1. Anagha Deshpande(18) Richa Piplani(46) Rajan Vasani(58) Vinayak Harer(28) Omkar Agarwal (105)

2.  What is Monopoly in infrastructure projects?  Very large investments in durable and immobile assets  single player  What is Natural Monopoly in infra projects?  [Very large investments in durable and immobile assets] + [Strong economies of scale or traffic density] Note - Many infrastructure projects have an element of natural monopoly

3. Governments might be tempted to yield to popular pressure to lower tariffs or renege on other promises to the company Private Investments Investors might take advantage of their durable and immobile investments by raising prices well above costs Governments Consumers also make durable and immobile investments in their local communities that makes it difficult for them to move elsewhere Consumers

4.  Tendency towards natural monopoly in infrastructure projects  For governments, natural monopolies are difficult to deal with  Difficulty in assembling right of way required for infrastructure network  Government hesitant to delegate eminent powers to private companies  Benefits beyond those that accrue to immediate users  E.g. Street light or clean drinking water projects  Difficult to persuade the subscriber to pay for the service

5.  Economic Development & Equity considerations  E.g. Rural basic infrastructure  Promote monopoly to cross subsidize the services to rural areas or poor households e.g. Department of Telecommunications  Safety and Environmental Problems  Keeping regulation separate from those who control the monopoly in order to avoid conflict of interest

6. Degree to which a company can raise prices without losing too many sales Factors important to market power  Entry Barriers  Few close substitutes  Type of customers  Different stages or components of a infra service  Technology

7. Market Politics Private Contracts Customer negotiates with Private Player Market plays dominant role, Politics for legislature and enforcement Private Contracts Customer negotiates with Private Player Market plays dominant role, Politics for legislature and enforcement Concession Contracts Government and Private Player Government sets price & Quality on behalf of customer Concession Contracts Government and Private Player Government sets price & Quality on behalf of customer Discretionary Regulation Govt. regulatory agency unilaterally sets tariff and service standards Gives Govt. substantial discretion and flexibility Role of Market is to finance investments required by firms Discretionary Regulation Govt. regulatory agency unilaterally sets tariff and service standards Gives Govt. substantial discretion and flexibility Role of Market is to finance investments required by firms Public Enterprise Public or nonprofit enterprise provide service Private firms play restricted role Less incentive for private investors to take advantage of monopoly position Public Enterprise Public or nonprofit enterprise provide service Private firms play restricted role Less incentive for private investors to take advantage of monopoly position Range of Solutions to monopoly

8.  Private Player gets exclusive rights from the government.  Private Party pays either a fixed sum or percentage of revenue from the utility.  Types of concession contract- annuity, BOT, etc

9.  Relationship between regulatory agency and private concessionaire  Duration of Contract  Investments  Remuneration

10.  Risk outside the concessionaire’s control (Eg- Price inflation)  Demand risk (Eg- Toll revenue)

11.  Target Traffic on BOT toll road > 20% -> excess revenue will go to safety fund  Trend continues for 3 years-> contract will be terminated  For Land acquisition- around 150 SLUs will be set up

12.  Development Risk  Financing Risk  Construction Risk  Operation Risk

13.  Administrative Decision(Beauty Contest)  Lottery  Auction

14.  Design of contract depends on :  Information concerning good or service  Form and nature of demand  Ex-post and Ex-ante information from the firm  Resources the regulating agency can devote to implement  Speed of making concession decision

15.  What concession contract should contain?  Explicit list of penalties in case rules not respected  Only credible threats should be included  Non-credible threats are bad  When work of regulatory commission lead to decreased firm profits, firms have incentive to capture the commissioners

16.  To prevent risks of capture  Requires monitoring of costs  Manipulated by collusion b/w firm managers & agency employees  To prevent capture by activists minority of consumers, commissioners be elected for fixed period

17.  Regulator’s viewpoint :  They get information over time on behavior, characteristics and potential challenges of firm  Postponing decisions until deadline is efficient  Hope to franchise a new firm or renegotiate  So, Short term considered ideal

18.  Firm’s viewpoint :  Short term contract viewed as device to extract information today to extract profits tomorrow  They will not disclose all information necessary to implement contract efficiently  Will demand long term contract with no renegotiation  So, Long Term considered ideal

