Draft chapters of a legislative guide on privately financed infrastructure projects 

Report of the Secretary-General

Addendum

Chapter II. SECTOR STRUCTURE AND REGULATION*

Paragraph
Legislative recommendations 
Notes on legislative recommendations 1-95 
A. Market structure and competition 1-13 
1. Elements for the analysis of infrastructure markets 3-4 
2. Competition policy and monopolies 5-9 
3. Scope for competition in different sectors 10-13 
B. Legislative measures to implement sector reform 14-40 
1. Abolition of legal barriers and obstacles 15-16 
2. Restructuring infrastructure sectors 17-31 
3. Transitional measures 32-35 
4. Controlling residual monopolies 36-40 
C. Regulation of infrastructure services 41-95 
1. General remarks 41-48 
2. Substantive rules 49-63 
3. Regulatory bodies 64-82 
4. Regulatory process and procedures 83-95 


* The Secretariat wishes to express its appreciation to the Private Sector Development Department of the International Bank for Reconstruction and Development (World Bank) for having contributed the substance of this draft chapter.

LEGISLATIVE RECOMMENDATIONS

Market structure and competition
(1) In devising programmes to promote private sector investment in infrastructure development and operation, it is useful to review the assumptions under which State monopolies had been established, with a view to
(a) identifying the activities that still maintain the characteristics of natural monopoly and
(b) assessing the feasibility and desirability of introducing competition in other infrastructure sectors or segments thereof (see paras. 1-13).

Abolition of legal barriers and obstacles
(2) The opening of infrastructure sectors to private participation and competition requires the abolition of rules that prohibit private participation or new entry and the removal of other legal impediments to competition (see 
paras. 15-16).

Restructuring infrastructure sectors
(3) When formulating competition policies for individual infrastructure sectors, it is desirable to consider the possible need for, and the possible cost entailed by, separating the provision of infrastructure services from the 
operation of the underlying physical infrastructure (see paras. 18-21).

Transitional measures
(4) Where it is not advisable to introduce competition at once, the law may provide for temporary exclusivity rights, limitation in the number of concessionaires or other restrictions on competition. The scope and duration of 
such restrictions should normally be limited to the minimum required. The law may provide for periodic revisions of such restrictions with a view to ascertaining whether the conditions that justified them at the time when they 
were introduced still prevail (see paras. 33-34).
(5) Where the reform requires the restructuring or privatization of the incumbent public service provider, it is advisable to remove, restrict or shorten its exclusive rights or monopolies prior to the privatization (see para. 35).

Controlling residual monopolies
(6) Where the right to provide a specific service is restricted, it is advisable to award the pertinent licences or concessions through competitive selection procedures and to require that exclusive licences or concessions be rebid from time to time. The period between the initial award and the subsequent rebidding should take into account the level of investment and other risks faced by the licensee or concessionaire (see paras. 37-38). 
(7) Where economically and technically feasible, it may be useful to divide the 
territory of residual monopolies into smaller regions (see para. 40).

Conditions for the award of licences and concessions
(8) Where entry to the market is not restricted, the role of the licensing 
authority may be only to ascertain whether the new entrant meets the basic legal 
requirements to provide the services. Where the number of entrants is limited, 
it is advisable to use a competitive selection procedure for the award of the 
single or multiple licences offered (see paras. 50).

Interconnection and access regulation
(9) Service providers should have the right to use the infrastructure of the 
network operator on conditions that are not less favourable than those granted 
by the network operator to its own services or to competing providers (see 
paras. 51-54).

Price and profit regulation
(10) Where monopolistic conditions prevail or where markets are not yet truly 
competitive, it may be desirable to introduce a price or profit regulation 
mechanism (see paras. 55-56).
(11) Price regulation may be limited to non-competitive market segments, while 
leaving prices in competitive segments free. It may be useful to set only the 
broad pricing principles in legislation while leaving their actual 
implementation to the regulatory body concerned and the terms and conditions of 
licenses or concessions. It is advisable to provide a mechanism for revision of 
the tariff formula (see para. 57).

Subsidies and universal service 
(12) Where service providers are required to offer specific services without 
compensation or below cost, it may be necessary to consider appropriate forms of 
direct compensation (see para. 62).

Performance standards
(13) Service providers should be required to meet technical and service 
standards, which should be provided in detail, as appropriate, in implementing 
decrees, concessions, licences or other documents (see para. 63).
Independence and autonomy of regulatory bodies
(14) It is advisable to consider separating the regulatory functions from 
operational ones by removing any regulatory functions that may still be vested 
with public service providers and entrust them to a legally and functionally 
independent body (see paras. 67-69).
(15) It is further advisable to consider granting the regulatory body a 
sufficient level of autonomy to ensure that its decisions are made on technical 
rather than political grounds (see paras. 70-71).

Sectoral attributions of regulatory bodies
(16) It is advisable to consider the possible advantages and disadvantages, 
including cost considerations, of organizing regulatory responsibilities on a 
sectoral or rather cross-sectoral basis (see paras. 72-73).

Mandate of regulatory bodies
(17) It is useful for the law setting up a regulatory mechanism to stipulate a 
number of general objectives that should guide the actions of regulatory bodies 
(e.g. the promotion of competition, the protection of users= interests, the 
satisfaction of demand, the efficiency of the sector or the public service 
providers, their financial viability, the safeguarding of the public interest or 
of public service obligations, and the protection of investors= rights) (see 
para. 74).

Powers of regulatory bodies
(18) The law should set out with clarity whether the regulatory bodies have 
decision-making powers or purely advisory powers. The law should further specify 
which powers are vested with other governmental agencies and which ones with the 
regulatory body (see paras. 75-78).

Composition of the regulatory body
(19) Where the regulatory body takes the form of a regulatory commission, it may 
be advisable to keep the number of its members small (see para. 80).
(20) It may be useful to involve different institutions in the process leading 
to the nomination of the members of the regulatory commission and to require 
certain minimal professional qualifications, as well as the absence of conflicts 
of interest that might disqualify them for the function (see para. 81).

Disclosure requirements
(21) It may be desirable for the law to spell out certain specific obligations 
of public service providers, including the obligation to provide the regulatory 
body accurate and timely information on the operation of the company, and to 
grant the regulatory body specific enforcement rights. They may include 
enquiries and audits, including detailed performance and compliance audits; 
sanctions for non-cooperative companies; power to issue orders or at least to 
initiate the issuance of orders; or penalty procedures to enforce disclosure 
(see paras. 84-86).

Procedures
(22) Legislation should require the publication of regulatory procedures, which 
should be objective and clear. Legislation should further require that 
regulatory decisions state the reasons on which they are based and be accessible 
to interested parties through publication or other means (see paras. 87-88).
(23) The regulatory process may include consultation procedures for major 
decisions or recommendations. To enhance transparency, comments or 
recommendations resulting from the consultation process may have to be published 
or made publicly available (see para. 89).

Sanctions
(24) The law may give the regulatory body adequate enforcement powers, including 
the power to modify a licence, concession or authorization, or to suspend it or 
withdraw it; the power to set the terms of contracts between public service 
providers (e.g. interconnection or access agreement); to initiate the break-up 
of a dominant public service provider; to issue orders to public service 
providers; to impose civil penalties including penalties for any delay in 
implementing the regulatory body=s decision, and to initiate judicial 
proceedings (see para. 94).

Appeals
(25) It is advisable for the law to establish appeal procedures against 
decisions of a regulatory body. The law may limit the causes that give ground to 
appeals in order to prevent frivolous or dilatory appeals (see para. 95).

