Theories and approaches to regulationDr. Alison Gillwald Executive Director: Research ICT AfricaAdjunct Professor: UCT Graduate School of Business, Management of Infrastructure Reform & Regulation.

Post graduate executive certificate: ICT Policy & RegulationPolytechnic Namibia

Theories (Baldwin & Cave)Interest theoriesPublic Interest

Problems of definitionDisinterested expert regulatorsOnly pertinent in early phase of regulatory life-cycleUnable to deliver public interested outcomes

Interest group theoriesRelationship between different interest groups and between interest groups and stateCompetition for powerCapture theory (Bernstein)

Pluralistist - coalitions of interest to win electionsCorporatists - successful group taken into partnerships with State and produce regulatory regimes that exclude other interestsPrivate interest theories

Economic, Chicago, private interest, public choice, special interest and capture

Rational choicerational individual maximizers of own welfare

Theories (2)Institutional theory

Regulation shaped by institutional arrangements and rulesPrinciple agent problemsBureaucratic and legal drift (McNollGast).Political: way institutions,structures and decision-making processes shape political outcomesSociological: organisational, behaviouralHistorical and cultural

(See Baldwin and Cave 1999:33)

New Institutional theory• (Immergut 1998:12)

• Rational Choice theory

• Organisational Theory

• Rejects rationality. Without the time and information to weigh preferences, individuals rely on “the shortcuts of bounded rationality such as reliance on standard operating procedures” to make decisions.

• Historical institutionalism

Theories (4)• Historical institutionalism• Whereas organisational theorists emphasise the cognitive limits on rationality and the co-

ordination of individual action through institutional rules and procedures, Historical Institutionalism stresses the importance of power and interests.

• Focuses on the relations between politics, state and society within particular historical periods. “Citizens preferences are not as the pluralist thought, efficiently transmitted to political leaders via interest groups and political parties: instead, the representations of interests is shaped by collective actors and institutions that bear traces of their own history.”

• State structures, political and legal institutions all shape public policies. “…political economies – like political systems – are structured by dense interactions among economic, social and political actors that work according to different logics in different contexts.”

• Political demands therefore are not a precise reflection of the preferences of individuals but rather the result of various institutional factors that adjudicate interests, legitimating some and allowing them to benefit above others (Immergut 1998:16-17).

EXERCISE

• Describe Hernan Galperin’s (2004) application of new institutionalism conceptual tools to regime change in communication in Namibia

Galperin• Forces shaping policy outcomes• Interest group - power that each interest groups is able to amass and wield in

support of its preferred outcome• Ideological - provide basic cognitive template through which decision-makers

interpret complex problems and assess the validity of alternative policies• Technological - compels policy reforms through circumvention, destruction

and innovation• Policy often not reducible to powerful interest groups• State not open arena where interest groups wage rent seeking battles• Institutional fabric that underlies decisions favour some, diffuse interests• New institutionalism focuses on state actors and structures and economy to

explain policies.

McNollGast (1)• Efficiency of organisation in decision-making• Admin procedures are one means of guiding agencies to make decision that

are consistent with legislative intention (winning coalition limit ex post opportunistic behaviour)

• Failure of traditional rewards and punishments• Principal agent theory - problems of compliance• Correct non-compliance with amendment to mandate, structure or

procedures• Agency non-compliance and policy drift - correction only possible outside of

broader framework, but even if corrected not necessarily intended policy outcome - negative sum game.

McNollGast (2)• Agency structure and process can influence policy decisions - depend on

information and structure and process determine the quality and completeness of information.

• Principals control dependent on constituency for information• Resources to act independently and promote own decisions.• Prevent agents from presenting decisions as fait accompli - early warning

systems - time to adjust non-compliant decisions. - procedures producing delays.

• Because difficult for politicians to punish or correct agencies they devise institutions that limit deviation.

• Agency design - mirror politics of time of enactment - policy can drift with sponsors

Regulatory design• Regulatory governance

• Structure to restrain discretion

• Regulatory incentives

• Rules governing pricing, subsidies, entry, interconnection

• Incentives only effective if governance structure adequate

• Choices constrained by institutional endowmentsLevy & Spiller 1996

EXERCISE• Consider the problems and challenges identified by Anton Eberhard with the

establishment of independent regulators in relation to Namibia and consider which of the hybrid and transitional regulatory models he describes might address the identified challenges inNamibia.

