Showing posts with label utility. Show all posts
Showing posts with label utility. Show all posts
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What do we mean by 'regulatory governance'?

Thursday, April 1, 2010

The origin of this whole governance debate can be found in the 'grandfather-paper' of this topic written by Levy and Spiller (1994). The 1994 paper distinguishes "regulatory content" (as in technical regulation dealing with the input, process and output) from "regulatory governance arrangement "which focuses on restraining the regulator's discretion. The governance arrangement deals with among other, how predictable the regulatory law is and the track record of the courts in hearing and settling disputes impartially. So the focus of the governance debate is on the commitment of the state in regulating and in constraining the discretion of the regulator. It appears to me that the focus is more on the investor side of the regulation, and not really on the consumer side. 

When privatization was carried out in the UK during the 90s, experts considered that in practice, it is hard to stick to the black letter of the regulatory mandate. The mandate, according to them, has to be continuously reinterpreted. In fact, as we can see many English legislation, regulatory mandate always contain some 'public interest' clause, which broadens the scope of discretion.

Legal scholars such as Graham and Prosser thus considered that the regulator is responsible for, not only in performing regulation in technical sense, but also in furthering social objectives. This duty is both implicit (such as found in the public interest clauses) and explicit in the regulatory mandate. 

Back to the governance debate.

When Levy and Spiller (1994, above) argued that regulatory governance is primarily about restraining regulatory discretion, 1997 papers onward (for example, this one) considered that some discretion is inevitable instead, especially when it comes to the regulation of industries with rapid tech-changes. Of course, these papers still focus on the investor protection side of the debate. 

However, recent literature on governance pays more attention to the consumer side of the regulation, rather the investor side. Consider for example, Dunleavy's seminal paper "New Public Management is Dead -- Long Live Digital Era Governance" which argued that people are no longer a passive recipient of a public service, but also an actor and a partner. Other literature argued that the case where customer has no say on how the store is run, is no longer the trend. Disempowering customer from regulation has, in many instances, produces failures. For example, a steep increase in water tariff results in inability to pay. Inability to pay leads to disconnection. Disconnection leads to unpaid investment (in installing water meters and extending  pipelines to household) and in water theft. Water theft and unpaid investments leads to even higher tariffs. Finally, in the end of the day, the whole system collapse. 

Thus, the literature suggests the shifting trend from customer paradigm-- where they are a passive recipient of the service into citizen paradigm, where people are involved in the decision making process in service delivery (for example, in setting tariffs). How this is done (see paper), is through accountability, transparency and participation mechanisms. This is the new focus of the recent regulatory governance debate.

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What is the best indicator for a regulatory transparency?

Wednesday, March 31, 2010

Gutierrez (2003, paper here) tried to come up with an operational elements of regulatory governance.  He considered that autonomy and independence should be reflected in financial and budgetary independence and no free removal of commissioners; accountability is reflected through clear mechanisms for solving disputes, while clarity of roles and objective is manifested through the regulatory authority’s ability to impose fines and set tariffs. Finally, he opined that "..transparency and participation are operationalized by the existence of hearings for the setting of tariffs and other issues" (see pages 18, 19 and 24). 

However the argument that public hearing is the best proxy in determining regulatory transparency was disputed by Stern and Cubin (2003, paper here), who argued that it is too american-centric. Stern and Cubin argued instead that the requirement for regulator to publish their decision is the better proxy.  

Now the hard task for lawyers is in translating this into a legal concept.  First we need to choose which one is the best proxy. Should we obligate public hearing, or instead, it is adequate for the legal framework to require regulator to explain and justify their decisions? The devil will of course be found in the detail. Public hearing without adequate information disclosure is a non-sense. The legal requirement to explain and justify decision is also not clear in itself unless it is detailed further on how this should be performed.  

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The new electricity law

Friday, September 11, 2009

The House of Representative recently passed the new electricity bill. The bill is perceived by the media as a real attempt to liberalize the electricity sector in Indonesia. But is it true that the law is an attempt to liberalize the sector? How does the law protect investor?

Under the new law, electricity provision are segregated into generation, transmission, distribution and retail and the private sector is allowed to participate. The question is of course, in which segment can the private sector participate and what are the incentives, rights and obligation?

I will return with the discussion later. In the mean time, you can have a look at the new law here (in Bahasa).


Can public service law be applied to private sector?

Tuesday, July 14, 2009

Below is my recent Below is my recent op ed in Jakarta Post. Just a little typo at the 7th paragraph, it should read 'employer'.

Can public service law be applied to private sector?

