The Political Economy of Local Regulation

This book aims at proposing an approach to local regulation that goes beyond the traditional set of instruments of descriptive and prescriptive regulatory analysis. If the slogan ‘All policies are local’ seems intentionally exaggerated, considering the absence of a local dimension in monetary and foreign policy, the need for a closer look at the local dimension of policies, and in particular of regulation, is the true reason for this handbook.

This chapter aims to outline some theoretical and methodological issues that originate when researching the political economy of regulation at the local level. First, the chapter discusses the rationales and motivations for undertaking research on the political economy of local regulation. We will discuss, then, more specific research issues that relate to the definition of regulatory performance, to the explanation for the performance of regulatory systems, and to the design of regulatory systems. After indicating the kind of methodological approaches that researchers can follow, we will conclude by reviewing the results that are expected from research in this area of inquiry.

This chapter outlines the rationale, the data collection process, and the potential fallouts of the FIELD (Framework of Incentives to Empower Local Decision-makers) methodology developed by the Turin School of Local Regulation. After an introduction that builds up the peculiar aspects of local regulation and local regulatory analysis, and confirms the need of multi-disciplinary approach in order to have a deep understanding of local services provision, the methodology is presented in a detailed eight-step process. The structured data collection aims at enriching the data set available to local decision makers with regards to actors, incentives, and information in local systems. We will discuss the critical issues that might be faced in the implementation of FIELD and also some preliminary results stemming out from a number of tests carried out in many urban contexts, belonging to both OECD and non-OECD Countries. We will conclude with a research outlook on the possibility of using FIELD to support the design of institutional mechanisms and innovative incentive schemes.

This chapter aims to contribute to the academic discussion of the role of political and institutional factors that explain the effectiveness of local regulation. The institutional analysis perspective can facilitate understanding of the factors that encourage a good design and administration of the regulatory systems at the local level. The development of a local regulatory system is modulated by its institutional matrix, which structures the relations between public and private actors and encourages or constrains their behaviour. Some institutional variables of the local regulatory system (decision-making system, control systems, transparency, resources, and technical capacity of local government) have a direct impact on the capacity of policy to design and administer regulatory systems. An analytical model of the study of local regulatory policy network organisational and institutional characteristics is presented. The model analyses the institutional and organisational factors that can potentially undermine the efficiency and effectiveness of local regulatory systems and proposes how to measure the impact of these factors in a particular regulatory area. The chapter also introduces to the quantitative and qualitative methodologies for this analysis.

This chapter reviews some classical theoretical models of regulation in the presence of asymmetric information and investigates how their main insights and policy implications get modified when one sets the analysis at the local, rather than at the national, level. We focus in particular on the regulatory capture phenomenon. We show that, from a qualitative point of view, standard results remain valid. However, some specific features of the local dimension may affect the strength of agents’ incentives and thus modify the likelihood of regulatory capture and the overall efficiency of regulatory outcomes. The level of social capital and the relevant social norms appear to be the main determinants of the quality of regulation at the local level.

A feature of contemporary regulation debates is the view that social and economic actors can produce a form of ‘civil regulation’ that can influence organisational behaviours and practices. The following chapter uses ‘firm size’ as a tool for exploring how civil regulation might affect firms’ environmental practices. It suggests that civil regulation is an unpredictable mechanism that affects firms in different ways. Yet it also suggests that large firms are likely to be affected by stronger civil regulatory influences, due to their greater levels of visibility and exposure. For small and medium enterprises (SMEs), civil regulation is likely to be more subdued, though recent evidence suggests it can, in limited circumstances, provide ‘problem-solving’ outcomes. Work is needed, however, to further understand the nature and extent of civil regulatory pressures.

In the last two decades economics of complexity has provided new tools to improve the analysis of complex systems. The supply of public goods and services is an example of economic problems implying complex systems. This chapter gives some insights on the need to use advanced tools to analyse the effects of the local regulation in high-complexity systems, focusing on agent-based models (ABMs) and their application to urban mobility and transport management policies. It provides a review of research on this issue, explicitly focusing on urban areas where different agents interact. Passenger flows and their negative effects on the community are increasing, and the need to identify effective and efficient regulation policies for more sustainable transport has become a key challenge. ABMs demonstrate potentially important advantages for evaluating public policies and particularly in the case of passenger mobility.

