PPP Development Stage – Regulating the PPP
15.4 Background to the process of creating a new regulatory body
The PPP contract becomes effective typically about two months
after conclusion of negotiations and award and signature of
the contract(s) with the private sector provider. This is effectively
the date that the operating contract commences. The regulator
is required to be up and running by this time. The time lag
between completing negotiations and commencing operations is
needed to legally establish and enable any joint ventures,
to register the operating companies and to put in place the
financial infrastructure for operations.
Preparation and mobilisation
of the private operator’s staff
and other technical resources also takes place at the same
time. Similar preparation will take place in the public utility
and in the government office responsible for supervision (i.e.
the regulator). Depending upon the scope and scale of the PPP
operation, it is debatable whether two months is adequate.
By commencement, the regulator must:
- be constitutionally established;
- be legally enabled;
- be adequately staffed; and
- have sufficient capacity to supervise the contract effectively.
The PPP arrangements require that most of the public utility’s
functions (operations, maintenance and customer management), staff
and statutory obligations associated with delivering services become
the responsibility of the private operator. Both transition and
ongoing operations are necessarily complex. Equally, creating and
resourcing the contract supervisor (regulator) is similarly demanding – particularly
at inception. As a result, regulatory and institutional arrangements
can vary widely between utilities.
While rushing to get the PPP arrangements
and running, it might not be feasible to expect
the regulator to
mobilise within two months
without leaving pro-poor issues behind.
Initially, as a result of the successful bidder’s due diligence
at tender stage and open access to planning and operational records,
the operator will command considerably more information about the
technical and commercial performance of the basic services systems
than the regulator. It takes time for the regulator to collect
sufficient information to be on a level footing. This initial imbalance
(known as “information asymmetry”) is widespread
in all emerging regulatory regimes and therefore can be more
detrimental in low-income environments. It arises for the following
- 1. it can take two or three years to plan and implement
performance improvements through investment or strengthened
operations (the implementation period can be much longer where
the service standards are abysmal or where assets are run down);
- 2. the skills available to the regulator may be less experienced
in regulation than those of the operator (who has experience
in similar contracts elsewhere); this can reduce the
- 3. the onus for data gathering and reporting
rests with the operator, whilst the regulator is confined
to requesting and reviewing reports to inform regulatory
- 4. the regulator can assess performance only at macro
level, whilst the operator has access to management and
commercial information for local areas.
There is little consistent cost and performance data
in low-income environments, which could otherwise be
used as a yardstick against which to set standards or
assess performance. Historic data from the former public
utility will likely be of doubtful reliability, whilst external
comparisons with peer utilities of similar size are questionable.
Global benchmarking data may be used for comparing past
performance, but such comparisons can be statistically
flawed and all situations are different.
The experience of similar emergent regulatory regimes
worldwide suggests that it could take at least five
years for newly-created regulators to acquire information that
is sufficiently robust to make a significant impact
on performance or outcomes.
Developing a forum for sharing experiences on cost
and performance information for basic services in the
region could be one of the ways to get the necessary information.
If this proves valuable, there may be merit in adopting
similar projects in other regions. However, local government
managers should keep in mind that using comparative
data to contrast performance between similar organisations
could have limited value in establishing targets for
Relationship between regulator and operating company
It is widely accepted that effective regulation is essential
in order to extract successfully the full benefits of private
sector participation in delivering basic services. The
regulatory process requires a clear delineation of roles and
responsibilities between customers, the regulator and the private
operator with transparent relationships between the parties.
Establishing this relationship in an even-handed manner,
whilst preserving independence and ensuring fairness to
all parties can pose a particular challenge for the regulator.
This challenge is heightened where regulation concerns
a small number of single-sector providers. Notably, contract
supervisors (as regulators of single operators) can be open
to criticism from one party or another for bias.
An effective working relationship, albeit within strict
limits of contractual responsibility and legal authority,
depends on trust and understanding between individual personalities
on opposite sides of the fence. Regulators as governmental
bodies are publicly accountable and must conform to constitutional
standards. Successful regulation seeks balanced outcomes,
including protection of customers in general. It is not
in the customers’ interests for private
operators to be under-funded and therefore unable to perform properly.