There is a need to regulate a service provider to ensure that services provided reflect the adequate level and meet the desired standard or quality. Several risks are involved in the absence of a regulatory system. The main risks are:
• Excessive tariff
• Inadequate service level and quality
• Non-compliance of contractual obligations to users, government or other parties
• Low efficiency in production and in the provision of goods and services
• Inadequate level of investment in the sector, and
• Frequent discontent between the parties involved.
In order to eliminate or minimise these risks, an appropriate regulatory system needs to be in place and should be considered at the planning stage of a project.
The powers to regulate are provided in the relevant legal instruments, statutory rules, concession/contract agreements, and other applicable documents.
The structure of the regulatory authority varies from one country to another and may also vary by sector within a country. There can also be various institutional arrangements with respect to regulatory authorities that may include: the concerned ministry, a special cell within the ministry, regulation by contract, and an independent regulator with discretionary powers.
Often, PPPs rely mainly on regulation by contract, particularly in the early years of PPP development. This is also a common form of regulatory arrangement in the roads sector. In such a case, a contract administrator monitors compliance with the contract agreement. Investors may often prefer such arrangements because of low discretionary powers on the part of the regulator. However, the major disadvantage of regulation by contract is that such contracts may be difficult to adjust or renegotiate, if such a necessity arises.