Regulation in Developing Countries Is Different: Avoiding Negotiation

Energy Policy 31 (2003) 299–305 Regulation in developing countries is different: avoiding negotiation, renegotiation and frustration Matthew Bell* Frontier Economics, 150 Holborn, London EC1N 2NS, UK Abstract Developing countries are implementing a wide range of energy sector reforms. All of these involve a series of steps to set up credible contracting frameworks (e.g. regulatory offices, competition commissions). Evidence indicates such regimes are not succeeding in avoiding protracted, expensive renegotiations between private investors and the institutions designed to oversee the new regime. One potential solution is the increased use of options in privatisation contracts. Such options can be designed to decrease the incentive for requests to renegotiate from investors seeking solely to extract further concessions and to provide clear signals about the profitability of investment opportunities. r 2002 Elsevier Science Ltd. All rights reserved. Keywords: Regulation; Enforcement; Contracts 1. Introduction Governments in many developing and transition We now know that the safety of our position in any countries have embarked on programmes to privatise country depends not alone on compliance with laws and, where necessary, regulate energy services (e.g. see and contracts, or on the rate or amount of our Stern, 2000). In many countries, these programmes have payments to the government, but on whether our been driven by the failure of government owned whole relationship is accepted at any given moment monopolies to provide services for a large proportion by the government and public opinion of the of the population. Elsewhere, they are driven by the country—and by our own government and public need for new investment to meet growing demand (e.g. opinion—as ‘fair’. If it is not so accepted, it will be see Baer and Cavalcanti, 2001). changed. Despite extensive support negotiating the associated contracts and setting up regulatory regimes to ensure Internal note, Standard Oil of New Jersey (now that these programmes meet local needs there have been Exxon), 1952, on investments in the Middle East, few notable successes. A World Bank database of the quoted in Yergin (1993). large-scale infrastructure privatisation programmes in Latin America indicates that concessions—contracts that are typically designed to last 15–30 years—are Regulatory contracts y suffer in less developed renegotiated on average after only 2.1 years (Laffont, countries from a severe lack of enforcement y It is 2001). Outside Latin America the record for attracting much more difficult to enforce them, because of and retaining needed investment in the electricity sector the lack of financial and technical resources, because is worse: of the corruption of enforcement institutions, and because of the weak bargaining position of regula- * private investments in generation, in countries ran- tors. ging from India to Tanzania, have degenerated into legal battles over payment and contractual terms; and * Laffont (2001). efforts to effectively regulate monopoly networks are in danger of falling apart in several countries (e.g. in *Tel.: +44-20-7611-9426; fax: +44-20-7611-9495. the Indian state of Orissa extensive reforms are E-mail address: [email protected] (M. Bell). threatened as the regulatory framework struggles to 0301-4215/03/$ - see front matter r 2002 Elsevier Science Ltd. All rights reserved. PII: S 0301-4215(02)00042-3 300 M. Bell / Energy Policy 31 (2003) 299–305 deal with events since privatisation, in Argentina the Regulatory reforms can generally be classified into recent financial crisis threatens existing contracts). one of two categories.3 One regime involves the creation of single or multi sector regulators with a relatively large This evidence, as well as indications of similar amount of discretion over the treatment of public and problems elsewhere in the world, is leading to a growing private service providers. This discretion may be recognition that regulation in developing countries is exercised in a number of ways, including: different. It is different for many reasons but most * importantly because the lack of an explicit institutional issuing licenses; * framework for enforcing contracts.1 setting maximum prices; * The absence of such a framework substantially determining quality and form of service obligations; and * increases the cost of investment and threatens to unravel ruling on disputes. programmes designed to increase service provision to These regimes, sometimes termed license-based re- the poorest members of society, increase growth, gimes, are often based on the initial reforms in England productivity and the wealth of many nations. At the and Wales. Under these reforms regulatory offices with same time, it has taken hundreds of years to develop substantial de facto discretion were created.4 A number credible enforcement regimes in more developed econo- of developing countries (e.g. India, Uganda, Ghana) mies. Simply transferring contractual and regulatory have adopted similar license based regimes as part of mechanisms from developed to developing countries, their power sector reform programmes. The ability of under the assumption that enforcement against the the regulatory institutions created under this system to opportunistic behaviour of investors will also work in exercise its discretion and enforce the associated the same manner, is increasingly discredited, as the contracts is provided through a series of measures evidence quoted above illustrates. Consequently, it is designed to guarantee its independence. This typically important to develop new mechanisms that will work includes three categories of measures: under the institutional regimes that exist in developing and transition countries. (1) Funding: creating a source of funding for the agency This paper explores the issues raised by the opportu- that is independent of the government’s nistic behaviour of investors and suggests one potential budget allocation process. This may involve some solution. There are seven further sections. The next form of direct levy on the industry that is then used section provides some background on typical ap- to finance the regulatory office. proaches to regulation and contracting in developing (2) Appointment and dismissal: transparent procedures countries. Section 3 highlights some important issues for appointing officials to lead the regulatory office that have arisen from the adoption of this approach. and clear, limited guidelines setting out the condi- Section 4 identifies the components of the problem. tions under which they can be dismissed. Section 5 defines the problem. Section 6 provides a (3) Position: setting up the agency outside the direct theoretical framework in which new solutions can be control of a specific ministry or government found. Section 7 contains a warning about the limita- organisation. tions of these solutions and Section 8 summarises the paper. These measures are designed to protect the regulatory institution from undue influence by any single stake- holder. This allows it to effectively enforce the regime it is designed to protect. 2. The typical framework The main alternative to license-based regimes are often termed contractual regimes. Under these regimes The introduction of large private sector investment to much of the discretion handed to the regulator in the energy, and particularly electricity, sectors of license-based regimes is instead spelt out in detail in a developing countries is frequently accompanied by industry, market and regulatory reforms (Holder and 3 2 In practice, there is a wide range of approaches and no clear Stern, 1999). delineation between the two categories to be discussed (e.g. Jannsenns, 1999; Littlechild, 2001). However, for the purposes of this paper, these 1 There is an extensive literature on informal contract enforcement in differences are not of central importance. developing countries (e.g. see Ray, 1998). However, these mechanisms 4 While subsequent reforms in other countries have often assumed are typically irrelevant when considering multi million, sometimes that the regimes set up in England and Wales provided regulators with billion, dollar energy contracts. strong legal support for this discretion, in many instances this was not 2 In many countries there are already a significant number of small the case. Instead regulatory power was a function of the strong scale private providers of energy who are central to the successful institutional framework that existed within the UK, rather than expansion of services. While it is vital that the regulatory and market explicit legal powers provided in the Acts. This is another illustration design take account of these providers (e.g. see Webb et al., 2001) they of the importance of institutions in successful contract enforcement, are not discussed in this paper. rather than specific legal rules or procedures. M. Bell / Energy Policy 31 (2003) 299–305 301 contract signed between the service provider and a The resulting conflicts ultimately dissuade further government representative. In the case of disputes over investment. the application of the contracts, or in the case of This is far from an isolated case. Basanes et al. (1999) unanticipated events, resort is often made to the existing document the plethora of disputes that have arisen judicial system, or in some cases to special competition following privatisation programmes in Chile. In addi- commissions. In recognition of the impossibility of tion, the figures quoted

Load more