Building trust in regulation a global study of operator regulator relationships

ECO N O M I CS & REG U L AT I O N

Building Trust in Regulation
A global study of operator-regulator relationships

A DVI SO RY

© 2009 KPM G International. KPM G International is a Sw iss cooperative. M ember fi rms of the KPM G netw ork of independent fi rms are affi liated
w ith KPM G International. KPM G International provides no client services. No member fi rm has any authority to obligate or bind KPM G
International or any other member fi rm vis-à-vis third parties, nor does KPM G International have any such authority to obligate or bind any
member fi rm. All rights reserved.


© 2009 KPM G International. KPM G International is a Sw iss cooperative. M ember fi rms of the KPM G netw ork of independent fi rms are affi liated
w ith KPM G International. KPM G International provides no client services. No member fi rm has any authority to obligate or bind KPM G
International or any other member fi rm vis-à-vis third parties, nor does KPM G International have any such authority to obligate or bind any
member fi rm. All rights reserved.


5 BUILDING TRUST IN REGULATION

Contents
1.

Forew ord

1

2.

About the research

2

3.

Executive sum m ary

3

4.

Introduction

5

5.

The state of relationships

7

6.

KPM G Com m ent: Working m ore constructively together

11

7.

The consequences of m istrust

13

8.

KPM G Com m ent: Em erging issues in em erging m arkets

20

9.

The m echanics of trust

21

10. KPM G Com m ent: Building fi rm foundations for the
regulatory process

25

11. KPM G Com m ent: Tackling uncertainty, safeguarding
investm ent

27

12. The people factor

29

13. KPM G Com m ent: Converged data, im proved perform ance

31

14. Conclusion: A positive outlook for trust

33

15. Appendix: Survey dem ographics

35

© 2009 KPM G International. KPM G International is a Sw iss cooperative. M ember fi rms of the KPM G netw ork of independent fi rms are affi liated
w ith KPM G International. KPM G International provides no client services. No member fi rm has any authority to obligate or bind KPM G
International or any other member fi rm vis-à-vis third parties, nor does KPM G International have any such authority to obligate or bind any
member fi rm. All rights reserved.


1 BUILDING TRUST IN REGULATION

Foreword
Trust is the glue that holds relationships together but
also the lubricant that keeps things moving. This study,
from the Economist Intelligence Unit, commissioned by
KPMG International examines the current state of trust
between regulators and the industries they regulate
around the globe.
Many of the findings relate to the need for better communication and ensuring that
regulators and operators can establish a common understanding between one another:
concerns that KPMG firms care deeply about and work with many clients to address.
While it is encouraging that levels of trust seem to be improving, these relationships

can be extremely fragile. Moreover, as global economic uncertainty continues, the
potential cost of related regulatory uncertainty is an unnecessary burden at a time when
investment and revenues are under threat. Now, more than ever, trust between parties
is critically important.
This is not to say that we all ‘hug a regulator’, or that we throw away robust regulatory
strategies, or that regulators shouldn’t take decisions that might negatively affect certain
stakeholders, but it’s the environment in which you communicate those decisions that is
important: one characterized by respect.
We hope that the findings stimulate further thoughts in an area of consistent change
and challenge and would be delighted to talk with you about what KPMG firms are doing
to help our clients build levels of trust that enable better regulation and benefits to
the economy.
Finally, I would like to thank the survey’s participants and interviewees for their time.

David Thomas
Global Head of Communications Regulation, KPMG

© 2009 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated
with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG
International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any
member firm. All rights reserved.


BUILDING TRUST IN REGULATION 2

About the research
KPMG International
commissioned the
Economist Intelligence
Unit to write Building Trust

in Regulation. The report
is based on the following
research activities:
The Economist Intelligence Unit conducted
a survey, completed in 2009, of 213
executives who are closely involved with
the regulation of current and former
utilities. The survey brings together
practitioners from both sides of the
commercial operator-regulator divide,
including 165 respondents from operators
and 48 from regulators. All are closely
familiar with their organization’s key
regulatory relationships, and they hail
from five heavily regulated industries
– telecommunications, power, water,

transport and post. The survey sample
is global, with 36 percent of participants
based in Europe, 23 percent in North
America and 20 percent in Asia-Pacifi c.
A total of 77 respondents – 36 percent
of the sample – are based in developing
countries.
To supplement the survey, the Economist
Intelligence Unit conducted a program of
interviews with senior executives of both
commercial operators and regulators in the
aforementioned industries. We are grateful
to the survey participants and interviewees

for sharing their valuable time and insights.

The views and opinions expressed herein are those of the
Economist Intelligence Unit and do not necessarily refl ect the
views and opinions of KPMG International or KPMG member
fi rms. The KPMG comment sections were written by
professionals from KPMG member fi rms.

© 2009 KPM G International. KPM G International is a Sw iss cooperative. M ember fi rms of the KPM G netw ork of independent fi rms are affi liated
w ith KPM G International. KPM G International provides no client services. No member fi rm has any authority to obligate or bind KPM G
International or any other member fi rm vis-à-vis third parties, nor does KPM G International have any such authority to obligate or bind any
member fi rm. All rights reserved.


