One of the primary features determining the operating context for private sector participation, and the regulatory framework particularly, is whether or not a regulatory body exists. The role of the municipality and the overall regulatory climate will be fundamentally affected by the presence of such a regulator. Experience has suggested that there are some key parameters guiding decision-making over regulators and municipalities should develop an understanding of the sort of regulatory body most suited to their contexts.
In the context of large-scale complex partnerships with the international private sector, current guidelines propose the need for a regulatory body that administers pricing, monitors compliance and enforces obligations. It is essential that this body is independent - and that means that the municipality cannot be both regulator and monitor/manager of private sector operations. Ideally, policy formulation should be handled by an agency different from the one that regulates, and so too with implementation. This helps avoid conflicts of interests, and therefore enhances the overall integrity and credibility of the regulator. Those arrangements that do not include an independent regulator but are based on a municipality playing conflicting roles undermine confidence and threaten the legitimacy of arrangements.7 It may also be essential that the regulator is independent from political interference. If the regulator assumes responsibility for pricing, it will be important for investors to see the regulator as being as independent as is possible in a given context. The problems of regulatory capture are described in Box 10.9.
The efficacy of regulatory bodies in developing countries can be largely dependent on the financial and human resources available to them, and by extension on the competencies of the staff, and the definition of their roles. The broad range of skills required, along with independence and diplomacy, are not always found with ease. However, the regulator's ability to enforce is critical to its credibility, as illustrated by the case of Buenos Aires in Box 7.18.
Municipalities need to build an understanding of the nature and scope of the regulator, and if a regulatory body is being formed, seek to influence the capacity of the organisation. All such efforts bring reduced risk - and lower costs. It is also necessary to understand the degree to which the regulator is able to embrace appropriate technologies and service standards, small-scale suppliers and service providers, and other strategies for delivering to the poor. This opens up a much broader set of skill requirements including: barriers to market entry, anti-competitive conduct, and public awareness. It is not necessarily desirable for a regulatory body to perform all functions itself. It should, however, ensure that these functions are carried out in a transparent manner, and that there are adequate and ongoing capacity building programmes set up to enhance its capacity to perform its role.
The location of the regulator is also a key issue. Municipalities must understand the implications of placing regulators at national, provincial or regional/local levels. National regulators may well provide the best solution for the regulation of partnerships involving the international private sector (offering distance, better skills and reduced susceptibility to capture) and thus be a more appropriate location for appeals and arbitration. However, it is unlikely to be a practical or desirable location for the regulation of small-scale service providers. Municipalities may need to explore where such regulation is best placed at a local level.
The overall role, competency and perceived legitimacy of the regulator are very important to municipalities. This must be known by all parties at the outset, such that supplementary measures are taken in the formulation of the contract. Examples of different forms of regulatory bodies in Latin America are provided in Box 10.11.
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