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Industry structure and regulation

  • Stewart-Smith, Martin C.
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    As private firms become increasingly involved in the development of key infrastructure, redefining the role of government from that of serviceprovider to regulator presents both challenges and opportunities. The factors that give rise to sector reforms color how much policymakers invest in regulatory design during the reform process. Nevertheless, two factors are essential to sustainable sector and regulatory reform. First, the right structure must be established for the industry concerned, a structure that allows competition appropriate for that industry. Second, the objectives of regulation must be well defined, with a clear distinction between policymaking, policy implementation, and operations. The extent to which competition can be harnessed to help make regulation efficient, effective, and sustainable depends on the intrinsic technical characteristics of the sector. Each decision affects the sustainability of the regulatory regime in the face of the threat of regulatory capture (both political and commercial). Careful regulatory design is crucial not only for successful sectoral reform but also to balance the interests of various actors (government, consumers, developers, investors, and financiers). One model that has been relatively successful combines new entry, unbundled services, and the unambiguous spelling out of the legal rights and duties for both public and private service providers, administered by an autonomous regulatory authority. Problems with regulation often result as much from inadequate attention to sector structure and fostering competition as from weaknesses in the regulatory authority's institutional capacity. As for the tools of regulation, despite differences in some details between licenses and concessions (and their many contractual variations), these are basically instruments that establish the rights and obligations of contracting parties. Choices about where these rights and obligations are located in the legal hierarchy are shaped by a country's institutional capacity and legal traditions. But the existence of instruments to establish those rights and obligations does not eliminate the need for institutionsto administer them, and thus carry out the regulatory function. Establishing effective sectorwide regulation can be difficult in a developing country, but it is necessary. Policymakers will be able to create effective regulatory regimes where adequate attention is given to sector structure, competition, and institution-building.

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    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1419.

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    Date of creation: 28 Feb 1995
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    Handle: RePEc:wbk:wbrwps:1419
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