3Improving regulatory performance by matching country circumstances

where there are challenges or problems relat-ing to a regulator’s independence, capacity, or legitimacy—or where regulatory contracts need additional support for effective administration. Outsourcing might also be used for cost-benefit reasons (Tremolet, Shukla, and Venton 2004).

There are two main models of regulatory outsourc-ing. The first involves consulting or technical support for regulators or the parties to a regulatory contract. The second involves the government’s contracting of separate advisory regulators or expert panels. In the strongest version of this model the advisory regulator or expert panel must give its advice in a publicly available document that clearly explains the decision. The minister (or other relevant authority) may request reconsideration of the recommendations, but must do so within a specified period. If the minister fails to react, the recommendations are enacted. And if the minis-ter rejects or modifies the recommendations, the minister must provide a written public explanation. The minister’s policy directives and other commu-nications to the regulator or expert panel must be in a public document. The regulator or expert panel holds public consultations with the parties affected and is funded from an earmarked budget outside the line ministry (Brown et al 2006, p100).

Expert panels may also be used to arbitrate

disputes between regulators and utility operators or disputes that arise out of contested interpre-tations in regulatory contracts. In contrast with conventional arbitration mechanisms, expert panels have the specialist expertise needed to analyze comprehensive tariff reviews and use procedures that are less formal and adversarial.

One interesting use of expert panels could be at the regional level. Regional economic bodies or regulatory associations could employ an expert panel to provide technical assistance to a number of national regulators. Regional panels would provide greater continuity and consistency in specialist support and could make better use of scarce regulatory expertise. They could also assist in harmonizing regulatory regimes, aiding the integration of regional networks.

Toward better regulatory systems

The different regulatory models embody varying degrees of regulatory discretion. But they are not mutually exclusive and often coexist (figure 2). How to choose between these options or decide on an appropriate combination?

Some have argued that the fundamental chal-lenge in regulatory design is to find governance mechanisms that restrain regulatory discretion over substantive issues such as tariff setting (Levy and Spiller 1994). Others argue that some regula-tory discretion is inevitable (and even desirable) and so the fundamental problem is how to estab-lish governance arrangements and procedures that allow a “nontrivial degree of bounded and account-able discretion” (Stern and Cubbin 2005, p7).

A model to fit the contextThe level of regulatory discretion should be determined by the context. Regulatory models and governance systems should be securely located within the political, constitutional, and legal arrangements of the country. They should also fit the country’s regulatory commitment, institutional development, and human resource capacity.

Where there is weak regulatory commitment and capacity, the initial choice might be a set of low-discretion regulatory contracts without a regulatory agency (figure 3). Where there is strong regulatory commitment but weak institutional development and capacity, regulatory functions could be contracted to an expert panel.

The level of regulatory discretion should depend on the context

FIGURE 2Different regulatory options can often coexist

Regulation by agency

Regulation by contract

Consultants or expert panels undertakeor assist with tariff reviews, standard

setting, monitoring, arbitration

Regulator(or ministry)administers

contract (such as a concession

contract

Regulatorycontract provides

for externalcontractors

Advisory regulators

Expert panels

Independent regulator sets tariffs and regulates access, quality of supply,

customer service, dispute resolution

Government policy and

legal framework

Government policy and

legal framework

Regulatory regime (including tariff setting)prespecified in detail

in legal instrument

Outsourcing of regulatoryfunctions to third parties

Regulatoryoutsources

some support functions

Independent reviews

Matching regulatory design to country circumstancesThe potential of hybrid and transitional models

Anton Eberhard

c/o The World Bank, 1818 H St., N.W., Washington, DC 20433, USAPHONE (+1) 202 458 5588 FAX (+1) 202 522 7466

GENERAL EMAIL ppiaf@ppiaf.org WEB www.ppiaf.org

PUBLIC-PRIVATE INFRASTRUCTURE ADVISORY FACILITY

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PUBLIC-PRIVATE INFRASTRUCTURE ADVISORY FACILITY

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4

Hybrid and transitional modelsWe have already noted the possibility of hybrid models. Yet another possibility is a transitional path (as indicated in Figure 3). The situation in a country may change over time. While regulatory commitment is being increased, strong advisory panels could be contracted or a separate regulatory agency established, perhaps initially with limited discretion. As institutional and human resource capacity is built, the responsibilities and functions of the regulatory agency could be expanded. And as these transitional and hybrid models evolve, sensible decisions could be made on outsourcing certain regulatory functions where cost-effective.