NOTES ON LEGISLATIVE RECOMMENDATIONS

A. Market structure and competition
1. In most of the countries that have recently built new infrastructure through 
private investment, privately financed infrastructure projects are not only an 
alternative for traditional financing of public infrastructure, but an important 
tool for meeting national infrastructure needs. Therefore, the conditions under 
which individual projects are executed have been typically devised in the light 
of the overall policy of the host Government for the infrastructure sector 
concerned. Essential elements of national policies include the level of 
competition sought for each infrastructure sector, the way in which the sector 
is structured and the mechanisms used to ensure adequate functioning of 
infrastructure markets.
2. National policies to promote private investment in infrastructure are often 
accompanied by measures destined to introduce competition between public service 
providers or to prevent abuse of monopolistic conditions, where competition is 
not feasible. Competition has been found to reduce costs and increase the 
productivity of infrastructure investment, as well as to enhance responsiveness 
to the needs of the customers. Through the lower costs and better quality 
obtained, competition typically improves the business environment in all sectors 
of the economy, thus increasing the country=s competitiveness. Private 
participation has further been found to foster the development of modern 
management techniques and innovative solutions. Where it involves companies from 
other countries, it can make an important contribution to foreign direct 
investment and the international transfer of know-how.
1. Elements for the analysis of infrastructure markets
3. The scope for competition varies considerably in different infrastructure 
sectors. While certain sectors have been successfully opened to free 
competition, other sectors, or segments thereof, have the characteristics of 
natural monopolies, in which case open competition is usually not an 
economically viable alternative (see paras. 5-9). In order to analyse 
monopolistic conditions (including presence of a dominant position) and to 
determine the potential for competition, it is necessary to assess carefully the 
relevant market, taking into account, as appropriate, the degree to which some 
markets may be interrelated or segmemented. For instance, reforms in the power 
and gas sectors have in some countries been considered together in view of the 
significant degree of substitutability (and thus competition) between these two 
sources of energy. The same holds true for transport, where different modes 
often compete with each other; the relevant market may, for example, be the 
market for freight transport, including rail, road, water and air freight, as 
the case may be.
4. The measures that may be required to promote competition in various 
infrastructure sectors will essentially depend on the prevailing market 
structure (see paras. 22-32). Key elements that characterize a particular market 
structure include barriers to entry of competitors (e.g. economic, legal, 
technical or other), the degree of vertical or horizontal integration, the 
number of companies operating in the market as well as the availability of 
substitute products or services. Together, these elements determine the degree 
to which a market is competitive or not. Therefore, their analysis is crucial to 
develop strategies for policy intervention.
2. Competition policy and monopolies
5. In devising programmes to promote private sector investment in infrastructure 
development and operation, a number of Governments have found it useful to 
review the assumptions under which State monopolies had been established with a 
view to (a) identifying those activities that still maintain the characteristics 
of natural monopoly and (b) assessing the feasibility and desirability of 
introducing competition in certain infrastructure sectors.
6. The term monopoly in the strict sense refers to a market with only one 
supplier. However, pure monopoly and perfect competition mark two ends of a 
spectrum. Most markets for commodities or services are characterized by a degree 
of competition that lies between those two ends. Generally, monopolies can be 
classified as natural monopolies, legal monopolies and de facto monopolies; each 
of them may require different policy approaches:
(a) Natural monopolies are those economic activities that allow a single 
provider to supply the whole market at a lower cost than two or more 
providers. This situation is typical for economic activities that entail large 
investment and high fixed costs but decreasing costs of producing an 
additional unit of services (e.g. an additional cubic metre of water) to 
attend an increase of demand. Natural monopolies tend to exhibit large 
up-front fixed investment requirements which make it difficult for a new 
company, lacking comparable economies of scale, to enter the market and 
undercut the incumbent;
(b) Legal monopolies are established by law and may cover sectors or 
activities that are natural monopolies or not. In the latter category, 
monopolies exist solely because competition is prohibited. The developments 
that had led many countries to the establishment of legal monopolies were 
often based on the consideration that national infrastructure needs, both in 
terms of quality and quantity, could not be adequately met by leaving 
infrastructure to the free market;
(c) Lastly, de facto monopolies may not necessarily be the result of economic 
fundamentals nor of legal provisions but simply the absence of competition 
resulting, for example, from the integrated nature of the infrastructure 
company and its ability to control essential facilities to the exclusion of 
other suppliers.
7. From a policy perspective, monopolies (of whatever form) pose a variety of 
problems. A service provider operating under monopolistic conditions is 
typically able to fix prices. The surplus profit that results from insufficient 
competition is called a Amonopoly rent@. Monopoly rents may be perceived as 
being unfair, because they imply a transfer of wealth from consumers to 
producers. Furthermore, monopoly rents may be economically questionable, because 
they impose a net loss of welfare to the economy. This loss of welfare, which is 
sometimes called a Adeadweight loss@, is the result of three main reasons:
(a) Monopoly rents are obtained through inflated prices which result from 
artificially low production (static inefficiency);
(b) Lack of competition reduces the rate of innovation and efforts to reduce 
production costs (dynamic inefficiency); and
(c) Particularly in infrastructure sectors, there may be secondary effects on 
other markets (e.g. lack of competition and efficiency in telecommunications 
has negative repercussions on, or increases the costs for, the economy at 
large).
8. Despite their negative economic effects, monopolies and other regulatory 
barriers have sometimes been maintained in the absence of natural monopoly 
conditions. One of the reasons cited for retaining monopolies is that they may 
be used to foster certain policy objectives, such as ensuring the provision of 
services in certain regions or to certain categories of consumers at a low 
prices or even below cost. Examples of services for which the price may not 
cover costs include lifeline telephone, water or power service, discounted 
transport for certain categories of travellers (e.g. school children, senior 
citizens), as well as other services for low-income or rural users. A 
monopolistic service provider is able to finance the provision of such services 
through internal Across-subsidies@ from other profitable services provided in 
other regions or to other categories of consumers. However, the experience of a 
number of countries has shown that cross-subsidies may be costly and poorly 
targeted; furthermore, they are usually not transparent and bypass the normal 
budget allocation mechanisms allowing to fund expenditures that may otherwise 
not pass public scrutiny. Some countries have found that other policy 
instruments, including direct subsidies payable to the service provider, were 
better suited to ensure the provision of those services and did not rely on a 
continued monopoly situation.
9. Another reason sometimes cited for retaining legal monopolies in the absence 
of natural monopoly conditions is to make the sector more attractive to private 
investors. Private operators may insist on being granted exclusivity rights to 
provide a certain service so as to reduce the commercial risk of their 
investment. However, this objective has to be balanced against the interests of 
consumers and the economy as a whole. Alternative, and socially less costly, 
options to make the environment more attractive to investors include measures 
aimed at enhancing transparency and reducing uncertainty related to the 
regulatory regime. For those countries where the granting of exclusivity rights 
is found to be needed as an incentive to private investment, it may be advisable 
to consider restricting competition on a temporary basis only (see further 
chapter IV, AConclusion and general terms of the project agreement@, paras. 
17-21).
3. Scope for competition in different sectors
10. Until recently, monopolistic conditions prevailed in most infrastructure 
sectors either because the sector was a natural monopoly or because regulatory 
barriers or other factors (e.g. vertically integrated structure of public 
service providers) prevented effective competition. However, rapid technological 
progress has challenged the economic fundamentals of many former natural 
monopolies. These changes have in many cases resulted in a gap between the 
economically desirable market structure and the legislation in force. This has 
prompted legislators in a number of countries to extend competition to 
infrastructure sectors by adopting legislation that abolishes monopolies and 
other barriers to entry, changes the way infrastructure sectors are organized 
and establishes a regulatory framework fostering effective competition. The 
extent to which this can be done depends on the sector, the size of the market 
and other factors.
11. In telecommunications, for instance, new telecommunications laws have been 
adopted in a number of countries largely as a result of the fast-changing 
technology in this sector. New wireless technology not only makes mobile 
telecommunications services possible, but is also increasingly competing with 
fixed (wireline) services. Fibre optic networks, cable television networks, data 
transmission over power lines, global satellite systems, increasing computing 
power, improved data compression techniques, convergence between communications, 
broadcasting and data processing are further contributing to the breakdown of 
traditional monopolies and modes of service provision. As a result of these and 
other changes, telecommunications services have become competitive and countries 
are increasingly opening up this sector to free entry, while limiting access 
only to services that require the use of scarce public resources, such as radio 
frequency. In this context, market structure and competition rules need to be 
flexible enough to adapt to changing circumstances, which increasingly requires 
technologically neutral approaches.
12. In the energy sector, combined-cycle gas turbines and other technologies 
allowing for efficient power production on smaller scales and standardization in 
manufacturing of power generation equipment have led several countries to change 
the monopolistic and vertically integrated structure of domestic electricity 
markets. Increasing computing power and improved data processing software make 
it easier to dispatch electricity across a grid and to organize power pools and 
other mechanisms to access the network and trade in electricity. Like 
telecommunications, electricity is becoming a tradable commodity. 
13. Technology is in many cases also at the origin of changing patterns in the 
