The design of a robust regulatory framework in the U.S. must start with a clear understanding of what the regulators objectives are in their entirety. While these may be expected to vary reasonably from state to state, there will be none-the-less a general template that will address a broad set of objectives that are likely to exist across the individual states. The development of such a template would likely foster the development of PPPs at the state and local level while reducing marketing and bidding costs by PPP providers. Herein lays a role for the U.S. DOT. Let me be clear, I am not suggesting national level regulation but I am encouraging national level facilitation of a robust PPP regulatory template. One that builds on the experiences not just gained to date in the U.S. market but also reflecting the vast experience in this area which international regulators and financial institutions have gained.
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These regulatory objectives must start with the recognition that they are not unitary or necessarily independent, and they are often bounded by unwillingness to deal with difficult political tradeoffs. The main objectives should include viability, efficiency and fairness. But they cannot stop there. These regulatory objectives must also specifically consider:
- Financial viability of PPP - the alternative is failure and potential early recapture by government of a distressed and most likely debt-burdened asset. The Regulator must understand IRR, cash flows, debt structure and coverage ratios, equity returns and time to target return, profitability, bankruptcy risk of project and the concessionaire's business model. This viability and how it changes over the project lifetime must be understood in advance by government and updated as the project moves through its full lifecycle
- Toll rate structure efficiency - in non regulated rate of return environments, toll rate structure design is intended to provide a regulatory substitute for both ensuring the operator receives a fair rate of return while protecting the general public from "unfair" monopolistic pricing. The objective of ensuring this regulatory framework provides marginal pricing equal to marginal real cost is imperfect at best and must address adjustment for factors outside the regulators (and concessionaires control) such as difficult credit markets (for any agreed to refinancing flexibility), tight labor markets (that cause labor costs to behave dramatically different than indexed averages that may have been used in developing the toll rate structure, and tax system changes
- Fairness of toll rate structure - in the absence of specific government subsidies to specific user classes, it is not uncommon to establish toll rate structures that incorporate inherent cross subsidies. These relationships are often fixed at initial contract award but their recalibration over the PPP lifetime must be addressed in any developed regulatory framework
- Efficiency of delivery and operation - important in any regulated rate of return scenario. Early delivery of infrastructure is often a prime driver in the decision to utilize a PPP approach. Regulatory targets should as a matter of policy seek to facilitate and, more importantly, reward this early delivery. During the operating phase, targets must be set but "hidden" profits must be identifiable through up front definition of data requirements. Efficiency must be encouraged but an appropriate sharing mechanism developed between government, the facility user (through toll rate structure) and the concessionaire.
- Reinvestment efficiency - regulator must ensure that PPP structure does not encourage excessive early cash flow harvesting by a program of disinvestment in service capacity and quality (the facility is not run into the ground). Sinking fund requirements for anticipated capacity expansion or level of service improvements and requirements on condition and capacity of facility at turnover must be addressed. Investments linked to demand forecasts and actual demand realized must be addressed by the regulator.
- Recalibration of toll rate structure at periodic refinancing - this is especially important in concession terms extending beyond the durations served by the debt markets but is also important in valuing the recapture of debt market risk premiums (reflected in higher coverage ratios) associated with the initial ramp up of the infrastructure projects traffic and revenue streams. A focus on linking toll rate structure to marginal cost increases is not sufficient
- Developed regulatory regime must be simple, transparent, non- conflictive, justifiable and justified, fair in allocation of risks, avoid pricing discrimination and excessive price fluctuation