Designing regulatory institutions for infrastructure : lessons from Argentina

Privatesector P U B L I C P O L I C Y F O R T H E The World Bank Group May 1997 Note No. 114 Designing Regulatory Institutions for Infrastructure—Lessons from Argentina Antonio Estache As in many aspects of infrastructure reform, Argentina has been a leader in experimenting with the design of regulatory agencies. This Note describes the essential elements of good regulatory agency design—independence, autonomy, expertise, and accountability—and rates Argentina’s performance against these benchmarks in the gas, power, water, and telecommunications sec- tors. The Note concludes that the biggest challenges to design are achieving political indepen- dence and establishing rules to ensure regulatory accountability. What the doctor would have ordered1 Independence. Ideally, regulators should oper- ate independently from political pressures—from Most regulatory experts would argue that there ministries and from the regulated enterprises, are some common elements that designers of private or public. Here, most experts would ar- regulatory agencies need to address. First, gov- gue that as a minimum for ensuring this inde- ernments must decide on breadth of regulatory pendence, regulators should be appointed on authority. In principle, regulatory authorities can the basis of professional rather than political be industry-specific with separate agencies for criteria and should have formal protection from gas, water, electricity, and so on, as in the United arbitrary removal during their term. In addition, Kingdom. They can be sector-specific with sepa- the appointment process should involve both rate agencies for groups of related industries, the executive and the legislature, to ensure such as for gas and electricity combined, as in proper checks and balances. Colombia and Hungary. Or they can be multi- sectoral with a single regulatory agency for all Autonomy. To be autonomous, regulatory agen- or most infrastructure sectors, as in the case of cies must first have their own resources—from state-level regulators in the United States and their own funding sources. Relying on budget- national regulators in Jamaica. Most experts ary transfers controlled by politicians is often agree that a multisectoral agency offers advan- viewed as a threat to regulators’ independence. tages over the alternatives. It pools regulatory Cutting their allocation would be an easy way resources (regulatory economists and lawyers, to reduce their effectiveness. The most common for example), especially important in countries method of funding is through levies on the regu- with limited regulatory capacity. And by pitting lated firms or the consumers of the regulated interest groups against one another, it tends to services. These levies can be viewed as user increase resistance to regulatory capture and fees for the protection services provided by the political interference and to improve the con- regulators. But autonomy must go beyond fi- sistency of decisions across sectors. nancing. Regulators should also have autonomy in staffing, so that they can recruit staff with Next, the designers face a set of interrelated high levels of expertise. The tasks of the agency issues to do with independence, autonomy, and should determine the size of the staff—not po- accountability: litical considerations such as how many people Private Sector Development Department ▪ Finance, Private Sector, and Infrastructure Network  Designing Regulatory Institutions for Infrastructure—Lessons from Argentina MAIN FEATURES OF ENRE’S STRUCTURE AND FUNCTION Structure ▪ Government-appointed board of five directors. ▪ Rules setting deadlines for decisions ▪ Recruiting and hiring of the president, the vice president, and one ▪ Rules requiring detailed justifications and director were based on public job listings (candidates were nonpolitical reviews of decisions ▪ Processes to ensure that all concerned parties required to be an engineer or economist and to have relevant have the opportunity to express their views experience; they were interviewed by an international consulting in public hearings and to appeal decisions firm, which short-listed three from which the secretary of energy ▪ Rules to permit the removal of regulators in selected the president and the vice president). The other two cases of proven misconduct. directors were selected from a short list proposed by the Federal Energy Council (a provincial entity). Another key factor in accountability is the num- ber of regulators. Generally, a regulatory com- mission made up of three to five members is a Functions and obligations better choice than a single regulator, because ▪ Determine the basis and criteria for assigning concessions. each member of the commission ends up moni- ▪ Enforce the regulatory framework, contracts, and public service toring the others, increasing accountability. The obligations. advantage of regulatory commissions is now ▪ Issue rules and regulations on matters of safety, technical widely recognized even in the United Kingdom, which originated the single-regulator approach. procedures, and norms, and monitor compliance. ▪ Monitor billing, control and use of meters, interruption and Argentina’s experience at a reconnection of service, access, and service quality. national level ▪ Define the basis for calculating tariffs and ensure compliance. ▪ Publicize the general principles that regulated entities must follow In Argentina responsibility for infrastructure ser- to avoid discrimination among consumers. vices is divided between the national and the provincial governments. The national government ▪ Organize public