transport sector: the introduction of containers and other innovations, such as 
satellite communications allowing to track shipments across the globe, have had 
profound consequences on shipping, port management, as well as rail and truck 
transport, while fostering the development of intermodal transport. This has led 
to faster, cheaper and more competitive transport modes and to the removal of 
transport sector monopolies that often prevailed.
B. Legislative measures to implement sectoral reform
14. Many countries have found that the introduction of private participation in 
infrastructure affords a unique opportunity to reconsider the existing market 
structure and regulatory setup. Legislative action typically begins with the 
abolition of rules that prohibit private participation in infrastructure and the 
removal of all other legal impediments to competition. Furthermore, where a 
decision has been made to open certain infrastructure sectors to competition, a 
number of countries have introduced changes in market structure or competition 
rules before, or in parallel with, the opening of the sector to private 
participation.1
1. Abolition of legal barriers and obstacles
15. Monopolistic situations that are not, or have ceased to be, the result of 
economic and technological fundamentals, but of legal prohibitions, are the 
easiest targets for reform. Introduction of competition in these activities is 
relatively simple and may not require the restructuring of the incumbent 
monopolistic public service provider. The main action needed is the removal of 
the legal barriers, which may need to be reinforced by competition rules (such 
as the prohibition of collusion, cartels, predatory pricing or other unfair 
trading practices) and regulatory oversight (see paras. 41-95).
16. For a number of activities, however, effective competition may not be 
obtained through the mere removal of legislated barriers without legislative 
measures to restructure the sector concerned. In some countries, monopolies have 
been temporarily maintained only for the time needed to facilitate a gradual, 
more orderly and socially acceptable transition from a monopolistic to a 
competitive market structure.
2. Restructuring infrastructure sectors
17. Even in the absence of economic or legal barriers to entry, vertically or 
horizontally integrated infrastructure companies may be able to prevent 
effective competition. Integrated companies may try to extend their monopolistic 
powers in one market or market segment to other markets or segments in order to 
extract monopoly rents in these activities as well. Separating the monopoly 
element (such as the grid in many networks) from competitive elements in a 
sector may require the unbundling of vertically or horizontally integrated 
activities. Unbundling also facilitates the regulation of the residual and less 
complex monopolistic segments. It should be noted that many unbundling options 
have only recently become available to policy makers as a result of 
technological progress.
(a) Vertical and horizontal unbundling
18. Vertical unbundling occurs when upstream activities are separated from 
downstream ones, for example by separating production, transmission, 
distribution and supply activities in the power sector. The objective is 
typically to separate key network components or essential facilities from the 
competitive segments of the business.
19. Horizontal unbundling occurs when one or more parallel activities of a 
monopolist public service provider are divided among separate companies, which 
may either compete directly with each other in the market (as is increasingly 
the case with power production) or retain a monopoly over a smaller territory 
(as may be the case with power distribution). Horizontal unbundling refers both 
to a single activity or segment being broken up (as in the power sector 
examples) and to substitutes being organized separately in one or more markets 
(as in the case of separation of cellular services from fixed-line telephony, 
for example). 
20. By and large, infrastructure services tend to be competitive, whereas the 
underlying physical infrastructure often has monopolistic characteristics. By 
separating the two, many countries have found to have been able to design new 
and more efficient sector solutions. Unbundling allows the introduction of 
competition in segments of the sector that are not natural monopolies. The 
remaining monopolistic activities will either be exercised by a company (e.g. a 
power transmission or railtrack company) whose activities will need to be 
regulated because they include a monopolistic segment. Unbundling allows the 
State and the regulatory body to adopt different tools and approaches for 
activities that are competitive or a natural monopoly.
21. However, the costs and benefits of these changes need to be carefully 
considered. Costs may include the costs associated with the change itself (e.g. 
transaction and transition costs, including the loss incurred by companies which 
lose benefits or protected positions as a result of the new scheme) and the 
costs resulting from the operation of the new scheme, in particular higher 
coordination costs (e.g. more complicated network planning, technical 
standardization, as well as regulation). Benefits, on the other hand, may 
include new investments, better or new services, more choice, lower economic 
costs. Costs and benefits will also vary depending on how the changes are 
implemented. 
(c) Recent experience in major infrastructure sectors
(i) Telecommunications
22. Unbundling has not been too common in the telecommunications sector. In some 
countries, long distance and international services were separated from local 
services; competition was introduced in the former, while the latter remained 
largely monopolistic. In some of these countries, this trend is now being 
reversed with local telephone companies being allowed to provide long-distance 
services and long-distance companies being allowed to provide local services, 
all in a competitive context. Mandatory open access rules are common in the 
telecommunications sector, where the historic public service provider typically 
provides services in competition with other providers while controlling 
essential parts of the network.
(ii) Electricity
23. Most new electricity laws call for the unbundling of the power sector by 
separating generation, transmission and distribution. In some cases, supply is 
further distinguished from distribution in order to leave only the monopolistic 
activity (i.e. the transport of electricity for public use over wires) under a 
monopoly. In these countries, the transmission and distribution companies do not 
buy or sell electricity but only transport it against a regulated fee. Trade in 
electricity occurs between producers or brokers on the one hand and users on the 
other. In some of these countries, competition is limited to large users only or 
is being phased in gradually.
24. Where countries have opted for the introduction of competition in the power 
and gas sectors, new legislation has organized the new market structure, 
stipulating to what extent the market had to be unbundled (sometimes including 
the number of public service providers to be created out of the incumbent 
monopoly), or removed barriers to new entry. The same energy laws have also 
established specific competition rules, whether structural (e.g. prohibition of 
cross-ownership between companies in different segments of the market, such as 
production, transmission and distribution, or gas and electricity sale and 
distribution) or behavioural (e.g. third party access rules, prohibition of 
alliances or other collusive arrangements). New institutions and regulatory 
mechanisms, such as power pools, dispatch mechanisms or energy regulatory 
bodies, have been established to make these new energy markets work. Finally, 
other aspects of energy law and policy have had to be amended in conjunction 
with these changes, including the rules governing the markets for oil, gas, 
coal, and other energy sources.
(iii) Water and sanitation
25. The most common market structure reform introduced in the water and 
sanitation sector is horizontal unbundling. Some countries have created several 
water utilities where a single one existed before. This is particularly common 
in, but is not limited to, countries with separate networks that are not or are 
little interconnected. One of the advantages of such unbundling is to facilitate 
comparing the performance of service providers.
26. Some countries have invited private investors to provide bulk water to a 
utility or to build and operate water treatment or desalination plants, for 
example. In this vertical unbundling, the private services (and the discrete 
investments they require) are usually rendered under contract to a utility and 
do not fundamentally modify the monopolistic nature of the market structure: the 
plants usually do not compete with each other and are usually not allowed to 
bypass the utility to supply customers. This is a matter of design, however, and 
in a few countries these services are provided in a competitive context. A 
number of countries have introduced competition in bulk water supply and 
transportation; in some cases, there are active water markets. Elsewhere, 
competition is limited to expensive bottled or trucked water and private wells.
27. The solid waste sector can be divided into different segments including 
collection, transfer stations, transport, landfill, incinerator or other 
disposal scheme, and recycling. Again, by unbundling these separable activities, 
Governments have been able to introduce competition in the sector. The size of 
the market will be a key parameter in determining whether competition can be 
introduced and the extent to which unbundling makes sense.
(iv) Transport
28. Increasingly, the distinction is made between transport infrastructure and 
transport services. The former may often have natural monopoly characteristics, 
whereas services are generally competitive. Competition in transport services 
should be considered not only within a single mode but also across modes, as 
trains, trucks, buses, airlines and ships tend to compete for passengers and 
freight.
29. With respect to railways, some countries have opted for a separation between 
the ownership and operation of infrastructure (e.g. tracks, signalling systems, 
train stations) on the one hand and of rail transport services (e.g. passenger, 
freight) on the other. In these schemes, the law does not allow the track 
operator to operate also transport services, which are operated by other 
companies often in competition with each other. Other countries have let 
integrated companies operate infrastructure as well as services but have 
enforced third party access rights to the infrastructure, sometimes called 
trackage rights. In these cases, transport companies, whether another rail line 
or a transport service company, have the right to access the track on certain 
terms, and the company controlling the track has the obligation to grant such 
access. Barriers to investment and operation in this sector are also gradually 
being removed.
30. In many countries, ports were until recently managed as public sector 
monopolies. When opening this sector to private participation, legislators have 
considered different models. Under the landlord-port system, the port authority 
is responsible for the infrastructure as well as overall coordination of port 
activities; it does not, however, provide services to ships or merchandise. In 
service ports, the same entity is responsible for infrastructure and services. 
Competition between service providers (e.g. tugboats, stevedoring, warehousing) 
may be easier to establish and maintain under the landlord system. In addition 
to competition between service providers using common facilities or between 
competing facilities within a port, there may be strong competition between 
ports. Indeed, hinterlands overlap and shippers often have a choice of ports. A 
second type of sector reform may thus consist in encouraging competition between 
