# **5 Studies of the Effectiveness of Independent Regulatory Agencies and Governance Arrangements on Utility Industry Outcomes**

## **5.1 General Issues**

The literature on estimating the effect of regulatory governance arrangements on outcomes is relatively small to date, particularly for electricity. There has been more for telecoms, particularly in recent years and we will draw on this in what follows. We will also refer to the recent work on infrastructure concession contracts in Latin America that has been done in and around the World Bank where the probability of renegotiation appears to be affected by the presence or absence of a regulatory agency – but how and why is unclear.

The larger literature for telecoms arises because there has been more and earlier DTE privatization and regulation for it than for other infrastructure industries. Not only does this mean that there is a longer observation period - and hence more chance of finding significant effects – but also that comprehensive databases have been assembled. The main one seems to be the ITU-World Bank database on telecommunications policy and regulation, but this can be supplemented by the Stanford-World Bank database (which covers mobile telephony in Latin America) and others.

For electricity, DPS (2002) report a figure of 4 years as the median duration of developing country electricity regulators (as of late 2000). Given the time needed to establish the effective working of regulatory institutions – let alone the time needed to establish their reputation and credibility – it is hardly surprising that, as yet, it has been difficult to make any robust estimates of the impact of regulation on outcomes.

In this context, it is worth noting that regulators established in the late 1990s were trying to develop their role around or after the time of the Asian and other financial crises and the much more difficult circumstances as the 1990s boom disintegrated. This also makes it harder to establish positive effects (eg on investment) than for telecoms.

For electricity, there is also, as yet, no database comparable to the World Bank/ITU database for telecoms. The data position is substantially weaker for railways and other transport infrastructure industries, water and sewage and, to some extent, for natural gas, primarily because there has been much less DTE privatization, unbundling or establishment of independent regulatory agencies. To our knowledge, virtually all of the relevant systematically collected data for these industries in DTE countries derives from Latin America via the Guasch et al World Bank data set on concession contracts and the Calderon-Serven data set (which ends in 1998)<sup>33</sup> .

**_A fundamental point to note is that_** **_<u>none</u> of these data sets includes data on the informal attributes of regulation (ie observations on transparency and other elements of regulatory practice).  This is in contrast to many of the estimates which have been made of the effect of independent central banks on macro-economic outcomes._** The implication is that all the econometric results based on these data sets for telecoms, electricity and other utility industries may provide downward-biased

> 33 See Caderon, Easterly and Serven (2002) for a full description of this data set.

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