intensity, for regulatory action may be more guarded within which they evolve, argues Michaelexample, seem to offer a dimmer view of towards the regulator. Pollitt, Assistant Director of the Electricityrelationships with the regulator. The highly Policy Research Group at the University of Regulatory conservatism induced by acompetitive telecoms sector provides an Cambridge. In turn, the best regulatory sense of self-preservation can develop intoillustration: only 32 percent of operator agencies – or at least those perceived as a full-blown suspicion of any regulatoryexecutives in this sector characterize the such – are typically found in countries that action. Steve Smith, Managing Director,level of trust in their market as high, have strong political and competition Networks at Ofgem, the UK energycompared with 52 percent of their institutions, notably in western and regulator, points out that some operatorscounterparts in other sectors. northern Europe. To illustrate this point, have an inherent conservatism that makes around one-third of the operators in our“This is a very difficult environment, ” them more guarded about regulatory survey that had noted a deterioration instates Karabo Motlana, CEO of South action. “It’s not that operators don’t trust their relationship with the regulator pointedAfrican telecoms regulator ICASA, about the regulator” says Mr Smith. “There is just , to political uncertainty at government levelhis country’s telecoms market. “ the As a risk aversion ingrained in operators that as the primary factor, with 36 percent alsoregulator introduces more competition in makes them sometimes not give the pointing to excessive governmentthe sector, he says, “people tend to be ” benefit of the doubt to the regulator. ” influence. © 2009 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  14. 14. 11 BUILDING TRUST IN REGULATIONKPMG CommentWorking more constructively togetherBuilding trust in the regulatory relationship brought by the change to establish a more Equally, business, both through boards andis about improving the efficiency but not trusting and effective relationship, as regulatory functions, can play its part inchanging the fundamental dynamics evidenced by Sean Williams, formerly understanding the policy agenda andof the relationship between a regulator of Ofcom and now at BT. communicating its operational agenda.and operator. It is striking that the UK government has Moreover, as KPMG’s report BringingRespondents indicated in the survey been considering extending Ofcom’s Regulation into the Boardroom (KPMG LLPthat a better understanding of business powers to incorporate the responsibilities (UK), 2007) demonstrated, goodoperations and risks on the part of currently held by PostComm, the postal communication within business, andregulators, and a better understanding of regulator. In his report on the UK postal particularly between the board andpolicy objectives on the part of industry system as chairman of the Independent regulatory team, is a precondition for awere the best means of improving the Review of the Postal Services Sector, robust but effective regulatory strategy.overall levels of trust. The ability for Richard Hooper writes that he is: As Mr Williams of BT demonstrates, thererespective stakeholders to put themselves is some career ‘cross-over’ between‘in the shoes’ of others is clearly, therefore, ...struck by the depth and range of regulators and industry, and vice versa.a key competence for all engaged in the disagreements between Royal Mail However, if there are concerns aboutregulatory sphere. and Postcomm. Even the most ‘regulatory capture’, the survey does notIt is clear that this means setting the basic facts are disputed… The bear this out. Nor does the practice seemappropriate ‘tone at the top’: the systems and necessary data particularly frequent. Rather, this suggestsrelationships between the regulator and needed to build a constructive and that there are further opportunities to buildthe regulated and the example it sets for professional regulatory relationship relationships and understanding betweenthe rest of their respective organizations. are not yet in place… regulators and industry without major riskThe survey results suggest that There is a lack of trust on both of regulatory capture, and that there mayrespondents agree, citing good senior level sides.5 also be improved mutual understandingrelationships as the key contributor to through some ‘cross-over’ – both bettereffective regulator–industry relationships. operational and policy competency. KPMG firms’ regulatory specialists haveIn some instances, however, the been employed around the globe to adviserelationships are fundamentally fractured on the development of new regulators,and more drastic action is required. By the working with governments, lawyerslate 1990s, relations between the UK and other stakeholders to identify whattelecommunications incumbent, BT plc, powers, skills and competencies areand former regulator, Oftel, were required where confidence in regulatorsconsidered poor by many commentators has been significantly eroded. In otherand in the words of former chairman, instances, we have worked closelySir Christopher Bland, ‘adversarial’4. alongside regulators to help them identifyFrom its creation in 2003, Ofcom and BT where they could perform more effectivelywere able to use the different environment and efficiently.and personalities 4 “‘New BT’ told it’s time to deliver - Broadband Britain benefits from lighter regulation”The Guardian, 25 July 2002 , 5 “Modernise or Decline: Policies to maintain the universal postal service in the United Kingdom” Richard Hooper, 2009 , © 2009 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  15. 