Regulatory Tradeoffs in Designing Concession Contracts for Infrastructure Networks
22 Pages Posted: 20 Apr 2016
Date Written: August 1997
Concession-based reform and contract-based regulation of private monopolists for infrastructure (including utilities, communications, and transportation) network services are increasingly common in developing countries. In liberalizing the delivery of a service, policymakers must consider not only efficiency but also social and fiscal feasibility. Crampes and Estache discuss how relevant information asymmetry is in contract design and the award and regulatory processes. They also discuss how to design pricing to accommodate the obligation to provide universal service.
Network activities typically involve collecting a good or service (such as electric utilities, phone services, and rail transportation) from many producers or distributing them to many users. Producers and users are often widely scattered, geographically. Close financial integration of networks is justified on the basis of economies of scope and scale and the benefits from pooling and coordinating. In many countries, network operators are completely integrated publicly owned firms (private firms being deemed insufficiently efficient or equitable).
Challengers of this practice contend that the inefficiency resulting from lack of competition outweighs the gain from economic integration. With reform, some competitive mechanisms can be introduced even when monopoly seems the best option for delivering a service. But conflicts between policymakers' objectives-including efficiency, equity, speed, speed of reform, and signaling-influence the design of concession contracts for infrastructure network services (including communications and transportation services).
Competition begins with the unbundling of various stages of delivery. Then competitive bidding is popular, with the public authority keeping property rights on productive assets but conceding their operation to a private firm. The winner gets the right to maximize profits, within limits (having to provide universal service, for example, and avoid price discrimination).
In liberalizing the delivery of a service, policymakers must consider not only efficiency but also social and fiscal feasibility. Crampes and Estache discuss how relevant information asymmetry is in contract design and the award and regulatory processes. They also discuss how to design pricing to accommodate the obligation to provide universal service.
To illustrate, they describe Argentina's experiment in liberalization, which is increasingly viewed as a model for changing private sector and government involvement in infrastructure services. Beginning in 1989, Argentina began privatizing utilities and transport services, because the government had decided that it could no longer afford to subsidize those services or finance the investments needed for their effective operation. To introduce competition, the government unbundled services and introduced competitive bidding. It also created sector-specific regulatory agencies to protect consumers from private monopolies and to protect the private concessionaires from government micromanagement.
Making concession-based reform and contracted-based regulation of private monopolists sustainable will require strengthening regulatory agencies, clarifying their terms of reference and accountability, and better separating the responsibilities of sector ministers and regulators.
This paper - a product of the Regulatory Reform and Private Enterprise Division, Economic Development Institute - is part of a larger effort in the institute to increase awareness on the importance and challenges involved in the design of new regulatory framework in infrastructure.
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