By Jerome Donovan, Esq
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About the Author... |
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Jerome Donovan Specializing in project finance and regulatory issues, Mr. Donovan is IP3's Cairo-based legal advisor on the Legal and Regulatory Reform Project for Egypt's water and sanitation sector. Mr. Donovan received his J.D. from Columbia University Law School and his B.A. in History from Yale University. He has worked as a legal and regulatory advisor in the following countries: Egypt, Indonesia, Albania, Ghana, Laos, Jordan, Azerbaijan, Turkmenistan, Russia, Sri Lanka, Vietnam, Guinea, Pakistan, Cambodia, Marshall Islands, Kazakhstan, and Croatia |
ABSTRACT
A water and sanitation sector that draws private-sector interest is characterized by the government's determination - reflected in its policies, laws, and regulations - to bring the benefits of the private sector's technical expertise and experience to the sector. But most important is a regulatory regime that is as independent as possible in the local context - one that gives the consumer the best service for the lowest price and protects the investor's interests.
Governments around the world are facing the challenge of providing safe and affordable water and sanitation services to all citizens. In many cases, particularly in emerging market countries, the only way to meet this challenge is to introduce private sector participation (PSP) as a means of attracting needed investment finance. However, for PSP to achieve the desired results, it is critical that there be an appropriate enabling environment, including a strong regulatory framework. Most effective regulatory frameworks are supported by:
In designing a regulatory framework, there are five key points that must be considered. Each of these is discussed in more detail below.
The Governments of emerging market countries need to take several preliminary steps - none of them easy - before they can effectively regulate water and sanitation services provided by private investors and operators. These steps relate to the development of a comprehensive and effective framework for the sector.
The first (and perhaps most difficult) step is to draft, harmonize, and implement financial and investment laws promoting PSP and ensuring currency convertibility and asset security. These laws should reflect government policies that promote local ownership and mobilize domestic financing.
Next, the government must draft model tender and contractual documents that reconcile host-country requirements and international best practices in the common forms of PSP contracts: management contracts, leases, concessions, and other arrangements (such as off-take agreements) that constitute BOT (Build-Operate-Transfer) and similar types of "project finance" projects. Tender documents should be designed to accommodate international competitive bidding when appropriate, and should ensure that the bid and evaluation process is transparent and equitable to all bidders. PSP contracts must include workable payment, termination, and dispute-resolution procedures and be enforceable in the host country and abroad.
Finally, the government must organize and staff a high-level unit within the concerned ministry to coordinate and facilitate PSP. Because this unit will be the private sector's point of entry into the country's water and sanitation "game," it should have on hand - and be able to disseminate - all relevant information on the government's plans for the sector and upcoming projects. An example of such a unit is Egypt's new Central Department for Private Sector Projects (CDPSP) in the Ministry of Housing, Utilities, and Urban Communities.
Within this investment/regulatory framework for the water sector, certain essential elements are required, including public awareness capacity, quality of service monitoring, and pricing monitoring.
The process of public awareness of a PSP policy should ideally begin before the PSP process, and should continue throughout the preparation and implementation of transactions. A key activity of a high-level coordinating unit includes consulting with the sector's "stakeholders" (consumers, government agencies and employees, and affected localities) about proposed projects so that all such groups have a chance to provide input and feedback to the process before key decisions are made or plans finalized.
The government must dispassionately assess the capacity and willingness of water and sanitation utilities to act autonomously and in consumers' best interests. In addition, the Government must require efficiency and transparency in utilities' corporate governance, and if their full or partial privatization (or "corporatization") is indicated, the government should demand it. The key objectives driving utility reform should be improved efficiency and quality of service, and increased accountability.
Special consideration must also be given to the quality of services being provided to poor consumers. In many countries, the poor do not receive any service from the formal service provider. Rather, they pay exorbitant prices to illegal or third party vendors selling water that is often of poor and unregulated quality. In the worst cases, consumers must spend significant amounts of time fetching water, and the result is that they are unable to sustain productive employment.
The poor must receive basic water and sanitation services at affordable prices. There are a number of ways to ensure that this is the case under PSP, including building incentives into the contract, requiring the private operator to enter formal arrangements with illegal or third party vendors, and involving the regulator in monitoring and enforcing the price and quality of service from small scale independent service providers. Of crucial importance is the willingness of the government to address the issue of cross-subsidization. If the government needs to subsidize these services by means of a low ("lifeline") tariff to assure sufficient services to the poor, it must do so, even if it means reducing the subsidies frequently enjoyed by industrial users.
To regulate the provision of services, the government should establish an independent regulatory body, discussed below.
The regulatory body balances the interests of consumers, government, and operators (including private investors), promotes efficiency and affordability, and ensures competition in service-provision.
Among its most important objectives are to protect consumers from monopoly behavior, reduce political interference in tariff setting, and establish incentives and sanctions to promote the delivery of efficient services at affordable prices.
When these objectives are accomplished, the cost of capital falls because uncertainty is lessened and long-term project risks are mitigated.
To do its job properly, a regulatory body must have clear legal authority to regulate the sector and the capacity to carry out its mandate. Its individual bureaus or offices must have clearly defined, non-overlapping functions; e.g., accounting, performance-monitoring, consumer-protection, and rate applications. The staff hired to work in the regulatory authority must be selected on the basis of their professional ability and must not have over-riding political affiliations. In carrying out their duties, the staff must have recourse to regulatory instruments, such as incentives, penalties, or fines that strengthen their ability to enforce compliance.
The body must have the technical capacity to balance investor requirements and consumer interests. In doing this, it must maintain an "arms-length" (businesslike) relationship with the government, utilities, private investors, and consumers. Only by acting in this way will it avoid the appearance of favoring one side and avoid being "captured" by any of the competing interests.
It is also the duty of the regulator to ensure that all stakeholders have access to information about the regulated service, and that stakeholders understand their rights and obligations. Public awareness and stakeholder consultation are therefore important tasks of the regulator. The best regulatory processes are those that enable stakeholders to provide input and feedback in the form of comments on proposed regulations and standards, and in the form of complaints or appeals to regulatory decisions.
The rules and regulations of the regulatory body must also provide effective strategies to promote transparency, contract enforcement, and dispute resolution.
The independence of the regulatory body is critical to its ability to effectively carry out its mandate. Independence can be achieved in a number of ways. These include limitations judicial review of regulatory decisions to the merits; ensuring that the regulator's source of funding is not subject to political review or approval; appointing regulators or commissioners on the basis of their professional qualifications; and scattering the terms of regulatory professionals such that they do not coincide with those of political officials.
The degree of independence of regulatory bodies around the world varies widely. As might be expected, regulators in Australia, Mexico, the United Kingdom, and the United States have full autonomy, with aggrieved parties able to appeal to appropriate courts. Close behind are countries like Argentina and South Africa, whose regulators have full autonomy, with the right of appeal to the concerned minister.
Regulatory bodies in Chile, Columbia, and Egypt are semi-autonomous, and are chaired by the concerned minister.
Barely autonomous boards, dominated by politically appointed employees, exist in many emerging market countries.
As more and more emerging market countries seek to lure private investors to their water and sanitation sectors, they are finding that they must first do their homework. They must adopt official policies welcoming and facilitating private-sector investment. They must implement those policies with investment laws and model contracts that incorporate international best practices.
None of these steps will work, however, unless a country also establishes a regulatory regime that is as independent as possible in the local context - one that protects the interests of all "stakeholders" in a transparent and predictable way. Only then will a country have a fighting chance in the competition for private investment in the sector.