15. BUILDING TRUST IN REGULATION 12Turning the tablesKPMG firms are developing a newapproach, ‘Turning the Tables’, in whichmanagers and staff at operators andregulators are taken through scenariosdeveloped by specialists and asked to takea role on the “opposing team” and makedecisions that reflect realistic corporateand regulatory challenges. Approachessuch as this are clearly needed to respondto some deeply entrenched differences inperception between parties. © 2009 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  16. 16. 13 BUILDING TRUST IN REGULATIONThe consequences of mistrust There is much that can go their mission. Market participants are also likely to assign a negative grade to an area awry in operator-regulator of interaction that has an adverse impact relationships, but the on their primary constituency (whether perception of what doesn’t it’s the government, consumers or work may be colored by shareholders). For example, operators in the survey cite dispute resolution and tariff each party’s own vested regulation as the areas that are most interests. problematic in their relationship with regulators. By contrast, regulators see Asked to identify specifically what goes quality of service as the key area of wrong, respondents to our survey point difficulty, although they also acknowledge primarily to those areas of regulatory problems with dispute resolution among implementation that have a direct, negative competing operators. impact on their ability to operate or fulfill In which operational areas does interaction between operator and regulator work poorly? (Top responses) 0 5 10 15 20 25 30 35 33% Resolution of disputes with competing operators 21% 31% Tariff regulation 15% 22% Market definition 17% 21% Policy consultations 8% 19% Monitoring and reporting on regulatory compliance 17% 19% Quality of service 23% 15% Licensing 8% 14% Transfer of operational information 19% 10% Consumer protection issues 19% Operators Regulators Source: Economist Intelligence Unit 2009 © 2009 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  17. 17. BUILDING TRUST IN REGULATION 14Breakdowns in the operator-regulator are prone to blame a breakdown in trust on regulator performance has negativelyrelationship often occur when there is a the performance of the regulator. Of the impacted market confidence: “Thelack of transparency in a decision or with respondents that say that their relationship regulator does not meet timelines, doesan increase in the degree of subjectivity with the regulator had deteriorated, 63 not digest all the inputs and does notrequired by the decision or rule-making percent blame poor regulator performance, follow procedures. Over time, you startprocess. While most decisions involve with another 37 percent pointing to unduly questioning their abilities. ”some degree of subjectivity, some close relationships of the regulator with On a more positive note, regulatorscategories – for example, dispute other players in the marketplace. get their best rating on enforcement ofresolution – are more subject to Most of the operators surveyed give a regulation, with 46 percent of operatorsinterpretation than others and are more rating ranging from mixed to poor on rating them as good or very good inlikely to create an aggrieved party. regulatory performance on key items this area.The blame game such as timeliness, consistency and transparency of decisions. A regulatoryAs a result, determining the source of a manager in one Africa-based operatorbreakdown in trust can easily devolve into interviewed for this study complains thata blame game. Operators, for example, How would you assess the performance of the regulator on timeliness of decisions and rulings? 1% Very good 5% 6% Good Mixed 17% 21% Somewhat poor 17% 17% Very poor Don’t know 26% 34% 56% Operators’ rating of regulators Regulators’ self-assessment Source: Economist Intelligence Unit 2009 © 2009 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  18. 18. 15 BUILDING TRUST IN REGULATION How would you assess the performance of the regulator on consistency of decisions and rulings? 2% 2% Very good 3% Good 8% Mixed Somewhat poor 23% 29% 28% Very poor Don’t know 26% 46% 33% Operators’ rating of regulators Regulators’ self-assessment Source: Economist Intelligence Unit 2009 How would you assess the performance of the regulator on transparency of decisions and rulings? 2% Very good 7% 6% Good 12% Mixed Somewhat poor 17% 31% Very poor Don’t know 21% 30% 28% 46% Operators’ rating of regulators Regulators’ self-assessment Source: Economist Intelligence Unit 2009 © 2009 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  19. 19. BUILDING TRUST IN REGULATION 16 How would you assess the performance of the regulator on enforcement of decisions and rulings? 