hearings. initiated a privatization program in 1989 for all ▪ Regulate the proceedings for imposing sanctions and impose the utilities under its purview—mainly gas, electric- appropriate penalties. ity generation and transmission, and water and ▪ Take relevant issues to court. electricity distribution in the Buenos Aires met- ▪ Issue an annual report and recommend policy actions to the ropolitan area. Like the United Kingdom, the executive as needed. national government created industry-specific agencies for the four main utilities: electricity (ENRE), gas (ENARGAS), telecommunications (CNT), and water and sanitation (ETOSS). But have lost their jobs through privatization. Over- unlike the United Kingdom, Argentina has opted staffing the agency can lead to interference with for regulatory commissions for each agency rather the commercial operation of regulated firms. than a single regulator. Achieving staffing autonomy in regulatory agen- cies often requires exempting them from civil Gas and power. Most successful have been the service salary and recruitment rules. It may also two agencies covering the power sector, ENRE mean allowing them to recruit external consult- (Ente Nacional Regulador de la Electricidad) ants. Where economic, accounting, and legal and ENARGAS (Ente Nacional Regulador del expertise is in short supply, banning subcon- Gas). These agencies are addressing many is- tracting can constrain regulatory capacity. sues that are similar or strongly related and it could be argued that the two should be amal- Accountability. Accountability requires transpar- gamated into one (see box for structure and ency in the regulatory agency’s decisionmaking functions of ENRE). Still, they have generally process, something that is often counterintuitive been extremely effective in carrying out most for many bureaucrats. It also requires clear, of their responsibilities. Both are reasonably simple procedural rules. Most important are: independent, autonomous, and accountable. They have their own sources of funding and There may be too many staff and they lack sufficient funding to perform all their tasks— many of the skills required for effective regu- though some would argue too much funding. lation, indicating that the agency may not have Both have a small, technically competent, well- sufficient autonomy or accountability. Over the paid staff (less than 100, including regional past year or so, ETOSS has begun to fix these offices), and the regulators on their commis- problems, hiring international consultants to sions are accountable to both the legislative deal with specific issues. But as a result of ini- and the executive branches of government. tial failures in resolving problems with the con- cessionaire, ETOSS still operates under heavy But both have been criticized for the absence of scrutiny from the media and other interest any systematic external scrutiny of their practices groups. This shows the importance of getting and administrative processes and for the lack of things right at the start. Once lost, credibility is transparency in some of their decisions. This lack hard to rebuild—especially when there is a lack of transparency increases the risk of capture— of transparency in decisionmaking. and the risk that regulatory costs may be too high and that users may be overcharged. There is Telecommunications. The weakest performer public concern about the power that the energy has been CNT (Comisión Nacional de Telecom- secretary still retains over some aspects of the municaciones). It was created by a 1990 ex- regulation of the gas and electricity sectors. The ecutive decree that divided the regulatory secretariat is the first administrative step in ap- responsibilities for telecommunications between peals of regulatory decisions, implying that in CNT and the Secretariat of Telecommunications. conflicts between a regulator’s decision and the Creation by executive decree tends not to be government, the regulator is likely to lose. (In conducive to independence, because it makes other countries, the appeal will often be straight the regulator accountable to the executive to the courts.) And both agencies still lack a key branch, not the legislative. The decree creat- regulatory tool—a set of accounting standards ing CNT has already been modified twice, and procedures. Consistent regulatory accounts reducing the agency’s regulatory role and ex- across all firms, with detailed cost information panding the executive’s. for each type of service, are essential for effec- tive economic regulation, particularly for revis- CNT’s operation is supposed to be financed ing prices and monitoring whether regulated through a 0.5 percent sales tax on telecommu- firms are using cross-subsidies. nications firms and payments by broadcasters for radio spectrum. But it has not yet managed Water. The water regulator, ETOSS (Ente to achieve autonomy in decisionmaking or ex- Tripartito de Obras y Servicios Sanitarios), has pertise. The problem stems in part from the ex- been less effective. Although its performance is ecutive branch’s influence on some key decisions improving, it has taken about two years to start and in part from the way regulatory responsi- to come to grips with its problems. Some issues bilities have been divided between the ministry will be hard to resolve. For example, a poten- and CNT. For example, end-user rates and ac- tial problem for the agency’s independence is cess rates need to be harmonized, but the min- that its commission represents the interests of istry is responsible for the first, and CNT for the three different levels of government: the national second. The costs of the division have been