Regulatory agencies play a vital role in infrastructure development since they strongly influence, for good or ill, the provision of existing infrastructure services and the levels of forthcoming investments. They also affect the accessibility of such services, particularly the rates at which these are made available.
Improving the regulatory environment for infrastructure therefore becomes contingent on institutional reforms, which will involve:
a. the separation of operation and regulatory functions of agencies in order to remove conflicts of interest that arise naturally when such functions are performed by a single entity;
b. the establishment of an independent body that consolidates in itself all regulatory functions to support the provision of public infrastructure services in subsectors with multiple regulators;
c. the creation of a regulatory framework where this is lacking and necessary; and
d. the strengthening of regulatory institutions through capacity building and reinforced independence.
Regulatory agencies should pay special attention to vertical integration trends in supply and distribution utilities. These may facilitate transfer-pricing and result in inefficiencies from the supply side to the distribution side. This issue becomes critical in sectors where natural monopolies are present, such as energy and water, where returns on investment are guaranteed and where distribution is regulated while supply is not.