2% 2% Very good Good 5% 10% 6% 15% Mixed 10% Somewhat poor Very poor 19% Don’t know 36% 37% 58% Operators’ rating of regulators Regulators’ self-assessment Source: Economist Intelligence Unit 2009It is probably not surprising that regulators should be the key functions of the on insufficient resources at their disposalin the survey have a better opinion of their regulator, or the focus of its activities at but also point to inaccurate or inadequateperformance in these areas than operators any given point in time. In turn assessment information submitted by operators.have. The magnitude of the gap in some of regulator performance is based on a Past operator behavior can play a roleareas, however – 77 percent of regulators distinct set of expectations. Whatever its in deepening the trust gap. Paul Foran,consider their performance in the area of reasons, this gap in the assessment of Vice President, Regulatory Programs oftimeliness of decisions as good or very regulator performance points to often American Water, a US water utility, pointsgood compared with only 22 percent of tense relationships and highlights the scale out that past abuses by some providersoperators who feel the same – is striking. of the effort that must be undertaken to often lead regulators to regard an entireThere may be a number of reasons for build trust between the two sides. sector with suspicion. “Utilities have tosuch a divergence of views. First, Regulators are just as likely to ascribe do their share to engage in building trust, ”regulators are more likely to rate their own some of the blame for a breakdown in trust he says.performance positively, while operators to the other side. Regulator respondents,take a more nuanced view. Further, the two for example, blame regulatory uncertaintyparties often have differences on what © 2009 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  20. 20. 17 BUILDING TRUST IN REGULATION Why does trust break down?License conversion, litigation and ICASA’s task required the creation of These differences in the perception oftrust in South Africa new processes and regulations across what goes amiss raise some larger issues. a multitude of issues, from licenseThe South African telecoms market offers If the sides cannot agree on what is wrong, conversion to frequency licensing,a good illustration of the challenges of fixing it becomes all the more difficult. facilities leasing, interconnect, licensemaintaining trust between parties in a A key step in developing some common fees and others, each issue rife withcontext of rapid technology evolution, ground is to devote more effort toward potential for acrimony. “The market is at aincreased competition and a policy understanding the motives of the critical juncture” remarks Karabo Motlana, ,framework looking to keep pace. In 2005, other party. CEO of ICASA, “and there are a lot ofthe country’s parliament enacted the fights on ancillary issues” . The precise role of regulators, for example,Electronic Communications Act (ECA), can be a source of friction. Mr Foran notesa new law designed to replace one which The ECA provided a two-year transition that there is an increasing trend of marketwas deemed both complex and obsolete. period during which ICASA was to regulation overlapping with consumerWhere the previous law created silos complete the license conversion process advocacy. A number of regulators areprimarily based on the types of services and replace existing regulations, with a perceived to straddle the fine line betweenoffered (for example, one for voice and possible six- month extension (to January protection of the consumer interest andone for data), the ECA separated the 2009). After industry consultations, the consumer activism; this is particularlyphysical network infrastructure from the regulator determined that some smaller the case in developing economies, or incommunications services running on top players would receive services licenses markets with a higher level of public-of the networks. rather than network infrastructure service influence (water and postal licenses (which some felt they shouldThe task befell the relatively young services, for instance). On the flip side, receive). As a result, ICASA was takenregulator, the Independent many operators see the regulator as a to court in a bid to force the judicial bodyCommunications Authority of South custodian for the sector, one that protects to provide an interpretation of establishedAfrica (ICASA), to convert licenses issued the interest of the market at large, policy that would allow those playersunder the previous law to the new including consumers and service providers. who wanted to do so to build theirlicensing regime. In effect, ICASA was own networks. As a result of these differences, operatorsto set the framework for transforming a are typically accused of focusingmarket with five major operators and an Following a court decision siding with the excessively on short-term financial resultsarray of value-added service providers operators, ICASA awarded licenses to the at the expense of the greater good of theto one having nearly 300 market players relevant players, but not before levels of overall market. Regulators, on the otherwith varying degrees of flexibility to trust between parties had effectively sunk hand, are blamed for either not holding realdeploy their own network infrastructure. to low levels. Nonetheless, the market power or, when they do, leveraging their had taken some important steps towards power in an unwieldy manner, acting legal clarity. primarily as consumer advocates. © 2009 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

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