When does outsourcing regulation make sense and how can it best be managed? This report published by the Public-Private Infrastructure Advisory Facility (PPIAF) draws on a 2004 World Bank survey of outsourcing practices by existing regulators. It finds that outsourcing regulatory functions or tasks can play a significant role in improving the effectiveness of institutions in charge of utility regulation.
Over the past decade, about 200 regulatory bodies have been established in some 130 countries to regulate services such as telecommunications, water, and electricity. Outsourcing of utility regulation is defined as the use by a regulator of an external contractor, instead of its own employees, to perform certain tasks or functions. Public bodies and private companies are permanently confronted with decisions about whether to make or buy products and services. Regulation as an exercise of public authority is no exception.
There are two main types of outsourcing: ‘advisory’ and ‘binding’. Nearly all regulators outsource, in developed and developing countries alike. Regulatory activity is typically cyclical with peaks around the time of five-year reviews, although there may be other peaks as well. Paradoxically, regulators that are comparatively more developed appear to contract out more.
- Outsourcing can help utility regulators improve their performance with respect to the three main qualities required: competence, independence, legitimacy.
- Outsourcing can help reduce costs because it can provide information about the real cost of performing the task or service, allow economies of scale and save precious management time.
- The main challenges for outsourcing are budgetary constraints and a small supply market.
There are a number of ways in which outsourcing decisions can be built into institutional arrangements from the start, usually at the transaction stage. When designing institutional and regulatory frameworks for utility services, policy makers need to consider the following:
- Even if recommendations are purely advisory in nature, they may be difficult for the regulator to ignore if they are disclosed to external stakeholders or if there are effective appeal mechanisms in place.
- Outsourcing a major decision-making function may secure access to otherwise limited technical competence but actually lower the perceived legitimacy in the regulatory process.
- As agencies outsource, they may fear that lower costs are being achieved at the expense of quality, and so they become more aware of the quality dimension of the regulatory function than when it was performed in house.
- Regulators should encourage long-term ongoing relationships with experts rather than short-term missions to minimise the costs of bringing the experts up to speed with local issues.
- For ongoing outsourcing to be successful, regulators should develop a well-considered outsourcing strategy and continue to build the regulator’s internal capacity.
