The roles and objectives of institutions responsible for regulation need to be clearly set out in primary legislation and contracts. Predictability can be increased by publishing ex ante the parameters that will be used in making decisions –such as price adjustment formulas and timetables of events. Stakeholders should also be able to participate in the discussion of draft regulatory decisions.<sup>15</sup> Contracts, licenses, regulatory decisions, consultation papers, legislation, tariff review procedures and methodologies, timetables and the results of consultations can all be public documents, yet a PPIAF survey of regulators in 2005 found that less than 30 percent of regulators currently publish contracts and licenses (Bertolini, 2006).<sup>16</sup> In larger countries with comparatively strong institutions and in certain sectors (most notably telecommunications), independent regulation has proven a successful model. Andres et. al. (2007) find that regulators in Latin America that were established under law, well funded by regulatory levy, and with a fixed-term regulatory commission screened by legislators, were considerably better at aligning cost of capital and rate of return. Gasmi et. al. (2006) find that independent regulation (with tenure) financed from operator contributions with clear authority (decisions that could only be overruled by the courts) as well as transparency (open meetings open and textual explanations of decisions) and power over licensing interconnection, pricing and quality of service produce better outcomes in telecoms in terms of network rollout.

Where the fully independent model is adopted, regulators should be able to recruit their own staff based on needs and pay market rates (not necessarily civil-service rates) to attract and retain expertise. They should have access to their own source of funds and decide how they are used (subject to rules regarding transparency, accountability, audits, and other controls on the abuse of power). Regulatory officials should only be able to be dismissed before the end of their term on certain grounds, such as incompetence, malfeasance, and conflicts of interest. The agency ought to be able to enforce decisions through fines, penalties and, ultimately, preventing a firm from operating.

Even with these features, regulators in developing countries will have comparatively limited capacity, suggesting the importance of simplicity in regulatory design. The US Federal Communications Commission budget of $304 million, for example, is probably larger than total telecoms sector revenues in around 89 of 139 low and middle income countries for which we have data.<sup>17</sup> A focus on a few precise and simple regulatory instruments over theoretically more efficient but complex rules is particularly vital in countries with limited regulatory capacity (Besant-Jones, 2006).

One important step towards regulatory simplicity is to remove overlap between agencies. Mongolia, a country of just two million people, has over 20 separate governmental

> 15 The regulatory process should require interested parties to be consulted before the government comes to a decision and should require the government to explain its decision. Given the importance of price control decisions, it may make sense to allow the regulated company to appeal on grounds of the substance of the regulator’s reasoning, not just on matters of law.

> 16 71 percent of East Asian regulators disclosed procedures and decisions, while 42 percent disclosed licenses and contracts, in a 2004 survey (Muzzini, 2006).

> 17 Estimated on the basis that telecoms revenues are approximately two percent of 2005 market GDP.

12