World Bank 2004

Key Regulatory Issues in Highway

Paul Noumba Umpnoumbaum@worldbank.org

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Outline

I. What politicians expect from Regulation?

II. What is Economic Regulation?III. What are the specificities of the

highway sectorIV. What are the Key Regulatory

Issues in HighwaysV. Concluding Remarks

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I- What politicians expect from Regulation? “As Governor, I found independent Regulatory

Commission very useful to blame when it did necessary but unpopular things, and to take credit from it when it did popular things. Such an agency serves to deflect criticism and give the government time to examine alternative solutions”

Richard Celeste, former Governor of Ohio in Rao, S (2004), p.38

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Why there is a Mismatch?

Political cycle is short term with a focus on “Re-election and not on Economic Efficiency”

Regulation is a long term and short term endeavor: Financial viability of the service provider in the short term Market efficiency (allocative/productive) in the long term

How to reconcile both?

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II- What is Economic Regulation?

Set of : Rules (Primary, Secondary Legislations and Contracts) Procedures and Processes Empowered Institutions (Ministry, Regulator, Competition Commission,

Judiciary)

Impacting regulated firms’ decisions on: Prices Quality of service Performance (service coverage, investment) Entry and Exit

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What are the Regulatory Institutions?

Minister Setting the Sector development Policy Maintaining the Regulatory Framework Granting or withdrawing of concessions Final decisions on rates or tolls

Concession contract (Regulation by Contract) A supervisory entity (Contract administrator, Committee, Ministry, Agency) Disputes Resolution mechanism Courts

Commission, Authority or Agency (Regulation by Agency) With specific decision making powers stated in legislations Concession contracts Appeals mechanism

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III - Specificities of the Highway sector

Railroad Natural monopoly Intermodal competition with road

sector ~ Intramodal competition between

rail service providers

Residual Regulatory Issues Regulation of Access (Interlining

or interconnection) and Access pricing

Regulation of rates for captive shippers

Security and Schedules coordination

Road Infrastructure Public authority/ Operator supply

and maintain the road infrastructure + Security + Safety

Whereas transportation services are handled by end users (third parties).

Residual Regulatory Issues Affordability of tolls or road pricing

scheme Compliance with contractual

obligations Safety and Security

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V – Key Regulatory Issues

Regulation of Entry and Exit: Concession Design and Award

Price Regulation Regulation of the performances

of concessionaires Concession and Regulation are

interdependent in highway

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Regulation of Entry and Exit

Concession Contract Design and Award Primary responsibility of the Government but Regulator should be

associated Competitive Bidding process with Pre-qualification Selection made on the basis on well chosen criteria

minimum toll/ minimum subsidy/aggressive investment/ combination

Oversight of the Concession Contract Oversight committee or Regulator with appropriate skills and means Strong information requirements on operators Understand the distribution of risks among the parties Appropriate regulatory accounting guidelines Triggers to adjust or to revise tolls

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Regulation of Tolls

Financial Equilibrium of the concessionaire: Profit = Volume of Vehicles* Toll – OPEX – Taxes – Depreciation = r * Ki

Are the derived Tolls affordable to Users? How much cost should be recovered through toll paid by users? How tolls should be adjusted over time? What level of demand discrimination is given to the concessionaire?

Impact of demand uncertainty? The inability to effectively audit cost and corruption deter

effectiveness of most pricing mechanism Regulatory regime often starts as a Price cap (max toll per type of

vehicle) and de facto moves to a Cost Plus because of subsidies or transfers.

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Regulation of the concessionaire’s performances Asset quality indicators to be considered at the concession design:

Pavement roughness and deterioration Condition of lighting, markings, signaling Toll collection facilities, fire and rescue services…

Quality aspects at operation: Performance standards are met: Lane availability, Average speeds off peak and

peak, toll queue performance, access conditions and bottlenecks, response time for emergency service.

Additional investment are made when performance triggers are reached Safety aspect

Facility can handle anticipated traffic volume and police enforcement of driving regulations

Need for regular quality audit and survey the perceptions of the users

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Concession design and Regulation are interdependent An excellent concession design followed with a poor regulatory

oversight leads to deficient sector performance An excellent regulatory oversight but with poor concession design

leads to deficient sector performance In other words, Regulation cannot solve the problems stemming

from a poorly designed concession PPP units and Entities in charge of regulation should work in close coordination

to design the concession Regulatory entities need: accurate information (assets valuation, demand

predictions, performance targets, investment plans, …) to determine the rate (toll) base

