PPPs often deal with the supply of essential services in monopoly (or near-monopoly) conditions. Private monopoly essential service providers are typically regulated by government to control tariffs and service standards-often by assigning responsibilities to an independent regulatory agency-to protect customers from possible abuse of market power. Sector regulation may also govern the terms on which providers in a sector deal with each other; entry to the sector through licensing; and control over sector investment decisions. Regulation is particularly important in the water, electricity, gas, and telecommunications sectors, and can also be found in other sectors, such as airports or highways.
There are several ways in which PPPs relate to the concept of sector regulation, in the context of natural monopoly sectors:
• PPP and privatization as alternative reform options. Governments looking at options to improve performance of existing public assets and services in these sectors may consider a PPP as an alternative sector reform option to privatizing and establishing a regulatory regime. While there are similarities in the processes of establishing a PPP and privatizing, and some of the guidance in this book may be applicable in both cases, the nature of the resulting relationship is distinct.
• Regulation by contract through a PPP. When PPPs are introduced in sectors that would typically be regulated, the PPP contract itself can be used to define tariffs and service standards in a way that protects customers' interests-as an alternative to establishing a regulatory regime. Box 1.1 presents some examples of 'regulation by contract'; some of the implications for PPP contract design are described further in Section 3.3: Structuring PPP Projects
• PPP alongside sector regulation. Some countries decide to establish sector regulatory regimes when introducing a PPP for service provision in a sector; including in some cases to act as government party to the contract. In other cases, sector regulation may already be in place. In either case, the PPP agreement and sector law and regulations need to be carefully harmonized-to ensure there is no conflict between the PPP contract and regulatory requirements, and to establish clear roles and responsibilities. Section 2.3.2: Institutional Responsibilities: Implementation provides more examples of the roles of sector regulators in developing, implementing, and managing PPPs.
The Body of Knowledge on Infrastructure Regulation [#288] is an online resource that provides detailed guidance and further reading on a wide range of regulation topics. The following references also discuss regulation in more detail, including how it relates to PPPs:
• Yong [#296, section 4.1.3] discusses regulatory frameworks for PPPs-box 4.4 in this section provides an overview of the different approaches to regulation of infrastructure
• The Explanatory Notes Series on Key Topics in Regulation of Water and Sanitation Services [#122] cover a wide range of topics in water sector regulation, including guidance on assigning regulatory functions, and the options of regulation by contract or by an independent agency
• Eberhard's paper on hybrid and transitional models of regulation in developing countries [#66] provides an overview of different regulatory models and the advantages and potential pitfalls of each model. The paper also provides recommendations on how to improve the performance of regulatory models
• Two papers by Ian Alexander [#4, #5] focus on establishing predetermined rules for committing regulators to future actions, and building confidence in the regulatory system to attract private investors.
Regulation is not limited to sectors involving the provision of essential services in monopoly or near-monopoly conditions. Regulatory frameworks can also be used to overcome other market failures, such as to ensure responsible management of limited natural resources. In some cases the processes and structures can bear resemblance to a PPP-for example, a concession for mining or petroleum exploration or exploitation, or for management of a tourism site. There can also be some muddy ground between these types of regulation, where some aspect of provision of essential services through a competitive market requires access to limited resources-such as allocation of radio spectrums for mobile telecommunications, or access to hydropower or other resources for electricity generation in the context of a competitive market. While there are some similarities between such concessions or licensing procedures and PPPs, for the most part the contract structures involved in such cases are distinct, and the material in this Reference Guide is of limited relevance in such cases.
