Overall Preview and Presentation of Regulatory system Governing an Infrastructure

1. Infrastructure Regulatory
System
Submitted by: Submitted to:
Tsering Ngutuk Gurung Er. Nirmal Prasad Baral
Roll No.:076PASMSIEM018 Department of Civil Engineering
Paschimanchal Campus,IOE,
Pokhara

2. A.Context
The biggest constraint to growth in Nepal and the developing world is
infrastructure. Infrastructure, being a natural monopoly, has traditionally
been the responsibility of the government for development. However,
capacity (financial and human) deficit in government led to the involvement
of private players with greater risk sharing, moving from the traditional
contract mode to the PPP mode. The advent of PPPs brought in significant
challenges, both for Government and the private players. Roles and mindset
needed redefinition, especially on the Government side. Appropriate
regulation became more critical. There is need to learn from both successes
and failures of PPPs in infrastructure sector to bring in a greater maturity and
professionalism in this eco-system by developing competencies and
perspectives.

3. B.Introduction
• Infrastructure is the services
needed for a country to run
smoothly and for economic
and social development to
take place in a country.
The infrastructure of
development are
communication, education,
health, power, market,
commerce, irrigation and
leisure facilities.

4. • Regulation is the sustained and focused control, normally exercised by a
public agency, over activities that are valued by a community. In addition,
regulation can either prevent undesirable behaviour, actions and activities
or enable and facilitate desirable ones.
Regulatory processes generally comprise three stages:
1. the enactment of enabling legislation
2. the creation of regulatory administrations and rules
3. the bringing to bear of those rules on individuals or
organizations whose behaviour is Into be influenced or
controlled.

5. C.Necessities of Regulation
In practice, governments may regulate the provision of infrastructure facilities and
services for a number of reasons, including:
1. Monopolies and natural monopolies
2. Windfall profit
3. Externalities
4. Information inadequacies
5. Continuity and availability of services
6. Anti-competitive behaviour and Predatory pricing
7. Public goods and public hazard
8. Rationalisation and coordination
9. Planning
10. Unequal bargaining power
11. Scarcity and rationing
12. Distribution and social justice
13. Fair competition and investor confidence

6. D. Forms of Infrastructure Regulation
There is a wide range of regulation to deal with market failure. They are
of following categories:-
• Economic regulation : It primarily addresses the problems of natural
monopoly power in infrastructure,i.e.
1. Regulation of structure and regulation of conduct
2. Regulation of structure introducing competition
3. Combination of instrument used in a different sectors
4. Comparative competition
5. Objectives of conduct regulation
6. Price regulation
7. Quality regulation
8. Input regulation

7. • Social regulation: it addresses problems of market access and
affordability, i.e.
1. Effects of infrastructure reform on consumers
2. Common situation of low income consumers
3. Pro poor regulatory mechanism
4. Benefits of of considering social protection policies in the design of pro
regulatory frameworks
5. Considering social issues in sector reforms
• Other regulations: It defines the regulation that is common to all
industries, i.e.
1. Environmental health and safety regulation
2. Balance cost and benefits of regulation

8. E.Regulatory Bodies
Regulation can be undertaken by a variety of bodies. The nature of the
regulatory institutions created can have a significant effect on the style of
regulation, the regulatory strategies employed, and also on the achievement
of the regulatory objectives. The main types of regulator are:
• Self-regulators
• Local authorities
• Courts and tribunals
• Central government departments
• Regulatory agencies
• Directors General
Experience in industrialized countries provides insights into matters such as
the expertise required, notions of “independence”, and the optimal location
among tiers of government

9. F.Institutional Design of Independent Regulatory
Agencies
The framework for the design process includes:
• Ensuring regulatory independence
• Selecting,appointing members of the board
• Funding
• Staffing
• Legislative changes: Legal instruments are
1. Primary legislation
2. Secondary legislation
3. Licensing
4. Contracts
• Single regulator

10. G.Evaluation of Infrastructure Regulatory
Systems
Evaluation and criticism of regulatory systems began almost as soon as they
were first established. Evaluations require benchmarks. The three most
common forms of evaluation are:
• Cross-country statistical studies
• Cross-country descriptive analyses
• Single-country structured case studies
Any evaluation must examine two basic dimensions of any regulatory
system: regulatory governance and regulatory substance.Similarly, the three
levels of evaluation are:
• A Short Basic Evaluation
• A Mid-Level Evaluation
• An In-Depth Evaluation

11. H.Regulatory Strategies for Infrastructure
If the state wants to control an infrastructure provider that possesses a natural
Monopoly, it may use a number of different strategies, including:
1. Harnessing markets by use of:
• Competition laws
• Franchising
• Regulation by contract
• Tradeable permits
2. Command and control
3. Incentives
4. Informing
5. Acting directly
6. Self-regulation

12. I. Self Regulation
Self-regulation occurs when a group of firms exert control over their
own membership and their behaviour. Examples are found in a number
of professions, such as medicine and law, and in industries, such as
banking and insurance. Self-regulation may play a part as an element
within a scheme of regulation.
Cost-benefit analysis :Cost-benefit analysis and other methods of
economic evaluation can be used, in principle, to assess the efficiency
of a particular regulatory regime.

