ASi" kUCTURE FlOR DEVELOPMENT

Box 3.8 Regulation and privatization: which comes first? The case of Malaysia
Ptivatization of the infrastructure sector has progressed sion of tariffs and the maintenance of service standards.
rapidly in Malaysia since the mid-198s. In all cases, the. The scope of regulatory action in Malavsia, however, is
government department or statutory body that was pre- fairly rudimentary. For instance, no clear link exists beviously
supplying the services has assumed the statu- tween the functions of the regulatory agencies and the
tory role of regulating the privatized suppier. Forexam- reation of incentives for the privatized supplierof infraple,
the Kelang Port Authority is now the regulatory structure services to achieve efficiency
agency supervising the two private operating conpanies Although regulatory agencies exist, the respective
at the port, and the Telecommunications Department is ministers stil appear to have considerable influence
the regulator of the telecommunications sector. (The over the policies of the privatized suppliers of infrachange
irn the function of the government department or structure .services. Rate revisions, for example, are not
statutory body has, in each case, necessitated new em- completely a.matter for the regulatory agency to decide
powering legislation.)
and almost alwhays appear to require ministerial sanc-
Significant government. equity ownership in for- tion. There is also a distinct possibility that industry
mnery privatized enterprises and the mechanism of the might "captuWre the regulatory agency in some cases. At
-golden share also play a role akin to regulation. (he. present, considerable ambiguity exists about the indegolden
share, which gives the government veto powers pendence of the regulatory agencies from ministerial or
on major policy matters of the privatized firm, was first political interference.
introduced in the privatization of Malaysian Airline Sys- Although still evolving, the regulatory mechanism
temsano the Malaysian InternationalShippng Corpora- does not appear to have limited new entry and.investtion.)
Equity ownership by the government and the ment The lesson from the Malaysian experience is that
golden share are intended to ensure that the polides of moves toward privatization and private sector provision
the pnivatized firm are in conformity with government of infrastuctureu services need not wait for the fomnal
policies and national objectives,
creation of a comprehensive regulatory framework-
Regalation in Malaysia has really meant the supervioften
unable to attract qualified people. Even in Ar- the process and policies are known and published
gentina, which has a pool of well-qualified people, can assessment of regulation be effective.
civil service salary restrictions and tight budgets The Philippines, responding to the generally inhave
led to weak regulatory agences (Box 3.9). effective regulation of the past, has recently acted to
Allowing a regulatory agency autonomy while make the process more autonomous and accountmaintaining,
its accountability requires a delicate able. A draft bill in the lower house of Congress debalance.
If regulators are easily replaced, directly fines the role of the National Telecommunications
elected at frequent intervals, or easily influenced by Commission more dearly, increases the number of
special interest groups, they may be unwilling to commissioners, assigns a fixed tenure, and increases
implement policies that are socially desirable but -the commission's access to operational funds.
poLitically inexpedient Conversely, a regulator with As regulators become stronger,. "regulating the
too much discretion can, for example, arbitrarily re- regulators" may be desirable, if experience in indusstrict
new investment Experience in Jamaica reflects trial countries is a guide. In the United Kingdom,
some of these problems (Box 3.10).
for example, the National Audit Office audits regu-
A few principles seem to have general accep- lators as. part of a mandate to determnine "value for
tance. It is important for a regulatory agency to re- money" in public service, and the Monopolies and
port directly to the legislature rather than solely to Mergers Commission hears appeals of decisions by
(or througlh) a minister. Legislative scrutiny of regu- sectoral regulatorslators
is typically more open, although informal
pressures can creep in. The head of the regulatory INsrRUMENTs OF REGuLAHON. While regulators
agency should be appointed for a fixed term, prefer- seek to maintain "reasonable' and just" prices in
ably out of cyde with political elections. Scrutiny order to protect consumers, profits must be adeshould
be regular and should systematically assess quate and not subject to political risk or uncertainty.
an agentc's performance in achieving its goals and The ubiquitous instrument of regulation used to
whetlher regulation is well focused. Transparency is balance these goals-for sectors ranging from urban
critical tG regulatory accountability because only if transport to electridty systems-has been "cost-
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