Mohamad Mova Al Afghani , Jakarta | Tue, 07/14/2009 9:55 AM | Opinion

The House of Representatives passed the public services bill into law on June 23, 2009. The law can impose a variety of sanctions on public servants in the form of written warnings, removal from office, termination of employment and compensation to victims.

It stipulates recourse for violations of public service obligations (PSO) through the ombudsman offices, the House of Representatives and the administrative court. This law represents quite a breakthrough for bureaucratic reform.

As far as regulating government officials goes, the law is fairly strong. However, in sectors where services are privatized, it is unclear if and how this law is applicable.

Consider for example the administrative sanctions that can be given to an offender. If the case involves public officials, the law on civil servants can be used to prosecute, but this is not the case when the offender is private actor.

The law mandates that if the offender is not a civil servant, complaints must be directed to the government official who delegates the function of public service to the private actor — this is difficult.

If the offender is not a civil servant, their employment is regulated by the ordinary labor law and not the law on civil servants. The most an official can do upon receiving a complaint is to pressure the offender’s superior to take action, but the official cannot intervene in the process.

The accountability mechanism for the public and private sectors is also different. When a public official is involved, they are accountable to the House, because of his/her direct action in providing the service or through their custody of shares. This is not the case in the private sector, where employees are directly accountable to their shareholders and creditors – not politicians. Hence, recourse for the victim through the House is not relevant to private enterprise.

When public services are privatized, the relationship between private actors and the government is governed through private law. The role of public law is limited to licenses. If the government determines that private actors deliver substandard services, it can revoke their licenses.

However, license revocation does not automatically drive a private actor out of business. Private actors can sue the government in an administrative court in order to get their license back. While this process is underway, their revenue stream remains. This means that private actors can hire lawyers in their litigation against the government using public money.

In practice, license revocation rarely happens, especially if the service is vital and employs many people. The government will not risk revoking licenses for minor violations. As such, governance by licenses alone may not be efficient.

If so, then, how do PSOs extend to private parties?

The public service law, unfortunately, does not adequately address the private sector. This is discouraging, given the fact that the role of the state in providing goods and services is gradually decreasing. What the government should have done, and needs to do, is to create mechanisms that can hold private enterprises publicly accountable beyond the traditional administrative law.

In foreign jurisdictions, PSOs can be extended to cover private parties through contracts. This is known as public contracting. In general terms, public contracting means that the freedom of contract rule under general private law is constrained. A private actors’ maneuverability in stipulating provisions of a contract is limited. Any provisions which may obstruct the materialization of public service obligation will be deemed inapplicable.

In order to ensure PSOs are met when contracting to the private sector, the law can impose mandatory provisions in contract form. Conversely, the law can also prohibit private actors from conducting actions which would be detrimental to consumers.

Although there are similar legal principles in PSOs, as each industry has its own specificities, generic formulation is not possible. For example, prohibition of disconnection from services is a typical PSO for water and electricity companies, but would be irrelevant to a railway company. Similarly, cross subsidy obligations are relevant in the network industry, but that may not be the case in banking or healthcare.

The detail of PSOs for each industry should therefore be extrapolated on in sectoral regulations; the public service law can act as an umbrella regulation for each sectoral PSO. This means that a PSO for a water company should be detailed in terms of water acts and a PSO for an electricity company should be regulated by electricity acts.

The question remains whether the public service law will have an impact on incidents that occurred before it was enacted. The transitory provision of the public service law is silent on this matter. But if the answer is positive, preexisting contracts between private actors and the government which contain public service functions may need some adjustment.

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CSR/GCG for utility companies

Monday, December 24, 2007

I wrote a paper explaining why certain Good Corporate Governance (GCG) and Corporate Social Responsibility (CSR) norms needs to be practiced by utility companies. You can download the paper here.


This paper argues that utilities delivers basic services to society, a function that was previously undertaken by the state. Given the problematic nature of corporations, the prevalence of natural monopoly in utilities, the asymmetric information present in certain utility markets and the social costs that may occur due to utilities privatization, stronger government intervention in utilities might be desirable. It must however, be conducted in a manner which aligned the corporation's self-interest of profit seeking with the social cost. The inspiration for such regulation can come from the recently growing CSR and GCG norms.

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Safeguarding Water Contracts (peer-reviewed version)

Saturday, December 8, 2007


The The provision of water and sewerage services has been in the public sector for thousands of years. However, the trend towards privatising these basic services has recently been growing. When dealing with Multinational Corporations (MNCs), governments face risks in the form of legal asymmetries.

This paper explains the theory and practice of water privatisation in Indonesia. It analyses the legal anatomy of privatisation, from the regulatory to the contractual levels. It attempts to highlight important issues and risks that governments and other stakeholders need to focus on when dealing with privatisation.

