Key Regulatory Issues in Highway

1. Key Regulatory Issues in Highway Paul Noumba Um pnoumbaum@worldbank.org

2. Outline • What politicians expect from Regulation? • What is Economic Regulation? • What are the specificities of the highway sector • What are the Key Regulatory Issues in Highways • Concluding Remarks

3. I- What politicians expect from Regulation? • “As Governor, I found independent Regulatory Commission very useful to blame when it did necessary but unpopular things, and to take credit from it when it did popular things. Such an agency serves to deflect criticism and give the government time to examine alternative solutions”Richard Celeste, former Governor of Ohio in Rao, S (2004), p.38

4. Why there is a Mismatch? • Political cycle is short term with a focus on “Re-election and not on Economic Efficiency” • Regulation is a long term and short term endeavor: • Financial viability of the service provider in the short term • Market efficiency (allocative/productive) in the long term • How to reconcile both?

5. II- What is Economic Regulation? • Set of : • Rules (Primary, Secondary Legislations and Contracts) • Procedures and Processes • Empowered Institutions (Ministry, Regulator, Competition Commission, Judiciary) • Impacting regulated firms’ decisions on: • Prices • Quality of service • Performance (service coverage, investment) • Entry and Exit

6. What are the Regulatory Institutions? • Minister • Setting the Sector development Policy • Maintaining the Regulatory Framework • Granting or withdrawing of concessions • Final decisions on rates or tolls • Concession contract (Regulation by Contract) • A supervisory entity (Contract administrator, Committee, Ministry, Agency) • Disputes Resolution mechanism • Courts • Commission, Authority or Agency (Regulation by Agency) • With specific decision making powers stated in legislations • Concession contracts • Appeals mechanism

7. Railroad Natural monopoly Intermodal competition with road sector ~ Intramodal competition between rail service providers Residual Regulatory Issues Regulation of Access (Interlining or interconnection) and Access pricing Regulation of rates for captive shippers Security and Schedules coordination Road Infrastructure Public authority/ Operator supply and maintain the road infrastructure + Security + Safety Whereas transportation services are handled by end users (third parties). Residual Regulatory Issues Affordability of tolls or road pricing scheme Compliance with contractual obligations Safety and Security III - Specificities of the Highway sector

8. V – Key Regulatory Issues • Regulation of Entry and Exit: Concession Design and Award • Price Regulation • Regulation of the performances of concessionaires • Concession and Regulation are interdependent in highway

9. Regulation of Entry and Exit • Concession Contract Design and Award • Primary responsibility of the Government but Regulator should be associated • Competitive Bidding process with Pre-qualification • Selection made on the basis on well chosen criteria • minimum toll/ minimum subsidy/aggressive investment/ combination • Oversight of the Concession Contract • Oversight committee or Regulator with appropriate skills and means • Strong information requirements on operators • Understand the distribution of risks among the parties • Appropriate regulatory accounting guidelines • Triggers to adjust or to revise tolls

10. Regulation of Tolls • Financial Equilibrium of the concessionaire: • Profit = Volume of Vehicles* Toll – OPEX – Taxes – Depreciation = r * Ki • Are the derived Tolls affordable to Users? • How much cost should be recovered through toll paid by users? • How tolls should be adjusted over time? • What level of demand discrimination is given to the concessionaire? • Impact of demand uncertainty? • The inability to effectively audit cost and corruption deter effectiveness of most pricing mechanism • Regulatory regime often starts as a Price cap (max toll per type of vehicle) and de facto moves to a Cost Plus because of subsidies or transfers.

11. Regulation of the concessionaire’s performances • Asset quality indicators to be considered at the concession design: • Pavement roughness and deterioration • Condition of lighting, markings, signaling • Toll collection facilities, fire and rescue services… • Quality aspects at operation: • Performance standards are met: Lane availability, Average speeds off peak and peak, toll queue performance, access conditions and bottlenecks, response time for emergency service. • Additional investment are made when performance triggers are reached • Safety aspect • Facility can handle anticipated traffic volume and police enforcement of driving regulations • Need for regular quality audit and survey the perceptions of the users

12. Concession design and Regulation are interdependent • An excellent concession design followed with a poor regulatory oversight leads to deficient sector performance • An excellent regulatory oversight but with poor concession design leads to deficient sector performance • In other words, Regulation cannot solve the problems stemming from a poorly designed concession • PPP units and Entities in charge of regulation should work in close coordination to design the concession • Regulatory entities need: accurate information (assets valuation, demand predictions, performance targets, investment plans, …) to determine the rate (toll) base

13. Examples of toll road concessions Adapted from Fischer, G, and Babar, S. (1996)

14. In conclusion • Most countries rely on concession contracts • While this provides certainty in terms of the stability of the regulatory framework, but it may lack flexibility to deal with external shock… • Weaknesses in the oversight of concession contract • Lack of appropriate compensation mechanism for govt. unilateral contract change • Over-optimistic traffic predictions and disputes over initial conditions • Failure to incorporate strong information requirements or accounting guidelines • Questionable choice of award criteria leading to opportunistic negotiations • Termination periods not appropriately regulated to avoid opportunistic strategies • When RA exist there are autonomous but report to line Ministers. They face financing issue and the Matrix of salaries is not competitive. Although their Decisions can be appealed, due process is not always mandatory

15. Appendices on institutional Arrangements

16. Organization of transport RA

17. Appointment and Dismissal of T/Regulators

18. Resources of T/RAs …

19. Appeals of Regulatory Decisions

20. Transparency and Consumers Participation..

21. Thank You