ports, be it by breaking up national port authorities, by strengthening 
intermodal connections of weaker ports, or by other means. Many Governments have 
found that by fostering competition between ports and within ports, service 
quality improves and the need to regulate decreases.
31. Legislation governing airports may also require changes, whether to allow 
private investment or competition between airports or within airports. Links 
between airport operation and air traffic control may need to be carefully 
considered as well. Within airports, many countries have introduced competition 
in handling services, catering, and other services to planes, as well as in 
commercial passenger services such as retail shops, restaurants, parking and the 
like. In some countries, the construction and operation of a new terminal at an 
existing airport has been entrusted to a new operator, hence creating 
competition between terminals. In others, new airports have been built on a BOT 
basis and existing ones are transferred to private ownership. Finally, many 
countries have found that liberalization of air transport (airline routes) 
greatly contributes to the demand for airport services and hence to the 
financial viability of private airport projects.
3. Transitional measures
32. Whether sector reforms involve abolishing legal barriers to entry, 
unbundling of separable market segments, other measures, or a combination 
thereof, Governments have often paid great attention to the reform process. The 
transition from monopoly to market may need to be carefully managed. Political, 
social or other factors have led some countries to pursue a gradual or phased 
approach to implementation. As technology and other outside forces are 
constantly changing, some countries have adopted sector reforms that could be 
accelerated or adjusted to take these changing circumstances into account.
(a) Phasing out barriers to entry
33. Some countries have felt that competition should not be introduced at once. 
In such cases, legislation has provided for temporary exclusivity rights, 
limitation in the number of public service providers or other restrictions on 
competition. The scope and duration of such restrictions should normally be 
limited to the minimum required (typically less than the scope and duration of 
the licence or concession). The first is set to give the incumbent adequate time 
to prepare for competition, adjust tariffs, while the latter is intended to 
provide the public service provider adequate incentives for investment and 
service expansion. Some laws include provisions for the loss of all or part of 
these exclusivity rights or protection if the public service provider does not 
comply with the requirements of its licence; an exclusivity on the provision of 
certain services may lapse, for instance, if the dominant public service 
provider does not effectively provide them. Other countries have included 
provisions calling for the periodic revision (at the time of tariff reviews, for 
example) of such restrictions with a view to ascertaining whether the conditions 
that justified them at the time when they were introduced still prevail.
34. Recent experience in the telecommunications sector offers examples for this 
type of transitional measures. A number of modern telecommunications laws in 
many countries allow for full competition in all or most segments of the market. 
Legislators have often chosen to manage the transition to an open 
telecommunications sector gradually by lowering or removing barriers to entry 
and competition over a period of time, typically between one and seven years. 
Countries that have opted for the gradual approach have often started with the 
liberalization of terminal equipment (e.g. telephone sets, computer modems, 
private exchanges), followed by the introduction of one or more competing 
providers in mobile services (e.g. cellular telephony, paging) and the 
liberalization of value-added services (e.g. electronic mail, electronic 
databases, voice mail). After some years, long-distance and international 
services are opened up before local services and the sector as a whole including 
both infrastructure and services are liberalized. The advantage of this approach 
is to give incumbent public service providers the time to adjust to the new 
competitive context and, in particular, to adjust their tariffs in order to 
eliminate existing cross-subsidies between services. Some countries have pursued 
the same objective through other means, such as by gradually reducing high 
initial interconnection charges to cost-based levels as cross-subsidies are 
eliminated. The costs of a transition period include the delay in the benefits 
from competition accruing to users and, possibly, the weakening of the protected 
domestic public service providers relative to their foreign competitors 
operating in liberalized environments. In this sense, early reformers may have 
had more time to manage the transition to competitive markets than late 
reformers.
(b) Restructuring and privatization
35. Another transitional measure, at least in countries with state-owned public 
service providers, has been the restructuring or privatization of the incumbent 
service provider. All the reforms involving vertical and horizontal unbundling 
have by their nature required the restructuring of the incumbent public service 
provider. In addition, privatization of the State-owned public service provider 
has often been considered necessary to allow that company to compete effectively 
and fairly with new private entrants. While the sequence between privatization 
and liberalization has differed, liberalization has by and large either 
accompanied or preceded privatization. Some countries have proceeded otherwise 
and have privatized companies with significant exclusivity rights, often to 
increase privatization proceeds. They have, however, found it difficult and 
sometimes very expensive to remove, restrict or shorten at a later stage the 
exclusive rights or monopolies protecting private or privatized incumbents.
4. Controlling residual monopolies
36. Where natural monopoly conditions prevail and competition cannot be 
introduced in the market (that is, between companies competing for the same 
customers), many countries have introduced competition for the market (see 
paras. 37-39). Indirect competition between companies has also been created by 
way of benchmarks (see para. 40). In some cases, the Government may not be able 
to abolish legal barriers, to unbundle integrated sectors or to take other 
measures leading to the establishment of a competitive sector. In such cases, 
competition for the market and indirect competition may also be used to 
attenuate monopoly costs.
(a) Use of competitive selection procedures
37. Competition for the market refers to a process leading to the selection of a 
company among several competing consortia to be awarded the right to provide the 
infrastructure service (for a discussion of selection methods, see chapter III, 
ASelection of the concessionaire@). It provides a mechanism to reduce or 
eliminate monopoly rents by inviting competing companies to bid against each 
other for this right. It requires private participation though not necessarily 
at the exclusion of public sector candidates. Some local governments have, for 
example, awarded solid waste collection franchises or concessions to the 
incumbent public authority or successors thereof who won tenders in which they 
competed with private tenderers; in these cases, the actual threat of private 
entry resulted in significant improvements in public sector performance. 
38. A number of countries have adopted legislation requiring that exclusive 
licences or concessions be rebid from time to time (see below, chapter X 
ADuration, extension and early termination@, ___ ). The period between the 
initial award and the first (and subsequent) rebidding should take into account 
the level of investments and other risks faced by the investor. For solid waste 
collection licences not requiring heavy fixed investments the periodicity may be 
relatively short (e.g. every three to five years) whereas longer periods may be 
desirable for a power or water distribution contract, for example. In many 
countries, rebidding coincides with the end of the contract term, but in others 
a concession may be granted for a long period (e.g. ninety-nine years), with 
periodic rebidding (e.g. every ten or fifteen years). In the latter mechanism, 
which has been adopted in a few countries, the first rebidding occurs before the 
investor has fully recouped its investments; the incumbent has property rights 
that will need to be compensated if it does not win the next bidding round, in 
which case all or part of the bidding proceeds revert to the incumbent. Periodic 
rebidding may give public service providers strong performance incentives. While 
it may increase the longer term risk faced by investors and lenders, it may also 
provide them a valuable exit option.
39. Competition for the market may be used not only when the market in question 
is a natural monopoly, but also where resource constraints (such as wavelength 
spectrum availability) or Government decisions are limiting the number of 
concessions or licences awarded, hence creating a Ascarcity@ rent. If the 
Government decides to issue only two or three cellular licences, for example, 
the same mechanisms will be used to select the licensee; in these cases, 
however, the licence would normally not include exclusivity or, if it does, it 
would only be a temporary one allowing the Government to issue other licences a 
few years later.
(b) Geographical division of residual monopolies
40. By way of unbundling, many Governments have created the conditions for 
indirect, or Abenchmark@ competition, where concessionaires do not compete on 
the same territory but regulatory bodies are able to compare the performance of 
different companies (each with a regional monopoly) and use this information in 
the exercise of their regulatory functions (see chapter VIII, AOperational 
phase@, ___). In this way, a regulatory body with authority over several 
concessionaires in a given sector (some of which may be publicly owned and 
operated) may be in a better position to regulate them. More generally, 
regulatory bodies may be able to use international prices as benchmarks against 
which to judge the costs and performance of regulated companies. These domestic 
and international reference points may provide strong indirect performance 
incentives to companies in monopolistic sectors. In some instances, such 
benchmark prices have even been included in tariff formulae.
C. Regulation of infrastructure services
1. General remarks
41. Regulation involves several distinct elements, including substantive rules, 
procedures, instruments and institutions. The regulatory framework in a given 
country and sector
- which defines the rights and obligations of service providers, consumers, 
regulatory bodies and the Government - results from the interplay of these 
elements. Depending on the country and its legal and political traditions, this 
framework may be established by treaties, constitution, laws, executive decrees, 
regulations, decisions of regulatory bodies, case law, licences, concessions or 
other contracts or instruments.
(a) Historical context
42. Regulation of infrastructure was in many countries introduced to contain 
abuses of monopolistic providers and cartels of public service providers trying 
to maximize their profits by reducing output and increasing prices above the 
economically and socially desirable level. Governments have taken various 
approaches to control these monopolistic tendencies. In many instances, the 
monopolistic infrastructure service provider was set up as (or later became, 
following nationalization) a public sector enterprise. State or municipal 
ownership was seen in itself as a guarantee against abuses and as a protection 
of consumer interests; regulation was in these cases exercised by way of public 
ownership. In other countries or sectors, the infrastructure provider was or 
