The institutional arrangement for the supervision of PPP can take many forms being the independent regulatory agency the most common approach adopted during the 90s.
As mentioned, one of the key issues of the reform of infrastructure sectors in Latin America, which took place in the 90's and stemmed from the experience in the United Kingdom, was to unbundle the functions of tariff setting, regulation and service provision -all of them previously concentrated in the public sector-, and entrust the regulation to an independent organization with a clear mandate so as to try to protect long term objectives (greater coverage, better services, higher efficiency) from short term pressures faced by the government (lower tariffs to avoid inflation, overstaffed in state-owned companies). Since then, it is usually the regulator's job to preserve the interests of the parties involved and to supervise the compliance with the obligations under the PPP contract.
However, the specific institutional setting will depend on many factors that need to be taken into account when deciding on the most efficient way to supervise a PPP contract. The magnitude of the project, the size of the respective country or jurisdiction, the technical characteristics of the sector, the expertise on previous agreements, the technical and institutional skills, the country's legal tradition89, etc. are all factors that must be carefully reviewed.
Table 5 below summaries the main institutional alternatives of regulatory agencies created to supervise and control PPP agreements during the construction and operation stage.
Table 5 : Institutional possibilities of external supervision
| Ministries | The oversight function can be entrusted to ministries or to secretariats or undersecretariats reporting to them. For instance, it could be within the scope of the Ministry of Public Works and the Secretariat of the sector where PPPs are developed. |
| Independent regulatory agencies | They are specialized institutions, specially created to regulate the sector where PPPs are developed. It is required that they be independent of political interferences and any other stakeholders. They usually have powers to supervise, carry out a due process upon certain issues and procedures not provided for in the contracts and to settle the disputes arising between the parties. |
| Contracting out of functions | Sometimes, the institutions responsible for the supervision of PPP contracts outsource to third parties (consultants, experts committees, other regulators or companies in the sector, as the study case) the complete execution of some of its functions (technical supervision, in this case) or hire independent advisory services during the implementation of such functions (tariff reviews, cost of capital calculation, fixed assets valuation, among others). |
| Municipal or provincial jurisdictions | The oversight function may lie on municipal and provincial jurisdictions, and this institutional possibility is particularly important when supervising the performance of small-scale service providers. |
| Multinational regulatory agencies | They are agencies created in neighboring countries to supervise regional projects or, also, in small, generally developing, countries when they are unable to meet the necessary resources to have a national agency. |
| Contract Specific Institution | Institutions which have the responsibility of overseeing a single specific contract even when multiple similar contracts exist in the sector or industry. |
Traditionally sectoral ministries were in charge of the regulation and the supervision of Utilities. Given the scarcity of resources of the ministries, the tasks of policy making, regulation and service provision were practically concentrated on the operator
The creation of an independent regulator has been the most recommended option in infrastructure sectors during the nineties. The idea of providing an independent government entity with regulation functions mainly looked for to send a commitment signal with the engagements assumed with the private sector (see BOX 6 for the water in the UK).
BOX 6 : OFWAT; Water Regulator - UK
| Since the implementation of the Water Act 2003, the Water Services Regulation Authority (OFWAT) is the economic regulator of the water and sewerage industry in England and Wales. The Board includes the Chairman, a Chief Executive, two executive and four non-executive directors. The purpose of the entity is to promote quality and efficiency within the industry in the best interest of the consumers. OFWAT responsibilities include: Set price limits Approve companies' codes of practice. |
Contracting out the supervision function is another alternative within the group of institutional possibilities that may be developed to carry out the oversight during the operation stage of a PPP contract.
For instance, regulatory agencies in the electric power sector are usually in charge of supervising the construction of electricity infrastructure works, issuing the technical licenses to authorize the construction and the completion certificates when the works are finished (new plants, network expansions, etc.). These technical licenses and completion certificates specify the technical and quality standards to be met for the construction and operation of said works, but their issuance also implies that the works, whether a new plant or an expansion, will be built in accordance with the regulation in force.90 However, in some countries, the supervision and issuance of certificates or technical licenses may be outsourced (see BOX 7).
BOX 7 : Electricity Transmission Licences in Argentina
| In Argentina, Transener, the high-voltage electricity transmission company, is responsible for the supervision of independent transmission companies that carry out expansions of the existing capacity and the issuing of the appropriate technical licenses, which establish the conditions under which such transmission companies' network expansion shall be constructed, operated and maintained. |
| According to TRANSENER's Concesion Contract, "Independent Transmission Company: It is the owner and operator of power transmission facilities that, pursuant to the conditions set forth in a technical license granted by a TRANSMISSION COMPANY under the RULES OF ACCESS, makes such facilities available, without acquiring the capacity of a WHOLESALE ELECTRICITY MARKET (WEM) agent". |
On the other hand, the oversight duty may lie on municipal and provincial jurisdictions, and this institutional possibility is particularly important when supervising the performance of small-scale service providers. In effect, for being these providers so small, the oversight duty shall require less effort and information and fewer requirements. In addition, it turns out to be more efficient also when the supervision function is carried out by institutions which are closer to the providers. Given the relatively fix costs associated to regulation many smaller jurisdictions or even small countries have adopted multisectoral regulators in which a single agency is in charge of overseeing several sectors (see BOX 8)
BOX 8 : Multisectoral Regulatory Agency
| The State Agency of Energy, Transport and Communications Utilities Regulation of Bahia (AGERBA) was created in May of 1998 by Law No. 7,314. It is governed by a Consultative Board made up of seven Advisors and the Executive Board, which involves the group of agencies in charge of the activities of planning, advising, execution, assessment, supervision and control. Among its objectives, the following can be mentioned: to offer users a high-quality service; to contribute to the universalization of public services; to promote the technical skills and to implement an agile, transparent and efficient communication It is in charge of the regulation, concession, control and monitoring of public services. These activities include: elaboration of rules and regulations; supervision of the compliance with the rules and regulations, the quality and efficiency of the services rendered as well as the economic and financial performance of the concessionaires; analysis and approval of tariff reviews and adjustments; performance and publication of opinion polls; prevention, mediation and settlement of disputes. |
The existence of multinational regulatory agencies should be mentioned, which can be created in neighboring countries to supervise regional projects or, also, in small, generally developing, countries when they are unable to meet the necessary resources to have a national agency.
