The diagnostic should cover the existing legal, regulatory, and policy frameworks including:
• applicable laws, and existing regime for assigning authority and setting performance standards;
• oversight arrangements, regulatory bodies, regulations;
• major sector institutions and government entities related to the sector;
• tariff and subsidy policies and arrangements;
• existence and applicability of legally mandated service quality standards;
• natural resource safeguards and management requirements important to sector performance;
• environmental and health regulations;
■ relevant labor laws and regulations; and
■ limitations on foreign ownership/sector participation, foreign exchange restrictions, and limitations on repatriation of profits, i.e., foreign investment laws.
In particular, the regulatory regime may have to be reformed and/or regulatory bodies created to facilitate a shift from purely government-provided services to the private provision of services.
Enabling legal, regulatory, and policy environments are critical to a sustainable PPP. At a baseine level, a legal environment that can support private sector involvement in critical services is needed. The legal environment has to minimize the likelihood of corruption and must be sufficiently reliable as to encourage private participation and investment. To the degree that the legal and judicial environment is not defined, investors and project participants will see the project as unpredictable and highly risky. See Box 1 for the case in the PRC.
Equally, possible investors must have confidence that the laws and the contract will be respected and can be enforced in the courts or through arbitration, if necessary.
The framework for economic regulation must be equally explicit. This may entail creating an independent regulator, a regulatory unit within a part of government, or another form of regulatory capacity. It can also be effective to embed regulatory principles within the contract and the external capacity required is limited to an effective monitoring capacity and audit of performance outcomes. Highly specific contract terms that establish duties, performance targets, tariff level and structure, rules for changing tariffs, and dispute resoution procedures, allow the private sector to better predict the profitability of the venture and decide what the contract is worth bidding for. The basic principle is that the level of service demanded and the costs of those services must be equitably balanced, while creating incentives for improved efficiencies in the system.