19.  Other viewpoints in favor of Long term :  Necessity of sunk investments  A short term or renegotiable long term contract will induce under-investment  On the contrary, if reimbursement clause included for cases of breach or franchisee change by regulator, firms have incentive to over-invest  Other viewpoints in favor of short term :  Longer the term, more incomplete contract is  Firms with very intense R&D prefer short term contract

20.  When uncertainty small, no need to reimburse cost to induce revelation of information  So, under risk neutrality, contract converges to fixed price contract  As a project evolves over time, the contract resembles more and more a fixed price contract

21.  Knowledge Extraction:  Ex ante  Ex post  Three methods:  Administrative Decisions  Lotteries  Auctions Based on speed, transaction cost, efficiency, equity and fiscal payoff

22.  Administrative Decisions:  Comparative hearings  Heavy backlog  Lotteries:  Random decision  Quick, but not the most efficient

23. Prequalification of potential bidders Highest payer or Lowest price  Disadvantages:  Slow process  Collusion of buyers  Capture of auctioneer  Redistribution

24. Administrative simplicity Instantaneous plan revision Collusion Predatory bidding Multiple Round Auction Eliminates disadvantages of multiple round auction Multiple Simultaneous Auction: Clear stopping rules Aggregation possibilities Simultaneous Auction

25.  Project cost increased by Rs. 2975 crore (up 50%)  Impact:  Hike in airport development fee for mitigation  Reasons:  Concession agreement(OMDA) did not specify project cost  AERA yet to be fully operational  Increase in air travel load not considered  Penalties and mitigation plan not in place

26.  Current Scenario:  DIAL not to be allowed to levy ADF if cost estimates not sent by 15 April 2010  AERA has proposed to cut down the period for levying ADF from 36 months to 24 months  Pressure from IATA  DIAL raised Rs 1472 cr from sale of 45 acres of land  Project cost not yet submitted by DIAL

27.  With increased private participation, regulator has to be  Competent (Technical Expertise)  Independent (free from Government interference)  Legitimate (accountable and abiding legal principles)  With limited human and financial resources and political interferences faced, it might be effective to contract out regulatory function to external expert / technical panel

28.  Built in or Contracting out by regulators  3 rd party independent expert review might be built into concession contract as part of fulfillment of contract(E.g. PMGSY)  Alternatively, consultant can play role in regulatory decision making process.  Advisory Tasks or Binding input  Whether consultant recommendation is suggestion to government or binding input

29. Monitoring Technical and financial audit by private 3 rd party increases credibility of regulatory process and reduces information asymmetry What if consultant is contracted to monitor water distribution system? Tariff Setting Tariff proposed by expert panel has to be binding but requiring formal approval of respective Ministry; May give comfort to customers that prices are fair May reduce regulatory cost Dispute Settlement Expert panels or reputed bodies like International Chamber of Commerce can be considered for dispute settlement However, practical considerations like Ease of enforcement Availability of experts Confidentiality Timelines What Regulatory functions can be contracted out?

30.  Example  Eastern Caribbean Telecommunication Authority (ECTEL) serves member countries of Organization of Eastern Caribbean States as shared regulatory authority  Reduces fixed cost for national regulators  Challenges  Budgetary constraints  Difficulty in specifying and managing contracts  Small market of appropriate consultants

31. Clear assessment of desirability (eg: cost or credibility) Clear specification of Payment, Responsibility and Authority Maintaining in-house capacity for setting target and monitoring performance Encouraging competition and transparency Framework for designing contracting-out arrangement

32.  Crampes C. and Estache A. (1997) - Regulatory Tradeoffs in Designing Concession Contracts for Infrastructure Networks, Policy Research Working Paper 1854, The World Bank, Washington  Gomez-Ibanez Jose A (2003) – Regulating Infrastructure: Monopoly, Contracts, and Discretion  http://www.livemint.com/2009/08/12002623/Regulator-review-to- nix-DIAL-g.html http://www.livemint.com/2009/08/12002623/Regulator-review-to- nix-DIAL-g.html  http://www.livemint.com/2010/03/24225540/DIAL-to-submit- costs-report-or.html http://www.livemint.com/2010/03/24225540/DIAL-to-submit- costs-report-or.html  http://www.livemint.com/2010/02/11225653/DIAL-raises-Rs1472- cr-from-sa.html http://www.livemint.com/2010/02/11225653/DIAL-raises-Rs1472- cr-from-sa.html

33. THANK YOU