What are the foundations for regulatory activities in infrastructure?

[Response by Sophie Trémolet and Diane Binder, August 2009]

It has been estimated that close to 200 new infrastructure regulators have been created around the world since the late 1990s, largely as part of broader infrastructure reforms. The new agencies balance the interests of various stakeholders and are partly designed to address market failures. There are three different types of market failures that can potentially drive the design of infrastructure reforms: failure of competitive markets due to the existence of natural monopolies; information asymmetries; and externalities. These are explained in more detail in questions below. When infrastructure reforms are introduced, they are expected to yield a number of benefits, including improvements in sector performance, affordability, transparency and accountability, financial sustainability, and benchmarking comparisons. Infrastructure reforms, as with any reforms, are likely to generate winners and losers, and therefore, to generate resistance. As a result, strong political will is usually required to take the reforms forward. The three main groups impacted by regulation are consumers, operators, and governments:

• Consumers – infrastructure reforms aim to protect consumers from private sector abuses and political interferences.
• Operators – reforms are usually implemented to protect the private sector from politically-driven decisions.
• Governments – reforms allow governments to make informed decisions and increase their revenues.

Infrastructure reforms may hurt certain groups for two main reasons. On the one hand, it is inherent to the process of reforms that there are likely to be winners and losers from such reforms. On the whole, however, such losses should prove temporary and infrastructure reforms are assumed to yield overall net gains over the long term. In some cases, however, infrastructure reforms may be designed or conducted “badly” and as such, could have unintended consequences. The regulator can mitigate unintended consequences by constantly informing the public of main policy decisions and by carrying out a consultation with all stakeholders at all stages of the regulatory process.