reform and regulation of infrastructure by shantha jayasinghe (research officer- institute of policy...
TRANSCRIPT
Reform and Regulation of Infrastructure
By Shantha Jayasinghe
(Research Officer- Institute of Policy Studies)
Issues in Infrastructure Importance of Infrastructure networks
Lack has effects on: Share of National Product and influence economic
growth Competitiveness of the economy Living conditions of the people
High ratio of sunk cost that deter entry Government Provision
Reasons: Government usually does not go bankrupt Public Goods
In Sri Lanka: poor quality and coverage
Infrastructure in Sri Lanka Electricity: Access- 74% of households Relatively high cost of electricity in Asia
Increased reliance on expensive energy
Telephone: Land or Cellular – 24% Firewood for cooking – 83% Well or Pipe-borne water - 62%(Source: Development policy review, WB and CBSL)
Comparison of Electricity Tariffs of ASEAN Countries (source: World Bank)
Sri Lanka Malaysia Singapore Thailand IndonesiaPhilippines Laos
Residential- low
Residential - high
Commercial - low
Commercial - high
Industrial - low
Industrial - high
Government Failure
Principal – Agent Problem“how to get the employee or contractor (Agent) to act in the best interests of the employer (principal) when the employee or contractor has an informational advantage over the principal and has interest different from those of principal”
Government
Principal – Agent Problem
People People’s Representatives
People’s Representatives
Board of Directors
Board of Directors
Employees
Private Sector
Principal- Agent Problem
Board of Directors Employees
Shareholders Board of Directors
Why are Markets better?
Decentralized decision making Maximize the benefits of resource
allocation Provide incentive for innovation Markets relatively better than
centralized decision making
Infrastructure Reforms
Key characteristics: Subject to elements of Natural
Monopoly
“Natural Monopoly” Vs. “potentially Competitive” segments in the market
Natural Monopoly “Natural Monopoly exists in a
particular market if a single firm can serve that market at lower cost than any combination of two or more firms”
Natural Monopoly exists because Economics of Scale: Producing more
units results in lower unit cost. Economics of Scope: Producing multiple
products together results in lower cost
Design of Market Structure
Separating out the natural monopoly
ElectricityGen 1 Gen 2 Gen 3
Transmission
Dist 1 Dist 2 Dist 3
Creating Competition
Competition in the Market : If it is cheaper and technically
feasible to have more than one provider:
Ex-post (After the event) regulation: Independent Competition Authority regulate anti- competitive behaviour
Creating Competition
Competition for the Market : Auction to force the potential
monopolists to compete with each other for the right to be the single supplier of a network:
Regulation is necessary Ex-ante (Before the event) regulation:
Sectoral Regulation by Independent Body
Creating Competition
Sector Non-competitive Component
Competitive Activity
Electricity Transmission & local distribution
Generation & supply
Telecom Residential telephony
Long distance, mobile, value added services
Water Water main and waste water
Collection & treatment
Air Services Airport Facilities Aircraft operation, maintenace facilities
Railways Track and signalling Train operation,
maintenance
What is Regulation (Ex-ante)?
Broadly defined as imposition of rules by government, backed by the use of penalties that are intended specifically to modify the economic behaviour of individuals and firms towards maximizing welfare
Why do we need to regulate?
Market Power Imperfect information Externalities Joint Provision and consumption
Externalities
A situation where the effect of production or consumption of goods and services imposes costs or benefits on others which are not reflected in the prices charged for the goods and services being provided.
Eg: Pollution
Regulatory Strategies
Command and control Where legal authority and the
command of law is used to pursue policy objective
Strength: Fixed standards set minimum acceptable
level of behaviour Force of law Seen as highly protective of public
Proposed customer protection performance standards in Electricity - PUCSL
Restoring Supplies after a fault: …..Minimum percentage of supplies to be connected within 2 hours.
All supplies to be reconnected within 24 hours
Regulatory Strategies
Weaknesses: Prone to capture Inflexible Expensive to administer Incentive is to meet standards, not go
better Complex rules tend to multiple
inflexibles
Regulatory Strategies
Regulatory Capture; The pursuit of the regulated enterprises’
interests rather than those of the public at large
Information AsymmetryRegulators require a good deal of information in order to carry out their functions Eg: Fix appropriate standards, price increases etc.“the operator knows more about its abilities and effort and about the utility market than does the regulator”
Regulatory Strategies Self Regulation
Self-regulation usually involves an organization or association developing a system of rules that it monitors and enforces against its own members
High commitment to own rules Low cost govern Rules may be self serving May not represent the interest of consumers
Regulatory Strategies Incentive Regulation “Provide incentive to behave the way that the
government wants” To deal with information asymmetries regulator can
design and implement incentive schemes that reward the operator for using its private information to achieve the government’s objectives.
How could it be done? Provide the operator with additional units of
something it wants – Eg. ProfitBut in turn, operator should give something to the government Eg. lower prices
Regulatory Strategies
Overall Price Level Regulation: Rate of Return Regulation Price Cap Regulation Benchmark or yardstick regulation
Rate of Return Regulation
Tariff = Cost of Production including Cost of Capital
No incentive to operate efficiently Operator may over-invest in
capital equipment
Price Cap Regulation
Permits a utility to increase its overall level of prices by the previous year’s rate of inflation (RPI) moderated by a percentage (X) that reflects the real cost reduction that the regulator expects.
RPI - X
RIA - explained
RIA is used: to assess the likely consequences of
proposed regulation, and the actual consequences of existing regulations
to assist those engaged in planning, approving and implementing improvements to regulatory systems
It is a technique for improving the empirical basis for regulatory decisions
It systematically and consistently examines potential impacts (benefits and costs) arising from government action
It conveys this information to decision-makers allowing them to consider the full range of impacts associated with a regulatory proposal
RIA - explained Continued…
RIA meets the following criteria for good policy-making
Minimizes regulatory capture Improves understanding of the
benefits and costs of government action
Improves transparency and consultation
Improves government accountability
Origin and Evolution of RIA
Formalized arrangements for RIA originated in the USA in 1975
In 1980, two additional countries were using RIA, Canada & Finland
In 1996, 20 out of 28 OECD countries were using RIA
Mexico and Korea provide two illustrations from middle income countries
Countries like Chile, China, Indonesia, Korea, Malaysia, Peru, Philippines, Thailand and Vietnam are also considering the implementation of RIA
RIA - the methodology It is a continuous process, which can
be seen to consist of three phases: Initial RIA – prepared immediately after
the policy idea is generated. Includes pros and cons of alternatives
Partial RIA – Initial RIA + Greater depth of consultation with stakeholders
Full RIA – Builds upon the information and analysis of the partial RIA, and the complete consultation process
RIA Process Identify the policy objective the issue that
intend to address Identify regulatory and non-regulatory
alternative options, including do nothing/base case
Consider the pros and cons of each option Identify who is affected, including business
sectors affected Equity and fairness Benefits and Cost analysis Flag up any potential unintended consequences Consider how to secure compliance