We've made some significant editing for this version. Download the full paper here.

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Safeguarding a water contract

Monday, July 23, 2007

If you are representing a municipality or a central government, and you have to deal with water MNCs in concluding an agreement, what will you do?

I wrote a paper on this issue for a conference held by the IELRC in Geneva, last April. Here's the abstract:

Due to financial and technological reasons, water undertakings are often being conducted by large scale Multi National Corporations (MNC). Governments often positioned Regional Authorities as a regulator to these MNCs, and at the same time engaged in water contracts with them through State Owned Enterprise (SOE).

However, the relationship between Water MNC and Governments is asymmetrical as MNCs can move their assets overnight, transfer their ownership to third parties, seek various means of redress through bilateral, regional or international investment treaties and avoid confiscation by reallocating their assets. These are often done by hiding behind multiple jurisdictions enjoyed either by their parent companies, subsidiaries or shareholders.

The positions of Governments are the opposite as they do not have the flexibilities enjoyed by MNCs. This paper attempts to prescribe issues that need to be highlighted in safeguarding water contracts in Indonesia.

The first part discusses the legal relationship between institutions involved in a water undertaking. The second part listed down regulatory mechanisms in Indonesian context, more specific towards the impact of Constitutional Court’s review of the Water Law (2004). The third part of the paper examines the provisions existing normally in water contracts between a local subsidiary of MNC and regional authorities and presents a point of view in drafting the clauses.

Note that all laws mentioned there are as of March, 2007. The investment law has been modified recently. See the paper here.

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The right to water must be explicitly stated in the Constitution

Monday, July 9, 2007

JP has just published my Article on the right to water today:

Access to water is a fundamental human right

Mohamad Mova Al 'Afghani, Jakarta

Enough has been said about the depletion of our supply of fresh water from industrialization, deforestation and climate change. Now, the rise of megacities is also complicating the problem.

In a recent report, the United Nations Family Planning Agency (UNFPA) predicted half the world's population would be living in cities by next year, with the figure expected to grow.

This presents challenges for more effective land use, transportation and the fulfillment of minimum daily subsistence. Cities that fail to meet these challenges will become "failed cities", marked by the rise of megaslums.

The problem with water is that it is complicated by the fact that policy in this area is highly intertwined with other sectors. More food requires fine agriculture, which can also mean more water. More clothing requires industrialization, which can involve the use of more groundwater and the pollution of water sources. Housing can also cause problems if built above water catchment areas.

Failure by states to provide their populations with adequate water for drinking and sanitation can be considered a violation of international law.

Under Indonesia's current system, access to "water sources" is guaranteed by the Water Resources Law. Articles five and 16 of the law stipulate that every municipality must fulfill the minimum daily basic water needs of its local community.

However, the Constitution is silent on the right to water. The Water Resources Law for example -- due to the absence of the right to water in the Constitution -- only cites Article 33 of the Constitution, part of the economic chapter regulating natural resources.

This could be a problem, since water rights could then be perceived as existing only as derived from the economic provisions of the Constitution. Contrary to this interpretation, the international community now regards the right to water to be a part of the language of human rights.

The Constitutional Court acknowledged that access to water is a human right in its decision on the judicial review of the Water Resources Law. However, the court's decision does not bear the same weight as a provision of the Constitution.

Explicitly incorporating the right to water in the Constitution does not appear to be helpful at first glance. Adding more words to the Constitution will not provide more fresh water. But that's not how the legal system works.

The law, operating in the language of rights and obligations, helps answer questions on how to prioritize the allocation and use of existing resources. If, for example, there is a conflict between the right of an individual and the right of a company to exploit water, who should prevail? Does an individual have the right to challenge a factory because the water in his or her well is being depleted?

With the rise of megacities, the problem most likely to emerge will be disconnections from the water network. Imagine that in the future -- all at the same time -- the quality of groundwater worsens, reserves drop thanks to interference with catchment areas and urbanization drives up demand for water.

More and more people will rely on water networks for their supplies. Will water companies be able to disconnect those unable to pay?

Here is the question of whether we should see water consumers as mere actors in the market economy (who get their water as long as they pay) or as citizens (who are entitled to water regardless of whether they can come up with the money). If such a cases were brought to local courts where judges were not aware that access to water was a human right under international law, there is the danger that judgments will end up reflecting the narrow, market-oriented view of the consumer.

If, once again, the water resources law is perceived as only a derivative of economic chapters of the Constitution (Article 33), then the outcome of cases such as the hypothetical above would likely follow what has happened with other natural resources such as oil, gas and minerals.