remained a private company. To control its operations and prevent the exercise 
of monopolistic pricing and marketing strategies, Governments often set up 
general (e.g. anti-trust) and sector-specific regulatory mechanisms. The first 
regulatory commissions were set up in the mid nineteenth century.
43. The shift toward greater private participation and competition has been 
accompanied and strengthened by a shift to less intrusive regulation of public 
service providers (whether State owned or private entities). Realizing that 
short-term political pressures often led to barriers to entry and other 
regulatory interventions that were not always in the public interest, many 
Governments have limited their level of discretion (often in contractual terms) 
and have opted for autonomous and independent regulatory mechanisms less exposed 
to political pressures. Where successfully introduced, these reforms have 
lowered the risks faced by private investors and hence financing costs.
(b) Objectives of regulation
44. The main purposes of regulation are to promote competition and efficiency, 
to address and correct to the extent possible market failures, and more 
generally to protect users from potential abuses by dominant or monopolistic 
public service providers and to protect investors from possible arbitrary 
government action. Regulatory intervention is often justified by a situation in 
which the market, left to its own devices, would not yield the desirable social 
outcome. Regulation may include control of monopoly power (including dominant 
positions), but also address environmental, safety, public health and other 
concerns. Those concerns are usually not specific to infrastructure sectors or 
to private companies, but are part of the overall regulatory framework that 
governs economic activity.
45. The nature of regulation differs substantially according to the 
characteristics of the sector. In natural monopolies, regulation focuses 
primarily on the production of the socially desirable level of services at 
economic prices, in particular by limiting the opportunities for the public 
service provider to collect monopoly rents. Where the sector as a whole is 
monopolistic, price control is often the key instrument. Where one or more 
segments of the sector are monopolistic and the rest competitive, special 
attention may need to be given to overseeing access by competitors to the 
monopolistic segments. 
46. Another major factor is the degree to which market-based reforms have been 
or are being introduced. A change in market structure, the introduction of 
private participation or competition in infrastructure sectors generally require 
new rules and institutions. In sectors in transition to market-based 
competition, regulation focuses primarily on managing this transition by 
ensuring that competition is effectively introduced and promoted. Once a sector 
or segment has become competitive (as may be the case for telecommunications 
services in some countries), sector-specific regulation may give way to the 
general competition regime covering most sectors of the economy. The regulatory 
rules and institutions established by legislators typically take such factors 
into account. Flexibility is required to adapt to evolving conditions.
(c) Costs and benefits of regulation
47. Infrastructure regulation is a complex task requiring considerable 
resources. The process is relatively new for many countries and lessons can be 
drawn from the experience of those countries that have already implemented 
similar reforms. 
48. However, it is important to weigh the costs and benefits of regulation. 
Effective regulation can foster the transition to competitive market, and 
protect consumers and investors, but it also has its costs. The direct costs of 
regulation include not only the costs of the regulatory machinery itself but 
also the costs of compliance by regulated enterprises. Indirect costs of 
regulation can be even more significant. Regulation may create distortions which 
at times may be larger than the market failures it was supposed to address. This 
may result from weak information available to regulatory bodies, capture of the 
regulatory process by interest groups, dearth of professional qualifications and 
experience of the regulatory body (which may be caused at least in part by 
inadequate regulatory resources and funding), lack of flexibility in rules and 
procedures or ill-considered or obsolete substantive rules. Finally, as a sector 
moves toward a competitive market structure the need for specific regulation 
disappears.
2. Substantive rules
49. Regulatory interventions may be divided into two broad categories. The first 
category includes the various actions up to the award of licences or 
concessions; these include sector reform and legislation, and managing the 
selection process for the award of licences or concessions. The second category 
is the regulatory intervention following the award of such licences or 
concessions. The following paragraphs briefly discuss some of the main 
regulatory issues that are encountered in a similar context in different 
sectors, including the regulation of entry and exit of competitors, 
interconnection, prices (tariffs), subsidies and universal service, and quality 
and performance. 
(a) Conditions for the award of licences and concessions
50. Entry and exit rules are at the core of the organization of infrastructure 
sectors. Rules may allow for free entry of service providers into a sector or 
segment thereof or may limit such entry to a number of providers as determined 
by government through a licensing or concession scheme. Where free entry is the 
rule, as is the case in an increasing number of countries for many 
telecommunications services or for power generation, the role of the licensing 
authority may be only to ascertain whether the new entrant meets the basic legal 
requirements to provide such services. In some countries, the new entrant simply 
has to file a declaration and may start services unless the licensing authority 
expresses an objection within a given time limit (for example, one month). Where 
the number of entrants is limited, Governments are often required by law to 
organize a competitive process for the award of the single or multiple licences 
offered (see further chapter III, ASelection of the concessionaire@). 
(b) Interconnection and access regulation
51. In network industries, such as railway transport, telecommunications, power 
or gas supply, the historic or dominant public service provider may try to 
protect or limit access by third parties to its network, which is often the 
monopolistic segment in these industries. In order to introduce competition, 
mandatory rules for access to the network by new entrants have been introduced 
as a key aspect of sector reform and regulation. In some cases, such rules have 
complemented the vertical unbundling measures (see paras. 18-21), in others they 
have been adopted to foster competition in sectors that remained fully or 
partially integrated.
52. Access rules generally impose obligations on the network operator to provide 
access on terms that are fair and non-discriminatory from a financial as well as 
technical point of view. Non-discrimination implies that the new entrant or 
service provider is able to use the infrastructure of the dominant public 
service provider on conditions that are not less favourable than those granted 
by the network operator to its own services or to those of competing providers. 
It should be noted, however, that, for example, many pipeline access regimes do 
not require completely equal terms for the carrier and rival users. The access 
obligation may be qualified in some way: it may for instance be limited to spare 
capacity only or be subject to reasonable (rather than equal) terms and 
conditions.
53. Generally, regulatory bodies will wish to ensure that access prices are high 
enough to give adequate incentives to invest in maintenance and expansion of the 
required infrastructure and low enough to encourage competition in the sector. 
Access pricing is usually cost-based. Where the network company provides 
services in competition with other providers, this may require that its 
activities be separated from an accounting point of view in order to determine 
the actual cost of the use by third parties of the network or parts thereof.
54. Technical access conditions may be equally critical, and dominant public 
service providers may be required to adapt their network to satisfy the access 
requirements of new entrants. Access may be to the network as a whole or to 
monopolistic parts or segments of the network (sometimes also referred to as 
bottleneck or essential facilities). Many Governments allow service providers to 
build their own infrastructure or to use alternative infrastructure where 
available; in such cases, the service provider may only need access to a small 
part of the network and cannot, under many regulations, be forced to pay more 
than the cost corresponding to the use of the specific facility he needs; this 
could be, for instance, the local loop in telecommunications, transmission 
capacity for the supply of electricity, or the use of a track section in 
railways.
(c) Price and profit regulation
55. Rules governing infrastructure sectors in most countries include price or 
profit regulation. The economic rationale is that, where monopolistic conditions 
prevail or where markets are not yet truly competitive, dominant public service 
providers may price their services too high to earn excess profits or too low 
(on a temporary basis) to drive out new entrants (predatory pricing). High 
prices and inadequate competition in infrastructure services may have a 
detrimental impact on the sector concerned and also on the national economy.
56. Infrastructure sectors have different market structures and scope for 
unbundling and competition. Increasingly, countries limit price regulation to 
non-competitive market segments, while leaving prices in competitive segments 
free. For example, cellular telephony prices may in some countries be left 
unregulated while local phone tariffs may remain regulated. In countries where 
road transport (or water transport) provides adequate competition, prices of 
rail transport may similarly be left unregulated. Where a company provides 
price-regulated services as well as unregulated services, safeguards may need to 
be established to prevent the company from cross-subsidizing its competitive 
activities with revenues from its regulated activities; to facilitate the 
enforcement of the prohibition of cross-subsidization, typical safeguards 
include separate cost accounting or the establishment of one or more 
subsidiaries to house the competitive or potentially competitive activities. 
Furthermore, in many countries price ceilings apply only to the dominant public 
service providers (to keep in check their ability to abuse their dominant 
position) and not to new entrants.
57. Many countries have chosen to set only the broad pricing principles in 
legislation while leaving their actual implementation to the concerned 
regulatory body and the terms and conditions of licences or concessions. Others 
have chosen to legislate tariff formulae. By and large, a balance is sought 
between the interests of users and those of investors and often also current and 
future users. For example, where tariffs are kept too low, public service 
providers are hurt, investors deterred and future users penalized as they will 
have to pay for postponed investments. The tariff regime will also require 
adequate stability and predictability, to enable public service providers and 
users to plan accordingly. 
58. Many infrastructure projects require heavy capital investment with 
relatively long amortization periods. Tariff formulae cannot be set once and for 
all, as technology, exchange rates, wage levels, productivity and other factors 
are bound to change significantly (and often unpredictably) over such periods. 
Many countries have in place mechanisms for revision of tariff formulae. 