Historically, electricity and gas supply evolved at the local level. In the nineteenth century, customers in cities were the first to enjoy artificial lighting by gas lamps and, later, by electric incandescent lamps. At that time, electricity and gas distribution, using public streets for the installation of cable network infrastructures, was granted through franchises or concession contracts. Today, we still find franchises and concession contracts regulating local electricity and gas distribution—but now deeply embedded in a regulatory environment at the national level, including statutes, regulatory agencies, and courts. As a consequence, this framework determines the scope for local regulation. In the light of the above, the question remains to what extent franchises and concession contracts can be seen as a means for genuine local regulation of electricity and gas distribution networks. Starting from the analysis of franchise-bidding schemes with respect to network infrastructures, we know what structures might lead to reduced inefficiencies and what inabilities pose problems. These insights give a guideline for the design of regulatory frameworks as a contractual relationship that are of high practical relevance, especially at a local level. This paper intends to contribute a next step in this analysis. Instead of prioritising centralised economic regulation for efficient allocation, we can emphasise the coordination of actors through decision-making processes. By virtue of decentralised coordination and consent with all the relevant actors at a local level, there is the prospect of more detailed goals different from centralised goals at a national level.

This research focuses on the role of subnational units in the enforcement of interstate regulations of natural gas pipeline safety in the USA. It does so by developing a theoretical model of interstate regulatory enforcement of natural gas pipelines at both the national and subnational units, utilising the Advocacy Coalition Framework developed by Sabatier and Jenkins-Smith (1993). Particular emphasis is placed on the role of public and private actors at the local and state levels in monitoring, enforcing, and correcting issues with pipeline construction and maintenance. This work addresses this problem through an empirical approach that estimates a mixed-effects model of incidence (number of fines issued) and compliance rates (measured as the percent of the number of incidents corrected by the number of incidents reported) at the state and local levels, accounting for intertemporal variation by a geographic, existing infrastructure of natural gas pipelines and socioeconomic, regulatory type, and political factors (Energy Policy 35(1): 650–671, 2007). Moreover, this research addresses whether differences in approaches to enforcement styles (cooperative vs. coercive) of natural gas pipelines at the subnational unit result in increases in compliance and incidence rates among natural gas pipeline operators. Overall findings suggest that enforcement style and the frequency of contacts between regulators and regulated entities significantly increase compliance rates. The results indicate that increased input from subnational actors would further increase pipeline safety rates overall.

Regulation can be described as the definition and implementation of rules setting the service general framework (service scope, technical characteristics, and service provision conditions), the stakeholders’ roles and missions, and how the various stakeholders should interact with one another. Regulation also specifies how the cost of the service is to be financed.

While regulation always pursues the same objective, there are several regulatory models deriving from different legal traditions and taking into account national institutional contexts. Among the different European regulatory models in force in the water sector, it is striking to notice that three different regulatory models apply to the French situation. This partly explains the complexity, fragmentation, and specificities of the regulatory framework of the French water sector. In such an institutional context, the French regulation framework is a mix of several regulation models. Self-regulation applies to water and sanitation services managed by public operators. Contractual regulation applies to services managed by private operators, and soft sunshine regulation applies to all services across the board.

Building upon the OECD analytical work, the water roles and responsibilities in France as well as the French regulation framework are assessed and described. As a result, it appears that the French regulatory model is a fragmented and complex multi-model and multi-level framework involving stakeholders at the national and local levels, each of them fulfilling specific regulation functions and powers. The historic and institutional construction of the French water sector regulation has resulted in a highly fragmented framework, which induces complex coordination and governance mechanisms and challenges in order to ensure qualitative and efficient regulation. As a result, efforts to enhance coordination and to rationalise the overall regulatory framework may be required in France to ensure better regulation, efficiency, effectiveness, and accountability of water policy and water utilities.

An important feature of the presently ongoing electricity transition in Germany is its strong decentralising character. Especially the local level has gained increasing importance. Renewable energies in Germany are predominantly small-scale installations owned by private citizens, farmers, local companies, etc. Local governments both try to re-engage themselves in the area of energy as well as play a pivotal role in spatial planning to determine over-potential sites for electricity generation. Due to the historical development of the electricity field in Germany, local governments furthermore play an important role in handing out local and regional network concessions. The activities of local action groups and local governments challenge the position of the big utilities and are difficult to bring in line with changing political priorities on the state and federal levels. Energy thus has become an important contentious policy field on the local level in Germany.

