If an adequate regulatory framework is not in place, there is an increased risk that countries will lose out by opening up. Moreover, once a country liberalizes, it is often hard to reverse the process. This makes the sequencing of reform important. A case can be made for gradual reforms that enable a country to develop the institutional capabilities first before designing and actually implementing the reforms (see, for example, WIR04). Competitive restructuring, the introduction of regulations and the establishment of an independent regulatory agency should precede steps towards liberalization. Such a sequence helps clarify the rules of the game for investors, and governments become better prepared for engaging in a specific project.
In reality, however, opening up to
foreign investment has often preceded comprehensive
sectoral reforms, with less positive results (Fay and
Morrison, 2007; Wint, 2005; Wells and Ahmed,
2007; Kessides, 2005). Unless credible regulatory
bodies can be established, most developing countries
are likely to be better off keeping their utilities in the
public domain, in particular the profitable ones (Bull,
Jerve and Sigvaldsen, 2006). In fact, governments
require greater skills and capabilities to privatize and
to govern privately operated infrastructure than to run
State owned enterprises (SOEs) (Wells and Ahmed,
2007).
The legal and regulatory framework for issuing
licenses or concessions should define the rights and
obligations of utilities, clarify pricing mechanisms and
establish procedures for dispute resolution. It may also
include conditions for ensuring that efficiency gains
are shared with consumers. To the extent possible, the institutional framework should seek to minimize the
possibility for conflicts of interest between participants
(i.e. competing firms, remaining monopolies and
consumers) in the provision of physical infrastructure
and related services. Although the specific features of
infrastructure industries necessitate a greater reliance
on regulation of the sector (chapter III), competition
policy also plays an important role.
Even when the benefits outweigh the costs of unbundling (chapters
III and IV), opening up needs to be complemented
by competition laws and authorities sufficiently
equipped to enforce these laws (Kessides, 2004: 69;
Newbery, 2006). Without a competitive restructuring
of infrastructure industries, privatized companies
may more easily acquire a dominant position.
Competition authorities should have the mandate to
review regulatory decisions, assess their impact on
competition and take action against firms that use the
regulatory process for anticompetitive purposes.
Another important element of reform is
the establishment of independent and accountable
regulatory agencies to implement laws and regulation
in infrastructure industries. An autonomous regulatory
agency that is separate from the executive branch of the
government is more likely to help maximize benefits
from reforms, balancing the interests of consumers
and service providers and providing foreign investors
with a degree of assurance that they are protected
from political intervention (Fay and Morrison, 2007;
Sader, 2000). A strong regulatory agency can be a
useful counterweight to political opportunism as well
as to opportunistic investors. Investors may try to
shift risks to consumers or taxpayers by demanding
renegotiation of key elements of governing contracts.
They may threaten withdrawal from a project,
calculating that the government, concerned with the
disruption of service, will give in to their demands.
The incidence of contract renegotiations has been
found to be much higher in countries with weak or
no regulatory agencies (Guasch, Laffont and Straub,
2003).
There are few clear yardsticks or rules of
thumbs that policymakers can use when designing
and implementing sectoral infrastructure reforms
and opening up to TNC involvement (Estache and
Fay, 2007; Woodhouse, 2006). However, some
general principles have been developed that may
help governments in this area, including by the
Organisation for Economic Cooperation and
Development (OECD) (box V.1).
Other policy guidelines include those developed by the United
Nations Commission on International Trade Law
(UNCITRAL) (UNCITRAL, 2004); the United
Nations Economic Commission for Europe (ECE,
2008) (box V.2); and the United Nations Industrial
Development Organization (UNIDO, 1996).
TNC involvement represents just one of
several options policymakers can consider to develop
their infrastructure.
Governments need to weigh the potential benefits and risks involved (chapter IV) by
studying all options - from privatization to traditional
government provision. If a decision is made to
involve TNCs, it is important to develop an overall
policy for such participation and to set clear goals,
values and principles (ECE, 2008: 19). This includes
making sure that the views of existing constituents
are reflected in the decision making process and in
project execution.