Lack of political continuity – How can legislation be used as a tool for promoting stability and continuity in the reform and regulatory processes?

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

Legislation can be used at two distinct stages of the regulatory process to promote stability and continuity in the reform:

  • At start-up phase, legislation can be used to establish the regulator.

Even in countries that have tended to rely on regulatory contracts to adopt regulatory reforms, such as concessions, hybrid regulatory systems have been explored combining regulation by contract and by independent agencies. Regulatory contracts may indeed be more sustainable when backed by independent regulators. However, it has been realized that independence, while of paramount importance, must be combined with a political contract (Bakovic, Tenenbaum, Wolf, 2003): commitment will not be believable unless it comes from the country’s highest political authorities. The underlying principles and initial parameters of regulation mechanisms (whether by contract or by an independent agency) should therefore be clearly specified in the country’s primary or secondary laws12. Where the regulatory framework is set out in legislation but private sector participation is introduced through a contract (such as concession agreements), it is important to avoid any contradiction between the two instruments as this could otherwise lead to differences in interpretation and potential conflicts. For example, in the Mali water and electricity sectors, contradictions in the texts of the law and the contract with respect to the regulator’s tariff-setting responsibility and mechanisms for adjustment led to conflicts between the regulator and the private operator, which in turn led to early termination of the contract.

Legislation is then used to:

  • Improve clarity in the institutional set-up;
  • Give additional powers to the regulator;
  • Ensure continuity in the regulatory regime: as legislation is lengthy and costly to abrogate, it reduces the risk that the regulatory agency would be arbitrarily removed.

Adopting legislation would usually be the preserve of policy makers rather than regulators. The latter can only give advice on the legislative changes in their position as sector experts.

Legislation may be needed to authorize the government to enter into service and supply contracts or to issue licenses or let concessions. In privatization, legislation often governs the parties’ rights and obligations, even though they are further defined in licenses. Regardless of the form of ownership, some countries rely primarily on statutes and laws that define the roles and responsibilities of all operators3.

Legislation can be used to adopt major changes in the regulatory regime: for example in the UK, water and sewerage companies have been prevented by regulation from cutting off domestic supplies over non-payment, a decision then enacted in a legal ban in 1999. Legislation may help strengthen a regulatory regime by consolidating all previous incremental changes in a single instrument. The fact that legislation is difficult to pass reduces the risk of arbitrary legislative changes that could reduce stability. However, a pitfall of legislation is that it needs to be responsive to global trends in order to be efficient. It is especially the case in telecommunications, where there are constant technological breakthroughs.

Legislation can be used to improve on transparency and monitoring of impact – if requirements of prescheduled, periodic, independent reviews of regulatory performance and impact are made in legislation, then legislation would be a powerful mechanism to build the competence, credibility, legitimacy and therefore stability of regulatory institutions.

Resources

Infrastructure regulation in developing countries: an exploration of hybrid and transitional models
Paper prepared for the African Forum of Utilities Regulators 3rd Annual Conference, 15-16 March 2006, Windhoek, Namibia.
Eberhard, Anton

Regulation by Contract: A New Way to Privatize Electricity Distribution?
Energy and Mining Sector Board Discussion Paper Series Paper no. 7, March 2003.
Bakovic, T., B. Tenenbaum, and R. Woolf

Private Sector Participation in Urban Water Supply in Sub Saharan Africa
A report for the German Cooperation, London, November 2005.
Tony Ballance and Sophie Trémolet

Telecommunications Legislation in Transitional and Developing Economies
World Bank Technical Paper No. 489, October 2000.
Schwarz, Tim, and David Satola

Wanted! Good Regulators for Good Regulation: An Evaluation of Human and Financial Resource Constraints for Utility Regulation
for the World Bank.
S. Trémolet & N. Shah

Footnotes

  1. In UK-style regulatory systems, the regulator’s discretion is bounded by legislation, case law and evolving regulatory practice.
  2. In Jakarta for example, a regulatory body, the Jakarta Water Supply Regulatory Body was established in 2001 under contract rather than law to regulate the two private water companies supplying water services to the city. However, although the essential regulatory mechanisms have been operating, the status of the regulator gave him less political clout to perform properly its role of consumer protection than if it had the authority derived from legislation (Water Dialogues, March 2009).
  3. See Development of Regulation.