1. Cross-Border Infrastructure: A Toolkit Competition Basics 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.

2. Cross-Border Infrastructure: A Toolkit Market Structure for Infrastructure Natural monopoly  Core network infrastructure usually a natural monopoly  e.g. electricity transmission  Services around core infrastructure can be competitive  e.g. generation companies Vertically integrated monopoly  Most infrastructure can be disaggregated into supply / distribution components  Introducing competition in disaggregated components can improve overall performance and reduce need for regulation

3. Cross-Border Infrastructure: A Toolkit Market Structure for Infrastructure Vertically integrated monopoly - ( continued )  ‘Unbundling’ can take place both vertically and horizontally  e.g. Electricity sector  Vertical: One transmission company  Horizontal: Many generators Oligopoly / imperfect competition  Large investment requirements can limit participation in infrastructure  Entry barriers

4. Cross-Border Infrastructure: A Toolkit Fostering Competition in Network Industries IndustryActivities that are usually not competitive Activities that can be competitive ElectricityHigh-voltage transmission and local distribution Generation and retail supply to final customers GasHigh-pressure transmission and local distribution Production, supply to final customers, and storage TelecommunicationsLocal residential telephony or legacy local loop Long-distance, mobile, and value added services RailwaysTrack, rail bed and signaling infrastructure Train operations, consolidation depots and track maintenance facilities WaterBulk water supply, local distribution and local wastewater collection Bulk water supply, long-distance transportation, purification, sewage treatment, bottled water Air servicesAir traffic control, airport facilities, runways Airline transport services, maintenance facilities, and commercial activities (Regulated)(Not Regulated)

5. Cross-Border Infrastructure: A Toolkit Competitive Monopoly

6. Cross-Border Infrastructure: A Toolkit Accountability Under Competition Consumers Government Explicit subsidies for social purposes Provider s Taxpayers Accountability? Tariff Service THE MARKET Are consumers the focus of policy??

7. Cross-Border Infrastructure: A Toolkit Private Sector Participation Introduction of competition frequently involves PSP Different accountability relationships (or just community perception) between public and private providers? Need to reduce regulatory risk to encourage private sector investment - certainty and predictability Scope of regulation decreases with increasing competition - market forces ensure more efficient outcomes

8. Cross-Border Infrastructure: A Toolkit Role of Regulation in Infrastructure Markets with Competitive Potential Should be minimal to let competitive forces work Main roles of industry regulator in competitive markets:  moderate behavior of dominant or monopoly elements  deal with access issues e.g. to monopoly network  manage explicit subsidy regimes  provide monitoring and evaluation regime of market Role of competition authority versus regulator  Competition authority affects market structure  Industry regulator affects behavior of market players

9. Cross-Border Infrastructure: A Toolkit Introducing Competition in the Infrastructure Sector Identify monopoly and competitive components Can competitive pressure be introduced by unbundling horizontally?  Regional monopolies  Regulated or not?  What to do with the CORE network – what is it?  Role of benchmarking?

10. Cross-Border Infrastructure: A Toolkit Introducing Competition ( continued ) Assess relative size of vertically unbundled components  Security of supply or service provision  Corporatize or privatize?  Long or short term?  Does the regulator have any role in competitive market?  Setting up clearing markets  Wholesale market?  Give consumers choice  Reconciliation market

11. Cross-Border Infrastructure: A Toolkit The Exercise Consider a totally integrated electricity sector in 100% Government ownership. The Government has decided to introduce as much competition in the sector as possible, for the benefit of consumers. The Government has a rural electrification social objective. Your task, as Minister of Electricity together with your officials, is to recommend the best way to deliver the decision. You have 12 minutes to work out the major steps you would take.