Regulatory Issues in the Development of Markets for Infrastructure Services

1. Regulatory Issues in the Development of Markets for Infrastructure Services Conference onSustaining Fast Growth: Role of Economic RegulationDelhi Dec.5, 2006 Sebastian Morris Indian Institute of Management Ahmedabad

2. The Red Herring of Financial Sector Problems • Financial side problems exaggerated • The financial side would respond if sufficient numbers of projects come about • Problems of regulatory and policy risks have been severe and debilitating • Sectors like roads when liberated with the correct framework have been able to attract much private capital

3. The Developments in Deregulation • Shift from cost plus to incentive regulation • Price cap as a workable and widely applied form of incentive regulation • The recognition of contestability to avoid regulation • Minimal regulation of standards, interconnect etc in some sectors of extreme dynamism

4. Unbundling and its basis • developments in IT and measurement and transport of information • developments in contracting • regulate only what needs to be • market creation • Markets and incentive regulation go hand in hand

5. Technology especially IT changes the boundaries of “market failure” • e.g. of roads in Singapore • The regulated part of the business is crucial to the performance of markets in the unregulated parts • gas pipelines, electricity transmission, oil pipelines, distribution wires business • Big sectors electricity gone on the wrong track

6. The Case of Electricity • The issue of treatment of subsidies is crucial • Direct subsidy would be non-distortionary • Price Cap is not problematic; generation can go competitive with offsetting rents on existing low cost players with a transition path; while transmission goes price cap again with offsets. • The perversity in power trading today

7. Varieties of power markets • pool based trading earlier UK Model • Contracts and markets for differences • Regulated price caps on peak power price • India ripe for power markets • good transmission system • price elasticities are high –low HH demand

8. accounting and measuring systems in place • regional power markets would come about • market design on the regulator /government but hampered by delays in open access, the intrusion of cross subsidies and the belief that the ABT is the right way to ahead; and the coupled behaviour of state owned entities despite unbundling; management of

9. cross subsides by “power source allocation”. • contradictions between the Draft Tariff Policy, the Draft Power Policy and the Electricity Act 2003

10. PFIs in Non-Traditional Areas • Annuity type projects • Water (irrigation) • Sanitation and sewerage services • Poorly appropriable (non-excludable) roads • Viability gap type projects • tolled roads upped by annuities • shadow tolling • Water and sanitation with direct output rather than capacity measures

11. Secondary Markets • Secondary markets for mitigating demand risks in toll roads is possible. • Listing • Markets in tolls (Tilotia and Pawar) • Case of Chinese listed companied in toll roads • Balance sheet financing of diversified infrastructure companies to reduce risks and capital costs • NTPC versus stand alone projects

12. Water Markets • today’ s water markets are limited • massive perversities and deadweight losses in irrigation and in electricity use for irrigation • cast low priced irrigation water as endowments in cu.m /acre feet of water • allow tradability; water discoms with water saving contracts possible • property rights definition completeness