Increasing a Good Governance: Outsourcing or contracting-out

It is often the case that, depending on the degree of development of the regulatory agency, the agency outsources (to consultants, expert panels or even other regulators) the full performance of a regulatory function, or that it contracts for outside counseling during the implementation of these functions (tariff reviews, calculation of costs and capital base, etc.) However, the practice of contracting out is also used by agencies that are already at a mature stage of operations, as it is the case with those in the United Kingdom.

The rationale used by the former agencies for contracting out lies, on the one hand, with the little ability and training of the staff at the initial stage and, on the other, with the need to create credibility in the public eye that regulatory agencies are often faced with at that stage. Outsourcing becomes a way to promote independent management in line with international practices, particularly when international consultants -or local consultants with international experience- are used, and it is also a way to develop the agency's in-house experience, i.e. the experience of the agency's staff.87

For the latter, cost efficiency is the main argument. In these cases, outsourcing certain functions allows the agency to have a reduced payroll, which translates into lower administrative and payroll costs. Here, the condition is that the agency staff be highly qualified to assess the quality of any outsourced work.

BOX 2 : Rationale for Contracting Out in Order to Increase Good Governance

Source: Sophie Trémolet, Padmesh Shukla and Courtenay Venton, "Contracting Out Utility Regulatory Functions." Final Report, Environmental Resources Management, World Bank, January 2004.

According to Trémolet, Shukla and Venton (2004), a survey of regulators from several countries on outsourcing reveals that 41% of the respondents claim to have outsourced some of their functions, which has allowed them to bring down their costs and improve their service quality. In turn, 91% of those who have outsourced claim that this practice has helped them improve the organizational competence, independence (62%) and trust with stakeholders (71%).

75% of the surveyed regulatory agencies outsource some of their functions. The results show that outsourcing is a highly common practice for agencies in Latin America and Africa, particularly in the water and sanitation and telecom sectors.

The decision to contract out can be made by law or through contractual arrangements at the agency-creation stage. In either case, it should be noted whether the outside opinions are binding or not. The distinction has great impact on the independence and legitimacy of the regulatory framework.

If the decision is not binding, when contracting out regulators seek expert opinions but are not required to act on these recommendations. In these cases, external advisors usually provide a menu of options or different action plans; however, the regulator remains the one making the final decision. It is worth mentioning that even though this is the outsourcing method most commonly used in the regulatory context, it is not necessarily the one that best fosters the regulator's independence.

When outsourcing is binding, recommendations by external advisors must be applied directly. Binding outsourcing is a useful tool in contexts of weak institutions. It is viewed as a way to increase the regulator's expertise while seeking to guarantee the regulatory framework's independence and legitimacy.

Based on their observation of regulatory outsourcing practices, Trémolet, Shukla and Venton (2004) identify five forms of outsourcing.

Outsourcing of the contract monitoring function. Outsourcing can be used to strengthen the contract monitoring institutions created when no regulatory agency exists. Outsourcing can involve specific aspects of monitoring and it can be binding or non-binding, depending on each specific case.

Outsourcing of regulatory and tariff-setting decisions. Decisions concerning regulatory functions can also be outsourced to an external advisor. Such outsourcing can be carried out by contracting a panel of independent technicians or some regulatory agency from another jurisdiction. The use of a panel of independent technicians may be of special interest in the context of tariff reviews, where the expertise and independence of those performing this function is critical to legitimize decisions in the eyes of investors.

BOX 3 : Outsourcing in Argentina.

Outsourcing of the dispute settlement function. Many regulators have developed internal mechanisms for the settlement of disputes between operators, consumers, the government and the regulator. These are procedures that represent an alternative to the ordinary judicial remedies, which often prove to be lengthy and costly. Delegating this function to a recognized national or international arbitrator may prove to be another tool to strengthen investor trust in the regulatory framework.

Outsourcing to regulatory agencies from foreign jurisdictions. Another institutional alternative for the contracting out of regulatory functions and tasks is through the assistance of regulatory agencies from other jurisdictions.

Outsourcing of regulatory functions to non-profit organizations. In certain cases, a good portion of the regulator's functions and tasks are delegated to non-profit organizations. Usually, the selected organizations are prestigious universities and political institutions. In particular, universities usually offer the credibility, reputation and technical expertise that government agencies and even certain regulators lack.

Table 2 provides a summary of potential contracting-out models, identifying whether the regulatory policy recommendation by the external advisor is binding or not.

Table 2 : Contracting out models

Key: ↑: Positive; ―: Neutral;

Source: Sophie Trémolet, Padmesh Shukla and Courtenay Venton, "Contracting Out Utility Regulatory Functions." Final Report, Environmental Resources Man

_____________________________________________________________

87  Anton Eberhard, "Infrastructure regulation in developing countries: an exploration of hybrid and transitional models." Prepared for the African Forum of Utilities Regulators 3rd Annual Conference, 15-16 March 2006, Windhoek, Namibia.