Restructuring the Regulatory Framework in Developing Countries

Abstract

Creating a regulatory framework for network sectors such as electricity in developing countries is constrained by lack of regulatory expertise and capital for expansion, a potentially high regulatory burden relative to the size of the sector, small but growing markets and low incomes. Regulatory models designed for electricity sectors in developed economies may not be suitable for developing economies or require serious reengineering to be effective. Unless a number of preparatory measures are in place, any attempt to implement a regulatory regime or reform of a current system is unlikely to succeed if the objective is to create a self-sustaining electricity sector in support of economic growth rather than a drain on budgetary resources. In this paper, five basic regulatory models are outlined with a focus on regulatory objectives and necessary conditions for success. The next section of the paper then illustrates the characteristic steps in the process of transformation from a vertically integrated and publicly administered utility towards a self-sustaining electricity sector directed by market-based incentives and signals in a hypothetical developing country, The associated policy choices at each stage of the process are identified and conclusions drawn regarding possible interim regulatory frameworks. The last section of the paper highlights the considerations in designing a long-term regulatory governance system in a developing country reflecting the presence and/or absence of factors more pertinent to systems in the developed world with a view to designing an efficient and cost effective regulatory process.