Periodic revisions (e.g. every four or five years) of the formula usually amount 
to a renegotiation of the contract, bearing in mind the interests of users and 
of the economy at large, as well as investors and lenders.
59. Legislators have opted for various price control systems, the most common 
being rate of return regulation and price cap regulation. Many tariff regimes 
have elements of both. Under rate of return regulation, infrastructure service 
providers are allowed a given return on their investments, usually expressed in 
percentage terms. Each year (or each time the regulatory body, the company or 
other interested parties deem that the prices in effect yield too much or too 
little profits) the regulatory body verifies the expenses of the utility, 
determines to what extent investments undertaken by the company are eligible for 
inclusion in the rate base, and calculates the revenues that need to be 
generated to cover the allowable expenses and the agreed-upon return on 
investment. Where available, regulatory bodies use risk-adjusted market rates to 
determine the rate of return figure. This system requires a substantial amount 
of information as well as negotiations (e.g. on eligible expenditures and cost 
allocation). It does not give public service providers strong incentives to 
improve efficiency as the efficiency gains they achieve in one year result in 
lower tariffs for the following year.
60. Under the price cap regime, a price formula is set for a given period (e.g. 
four or five years). Each year prices are allowed to fluctuate within the limits 
set by the formula. In some countries, the formula is a weighted average of 
various indices, in others it is a consumer price index minus a productivity 
factor. Where substantial new investments are required, the formula may include 
an additional component to cover these extra costs. The formula can apply to all 
services of the company or to selected baskets of services only, and different 
formulae may be used for different baskets. Services provided in a competitive 
environment may be excluded from the basket and deregulated, and the composition 
of the basket may be reviewed from time to time to take new market conditions 
into account. This price cap technique has been adopted increasingly in recent 
years. It may provide greater incentives for public service providers, as 
efficiency gains may be kept until the next adjustment period. In some 
countries, the price cap formula calls for partial pass-through of efficiency 
gains to consumers. The periodic readjustment of the formula is, however, based 
on rate-of-return type of calculations, requiring the same type of detailed 
information as indicated above, though on a less frequent basis.
61. Another price regulation technique that may be used to set prices, or more 
generally to monitor price levels, is benchmark or yardstick pricing. By 
comparing the prices of one public service provider with those of another and 
with international norms, regulatory bodies may be able to judge whether tariff 
adjustments requested by the public service provider are reasonable. Whatever 
technique is chosen, the complexity of the tariff mechanism should not exceed 
the administrative capacity of those in charge of implementing, monitoring and 
adapting it.
(d) Subsidies and universal service 
62. In many countries, the law requires that specific services must be provided 
even if they have to be provided without compensation or below cost. Examples of 
free services are emergency services (e.g. telephone calls to police, fire 
department, ambulances; inspection of alleged gas leaks or dangerous power 
lines). Services for which the price may not cover the costs include lifeline 
telephone, water or power service, discounted transport for certain categories 
of travellers (e.g. school children, senior citizens), as well as other services 
for low-income or rural users. Public service providers may recoup these service 
burdens or costs in several ways, including through Government subsidies, 
through funds or other official mechanisms created to share the financial burden 
of these obligations among all public service providers, or through internal 
cross-subsidies from other profitable services. Cross-subsidies should be 
distinguished from differentiated pricing, where different categories of users 
pay different prices (depending inter alia on the price elasticity of their 
demand), but where all prices cover, at least in the short run, marginal cost of 
the service. In this sense, price differentiation may be efficient and should 
not be prohibited. Direct Government or fund subsidies have the advantage of 
being more transparent and easier to monitor than cross-subsidies.
(e) Performance standards
63. Companies operating in regulated sectors generally have to meet a set of 
technical and service standards (see chapter IX, ADelays, defects and other 
failures to perform@, ___). These are often too detailed to figure in the sector 
legislation and may be included in implementing decrees, concessions, licences 
or other documents. They include, for instance, minimum conditions to insure 
interconnection in networked sectors, quality standards (such as requirements 
with respect to water purity and pressure), ceilings on time to perform repairs, 
ceilings on number of faults or complaints, on-time performance for transport 
services, continuity in supply, as well as health, safety and environmental 
standards. Legislation may, however, impose the basic principles that will guide 
the drafting of detailed standards or require compliance with international 
standards. 
3. Regulatory bodies
64. Legislative provisions governing regulation of infrastructure sectors 
generally include substantive as well as institutional rules. They are 
established by various bodies and are implemented and monitored by others. The 
term Aregulatory bodies@ refers to the institutional mechanisms required to 
implement and monitor the substantive rules. 
65. Regulatory bodies are needed because in the area of the operation of 
infrastructure facilities it is generally necessary for the rules to allow for a 
degree of discretion; someone needs to apply or implement the substantive rules, 
interpret them, monitor compliance, impose sanctions, and settle disputes 
arising out of the implementation of the rules. The specific regulatory tasks 
and the amount of discretion they involve will be determined by the rules in 
question, which can vary widely.
(a) Range of institutional set-ups
66. The range of institutional mechanisms for the regulation of infrastructure 
sectors varies greatly. While many countries still entrust regulatory functions 
to Government departments (such as the concerned ministries or departments in 
charge of prices or competition matters), the general trend is toward the 
establishment of autonomous regulatory bodies, separate from the Government. The 
same country may subject some infrastructure sectors to autonomous and 
independent regulation while leaving others under ministerial regulation. 
Regulatory powers may also be shared between an autonomous regulatory body and 
the Government, as is often the case with respect to licensing.
(b) Independence and autonomy of regulatory bodies
67. Regulatory bodies need to be isolated and protected from inappropriate 
pressures. Regulatory decisions need to be taken without interference from 
public service providers. To that effect, legislative provisions in most 
countries require the independence of the regulatory decision making process. 
Effective independence and autonomy go a long way towards reducing regulatory 
risks and hence reduce the cost of infrastructure services.
68. A primary requirement is the separation of regulatory functions from 
operational ones by removing any regulatory functions that may still be vested 
with the public service providers and entrust them to a legally and functionally 
independent entity. Examples of confusion between regulatory and operational 
functions may include the right of the incumbent public service provider to 
certify equipment for use on a network or to set interconnection or access 
conditions unilaterally, or the right of a port operator to allocate berths to 
incoming ships. 
69. Another essential requirement is the total independence of regulatory bodies 
from the industry they are regulating. That independence is often underpinned by 
prohibitions for staff of the regulatory body to hold mandates, accept gifts, 
enter into contracts or have any other relationship (directly or through family 
members or other intermediaries) with regulated companies, their parents or 
affiliates. This independence is a condition for the credibility of the 
regulatory body. It also implies that, to avoid conflicts of interest, 
regulation should, in particular in countries and sectors in which state-owned 
enterprises operate, be free from interference from the Government and the 
owners of enterprises in the sector.
70. This leads to a related issue, namely the autonomy of the regulatory body 
relative to the Government. This autonomy may be needed to minimize the risk of 
decisions being made or influenced by a body that is also the owner of 
enterprises operating in the regulated sector, or a body acting on political 
rather than technical grounds.
71. Independence and autonomy should not be considered solely on the basis of 
the institutional position of the regulatory function, but also on the basis of 
its functional autonomy, which requires that regulatory bodies have the 
financial and human resources to discharge their responsibilities professionally 
and with integrity.
(c) Sectoral attributions of regulatory bodies
72. Regulatory responsibilities may be organized on a sectoral or cross-sectoral 
basis. Countries that have opted for a sectoral approach have in many cases 
decided to place closely linked sectors or segments thereof under the same 
regulatory umbrella, as may be the case for example for telecommunications, 
cable television and broadcasting; power and gas; airports and airlines; or, 
more generally, competing transport modes. Other countries have organized 
regulation on a cross-sectoral basis, in some cases with one regulatory entity 
for all infrastructure sectors, and in others with one entity for utilities 
(water, power, gas, telecommunications) and one for transport.
73. The decision to use one or another model depends in part on the country=s 
regulatory capacity; the weaker it is, the more reason to reduce the number of 
independent structures and try to achieve economies of scope. Other reasons for 
having multi-sectoral agencies include: the common issues arising in the 
different infrastructure sectors and the ability to learn from the experience 
gained in other sectors; consistency in regulatory approach between sectors; the 
scope and sequence of the reform program (if it starts with one sector only, the 
entity will often be sector-specific); and better resistance to pressures from 
sectoral interest groups. One possible drawback of cross-sectoral bodies is that 
it may not foster the development of technical (i.e. sector-specific) expertise.
(d) Mandate of regulatory bodies
74. The law setting up a regulatory mechanism often stipulates a number of 
general objectives that should guide the actions of regulatory bodies, such as 
the promotion of competition, the protection of users= interests, the 
satisfaction of demand, the efficiency of the sector or the public service 
providers, their financial viability, the safeguarding of the public interest or 
of public service obligations, and the protection of investors= rights. Having 
one or two overriding objectives helps clarify the mandate of regulatory bodies 
and establish priorities among sometimes conflicting objectives. A clear mandate 
also increases a regulatory body=s autonomy and credibility.
(e) Powers of regulatory bodies
75. Regulatory bodies may have decision-making powers, advisory powers or purely 
consultative powers or a combination of these different levels of powers 