high- government (as owner of the assets), the mu- lighted recently in the controversy over rebal- nicipality of Buenos Aires, and the province. ancing the rates to correct a distortion between All three layers of government may be controlled long-distance and local rates and between com- by different political parties, which could lead mercial and residential rates. This controversy to political tensions that might affect decisions. also exposes the cost of CNT’s staffing prob- lem: CNT has not yet assembled in-house the ETOSS is funded by a fee the concessionaire skills required to address the complex issues it levies on consumers (2.67 percent of the bill). faces. But it has begun to hire consultants to  Designing Regulatory Institutions for Infrastructure—Lessons from Argentina address the rebalancing issue, and staff training That would have led to conflicts reflecting the is on the regulators’ reform agenda. new regulators’ resentment at not being kept on by the private company taking over the utility. CNT’s accountability performance has also been under the spotlight. With no time limits for Regulatory agencies are addressing training making decisions or resolving conflicts, CNT needs for their staff. But salaries are not always has typically been slow. And review of CNT’s high enough to retain the most qualified staff or activities has been less transparent than it to attract new staff. Funding seems secure—all should be, even though CNT reports directly provinces have introduced a regulatory user fee. to the president’s office. Overall, the regula- But as at the national level, processes are not tory experience in telecommunications has yet adequately defined, raising concerns about shown the tough political consequences that accountability. In the cases of Cordoba and failures in institutional design can have for Tucman the problems led to the cancellation of policymakers. But it has also provided useful privatization processes. lessons for regulators in other sectors. Conclusion The provincial regulators The biggest challenges for regulatory design Provincial governments began to follow the are achieving political independence and in- national government’s privatization lead in the troducing rules to ensure accountability. Po- mid-1990s. Seven provinces have granted con- litical independence requires a commitment by Viewpoint is an open forum intended to cessions for water and sanitation services, and the government early on in the process. And encourage dissemina- eleven provinces concessions for electricity dis- accountability requires robust procedural and tion of and debate on tribution. The privatization process and the con- sound accounting rules. However, ensuring the ideas, innovations, and best practices for cession contracts in electricity, prepared with independence of the regulatory agencies is expanding the private technical assistance from the National Energy likely to be more complex because politicians sector. The views Secretariat, have been fairly standard across often have a hard time giving up control over published are those of the authors and should provinces. There is more variation in the wa- resources considered politically sensitive. not be attributed to the ter concessions, which differ in award criteria, World Bank or any of its contractual obligations, and tariff design. Argentina’s experience shows that even the affiliated organizations. Nor do any of the con- most innovative reformers can have problems clusions represent The institutional arrangements adopted by the ensuring the independence, autonomy, and official policy of the national and provincial governments have much accountability of regulatory agencies. But these World Bank or of its Executive Directors in common and the provincial regulatory insti- problems, even in the case of telecommunica- or the countries they tutions, just now getting off the ground, face tions, have not yet been serious enough to off- represent. problems similar to those at the national level. set the short-term gains of privatization. The To order additional Most provinces are following the national Argentine public is receiving better utility ser- copies please call 202- government’s lead, opting for industry-specific vices—and often at lower prices—than before 458-1111 or contact agencies—though some, such as Catamarca, privatization. Whether these gains can be sus- Suzanne Smith, editor, Room G8105, The World have opted for the preferred public utility com- tained in the longer run depends on the Bank, 1818 H Street, mission approach. Most of the focus at this early strength of the regulatory agencies and on their NW, Washington, D.C. stage centers on staffing. Some provinces have capacity to deliver on their responsibilities. 20433, or Internet address ssmith7@ fallen short in ensuring the political indepen- Time is the test for these institutional issues. worldbank.org. dence of commission staffs, with some staff The series is also political appointees. Staff numbers are reason- 1 For a recent overview of best practice in utility regulation, see available on-line “Utility Regulators: Creating Agencies in Reforming and Develop- (www.worldbank. able, however (ranging from seven to forty). ing Countries,” W. Smith (1996), a paper presented to the Interna- org/html/fpd/notes/ The regulatory agencies avoided an important tional Forum for Utility Regulation, Oxford, England, June 1996. notelist.html). misstep early on, rejecting suggestions that they 9Printed on recycled hire much of the personnel of the public utili- Antonio Estache, Economic Development paper. ties declared redundant by the concessionaires. Institute (aestache@worldbank.org)