Regulation vs. Competition
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Regulation vs. Competition in network industries Some lessons from the developing countries experience. Antonio Estache July 2008. Overview. Some stylized facts Some theory tainted by facts Some case studies Some lessons Note: builds on joint work with Claude Crampes (Toulouse).

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Regulation vs. Competition in network industriesSome lessons from the developing countries experience

Antonio Estache

July 2008


Overview
Overview

  • Some stylized facts

  • Some theory tainted by facts

  • Some case studies

  • Some lessons

  • Note: builds on joint work with Claude Crampes (Toulouse)


Network industries
Network Industries

  • Focus on infrastructure

    • Telecommunications

    • Energy - power and gas

    • Transport - roads, rail, ports, airports

    • Water and sanitation


The initial conditions in early 1990s
The Initial Conditions in Early 1990s

  • poor service in terms of

    • quality (Costly, high frequency of interruptions, …)

    • coverage (rich connect. pay <, poor less connect. pay >)

  • no client orientation:

    • no metering

    • poor bill collection habits

  • political interference with tariff and clientelism

  • fiscal constraint :

    • Tradition of soft budget constraints and high subsidies levels but …massive fiscal crisis

    • => no more gvt financing:

      DRIVING FORCE FOR REFORM!


Restructuring and ppps as the solution
Restructuring and PPPs as the solution?

Search fo Improved

Efficiency

Search for fiscal benefits

Improved Access and Affordability ?


…: increased in the role of the private sector but not as much as often claimed…(% of countries with Private Participation)


Realizing the benefits from reform
Realizing the Benefits much as often claimed…(% of countries with Private Participation)from Reform

3 drivers with interest to both regulation and competition agencies

Form and extent of private involvement

Market structure and competition

Regulatory approach


Search for competition as the main driver of restructuring
Search for competition as the main driver of restructuring?? much as often claimed…(% of countries with Private Participation)

  • Major unbundling efforts to promote Competition in the Market,

    • Removing unnecessary regulatory barriers to entry…and exit

    • Unbundling potential competitive activities from monopolistic activities (vertically and horizontally)

  • Major effort to promote competition for the market,

    • Competitive bidding for new projects and privatizations

    • Competitive re-bidding at the end of concession/license terms

  • Some effort to introduce formal and informal yardstick competition

    • Mexican ports, Brazilian railways, Argentina and Brazil water, various countries in electricity distribution

  • ….But still many segments with strong residual monopoly power…so strong demand for regulation …and regulatory agencies


Of countries with independent regulatory agency per geographical regions 2004
% of countries with Independent Regulatory Agency much as often claimed…(% of countries with Private Participation)-per geographical regions, 2004 --


So what do we know in a nutshell
So what do we know in a nutshell? much as often claimed…(% of countries with Private Participation)

  • Not that many regulatory agencies

    • Strong regional biases

      • Both types of agencies are present in Central and South America

      • More regulation than competition in Africa

      • More competition than regulation in Asia

      • About even in Eastern Europe

  • Strong sectoral biases

    • In favor of telecoms and energy

  • Which means that self and hence political regulation continues to be widespread

  • ...and not a perfect coverage for competition agencies

    • OK in Latin America, Asia, possibly Eastern Europe almost absent in Africa

    • Economists matter relatively more in Latin America (+/-even with lawyers), much less in Asia (administrative staff dominates) and Lawyers dominate in Eastern Europe (the Serebrisky survey)

    • ….and staffing biases drive the nature of decisions (economic vs political)

  • And when network industries are covered by competition agencies….

    • Bigger deal in LAC, then EE and much less in Asia

    • Moreover, politics matter a lot


  • Moving a bit towards theory
    Moving a bit towards theory much as often claimed…(% of countries with Private Participation)

    • How to think about the differences in role for the regulation and competition agency that resonates with the real world…focusing on developing countries…

    • but not completely irrelevant for developed countries???....


    Laisser faire much as often claimed…(% of countries with Private Participation)

    Central planning

    Administrative regulation

    Competition policy

    Think of the degree of competition as the driving force in a continuum of forms of involvement of government


    For segments of industry potentially competitive much as often claimed…(% of countries with Private Participation) antitrust

    marginal cost

    average

    cost

    q

    Main differences in focus between regulation and competition agencies …The two types of agencies tend to focus on industries with different technologies

    For segments of industry potentially non competitive  regulation

    Average cost

    q

    Marginal cost


    Often there is a hierarchy much as often claimed…(% of countries with Private Participation) and political and legalistic competition agencies prevail over (less political and « economistic » regulatory agencies

    Competition agency (or public authority performing that role)

    Firm vs regulatory agency

    Firm vs firm


    Where do problems come from??? much as often claimed…(% of countries with Private Participation)The incompatibility of acceptable instruments of analysis and of solutions

    • Economics vs legal instruments

      • efficiency vs. equity

    • Biased arbitrations

      • Regulation in favor of benchmarking

      • Competition policy in favor of jurisprudence


    price much as often claimed…(% of countries with Private Participation)

    pM

    p(q)

    c

    qM

    qC

    R'(q)

    quantity

    0

    ¿back to basics….why is it again that we worry about regulating monopolies???