The chapter focuses on the analysis of the determinants of the public-private partnerships (PPP) institutional framework, with a particular attention to function, roles, and activities of PPP units in general and in the Western Balkans in particular. The main hypothesis is that the central PPP unit’s ability to deliver its ‘services’ stipulated by national laws is directly related to the organisation and capacity of the local level entity/authorities to receive such an impact, as well as to give proper reaction in terms of the implementation of the PPP project. This relates not only to project preparation, but also to service delivery, and it refers to both the functional and organisational capacity of local governments to transpose national economic development plans into local development strategies. Clear allocation of resources and identification of roles and responsibilities between the central and local levels are needed to boost economic growth and competitiveness in relatively weak Western Balkans economies. Due to the fact that central budget and extra-budgetary funds are not sufficient sources of capital investment financing, local governments have to be prepared to serve as facilitators of capital investments at the local level. This does not necessarily mean increasing the size or the complexity of the organisation, but rather making the necessary adjustments to existing processes and upgrading the role of local authorities in project design, negotiation and monitoring of service delivery. Based on comparative experiences from selected developed countries, our analysis is focused on the countries of the Western Balkans region, where PPP implementation is in its embryonic stage: Croatia, Serbia, Bosnia and Herzegovina, Montenegro, Albania, and FYR Macedonia. Each of those countries has introduced PPP legislation and created central PPP units. We argue that strengthening the role of local administration and creating functional relationships between the central and local levels, as well as the local level and the stakeholders, would contribute to the successful implementation of investments at the local level and regional development.

In Mali, water services in rural areas and small towns are fragmented and decentralised. Officially under the responsibility of municipalities, water services are provided by a multitude of small independent service operators that largely elude any form of control. While regulation in urban areas is ensured by a regulatory commission, regulation outside urban areas is not clearly assigned to any institution but is considered as being a task of the National Direction for Water (DNH). To better monitor water services, the DNH created a system called STEFI (Suivi Technique et Financier), which currently covers 30 % of existing mini-networks. While not being officially granted with a regulatory mandate, the STEFI system exercises some regulatory functions that could be strengthened and expanded.

The status of water supply service in India is woefully inadequate, nowhere satisfying the generally accepted performance norms. There are multiple factors contributing to this problem, including lack of legal and institutional clarity, an incentive structure skewed towards asset building rather than service delivery, a conflict of interest in the roles of the state government, and unsustainable financial practices. Karnataka showed the way with a pioneering performance-based management contract and also took some, albeit halting, steps for a new institutional arrangement for water supply. Upscaling this paradigm shift of increasing focus on service delivery accompanied by greater willingness to accept private participation in it as a sectoral reform is still a big challenge. This mixed bag of experience has many elements of learning, which are brought out in this case study.

Solid waste management is one of the most expensive and problematic public services a municipality has to provide. On the one hand, the public health protection requires organisation, technologies, and financial and human resources, and on the other one, waste collection, haulage, recycling, and disposal have a clear impact on the environment and on the economic and social life of the community. Moreover, the high visibility of municipal solid waste management makes such a public service particularly important from a political perspective, as clearly demonstrated by the emergency situations experienced by Beirut in 2015 and the protracted crisis of Naples, with several riots between 2007 and 2011. In low- and middle-income countries the situation is particularly critical due to a large number of challenges, in particular the strength of informal relationships between actors and the lack of a clear regulatory framework. This chapter suggests a methodology to assess waste management practices and to design a new integrated sustainable management system. The approach suggested is pragmatic and considers both theoretical models and practical examples. Acknowledgement of the actors involved and democratisation of the service are the two main steps suggested. Examples from different countries are provided, as well as indications to tackle the management of specific hazardous wastes, often left unmanaged in such conditions.

The management and regulation of urban services has emerged as one of the main development challenges for the Latin America and the Caribbean region. This article describes these two relevant institutional challenges as they manifested in the water and sanitation sector of Brazil and identifies the policy responses that occurred in the country. As a result of higher levels of administrative decentralisation and increasing private sector participation in infrastructure services, Brazilian municipalities were faced with the challenge of regulating public services. Currently, the municipalities of Brazil are experiencing the same hurdles that affected the federal and state level governments during the initial stages of structural reforms.

District heating (DH) suppliers enjoy ex-post monopoly power but, under appropriate circumstances, ex-ante competition among space-heating systems can constrain ex-post market power exercise. Key elements are absence of price discrimination between old and new customers and commitment to a price-adjustment rule. The development of DH in Italy provides examples of how ex-post market power mitigation can occur in practice. In mountain areas, full-fledged competition between space-heating systems was sufficient in a context of adequately informed customers, sometimes complemented by commitments not to reduce convenience with respect to heating oil-based systems. In areas served by natural gas networks, imperfect mitigation occurred due to mandated commitment to ‘price equivalence’ between DH and natural gas-based heating, in a context of significant informational asymmetries between regulators and customers, on the one side, and utilities, on the other side. The Italian experience suggests that it is possible to use market forces to discipline ex-post market power in DH provision by devising appropriate soft local regulation instruments.