But the way people need water is not the same as the way they need oil, gas or coal. So it is not adequate to argue about the right to water within the realm of Article 33. The right to water must stem from the human rights provisions of the Constitution, and that can only occur if it is expressly stated.

This does not mean that processed water should be available to everyone for free. A price should be associated with it to encourage people to conserve available resources. However, the provision of water and sewerage should be from the perspective of being a public service.

Individuals receiving the service are not mere consumers purchasing goods in the marketplace. They should be treated as citizens receiving services from the state. Their entitlement to water should be guaranteed by the government even if they are unable to pay.

It is the state's duty to respect, protect and fulfill the right to water. The quality and quantity of the amount of water individuals are entitled to must be clearly stipulated in law and not left to market mechanisms to decide. Water companies will have to be efficient and sustainable but at the same time pay due regard to prevailing regulations. Therefore, regulations on subsidies to the poor as well as speedy and cheap dispute resolution mechanisms when it comes to water disconnections must be in place.

Putting the right to water in the Constitution will not directly solve our water problems, but it will clarify to the government that they have a constitutional responsibility to provide this most essential of resources.

I think water issue should be given a substantial proportion during the current constitutional amendment process. The present law on water resources is not clear with regards to conflict between water exploitation right (used by companies) vs water use right (used by individual for daily subsistence). The best way is to state in the constitution that water is a fundamental human right.

Colombia, Ecuador, Eritrea, Gambia, Ethiopia, South Africa, Uganda, Uruguay and Zambia have provisions on the right to water in their constitutions.


The "right to water" in Indonesia

Tuesday, June 5, 2007

The right to water is guaranteed under Article 5 of the Water Resources Law. It is stated there that the state must guarantee the citizen's access to water. The implementation of such right is not yet clear. The elucidation of Article 5 only said:
This provision shall mean that the state holds the obligation to organize various efforts to guarantee the availability of water for everyone residing within the territory of the Republic of Indonesia. The said guarantee shall become the joint responsibility of the Government and regional government, including guaranteeing access for everyone to the water source to obtain water. The extent of daily minimum basic need for water shall be determined based on the guidance to be stipulated by the Government.

The Constitutional Court in its interpretation of the water law stated that Article 5, jointly with Article 16 (which stipulates that the duties and authorities of every municipalities are to to fulfill the minimum daily basic need for water of the community in its area) and Article 29(3) (which stipulates that The provision of water to fulfill the daily basic needs and irrigation for the smallholder estate crops in the existing irrigation system that became places the provision of water resources as the main priority over all other needs) have "sufficiently reflected the fulfillment of the right to water" under the law.

However, Article 80 of the Law stated:

(1) The use of water resources to fulfill the daily basic needs and for smallholder estate crops shall not be charged with water resources management service fee.

(2) The users of water resources other than those referred to in paragraph (1) shall bear the water resources management service fee.

And its elucidation:

Paragraph (1)

The parties who utilized the water resources to fulfill their daily basic needs and who are not subjected to any water resources management service fee shall mean the user of water resources who utilized water at or who procured water for their personal purpose from the water source that is not used as a distribution channel.

The water resources management service fee shall mean the cost required to manage the water resources so as the water resources may be utilized in a sustainable manner.

On this Article the Court says that water is free so long as people are taking it directly from its water source, but if it is taken from the water network, then the "full cost recovery" applies. The Court noted however that this does not mean that regional waterwork can charge high rates. The Court says that regional waterwork "shall not be established with a view of only seeking for profit, but as an enterprise who performs state functions in materializing Article 5"

The Court holds the law to be "conditionally constitutional" and thus can still be invalidated if its implementation is different from this guideline.

So, I think the right to water in Indonesia does not mean that everyone can get water as a free ticket. If they are taking it from a distribution network, they still have to pay. The minimum quality and quantity of the water per person -- as far as I know -- has not been legislated into a binding regulation.

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Water privatization, some condoning views

Sunday, May 20, 2007

My JP article on the legal risks of water privatization gets a mixed response and was quoted in blogosphere and other sites. I feel the need to bring a balancing view.

What I said on that article was that privatization carries legal risks, in simpler terms, the state's controlling power toward water will significantly reduces if water services is privatized. The article did not lead to the conclusion of whether privatization should be rejected or not, it only warns the government on the risks.

Is water privatization all bad?

I am not an economist so I do not have the competency to argue. But here's some view:

Privatization is not a panacea, but Segerfeldt shows that, when properly done, it can play a huge role in bringing safe clean drinking water to the hundreds of millions of people who still lack it. In the meantime, Segerfeldt wonders, "why anti-privatization activists do not expend as much energy on accusing governments of violating the rights of 1.1 billion people who do not have access to water as they do on trying to stop its commercialization." Good question.