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Examples of toll road concessionsCountry Prior

experience with toll road

Concession law

Bid process and evaluation criteria

Concession term

Contractual regulatory

mechanism

Brazil- Parana Yes No Longest Network length

- -

Chile – South Access

2nd concession Yes Competitive, Minimum subsidy

25 years Max Toll rate indexed to inflation

Colombia – Buga/Tulua

One of the first toll road

No Federal but provincial legislation

Competitive – Multi-criteria

15 years Max. Toll rate indexed to inflation. Revenue cap

Mexico – Mexico city/ Toluca

Ambitious toll roads program

Yes Competitive- Shortest term at fixed rate

4,5 year and ext. 11

Max Toll rate indexed to inflation

China- Guangzhou-Shenzhen

Toll road program in development

No Direct negotiations 30 years None – partner receives 50% of profits

Malaysia- North/South

First private toll No Competitive,

Multi-criteria

30 years Toll specified and indexed to inflation

Hungary- MI/M15 First private toll Yes Competitive, Multi-criteria

35 years Maximum toll indexed to inflation

Adapted from Fischer, G, and Babar, S. (1996)

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In conclusion

Most countries rely on concession contracts While this provides certainty in terms of the stability of the regulatory

framework, but it may lack flexibility to deal with external shock… Weaknesses in the oversight of concession contract Lack of appropriate compensation mechanism for govt. unilateral contract

change Over-optimistic traffic predictions and disputes over initial conditions Failure to incorporate strong information requirements or accounting

guidelines Questionable choice of award criteria leading to opportunistic negotiations Termination periods not appropriately regulated to avoid opportunistic

strategies When RA exist there are autonomous but report to line Ministers. They face

financing issue and the Matrix of salaries is not competitive. Although their Decisions can be appealed, due process is not always mandatory

World Bank 2004

Appendices on institutional Arrangements

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Organization of transport RA

Report to GEOGRAPHIC JURISDICTION

INSTITUTION’S MAIN CHARACTERISTICS

OSITRAN, Peru Independent Agency.

National Created in January 1998 to regulate the transport market (roads, railways, maritime and air transport),

CNRT, Argentina Reports to the Transport Secretary.

National Created in June 1996 to regulate road and rail transport within the Argentinean territory

FAB, Mexico FAB reports to the Sec of Communi and Transport.

National Regulates all issues related to transport sector, including air, terrestrial (roads and railways) and maritime transport.

ANTT, Brazil ANTT reports to the Transport Ministry.

National Created in February 2002, ANTT to regulate the terrestrial (roads and railways) public transport service provision.

National Bureau of Transport, Uruguay

Reports to the Ministry of Transport and Public Works.

National The bureau formulates transport policies; regulates, controls, and supervises operations among public services providers

ARM, Niger ARM is an

Autonomous Agency.

National ARM was created on October 1999 to regulate the water, energy, telecommunications and transport sectors.

CRTR, Colombia Report to the Transport

Ministry.

National CRTR created in February 2000 to regulate the public transport service provision (roads, railways, maritime and air transport).

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Appointment and Dismissal of T/Regulators

COUNTRY MANAGEMENT TERM- APPOINTED BY DISMISSAL CRITERIA

Peru 5 Directors 5 years, renewable once.

Appointed by the President of the Ministerial Council.

Conviction, Conflict of Interests

Argentina 5 Directors, but currently under the management of a single acting representative

5 years by Government Conviction, Conflict of Interests.

Colombia 9 Directors 4 years, renewable once and appointed by Government

Conviction, Conflict of Interests.

Mexico 5 Directors 6 years, appointed by Government Conviction, Conflict of Interests.

Brazil 5 Directors 5 years, appointed by Government Conviction, Conflict of Interests.

Uruguay 7 Directors 5 years, renewable once and appointed by Government

Conviction, Conflict of Interests.

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Resources of T/RAs …

COUNTRY STAFF MATRIX OF SALARIES

SOURCE OF FUNDING BUDGET

(in dollars)

APPROVAL PROCESS

Peru 40 Civil Servant 1% of every operator’s revenue.

2.3 million National Budget Bureau under the Ministry of Economy & Finance.

Argentina 60 Civil Servant “National Fund of Transport” (National Fee of transport supervision, % of operator’s revenue. National

Budget).

NA Congress and Executive Branch.

Colombia 453 (Ministry Staff)

Civil Servant Budget-approved by the Congress.

NA Congress and Executive Branch.

Brazil 625 Civil Servant 1) 53% from Budget (pre-approved by the Congress).

2) Regulation Tax (% operators).

3) Fines and tickets collected for

transit infringements .

44 million Congress and Executive Branch

Mexico 600 (FAB staff)

Civil Servant Budget (pre-approved by the Congress.

NA Congress and Executive Branch.

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Appeals of Regulatory Decisions

COUNTRY ADMINISTRATIVE COURT JUDICIARY COURT

Peru Independent Arbitration, Government

Direct Appeal

Argentina Government Direct Appeal

Colombia Government Direct Appeal

Mexico Government Direct Appeal

Brazil ANTT Disputes Resolution Committee, Government

Direct Appeal

Uruguay Government Direct Appeal

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Transparency and Consumers Participation..

COUNTRY COMPLAINTS OFFICE

PUBLIC HEARING CONSULTATIVE COMMITTEE

Peru Yes Yes (Required by Law)

Committee

Argentina Yes Possible Committee

Colombia Yes Unspecified Committee

Mexico Yes Unspecified Committee

Brazil Yes Possible Committee

Uruguay Yes Unspecified Committee

World Bank 2004

Thank You