There is no ideal destination. The transition may not always lead to a full-fledged independent regu-latory agency. There may well be situations where an independent agency is simply not justified and an expert panel or a well-designed regulatory contract would suffice.

Conclusion

The idea that infrastructure reform should involve setting up independent regulators became a mantra over the past 15 years. But mantras become substitutes for thinking—and may not fit all settings. The success of a regulatory system depends on its compatibility with a country’s regu-latory commitment and institutional and human resource endowment. Each country needs to select from a menu of regulatory options to create hybrid models that best fit its own circumstances and challenges. And as the country builds regu-latory independence and capacity, these hybrid models will evolve. Designing and implementing legitimate, competent regulatory institutions in developing countries will always be a dynamic challenge.

Note

This note is based on a number of papers by the

author. The papers can be accessed at www.gsb.

uct.ac.za/mir.

References

Bakovic, Tonci, Bernard Tenenbaum,

and Fiona Woolf. 2003. “Regulation

by Contract: A New Way to Privatize

Electricity Distribution?” Energy and

Mining Sector Board Discussion Paper 7.

World Bank, Washington, D.C.

Brown, Ashley, Jon Stern, Bernard Tenenbaum, and Defne Gencer.

2006. A Handbook for Evaluating Infrastructure Regulatory Systems.

Washington, D.C.: World Bank.

Levy, Brian, and Pablo Spiller. 1994. “The Institutional

Foundations of Regulatory Commitment: A Comparative Analysis

of Telecommunications Regulation.” Journal of Law, Economics and

Organization 10 (2): 201–47.

Stern, Jon, and John Cubbin. 2005. “Regulatory Effectiveness: The

Impact of Regulation and Regulatory Governance Arrangements

on Electricity Industry Outcomes.” Policy Research Working Paper

3536. World Bank, Washington, D.C.

Tremolet, Sophie, and Niraj Shah. 2005. “Wanted! Good

Regulators for Good Regulation: An Evaluation of Human and

Financial Resource Constraints for Utility Regulation.” Report by

Environmental Resources Management and Tremolet Consulting for

the World Bank, Washington, D.C.

Tremolet, Sophie, Padmesh Shukla, and Courtenay Venton.

2004. “Contracting Out Utility Regulatory Functions.” Report

by Environmental Resources Management for the World Bank,

Washington, D.C.

World Bank. 1993. The World Bank’s Role in the Electric Power Sector.

World Bank Policy Paper. Washington, D.C.

———. 2004. “Public and Private Sector Roles in the Supply of

Electricity Services.” Operational Guidance for World Bank Group

Staff. Energy and Mining Sector Board, Washington, D.C.

GRIDLINESGridlines share emerging knowledge on public-private partnership and give an overview of a wide selection of projects from various regions of the world. Past notes can be found at www.ppiaf.org/gridlines. Gridlines are a publication of PPIAF (Public-Private Infrastructure Advisory Facility), a multidonor technical assistance facility. Through technical assistance and knowledge dissemination PPIAF supports the efforts of policymakers, nongovernmental organizations, research institutions, and others in designing and implementing strategies to tap the full potential of private involvement in infrastructure. The views are those of the authors and do not necessarily reflect the views or the policy of PPIAF, the World Bank, or any other affiliated organization.

FIGURE 3The choice of regulatory option should fit the context

Source: Adapted from Brown and others 2006.

Independentregulator

Contracting-out if cost-effective

Strong advisory regulators

Expert panels

Regional regulators

Regulatory contracts

Regulatorycontracts with

contracting-out

Country X

?

High

Low

HighInstitutional and human resource capacity

Reg

ulat

ory

com

mitm

ent

References• Baldwin and Cave (1999)

• Galperin, H (2004)

• Immergut, E (1998) The Theoretical Core of New Institutionalism, Politics and Society, vol 26. No1. March. Sage. London.

• Intven (2000)

• Noll (2006)

• McCubbins, Noll and Weingast (1989