Regulation of Infrastructures in India Comments on the consultation paper (Patrick Legros – ECARES and CEPR)

Main Issues Achieving a credible regulation –Independence from politics, executive –Accountability: to the people, to legislature Means –Light regulation on competitive segments? –Multi-sectoral approach? –“Help” from competition policy? Goals –Eliminate abuse of market power –Quality of service, access –Induce investment and growth

Main Issues Achieving a credible regulation –Independence from politics, executive –Accountability: to the people, to legislature Means –Light regulation on competitive segments? –Multi-sectorial approach? –“Help” from competition policy? Goals –Eliminate abuse of market power –Quality of service, equity of access –Induce invesment and growth

Independence from Executive Regulatory body protected from executive interference The “political” separation yields similar tradeoffs as the vertical separation in infrastructures. What about corporate or political interference? –Ministry still responsible for policy objectives and policy guidelines –Regulatory action depends on information available (or provided by firms and executive) –Quality of audit, expertise of regulators? –Simpler mandates : more effective corruption?

Oversight Regulator is made accountable by –Reports to the legislature and questions raised by parliamentary –Decisions opened to appeal Police patrols or fire alarms? (McCubbins and Schwartz) –Credibility of audit –“Fair” access to appeal courts –Expertise and information of oversight committees –Mandate and rewards of the committees? Multi-principal effects; free riding Facilitates ‘targeted’ lobbying?

Second-Best Reasoning Making some parts of the economy more “effective” will lead to readjustments by firms and agents –Relationship between privatization, incentives, corruption, and efficiency is complex Example from Estache et al. (2006)

“Utilities reforms and corruption in developing countries,” Antonio Estache, Ana Goicoechea, Lourdes Trujillo, sept (153 countries) Water: 2/3 of countries that privatized had IRA.

153 countries, Electricity: –Compare no reform (1) to full reform (2): price effect larger (+) but access effect larger (-) –Compare partial (2)-(3) to full reform: access effect is better in the former case Caveats : endogeneity of reforms?