depending on the subject matter. In some countries, the legislator has decided 
to give the regulatory body limited powers initially but has increased them 
later as the regulatory body established a track record of independence and 
professionalism. The legislation often specifies which powers are vested with 
the Government and which ones with a regulatory agency. Clarity in this respect 
is important to avoid unnecessary conflicts and confusion. Investors, as well as 
consumers and other interested parties, should know to whom to turn with various 
requests, applications or complaints.
76. Licensing of public service providers, for example, is in many countries a 
process involving the Government as well as the regulatory body. If the decision 
to award a project involves broad judgment of a political rather than technical 
nature, which may often be the case in the context of infrastructure 
privatization, final responsibility often rests with the Government. If, 
however, the award criteria are more technical, as may be the case with a 
liberal licensing regime for power generation or telecommunications services, 
many countries entrust the decision to an independent regulatory body. In other 
cases, the Government may have to ask the regulatory body=s opinion prior to 
issuing the licence. On the other hand, some countries exclude direct 
involvement of regulatory bodies in the licensing process on the basis that it 
could affect the way they later regulate the use of these licences.
77. The jurisdiction of regulatory bodies normally extends to all enterprises 
operating in the sectors they regulate, with no distinction between private and 
public enterprises. The use of some regulatory powers or instruments may be 
limited by law to the dominant public service providers in the sector; a 
regulatory body may, for example, have price policing powers only vis-?vis the 
incumbent or dominant public service provider, while new entrants may be allowed 
to set prices freely.
78. The matters on which regulatory bodies have to pronounce themselves range 
from normative responsibilities (e.g. rules on the award of licences, conditions 
for certification of equipment), to the award of licences, concessions or 
authorizations; the modification of such instruments; the approval of contracts 
or decisions proposed by the regulated entities (e.g. a schedule or contract on 
network access); the definition and monitoring of an obligation to provide 
certain services; the oversight over public service providers (in particular 
compliance with licence conditions, norms, performance targets); tariff setting 
or adjustments; vetting of subsidies, exemptions or other advantages that could 
distort competition in the sector; sanctions; and dispute settlement.
(f) Composition of regulatory bodies and their staff
79. The confidence of investors and the public in the professionalism, 
competence, efficiency and integrity of the regulatory function depends to a 
large extent on who is vested with this function. The way regulatory bodies and 
their staff are appointed, their qualifications and experience and the rules 
under which they operate are critical in this respect.
80. When setting up a regulatory body, a few countries have opted for a 
regulatory body comprised of a single officer, whereas most others have 
preferred a regulatory commission. A commission may provide greater safeguards 
against undue influence or lobbying and may limit the risk of rash regulatory 
decisions. A one-person regulatory body, on the other hand, may be able to reach 
decisions faster and may be held more accountable. To improve the management of 
the decision making process in a regulatory commission, the number of members is 
often kept small (typically three or five members). Even numbers are often 
avoided to prevent a deadlock, though the chairman could of course have a 
casting vote.
81. To increase the regulatory body=s autonomy, different institutions may be 
involved in the nomination process; in some countries, regulatory bodies are 
appointed by the Head of State based on a list submitted by parliament; in 
others the executive branch of the Government appoints the regulatory body but 
subject to confirmation by parliament or upon nominations submitted by 
parliament, users associations or other bodies. Minimal professional 
qualifications are often required of regulatory bodies, as well as the absence 
of conflicts of interest that might disqualify them for the function. Mandates 
of members of regulatory commissions may be staggered in order to prevent total 
turnover and appointment of all members by the same administration; staggering 
also promotes continuity in regulatory decision making. Mandates are often for a 
fixed term, may be non-renewable and may be terminated before the expiry of the 
term for limited reasons only (such as crime conviction, mental incapacitation, 
grave negligence or dereliction of duty). Certain requirements extend to the 
whole staff of the regulatory entity. Many laws grant a favourable personnel 
regime, including adequate pay scales, in order to attract qualified candidates 
and reduce the risk of corruption. Regulatory bodies are often faced with 
experienced lawyers, accountants and other experts working for the regulated 
industry and need to be able to acquire the same level of expertise, skills and 
professionalism, either in-house or by hiring outside advisors as needed. They 
are often allowed to subcontract certain regulatory tasks short of the ultimate 
regulatory decision to outside experts.
(g) Budget of the regulatory body
82. Adequate staff and pay-levels, budget for outside expertise and training, 
and stable funding sources are critical for the success of the regulatory body. 
In many countries, the budget of the regulatory entity is funded by fees and 
other levies on the regulated industry. Fees may be set as a percentage of the 
turnover of the regulated companies, or be levied for the award of licences, 
concessions or other authorizations. In some countries, the entity=s budget is 
complemented as needed by budget transfers provided in the annual finance law, 
but this creates an element of uncertainty that may reduce the regulatory body=s 
autonomy. 
4. Regulatory process and procedures
83. Any regulatory framework includes procedural rules governing the way the 
institutions in charge of the various regulatory functions have to exercise 
their powers.
(a) Disclosure requirements
84. To allow regulatory bodies to carry out their responsibilities, legislation 
usually imposes specific obligations on regulated industries, including the 
obligation to provide the regulatory body accurate and timely information on the 
operations of the company, and grants regulatory bodies specific enforcement 
rights. They may include enquiries and audits, including detailed performance 
and compliance audits; sanctions for non-cooperative companies; injunctions or 
at least initiation of injunctions or penalty procedures to enforce disclosure.
85. Regulated companies are normally required to maintain and disclose their 
financial accounts and statements and to maintain detailed cost accounting 
allowing the regulatory body to track various aspects of the company=s 
activities separately. Financial transactions between the company and affiliated 
companies may also require scrutiny, as companies may try to transfer profits to 
non-regulated businesses or foreign affiliates. Regulated enterprises may also 
have detailed technical and performance reporting requirements. However, the 
regulated enterprises will always be more knowledgeable about their cost 
structure than regulatory bodies and will only disclose the information they are 
effectively required to disclose and in the way that is most favourable to their 
interests. 
86. Fostering competition in the infrastructure sector concerned is one method 
of dealing with this fundamental asymmetry in information. One of the benefits 
of introducing competition is that it provides the regulatory body multiple 
observations and reference points that allow it to determine whether proposals 
or positions of a regulated company are reasonable and in the public interest. 
Cost or technical information obtained from competitors may, for example, allow 
the regulatory body to disallow rate increases based on costs that are higher 
than the industry norm (see chapter VIII, AOperational phase@, ___).
(b) Procedures
87. The credibility of the regulatory process requires transparency and 
objectivity, irrespective of whether regulatory authority is exercised by a 
Government department or minister or by an autonomous regulatory body. Rules and 
procedures should be objective and clear so as to ensure fairness and 
impartiality. For transparency purposes, the law should require that they be 
published. Regulatory decisions should state the reasons on which they are based 
and should be made accessible to interested parties, through publication or 
other appropriate means.
88. Transparency may be further enhanced, as required by some laws, by the 
publication by the regulatory body of an annual report on the sector, the 
decisions taken during the exercise, the disputes that have arisen and the way 
they were settled, and so on. Such annual report may also include the accounts 
of the regulatory body and an audit thereof by an independent auditor. 
Legislation in many countries further requires that this annual report be 
submitted to a committee of parliament.
89. Regulatory decisions may impact on the interests of diverse groups, 
including the concerned public service provider, its current or potential 
competitors, and business or non-business users. In many countries, the 
regulatory process (whether managed by an agency or a ministry) includes 
consultation procedures for major decisions or recommendations. In some 
countries, this consultation takes the form of public hearings, in others of 
consultation papers on which comments from interested groups are solicited. Some 
countries have also established consultative bodies comprised of users and other 
concerned parties and require that their opinion be sought on major decisions 
and recommendations. To enhance transparency, comments, recommendations or 
opinions resulting from the consultation process may have to be published or 
made publicly available.
(c) Dispute settlement
90. The provision of infrastructure services may give rise to a wide range of 
disagreements or disputes, many of which typically fall within the province of 
the court system; this would be the case of disputes between public service 
providers and their suppliers and personnel. The same is true for disputes 
between public service providers and users, though consumers (or consumer 
associations) may often, in addition, lodge complaints with the regulatory body. 
Most major disputes to be settled by the regulatory body are likely to arise 
between infrastructure service providers, as would be the case with access or 
interconnection proceedings.
91. Another type of conflict that may arise between the regulated companies and 
the regulatory body or government concerns the modification of a licence or a 
tariff formula. These are often dealt with by the regulatory body and may be 
subject to appeal.
92. In addition, the legislation organizing the sector, investment protection treaties, and licence or contractual provisions often address the right of investors to resort to international commercial arbitration between the 
Government and the affected entity in case of a perceived breach of contract (see chapter XI, ASettlement of disputes@, ).
93. As any of these disputes may have a negative impact on the operations of the concerned company and in view of the public nature of most infrastructure services, many laws (and licence or contract provisions) have developed mechanisms that allow disagreements to be settled promptly without recourse to courts, the regulatory body or arbitration. These may include a technical expertise, audit or certification by an independent third party, as well as permanent conciliation panels or mechanisms.