Box 1.1: Regulation by Contract Many governments implement PPPs without creating an overall sector regulatory regime. A common approach to sector regulation is to address tariff and service standards directly through the contract with a private service provider. In this approach, no special tools or regulatory bodies are required. The contract itself sets out the service standards to be reached. In the case of a concession contract, the contract will also sets out what the tariff is, and rules and processes for adjusting the tariff from time to time. In a lease or affermage contract, tariff setting powers may be retained by the government, but the payment to the operator-which is also linked to the amount of the service supplied-is set in the contract. This approach is used successfully in France, and in many Francophone countries. For example: • Urban water concession, Senegal-in the 1995, the government implemented reforms to bring in private operators under an affermage and performance contract to improve the performance of the water sector. Provisions within the contracts outlined performance standards and indicators, allowed for monitoring by a committee, and included an effective dispute resolution mechanism. The private operator was legally obliged to meet the standards-such as water quality, access, non-revenue water-set out under the contract [#272] • Manila water concessions, Philippines-when the government of the Philippines decided to end a water crisis in Manila by letting two concession contracts for supply of water in the city, it considered establishing an independent statutory regulator. However, it decided that going to Congress to pass the necessary laws would be too time-consuming and risky. It therefore created a regulatory office for the two concession agreements within the public utility (which remains the asset owner and counterpart to the PPP contract). A clause in the concession agreement required the private operators to 'cooperate' with the regulatory office, which in turn was responsible for interpreting the regulations in the agreements [#63] • The Bucharest water concession, in Romania, also provides an interesting example of a regulatory structure created under contract. The concession had two different regulatory bodies-a technical regulator and an economic regulator. The technical regulator was created for the specific purpose of monitoring the technical performance of the private operator against the indicators set out under the concession contract. The economic regulator, a national government agency, approved tariff adjustments according to the formula set out by the concession contract. For further discussion of issues specific to 'regulation by contract' and case studies, refer to Regulation by Contract: A New Way to Privatize Electricity Distribution? [#26] and Explanatory Notes Series on Key Topics in Regulation of Water and Sanitation Services [#122]. |
Key References: What is a PPP | |
Reference | Description |
Delmon, Jeffrey (2010) Understanding Options for Private-Partnership Partnerships in Infrastructure, Policy Research Working Paper 5173, World Bank | Describes in detail the different PPP contract types and nomenclature, and which also introduces a new classification of PPP contracts intended to clarify and facilitate comparison |
Yescombe, E. R. (2013) Public-Private Partnerships: Principles of Policy and Finance, 2nd edition, Elsevier Science, Oxford | Chapter 1 "What are Public-Private Partnerships" describes the range of PPP structures and how these are classified |
Farquharson, Torres de Mästle, and Yescombe, with Encinas (2011) How to Engage with the Private Sector in Public-Private Partnerships in Emerging Markets, World Bank/PPIAF | Chapter 2 "Defining Public-Private Partnerships" focuses on how PPPs differ from privatization and management contracts; and describes user-fee and availability-based PPPs. Several case studies throughout the book provide examples of PPPs in developing countries |
Eric Groom, Jonathan Halpern & David Ehrhardt (2006) Explanatory Notes on Key Topics in the Regulation of Water and Sanitation Services, World Bank | Note 4 "regulation and private sector contracts" describes typical features of concession, lease, and management contracts in the water sector |
H. K. Yong (ed.) (2010) Public-Private Partnerships Policy and Practice: A Reference Guide, London: Commonwealth Secretariat | Section 7 reviews recent PPP experience in Commonwealth developing countries. Annex 5 presents case studies of 11 PPP projects, in the water, transport, power, and health sectors in Africa, Asia and the Caribbean |
Anton Eberhard (2007) Infrastructure Regulation in Developing Countries: An Exploration of Hybrid and Transitional Models, Working Paper No.4, World Bank | Provides an overview of different regulatory models and the advantages and potential pitfalls of each model. The paper also provides recommendations on how to improve the performance of regulatory models |
Ian Alexander (2008) Regulatory Certainty Through Committing to Explicit Rules - What, Why and How? Paper based on a presentation made at the 5th Annual Forum of Utility Regulators (AFUR) conference, Accra, Ghana | Focuses on the establishment of predetermined rules committing regulators to future actions |
Ian Alexander (2007) Improving the Balance Between Regulatory Independence, Accountability, Decision-making and Performance. Paper prepared for 4th Annual Forum of Utility Regulators (AFUR) conference, Livingstone, Zambia | Focuses on the importance of investor confidence in the regulatory regime |
Tonci Bakovic, Bernard Tenenbaum & Fiona Woolf (2003) Regulation by Contract: A New Way to Privatize Electricity Distribution?, World Bank Working Paper 14 | Describes the key features of "regulation by contract"; how different countries have handled some key regulatory issues through this mechanism; describes the strengths and weaknesses of different approaches, drawing on international experience |