There are some who argues that it helps to reduce waterborne diseases:

In the 1990s Argentina embarked on one of the largest privatization campaigns in the world, including the privatization of local water companies covering approximately 30 percent of the country’s municipalities. Using the variation in ownership of water provision across time and space generated by the privatization process, we find that child mortality fell 8 percent in the areas that privatized their water services and that the effect was largest (26 percent) in the poorest areas.

Im not really sure on privatizing an already established regional waterwork service like the Argentina case above. As far as I know, the impact of privatization on water price, water quality and availability mixes between good and bad (with the majority suggesting "bad").

But, on the other hand, I tend to agree with Segerfeldt's approach. Why not blame the government for not providing water services to the needy people and why blame corporation instead? However the focus here is the provision of new water network. I'd say, privatization should be OK if the aim is to establish new water network. From what I've heard, privatization mostly occurs on extending existing network. Privatization which is aimed solely at establishing new network is quite rare.

Thus, the regulation must support and provide benefits of privatization which are aimed at providing completely new water services.

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Water Privatization in Indonesia

Saturday, May 19, 2007

I wrote an op ed-piece for the JP a few days ago:

Privatization that involves MNCs will cover generally three legal arenas, namely transnational, national and contractual. Each legal arena requires a different model of legal protection.

In the transnational arena, governments may face parent companies and shareholders of an Indonesian-incorporated subsidiary company in arbitrations. In typical water contracts between local water authorities and a locally incorporated company, there is always a clause that refers every dispute arising from the contract exclusively to a local jurisdiction.

The problem is, MNCs can always refer to Bilateral Investment Treaty (BIT) to which Indonesia is a party and use the "umbrella clause" in the BIT to transform a problem that was originally a contractual dispute into an international investment dispute. So, the central government can be dragged into a costly international arbitration.

One of the drawbacks of international arbitration is that the proceedings are often closed to the public. This transparency can no longer be ensured once a dispute is settled at an international arbitration venue.

Another disadvantage in dealing with an MNC is that there is currently no adequate accountability and responsibility standard in place. Thus, it is theoretically possible for an MNC to cause losses (to the environment or labor) in a host state and get away with it. This is because an MNC is a single economic unity, but is legally distinct.

The losses are not attributable to its parent company in United States or Europe, because those companies exist beyond Indonesia's jurisdictions and they possess a distinct legal personality from their Indonesian "avatar".

From the above explanations, there are some conclusions that can be drawn.

First, the legal protections granted at the national level will be obsolete at the transnational level if the government decides to conclude a contract with an MNC.

Second, the damages created by an MNC to the host state may be irrecoverable due their transboundary character. Put it simply, the control by the government towards water provision will considerably diminish when privatization is opted.

The second legal arena is the national fora. Protection towards the right to water in Indonesia is very weak. The first weakness is that our constitution does not explicitly recognize the right to water. The right to water in Indonesia develops only out of a judicial interpretation of the Constitutional Court when the water law was reviewed.

The second weakness is the water law itself, which does not specifically cite the right to water as a human right. This is a mistake because it should have cited Chapter XA of the Constitution, which regulates human rights. If it is only Article 33 that is cited, then water would be perceived nothing but as an economic good.

The third weakness is that the current regulations governing infrastructure projects do not distinguish water from other projects. Currently, a 2005 Presidential regulation is used as a "catch-all" regulation for infrastructure project, including water. This could be fatal if the government decides to privatize more water services in the future.

Water projects are among the most critical infrastructure projects for emerging economies. They have natural, cultural, political and legal characteristics that differentiate them from other infrastructure projects. Naturally, water is a limited resource, inseparable from the hydrological cycle, it is an indispensable element of life for human, animal and the ecosystem as a whole.

Regulations governing water infrastructure must contain provisions that obligate financial and legal due diligence toward the bidders. There has to be provisions that specifically regulate water service companies, especially its shareholding, lending structure and corporate executives. Its financial condition must also be declared to the public.

The last of the legal arena is the contract between MNC's subsidiary and the authority. Provision of this contract is very delicate as it must embody and guarantee constitutional, human rights, environmental and financial benefits of all stakeholders.

Ensuring the sustainability of the contract would be difficult because MNC tends to always have a more favorable position to ask for renegotiation once the contract is signed. On the other hand, the government's interest is in ensuring water service from being impeded, and the government will be compelled to do it at any cost.

I also wrote a conference paper on the issue of water privatization and a power point presentation available here. Still on the water topic, I also wrote a paper on the Judicial Review of Indonesian water law available here.