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Module 3 - 15 Regulating the PPP

15.1 What is the process of regulation?
15.2 Alternative regulatory arrangements
15.3 What is the scope of regulation?
15.4 Background to the process of creating a new regulatory body
15.5 Some regulatory pitfalls
15.6 Regulation in low-income environments
Further Guidance

Key Questions:

Why carry out regulation of PPPs?
What does regulation entail?
How does regulation achieve poverty reduction

Related Tools:

4 Collecting Information
6 Objectives of PPPs

PPP Development Stage – Regulating the PPP

15.5 Some regulatory pitfalls

There follow some examples of possible regulatory pitfalls where the relationship between the basic services provider and the contract supervisor (or regulator) has become too comfortable, where it is poor or where it has broken down altogether.

1. By-passing the regulator

On a concession in Latin America, the private concessionaire bypassed the regulator on a number of key issues in order to deal with government directly. The credibility of the regulator was undermined, bringing into question the effectiveness of the regulatory mechanisms that were in place.

2. Distrust of foreign private management

A management contract in the Caribbean was frustrated due to antagonism amongst members of the supervising board to the presence of a foreign private manager. The board was obstructive, and this impaired the ability of the manager to perform. The situation led to the ultimate early termination of the contract.

3. Lack of finance

There was a case when a PPP arrangement, which depended heavily on the donor money, failed because the promised donor funding did not materialise due to macro-economic circumstances. This meant that the operator was unable to implement the investment programme and hence deliver the performance improvements it had agreed with the regulator.

4. Failure of the state to fulfil its obligations

The operator appointed for a PPP contract in Africa was unable to deliver the agreed performance improvements because the state-owned asset holding company failed to deliver its contractual commitment to fund the renewal of major plant. This resulted in financial stress on the operator.

5. Ineffective relationship between regulator and government or utility (regulatory capture)

Where a regulator’s sphere of activity is confined to a single supplier, or where external pressure and accountability are absent, a regulator can become over-familiar with the interests of one party or another in the partnership arrangement. With the commercial advantage weighed towards the operator, the regulator can, by stealth, become dependent upon the operator for information; this in turn may result in a perceived “cosy relationship” between the regulator and the regulated. Such a situation can arise, for instance, where there is a split between the organisation responsible for providing bulk water (under government ownership) and that responsible for distribution to consumers (under PPP). An example of such an arrangement existed in southern Africa, where the private distribution operator depended upon bulk supplies from several state-owned water boards. Although these boards were in effect governmental, in reality they operated autonomously with little regulatory pressure and as effective monopolies with a free hand in setting tariffs and standards. This undermined the performance of the PPP operator. Similarly, in Eastern Europe municipality-based regulators have been criticised in audits for procedural failings.

6. Micro management

There are examples where the regulatory/supervisory body has become too closely involved in the day-to-day management of the utility, rather than focusing on key strategic issues such as service provision to low-income groups. This can introduce considerable additional bureaucracy for the operator and hampers both the operator’s progress and regulatory processes. Furthermore, by blurring the role of “provider” and “client”, the regulator may reduce its own ability to enforce the contract.

7. Political interference

There is an inherent danger that political imperatives – for instance, price pressures – will conflict with the principles of good regulation. In one example, political pressure was placed on a concessionaire to serve areas that were not financially viable, without first allowing tariff adjustments and cross-subsidisation from other customers to take place. In the UK, political imperatives have prevailed on several occasions by imposing one-off windfall taxes on profits, or by encouraging the regulator to zealously pursue price reduction against the longer-term interests of sustainability in the water sector.

A pragmatic balance has to be struck between the various pressures. In the early days of a PPP regime, the regulator invariably focuses on the following key issues:

  • establishing a professional working relationship with the private operator and a mutual understanding of the sector issues, whilst at the same time striking a balance between antagonism and an over-comfortable relationship;
  • adhering to the legal and contractual powers and responsibilities described in the law, licence or contract, but focusing at all times on key issues that affect customers or potential future customers;
  • establishing numerical bases for determining whether levels of service are improving or getting worse; and
  • periodically reviewing and updating the operator’s plan to ensure that it is continually relevant – especially in relation to connections, expansion and provision of new services (including those to low-income customers).



  S T A R T P A G E  
  Module 1 - Before PPPs  
  01-Starting Out  
  02-Strategic Planning  
  Module 2 - Preparation Stage  
  03-Planning & Organising  
  04-Collecting Information  
  Module 3 - PPP Development Stage  
  05-Identifying Constraints  
  06-Defining Objectives  
  07-Defing Parameters (Scope)  
  08-Establishing Principles  
  09-Identifying Partners  
  10-Establishing Partnership  
  11-Selecting Options  
  12-Financing (Investment)  
  13-Financing (Cost Recovery)  
  14-Preparing Business Plans  
  15-Regulating the PPP  
  Module 4 - Implementation  
  16-Tendering & Procurement  
  17-Negotiating & Contracting  
  18-Managing PPPs  
  19-Monitoring & Evaluation  
  20-Managing Conflict  
  21-Capacity Development  
  Contact Information