(d) Sanctions
94. In many countries, the law gives regulatory bodies coercive or punitive powers. Such powers may include the authority to modify, suspend or withdraw a licence, concession or authorization; the right to set the terms of contracts between public service providers (e.g. interconnection or access agreements); to initiate the break-up of a dominant public service provider; to issue injunctions and orders to public service providers; to impose civil penalties including penalties for any delay in implementing the regulatory body=s decision, and to initiate criminal or other court procedures.

(e) Appeals
95. Legislators have often provided for appeal procedures against decisions of a regulatory body. The laws of many countries limit the causes that give ground to appeal, however, in order to prevent the regulatory uncertainty that may arise from appeals intended primarily to delay the effect of regulatory decisions. It is therefore desirable to strike a balance between the protection of legitimate rights of the regulated industry and the credibility of the regulatory system. It is often essential that decision be made quickly. For instance a refusal to 
grant access to a competitor could drive the competitor into bankruptcy if the matter cannot be resolved expeditiously. Where the right to appeal is granted, it should be to a body that has the required skills and expertise to adjudicate the matter. Some laws give public service providers the right to appeal against certain decisions of the regulatory body to the country=s competition authority, others to administrative tribunals or judicial courts.


1 See World Development Report 1994. Infrastructure for Development, World Bank, Washington, D.C., 1994, and in particular chapter 3 "Using markets in infrastructure provision" (pp. 52-72).