13. J. Principle of Good Regulation
Benchmarks Criteria Problems
Legislative mandate Authorisation from elected
legislature
Parliament’s intention may be
vague or contain conflicting
objectives
Excessive delegated discretion
Accountability and control Evidence of effective control
and accountability
Lack of representation of body
holding regulator to account
Due process Fair, accessible and open
procedures
Establishing an acceptable
trade off between openness,
accessibility and efficiency
Expertise expertise Specialist knowledge, skills
and experience
General distrust of experts
Expert may be subject to
`capture’ or self-interest
Efficiency Productivity of procedures
and investigations
Value for money with efficient
and effective outcomes
Limited ability of public to
judge efficiency
Auditing complexities
To decide whether a
system of regulation is
good, acceptable, or in
need of reform, it is
necessary to be clear
about the benchmarks
that are relevant to
such an evaluation.
Table 1 sets out a
number of criteria or
benchmarks, that may
be used in
evaluating a regulatory
system, how they may
be assessed, and
associated problems.
Table 1. Benchmarks
for regulation

14. K.Enforcing Regulation
The bringing to bear of regulatory rules on persons or organizations
they are intended to influence or control is vital to the success of
regulation. Failures to identify and deal with breaches of rules will
undermine any regulatory system.Regulators need to consider the
following issues in enforcing regulation:
1. Styles of enforcement
2. Rules of enforcement
3. When to intervene
4. How much to enforce
5. How to control corporations

15. Command
regulation
Insistent strategy
Persuasive strategy
Enforced self-regulation
Criminal
prosecution
Notices: improvement
and prohibition
Warnings: written
and verbal warnings
Persuasion: shaming; deadlines;
education and advice
Figure 1.The enforcement pyramid Figure 2.The sanctions pyramid

16. L. Challenges and Problems with Utility
Regulation in Developing Countries
1. Lack of regulatory commitment: political expediency and the limits
of independence
2. Lack of transparency , participation and accountability
3. Institutional fragility
4. Regulatory substance compromised: lack of capacity and
competency
5. Regulatory contacts also under stress

17. M.Regulating for The Poorest
Regulatory principles developed from experience in the industrialized
countries should be compatible with the aspirations of developing
countries concerned about the welfare of their poorest citizens. But
there are some special challenges associated with reaching the poorest
than can lead to important differences in emphasis and approach.
• Speacial challenges:
1. The acess priority
2. Affordability concerns
3. Constrained administrative regulatory capacity
4. Political and regulatory risk management

18. • Implications of regulator rules
1. Controlling market entry
• Extent of market to be liberalized
• Extent of relaxation of entry controls
• Other public barriers to entry
• Private barriers to entry
2. Controlling prices
• Extent of market to be leberalized
• Extent of relaxation of price controls
3. Controlling quality
• Implication for regulatory bodies
1. Expertise
2. Independence
3. Tier of government
• Implication for regulatory process

19. N. A Range of Regulatory Models
The range of possible regulatory models with varying levels of
regulatory discretion include:
• Regulation by government :
1. National regulation
2. Regional regulation
3. Local regulation
• Independent Regulation
• Outsourcing regulatory functions
• Advisory regulators and expert panels
• Hybrid and transitional models

20. O.Improvement for Regulatory Performance
Regulatory performance can be improved through better regulatory
design. Investors, operators, and consumers will benefit from
regulatory governance systems that match regulatory discretion with
levels of regulatory commitment and institutional endowment.
Regulatory performance can also be improved through:
• Mandatory, periodic, independent reviews of regulators
• Building the demand side for regulatory transparency and
participation
• Capacity building

21. P. Regulatory Risks
Regulation is centrally concerned with the control of risks -such as the
risk that infrastructure facilities and services will be inadequate or
prices will be excessive.
• Defining and assessing risks: Assessments have to be made to identify
potential risk in terms of its cost impact and probability of
occurrence.
• Risk management: involves regulating risks in an effective and
acceptable manner.
• Legitimacy of risk regulation: regulators face problems of legitimacy in
their regulatory decision-making.

22. Q.Mitigating Measures for Regulatory Risks
Regulatory risk may be mitigated through regulatory governance systems
that constrain regulatory discretion. Regulatory risk may also be mitigated
through following measures to improve regulatory performance.
• Partial risk guarantees for regulatory systems
• Other risk mitigation measures
1. Political risk insurance
2. Investment partial risk guarantees/partial credit guarantees
3. Additional financial security measures for investors
4. Change of law exemption in contracts
5. Bilateral investment treaties
6. Appeal, arbitration, and other dispute resolution mechanisms

23. R.Conclusion
Infrastructure regulatory systems are very essential to develop robust
and resilent infrastructure through strategic evidence based investment
in a infrastructure system that will underpin the strong economics to
drive good standard of living not for today only but also for same right
for future generation.