    Economists would be happy to support price discrimination

    price much as often claimed…(% of countries with Private Participation)

    p0

    p1

    p2

    p3

    c

    p(q)

    quantity

    0

    Economists would be happy to support price discrimination….

    • High political costs and risks….

    • rent goes to monopoly

    • buyers pay different pricess

    •  inconsistent with popular concepts of equity, social justice, public service…

    q1

    q2

    q3

    qc


    Lawyers and politicians prefer price reduction

    price much as often claimed…(% of countries with Private Participation)

    pM

    p(q)

    Excess demand

    c

    quantity

    0

    Lawyers and politicians prefer …price reduction

    • Problem…:

    • rationing

    • price loses its signaling value

    •  unacceptable from an efficiency and possibly social viewpoint ...


    The disagreements on the design of prices is not the only problem we see

    Many competition agencies are revealing a bias in favor of processes and structural solutions…

    => questioning of some of the restructuring processes of the 1990s

    Most regulators tended to favor behavior and technical assessments (but this is changing…)

    => questioning some of the changes in market structure taking place since reforms (mergers, alliances,….)

    The disagreements on the design of prices is not the only problem we see


    Legalistic and administrative tools

    Antitrust focus on: processes and structural solutions…

    market

    relevant market

    Market share and Herfindhal

    abuse of dominant position

    Agreement and restrictive practices

    Concentrations

    Subsidies levels and other state aid

    Regulationfocus on:

    industry

    Vertical integration

    Margins, cost of capital and Lerner Index

    Price control

    Quality control

    Incentive to invest

    Subsidies design

    Accounting information (cost allocation, regulatory accounting…)

    Legalistic and administrative tools


    Of common interest to regulatory and competition agencies processes and structural solutions…

    "essential facility": access necessary to allow competition

    If vertical unbundling, simple natural monopoly problem

    If maintain vertical integration, suspicions of favoritism

    So need information and access tariffs

    Major drama….most reformed railways have faced the problem in Latin America for instance

    So how did countries deal with it???

    Legalistic-political vs economic solutions

    Common issue in developing countries: access prices and rules


    Political solutions to access pricing processes and structural solutions…

    • A quick review of decisions taken suggests that the main concerns are (in no particular order…):

      • Allow cost recovery and efficient production and consumption of product,

      • But also…be equitable and not discriminatory,

      • Send reliable signals for investment plans

      • Stimulate entry of efficient producers and exit of inefficient ones,

      • Be simple and verifiable

      • Be polítically acceptable.


    Economic (normative) view of access tariff processes and structural solutions…

    (more common in regulatory agencies)

    • A quick review of decisions taken suggest that the main concerns are (in a clear order!!)…

    • objective:

    • maximize collective/social surplus

    • subject to the following constraints

    • budget constraint/balance (~ participation)

    • no discrimination (~ equity)

    • information asymmetry (~ incentive)

    • etc.


    More generally differing strategic visions
    More generally: differing strategic visions processes and structural solutions…


    Practical cases focusing on need to see investments speed up coverage issue is central in ldcs
    Practical cases focusing on need to see investments speed up…(coverage issue is central in LDCs!)

    • Mexico: rail-port integration

      • modal integration or competition issues…?

      • regulators sees the financing of investment side

      • Competition see perverse integration

      • Transport secretary sees positive integration

    • Chile: electricity production-transmission integration

    • Brazil: freight-passengers rail interactions involving various government levels decisions

    • Argentina: ports terminal mergers

    • Africa and South Asia: fixed-mobile telecoms integration


    So… up…(coverage issue is central in LDCs!)

    • Experience suggests that many of the problems/biases of the OECD countries are being imported in developing and transition economies

    • Major gap is still real concern for consumers…often more a battle between the state and the firms or btw the firms

    • Major concern is that political power interference continues to be much more dramatic in developing economies


    Revisiting what happened to the these initial conditions of early 1990s
    Revisiting what happened to the these Initial Conditions of Early 1990s …

    • improved service in terms of

      • quality (Costly, high frequency of interruptions, …)

      • coverage improvement but often regressive improvements

    • more client orientation:

      • But selective improvement…poor still face major problems

    • political interference never really stopped

    • fiscal constraint:

      • Improved in short run…but gvt driven renegotitions often brought back subsidies…=> return of gvt financing!!!


    …BUT the real Early 1990snew issue is a supranational one….concentration at the regional level….and not enough people are really looking into that


    Conclusions
    Conclusions Early 1990s

    • As usual…things are not always what they were intended to be

    • Common focus but differences in instruments between the two types of agencies raise issues with some concern for users and taxpayers

    • Politics matter increasingly and in that game competition agencies do better and are easier to recapture within a ministry

    • Moreover, lots of things are happening at the supranational level

    • Case for international cooperation is growing but…willingness to cooperate is still more formal than real

    • As always…a big chunk of the incidence is on the poorest who don’t see their access improve fast, but see affordability erode

    • When their voice is only heard in crisis situations, the good of reforms in these sectors is increasingly thrown away with the bad… (see policy reversals in Latin America and Africa)

    • Probably for the worse and not for the better…but we don’t have the right counterfactuals…so we don’t really know


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