Cross-Border Infrastructure: A Toolkit Governance and Accountability Session on Regulation & Accountability Max Bradford Castalia The views expressed here are those of the presenter and do not necessarily reflect the views or policies of the Asian Development Bank (ADB), or its Board of Directors, or the governments they represent.

Cross-Border Infrastructure: A Toolkit Key Messages Regulatory governance & accountability (G&A) are different but integrated Transparency of public policy does matter to sectoral performance G&A is a critical ingredient of private sector involvement in infrastructure investment, development and operation Good management of relationships makes G&A work

Cross-Border Infrastructure: A Toolkit Key Messages ( continued ) Contractual commitments and public demand: what predominates? Decentralization and corporatisation increase need for G&A Different political systems do not alter need for G&A

Cross-Border Infrastructure: A Toolkit Governance - Accountability Principles Good Governance: “The extent to which governments confer basic rights on their citizens to enable them to fulfill their expectations and potential, including for example, secure property rights and the protection of the rule of law backed up by an independent judiciary” Accountability: “The extent to, and manner in, which the institutions and processes of government using the coercive powers given to government decision makers are held accountable to the citizens who enjoy or suffer the decisions made” Successful regulation will be accountable regulation modified from Keefer, 2004

Cross-Border Infrastructure: A Toolkit Regulatory Governance & Accountability Governance Clear laws establishing regulatory system Transparent directions from government Independence from clandestine political interference Quality regulators Transparent decision making and contracting Accountability Reporting on decisions with reasons to stakeholders Consult stakeholders Challengeable decisions in courts Predictable and open processes for stakeholders Credibility built on integrity of process as well as decisions

Cross-Border Infrastructure: A Toolkit Accountability: Key Relationships Accountability is complex Is accountability master or servant? Accountability applies to all stakeholders Regulator (the integrity of the office) Infrastructure service provider(s) Consumers* Taxpayers* Government NGOs (as representatives of “the public”) Protecting accountability The courts The media Perhaps - the voters *Not always the same people

Cross-Border Infrastructure: A Toolkit Public Policy Transparency Globalized economies are built on trust, integrity Government policy framework critical element Governance quality comes from the “Top” i.e. Governments Arbitrary decisions are fatal to investment and growth  Government law making processes  Ministerial and officials’ decision making  Regulatory bodies  Courts  Local businesses Capital invested in risk areas If can’t rely on Government, who can the investor rely on? No investment capital, No growth

Cross-Border Infrastructure: A Toolkit Public Policy Transparency ( continued ) Investors engagement depends on:  Predictability of governmental decision making processes  Integrity of the processes i.e. corruption free  Sanctity of contract, enforceable in independent courts  Clear accountability of the regulator and the regulated No sanctity, No investment capital

Cross-Border Infrastructure: A Toolkit Contractual Commitment & Public Demands Regulator’s role very difficult  Independence in the law a key component to success Political pressure a real issue for regulators  A reality to deal with  Process important: make it transparent (e.g. Ministerial direction must be in writing and published, criminal penalties for offenders)

Cross-Border Infrastructure: A Toolkit Contractual Commitment ( continued ) Should a contractual commitment be broken?  Not without good cause e.g. service provider abrogates contract, or Government directs with compensation  Unless by agreement with counter-party  Transparent, open process of change The attitudes of tomorrow’s investors are important, not today’s decision

Cross-Border Infrastructure: A Toolkit Accountability & Independence Institutional independence implies:  Arms-length relationships with regulated firms, consumers and other private interests  Arms-length relationship with political authorities  Organizational autonomy + expertise Getting the proper balance between accountability and independence needs:  Rigorous transparency  Providing effective appeal arrangements with court review  Subjecting the regulator to the scrutiny of external auditors

Cross-Border Infrastructure: A Toolkit Corruption & Opportunism in Infrastructure Checks & Balances Public Sector MONEY & POWER Individuals & Political Parties Private Sector Operators Political Patronage Monopoly Pricing Underspending Self- dealing Rents Extracted sometimes by corrupt means Loss-Making Costs not scrutinized Underinvestment Not immediately visible Corruption Political Imperatives Lack financial discipline

Cross-Border Infrastructure: A Toolkit Political Intervention in Regulator’s Decisions Imposing ad-hoc rules in favor of government and consumers will break the trust / understanding of providers, threaten their sustainability, and increase investment risks Argentina: regulator cut consumer penalties for late payments  consumers didn’t pay bills Ghana: regulatory body imposed new tax on providers  legal appeal Kazakhstan: government reversed a promised increase in energy prices  operator withdrew from market Ecuador: government refused to allow regulator’s tariff increases  operator sued government

Cross-Border Infrastructure: A Toolkit Political Intervention ( continued ) Argentina: regulator cut consumer penalties for late payments  consumers didn’t pay bills Ghana: regulatory body imposed new tax on providers  legal appeal Kazakhstan: government reversed a promised increase in energy prices  operator withdrew from market Ecuador: government refused to allow Regulator’s tariff increases  operator sued Government Service provider lost money Borderline case? Did rules allow this? Catastrophic result - future risk for government Breach of contract - clash between regulator and the government

Cross-Border Infrastructure: A Toolkit “Best-Practice” Regulation Communication: Information should be made available to all stakeholders on a timely and accessible basis Consultation: Participation of stakeholder in meetings promotes the exchange of information and the education of those affected by regulatory decisions Consistency: The logic, data sources, and legal basis for decisions should be consistent across market participants and over time. Predictability: A reputation for predictable decisions facilitates planning by suppliers and customers, and reduces risk as perceived by the investment community

Cross-Border Infrastructure: A Toolkit “Best-Practice” Regulation ( continued ) Flexibility: The regulator should recognize and respond to changing conditions, balancing regulatory discretion against the costs associated with creating uncertainty Independence: Autonomy implies freedom from undue stakeholder influence, and promotes public confidence in the regulatory system Effectiveness and Efficiency: Cost effectiveness in it’s own processes should be implemented by the regulator - it expects it of those it regulates Transparency: The openness of the process to stakeholders promotes legitimacy and regulatory sustainability + ACCOUNTABILITY!