Water and sanitation services are becoming more and more a ‘hot topic’ in terms of management, control, and regulation, as each country applies a different approach to what is both an economic good and an essential human right. This chapter provides an overview of how quality and price regulation on water and sanitation (WS) services has been implemented in Bulgaria in the past 10 years; what has been achieved and what went wrong; and what solutions have been planned for the future. As the condition and performance of assets is fundamental for quality and efficiency of water and sanitation services, and as these are critical networks, the main conclusion is that both utilities and regulators need to focus their attention in providing holistic life-cycle asset management and customer service approach.

This study illustrates the changes experienced in the region of Emilia-Romagna in Italy after the reform of the regulatory agencies of the municipal solid waste service. In 2012, a unique regional regulatory agency was created in place of nine different local agencies. The design of the governance of the new regulatory agency consisted of two administrative levels: a regional board with main functions and responsibilities and nine local councils of a provincial (subregional) dimension. After three years since the constitution of the new regulatory agency, this study illustrates the changes that the new regional organization has brought to the behaviour of the stakeholders involved in urban waste management. A survey completed by the entire staff of the urban waste management team of the regulatory agency has been done to better investigate the most relevant issues, such as the changes that have occurred in the financial planning activities, the degree of independency of the new regulatory agency, and the changes in information asymmetry.

This chapter tackles the implications of ‘scaling down’ the traditional ‘command and control’ of public regulation that is traditionally centralised in the national authority in order to place those in polycentric governance structures at the local level. The aim is to set up new local standards as social and environmental indicators for the so-called Non-Timber Forest Products (NTFPs). Market incentives such as organic certification, expertise and know-how on seeds and fruit collecting, and the empowerment of rural families in monitoring institutional arrangements (cooperatives and smallholders associations) are fostered by Non-Governmental Organisations (NGOs) in cooperation with the private sector. We argue that stronger governance mechanisms between private incentives and local authorities are necessary in order to promote tools and instruments to measure and evaluate the local sustainable development. This chapter is mainly focused on the observational and qualitative aspects based on empirical data collected during fieldwork researches conducted in local extractive communities in the Amazon rainforest.

This article analyses regulation and municipal solid waste management experience in the Florence metropolitan area (Tuscany-Italy). The case study brings to evidence the most relevant aspects of modern technical and economic waste regulation contributing to the practical and theoretical debate on this subject, quite common in many countries of the world. The main topics covered are the following: (a) the presence of a supramunicipal local regulator (Local Waste Authority) that operates in the absence of a National Regulatory Authority (the opposite to what happens in Italy in the water, energy, and transport sectors); (b) the choice to promote scale economies focusing mainly on the demand side and to entrust the management of the service to a single local waste operator through a tendering process, overcoming the previous fragmented situation (from 50 operators to one single operator); (c) the choice of becoming more efficient through economies of scale and adopting the tendering procedure for the entrustment of urban waste management (one of the biggest in Europe for fifteen years); (d) the choice of including in the concession agreement the environmental objectives foreseen by Italian and European legislation (70 % of separate waste and 60 % recycling, energy saving, no landfill); (e) the choice of keeping the implementation of the energy plant (for which a PPP partnership had been foreseen, selecting the private partner through a tendering process) separated from the integrated service management; (f) the choice to switch from a local taxation system specifically intended for waste (TARI) to a ‘pay as you throw’ system with consequential direct responsibility for the regulator in collecting and overcoming ‘derivative finance’ and a broadened application of the producer liability principle; and (g) adding the ‘urban waste management’ project to the ‘smart city’ strategy framework of Florence and its metropolitan area.

The collection of works that have been put together in this book provide some evidence of what we know and what we aim to better understand about the political economy of local regulation. On the whole, these works illustrate many of the issues encountered in regulating the provision of public services at the local level: for example, regulations conceived and designed at the national (or sometimes supernational) level may conflict with existing regulatory practices and stakeholders’ interests at the local one; the relationship between the local regulators and the regulated firms may be one of collusion and cronyism rather than independence and integrity; regulatory institutions and practices may differ a lot across subnational jurisdictions, even within the same country and at a relatively short geographical distance; and developing countries still struggle to develop the capacity to administer complex regulatory systems and stimulate a culture of compliance with regulatory principles and rules.