Reformers – Who usually drives infrastructure reforms: governments, utility providers or sector regulators?

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

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.

Governments, in their role as policy-makers, are usually in charge of driving infrastructure reforms, as opposed to regulators. Regulators are usually set up as a consequence of infrastructure reforms and would usually be too recent or immature at the time of reform to be able to drive those forward. Once regulators are in place, however, they may recommend, as experts of the sector, further reforms to policy-makers (they would be called upon to make policy choices and balance stakeholders’ interests), but they would not usually be expected to take them forward.

The position of utility providers towards reform can vary significantly depending on their competitive position. Incumbent operators1, which are usually state-owned enterprises, would usually tend to oppose reforms, as they are usually afraid that these would affect their existing dominance and associated benefits (in the form of high prices linked to a monopolistic position, political favors, or potentially, corruption). On reverse, new entrants2 may seek to apply pressure on policy-makers and regulators in order to further open the market to competition or to private investments. This is typically the case in the telecommunications sector, where the potential for introducing competition is high and benefits from such competition substantial. In that sector, a consensus emerged that monopoly practices were hampering innovation, product differentiation and the translation of lower costs into final prices. New entrants have thus been pushing for incumbent operators to open their networks to interconnection so as to allow new entrants to be viable. This can also be the case, albeit at a more limited scale, in the water sector when competition has been introduced. For example, in England and Wales new entrant water companies can apply for “inset appointments” to serve specific groups of customers in areas that are usually served by regional monopolies. Although they may seek to influence the scope or the pace of infrastructure reforms, utility providers cannot drive reforms as such, however.

Driving infrastructure reforms requires careful planning, in order to avoid unwanted consequences and prevent potential failure. Driving reform should not be equated with dictating the terms of such reforms as forcing through reforms is often doomed to fail. Instead, it requires consulting potentially affected parties about their priorities and needs, conducting information campaigns to clarify the potential benefits of reform, identifying potential resistances up-front so as to put in place mitigation measures and potential compensation mechanisms as well as provide adequate incentives to increase the attractiveness of reforms.

Resources

ICT Regulation Toolkit
Washington, D.C.: infoDev and the International Telecommunications Union, 2007, Overview and Module 4.

Methods for Increasing Competition in Telecommunications Markets
University of Florida, Department of Economics, PURC Working Paper, 2008.
Jamison, Mark A.

Managing the Regulatory Process: Design, Concepts, Issues, and the Latin America and Caribbean Story
Washington, D.C.: The World Bank Group, 1999.
Guasch, J. Luis, and Pablo Spiller

Annual report 2002-2003 of the Director General of Water Services
OFWAT.
OFWAT

Footnotes

  1. Incumbent operators are generally state-owned (or formerly state-owned) utilities companies who benefited from a monopolistic position before the market opened up to competition. The continuing exercise of market power by the incumbent operators constitutes a form of market failure that must be addressed by regulators and competition authorities. The nature of utilities’ network (telecommunication, water, gas) provides strong advantages to the incumbent operators, such as the control of essential facilities, vertical economies, the control over networks standards and development and the capacity to cross-subsidize some services from others. The natural advantages of incumbent operators can be augmented by anti-competitive conduct on the part of such operators. (Telecommunications regulation Handbook, Module 4).
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  3. New entrants are operators that benefit from the opening of markets to competition to provide utility services. While new entrants may have advantages in the form of access to capital and innovation, it remains difficult to overcome the “incumbency advantages” of established operators, unless supported by strong regulation.