In effect, the use of multinational regulatory agencies represents a practical possibility to overcome the difficulties encountered by certain developing countries to find skilled staff, with the necessary expertise to perform regulatory functions according to best practices criteria. For example, in order to find a solution to this kind of difficulties, a companies' regulator for the electricity sector was created in West Africa, which supervises and exercises a regulatory function in several countries of the region (see BOX 9)
BOX 9 : Central America Energy Market
| By means of the Framework Treaty for the Electricity Market of Central America of 1998, the Governments of Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Panama, all of them participants of the project called Electricity Interconnection System of the Central American Countries (SIEPAC), set forth the rights, duties and rules to regulate the operation of the regional electricity market and the relationships among its participants. The Regional Electricity Interconnection Commission (CRIE) shall be the regulatory agency of the Regional Market, acting as an individual legal entity and with legal capacity for the purpose of international public law. It shall have enough powers to act in and out of court and to perform all the acts, agreements and operations as it deems necessary or convenient to accomplish its objectives, both within and outside the territories of the signatories to the Treaty. The CRIE shall be composed of a representative from each country, appointed by the respective Governments for a renewable 5-year term. The general objectives of the CRIE shall be to enforce the Treaty as well as its protocols, regulations and other supplementary instruments, to procure for the development and consolidation of the Market, to protect its transparency and proper operation and to promote the competition among the agents of the Market. CRIE's functions shall be, among others: a) to regulate the operation of the Market and, for that purpose, issue the necessary regulations, b) to guarantee the Market's competition and non-discrimination, c) to approve the rules for the regulation of physical and economic dispatches, d) to regulate the aspects related to regional transmission and generation, e) to impose the penalties set forth in the protocols for the non-compliance with the Treaty's provisions, h) to approve tariffs for the use of the regional transmission system, i) to solve the conflicts among the agents, j) to assess the evolution of the Market, k) to request audited accounting information from business units, and l) to coordinate, together with national regulatory agencies, the measures necessary for the proper operation of the Market. |
However, it is worth mentioning that for this type of institutional scheme to be able to efficiently and effectively perform its supervision role, it is necessary that all countries and governments involved cooperate with and rely on the institution, a situation which is not easy to achieve in developing countries92.
Finally we can mention the adoption of contract specific institutions in charge of supervising a single contract even when multiple PPP contracts exist in the sector.
In Chilean toll roads the Concession Contract is ruled in detail by a set of documents and covers topics such as the technical description of the project to be built and operated, the investment deadlines, the service obligations, the financial guarantees provided by the company, the minimum revenue guarantee provided by the government, the dates on which expropriated land or rights of way will be available, the level of the user charges, the duration of the concession, the regime of fines and sanctions, and the compensation to be provided by the Ministry if it requests additional works or the conditions of the concession are modified. Any dispute that may arise among the private company and the Ministry of Public Works in the interpretation or application of the Concession Contract can be presented by either party to the Conciliation Commission (see BOX 10)
BOX 10 : Comisión de Conciliación - Roads - Chile
| Conciliation Commission In case of controversy this expert panel proposes an agreement to the parties. If the parties do not agree on a solution, the private company has the right to request that the Conciliation Commission become an Arbitration Commission. The Conciliation Commission has three experts (which hold professional university degrees). One of the experts is named by the Ministry of Public Works, another by the company, and the third is nominated by mutual agreement and becomes the president of the panel. The Commission has to be set up within 30 days of the start of the concession period. Its members will remain in office during all the life of the concession. The president can only be replaced if both parties agree. |
| Kind of Decisions When acting as the Conciliation Commission, the panel has 1) to seek an agreement between the Ministry and the company if a dispute has been presented, 2) to propose terms for the conciliation, 3) to approve beforehand some major enforcement decisions that the Ministry can adopt, such as large fines, suspension of the concession, or extinction of the concession. When acting as the Arbitration Commission, the panel serves as an arbiter and makes the final decision regarding the dispute, based on the law and the contract. |
In spite of the existence of different institutional possibilities available for the oversight of PPP contracts during their operational stage, in general terms, it can be said that the creation of a regulatory agency has been, during the 90s, the most usual practice in most of the countries and sectors.
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89 Many of these elements represent what Levy & Spiller denominate the "institucional endowment", which from these authors' point of view, plays a key role in the performance of the agencies responsible for the regulation of infrastructure sectors.
90 Berg, Sanford V., Ali Nawaz Memon and Rama Skelton, "Designing an Independent. Regulatory Commission". Public Utility Research Center Working Paper, 2000.
92 Jon Stern, "Electricity and telecommunications regulatory institutions in small and developing countries." Utilities Policy, 2000, vol. 9, issue 3, pages 131-157.