Information, Accounting, and the Regulation of Concessioned Infrastructure Monopolies

Abstract

Information that private operators of infrastructure monopolies provide regulators can and should be used to address technical issues and monitor performance. But to reduce the risk of abusive behavior, the information should also be used to make both regulators and concessionaires accountable - for example, for passing any cost reductions along to consumers.

Economists often characterize the regulation of monopolies as a game (between the regulator and the service provider) in which the two players do not share the same information. The regulator is assumed to have poorer information than the service provider about the scope of future efficiency gains and the size and timing of future investment plans. Over time, the regulator must increase its information base so that regulatory targets become more realistic - but this is a costly process.

Burns and Estache examine the ways such information can and should be generated, especially through the accounting requirements a regulator can impose on private operators of infrastructure concessions. (They view concessioning and regulation as complementary, not substitute, activities.) Concessionaires should provide regulators with the information they need to:

Compare outcomes with expectations.

Evaluate the cost of adverse shocks that may warrant relaxed regulation.

Evaluate whether lower costs than expected are the result of better performance or diminished output.

Properly evaluate the asset base and charge for the consumption of capital.

Information that regulators get from private operators of infrastructure monopolies should be used to make both regulators and concessionaires accountable. In Chile, for example, the privatization of monopolies led to significant efficiency gains, but it took a long time for these gains to be passed on to users because neither the firms nor the regulators were held accountable - until Congress expressed reluctance to endorse further privatization because earlier waves of privatization had not benefited consumers. In other words, information should be used to make regulatory decisions more transparent and to reduce the risk of the private providers capturing the 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 understanding of the importance of regulation for the success of infrastructure privatization.