The literature on the obstacles to public-private partnerships (PPPs) focuses on problems associated with political support, institutional structure, contract design, bidding processes, public perception, and the effects of unforeseeable events. Not enough attention has been given to the role of regulatory governance in the performance of PPPs. This is surprising since infrastructure services are typically regulated regardless of ownership structure because of market competition in these services. Indeed, the quality of regulations affecting PPPs can be among the key determinants to the success of these partnerships (Brown et al. 2006; Eberhard 2007; Stern and Holder 1999). A World Bank survey of private power sector investors found that four of the top five factors for an unsatisfactory investment experience were related to lack of fairness and commitment in regulatory systems (Batra, Kaufmann, and Stone 2003). Ineffective regulations not only impair the performance of PPPs in infrastructure services that are underway, but are also a major barrier for potential investors.
Regulation is vital for the smooth performance of PPPs in infrastructure services, and for developing the PPP modality. The regulatory framework presented in this chapter consists of regulatory objectives, regulatory functions, regulatory agencies, and regulatory instruments. Confusion and misunderstanding are widespread on regulations affecting PPPs at the conceptual and operational levels for three main reasons. The first is that regulations are often seen as obstacles to the development of PPPs. Although the main objective of regulations is to reduce risks by protecting the interests of all stakeholders. The second is the dominance of economic regulation in dealing with market failures. Preventing these failures is at the heart of these regulations, but there are also other rationales, such as meeting social and environmental objectives. The third reason is that much more emphasis is put on regulatory issues for initiating PPPs than on sustaining PPP contracts.
Developments in PPPs in infrastructure services in Asia's emerging economies since the start of the 2000s provide a good opportunity to examine the role of regulation in improving the performance of these partnerships for infrastructure services. No systematic analysis has been done on this. Some studies focus on economic regulation only, but the regulation of economic issues beyond natural monopoly must also be taken into consideration. Other studies treat legal and regulatory issues as being in the same category, though approaches to both differ considerably.
By drawing on lessons from water sector PPPs using brief case studies from the People's Republic of China and the Philippines, this chapter aims to help fill these gaps with its analysis of how a strong regulatory environment can improve the performance of PPPs in infrastructure services. The chapter presents a framework for designing regulatory systems for infrastructure services, and discusses the challenges of regulating infrastructure services in Asia in the context of the case studies. The water sector was chosen not only because the regulation of water PPPs captures the full array of the regulatory challenges in dealing with these partnerships in infrastructure services but also because they have been more controversial than PPPs in other sectors in many countries in Asia. Among the regulatory challenges are a lack of clear understanding of the definitions, scope, functions, and mechanisms of regulations for PPPs in infrastructure services.