The degree of regulation necessary for price and quality has been determined to a large extent by whether or not a competitive marketplace can be established. The days of infrastructure and service delivery being natural monopolies have passed (and perhaps never really existed in relation to service delivery to poor areas). Services such as solid waste can be unbundled (see Chapter 8) and effective levels of competition established for collection, for transfer etc. Tendering processes can be established to ensure that disposal and recycling activities operate in a competitive environment. Given low levels of network coverage, sanitation services exist in a market that is far from monopolistic. In practice, a wide range of (unregulated, informal and/or illegal) small-scale service providers has filled sometimes massive gaps in the sewerage network. While the water sector shows a tendency for economies of scale and greater network coverage, various factors could create a competitive environment. These include new technologies, competitive tendering and benchmarking, as well as the increased role of small-scale providers able (and willing) to service the poor in marginal areas.
Existing barriers to entry currently include legal monopolies, exclusivity rights, zoning restrictions, technical standards and import tariffs or taxes. However, it is essential that municipalities look at whether the regulatory framework excludes those who currently serve the poor, and whether it effectively provides monopolies (and little incentive to expand) to those that do not. Municipalities should consider their own contexts, the existing coverage and the profiles of unsupplied households, and think about how markets can be opened up, and the existing small-scale independent providers legitimised and regulated. Large-scale operators have indicated they are less threatened by the role of small-scale providers than originally presumed and addressed through exclusivity agreements. The context will determine whether this could be done across the municipality or in specifically targeted areas.
How will the entry, price and quality of the various types of suppliers be addressed? There is no single answer and little experience to show what works and what does not. In fact it is 'possible to envisage a multi-tiered regulatory structure, with the smallest providers subject to minimal regulatory scrutiny at entry, larger firms subject to closer scrutiny, and the traditional utility subject to a more conventional licensing regime'.6
Private operators want to know that the procurement process is fair and competitive. It also provides comfort to government and end-users if service providers know that they are in competition with others, and that the quality of service they provide will affect their ability to attract more business. International experience shows clearly that where private sector participation benefits have failed to materialise, the problems can often be traced back to the absence of rival suppliers. Monopolies tend to weaken users in their efforts to exert pressure for better service.
The regulatory framework could shape levels of competition in different ways. One way is to separate bulk generation and supply of a service from distribution and reticulation. Bulk provision often requires economies of scale that could not be met by private suppliers, whereas reticulation lends itself more to smaller service providers. By separating bulk supply and reticulation, governments could therefore open opportunities for competition between distributors. Another way to enhance competition is to require tenders before contracts are awarded. Governments may also force competition between public utilities, or allow private companies to compete with those utilities. Even with these arrangements, however, some parts of a sector may tend to be monopolistic. In such cases, government's regulatory challenge is to set rules that will prevent abuse of power, encourage private sector participation and monitor performance. Once reform towards private sector participation is chosen, it becomes particularly important to ensure that government businesses do not enjoy any competitive advantage or disadvantage as a result of their public ownership. Public monopoly reform also involves the separation of the regulatory functions of a monopoly from commercial activities that can be subject to competition.
Box 10.9 What Is Regulatory Capture? The independence of regulators is sometimes compromised. This is often referred to as 'regulatory capture'. It means, in short, that regulators advocate the interests of the producers they are intended to regulate. This happens either because they are under control of those interests or unable to stand up to them. This problem can take different forms: • A regulatory agency might further the industry's interests at the expense of consumers, be more responsive to the industry pressures, or become too closely identified with the industry. • Some regulators become overly protective of the regulated firms. • Others identify too much with regulated firms' decisions or objectives. Regulatory capture mostly reflects power imbalances. • The ability of regulators to maintain their independence is, for example, often compromised because the regulator and the regulated industry both draw experts from the same limited pool. Regulatory agencies mostly require the services of individuals who are experts in the industries to be regulated. The regulated industry is therefore often an important source of future employment opportunities for the regulatory agencies' staff. This problem is more likely to occur in developing countries, where utilities are strong and the pool of experts limited. • Sometimes, the officials in the regulatory agency are of a lesser professional standing and expertise than those within the industry. Often, regulatory agencies cannot offer remuneration that competes with that offered by industry participants, so the former's staff are less experienced or are not industry pacesetters. This weakens a regulator's capacity to exert effective control, especially if it deals with well-staffed and highly skilled firms and utilities. • Personal relationships provide incentives for regulatory officials to soften their stance towards regulated firms. As part of the industry, such experts are likely to be sympathetic to the industry's interests, and are often likely to have had ties with those they are supposed to regulate. • Regulators are sometimes also not as well organised as interest groups. The latter tend to have a more direct interest in the sector than broad groups of consumers with only an indirect or distant stake. Industry interest groups therefore exercise political pressure on regulators and legislators. Such pressure is not always actively exerted: for example, industry participants may simply exhaust the agency's capacity by engaging it in endless, costly and even trivial appeals. • A related cause of regulatory capture is asymmetrical information. The firms and utilities in a particular industry often have more and better industry information at their disposal than regulators and governments. In fact, the main source of information is often the regulated firm; it has the incentive to acquire and hold good information because of its sizeable investments. They stand to lose if they lack such information. Industries are therefore often ahead on information, and regulators behind; hence, the former are often in a position to bias regulators through the manipulation of information. They control information that is vital to regulators and they know how to use it to their own ends. This is a powerful weapon, because the ability of a regulator is closely linked to its access to information, which forms the basis for its decision-making capacity. It is always important to keep an eye on the regulatory environment, and to ensure that the risks of regulatory capture are countered. The starting point is to institutionalise regulators' autonomy. This could be achieved, mainly, by legislating for their status, and continuously monitoring the laws to ensure that they remain effective. One particularly important area is to regulate the composition of boards, and to provide for inquiry and review teams. Such teams should include appropriate professionals and representatives from civil society. It is also a good idea to actively seek membership renewal legislation for the boards, to prevent one particular group of people developing too tight a hold over the structure. It is also important for regulators to actively try to attract and keep quality staff. The obvious option is to offer competitive compensation packages, but this is often difficult for government agencies, especially in developing countries. Other methods could also be used, such as giving regulatory agencies some form of a reward for every case or appeal resolved in favour of the general interest. The agency must then put in place internal processes to ensure that these benefits filter through to staff. It is difficult to overcome the information problem, but not impossible. Through widespread linkages throughout the sector, a regulator could gain good access to quality information. It is also advisable for central statistical services to attempt to develop some data that could assist regulators.
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