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Do We Need Regulation?

Session on Regulation & Accountability

Max BradfordCastalia

The views expressed here are those of the presenter and do not necessarily reflect the views or

policies of the Asian Development Bank (ADB), or its Board of Directors, or the governments they

represent.

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itWhat Do We Mean by Regulation?

• Differnt types of regulation: Environmental Safety Consumer protection Social objectives Economic

Rules +

Institutions

Monopoly Service Provider:

Tariffs+

Service Standards

set

monitor

enforce

change

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Inefficient tariff levels

+ Inappropriate service

When Is Regulation Needed?

• Ideal situation: Competitive market Many providers Full information Low risk

Incentives for appropriate level of

service + Efficient price = Minimal Regulation

• Reality for most infrastructure services: Often involves (natural) monopoly or oligopoly Large capital investments required Service provision highly politicized Minimum service standards required

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itWhen Is Regulation Needed?

• Problems of congestion

• Problems of non-excludability

• Barriers to entryMarket failure is real but, Regulatory failure also

occurs

• Competitive markets with anti-competitive protection = best

• Issue is not only identifying market failures, but of identifying large market failures where there is a scope for welfare enhancing interventions (Stiglitz)

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itWhat Does Regulation Control?

Tariffs

• “Too low”? Provider may not be able to

operate sustainably (need to recover full cost + return on capital)

Service standard suffers/ Government forced to subsidize

Consumers may ‘over-use’

• “Too high”? Provider may earn economic rent Consumers may be unable to

afford

Service standards

• “Too low”? May be threat to safety/

health Customers may be

dissatisfied

• “Too high”? Costs may increase

(‘gold-plating’)

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itHow Is Regulation Implemented?

• “Regulation by institution”

Used in:

UKCaribbeanAustralia

New Zealand

Government

Utility

Regulator

Consumers

Services

Sets tariffs and service standards

Tariffs

Appoints

Accountability?

Accountability?

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itHow Is Regulation Implemented?

• “Regulation by contract”

Used in:

FranceAfrica

Vanuatu

Government

Consumers

Contract sets tariffs and service

standards

Services

Utility

Tariffs

Accountability?

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itWhen Does Regulation Fail?

• Inadequate information

• Political interference

• Rules poorly designed / unclear (especially for dealing

with ‘shocks’ such as dramatic change in input prices)

• Rules not correctly applied (lack of competence /

understanding?)

• Personal incentives not aligned with institutional

incentives (personalities matter)

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itIs Regulation Only for Private Providers?

• Governments are often monopoly service providers

• Governments are ‘accountable’ to consumers - but may

not have incentives to operate efficiently

• Regulation of state-owned companies also important