3 BUILDING TRUST IN REGULATION

Executive summary
Recent revelations of
failures in regulatory
oversight have helped
to put regulation under
the microscope.
Effective regulation resulting in effi cient
markets, however, is the result not only
of the regulator’s performance but also
of the quality of interaction between the
regulator and the market’s commercial
players. In heavily regulated sectors
where existing or former public utilities are
dominant – telecommunications, power,

water, transport and post 1 – and where
policy reforms over the past two decades
have created new regulatory bodies and
competitors, relationships between
regulator and regulated have frequently
been troubled. Trust is the foundation of
any good relationship; it has arguably been
in shorter supply among market players in
these sectors than others, and the lack of it
has stifled aspects of market growth even
in fast-growing economies.
This study of operator-regulator2 interaction
in five heavily regulated sectors reveals,
perhaps surprisingly, a large percentage
of regulatory relationships in which the
parties deem the level of trust to be “ high”.
However, the research – based on a global
survey of 213 operator and regulator
executives, as well as a series of one-onone interviews with practitioners – also
suggests that relationships in some
sectors and parts of the world are weaker

than others. It also makes clear that, even
where relationships are good, trust is an
extremely fragile commodity which does
not take much to undermine. Mistrust
often breeds uncertainty, which can have
tangible negative consequences for
market players.
Following are the main conclusions of

the research:

• Operator-regulator relationships are
evolving for the better. This is
encouraging in a global context that has
seen renewed calls for a more vigorous
approach to regulating competitive
markets. More executives in our survey
characterize the level of trust between
operators and regulators in their sector
as “ high” than those who think the
opposite, and more participants believe
that operator-regulator relationships
are improving than those who see
deterioration. Operators are less
satisfied than regulators with the levels
of mutual trust, and operators in
developed economies are not as
positive in their assessments as their
counterparts in the developing world.
But majorities of both operators and
regulators in our survey expect
improvement in their mutual
relationships in the coming years.

• Breakdowns in trust often result from
regulatory uncertainty, which can
negatively impact industry
development. Uncertainty and a
resulting loss of trust carry a variety of

1 This study’s coverage of the power sector includes electricity and gas utilities. In the transport sector the research focuses
on railways, airports and other ports.
2 The term “operator” is used in this report to refer to commercial service providers in the five sectors covered by our
research. Other terms, such as “ utility” or “ company”, are also commonly used in different parts of the world to describe
these entities.
© 2009 KPM G International. KPM G International is a Sw iss cooperative. M ember fi rms of the KPM G netw ork of independent fi rms are affi liated
w ith KPM G International. KPM G International provides no client services. No member fi rm has any authority to obligate or bind KPM G
International or any other member fi rm vis-à-vis third parties, nor does KPM G International have any such authority to obligate or bind any
member fi rm. All rights reserved.


BUILDING TRUST IN REGULATION 4

potential consequences for market
players, from direct financial losses to
an increase in litigation. Operators in the
survey cite the most frequent outcomes
of regulatory uncertainty to be direct
increases in cost, lost revenue,
cancelled or postponed investments,
business initiatives put on hold or
increased litigation. Taken at overall
market level, the uncertainty can
quickly translate into slower market
development and service penetration.

• Achieving genuine trust between
operator and regulator hinges on
the development of a mutual

understanding of each side’s
objectives and constraints. With each
party’s perception of the other shaped
by its own experience, culture and
market interests, the ability to
understand the influences and motives
driving the other side is a vital factor in
building trust. Operators are adamant
that regulators must achieve a greater
appreciation of business operations and
risks. Regulators, for their part, insist
that operators gain an improved
knowledge of regulatory and policy
objectives.

• Transparency of processes and clarity
of the regulatory framework increase
levels of trust. The trust gap widens on
issues that are susceptible to political
influence and unpredictability, while
routine, process-oriented interaction
tends to proceed more smoothly for the
parties. For example, both operators

and regulators highlight licensing as a
largely problem-free area of interaction,
with monitoring and compliance,
consumer protection, and data transfer
also proceeding relatively smoothly.

• Industry consultations, a key tool in
building trust, will widen the trust
gap if they are more form than
substance. While the survey revealed a
consensus on the need for consultations
on key issues, several operators voice
concern with the consultation process
itself, complaining that regulators treat
consultations as no more than a
formality. Generally speaking, operators
also tend to value informal consultations
over the public variety. By contrast,
regulators seem more wary of such
informal exchanges, which they see as
contradicting the need for transparency.

• Processes and frameworks are
important, but people and personal
relationships are the critical
ingredients in building trust. Asked to
identify the most important contributors
to an effective operator-regulator
relationship, both groups of survey
respondents point with equal emphasis
to good personal rapport between
senior executives from both parties.
Strong personal relationships help
to smooth potentially antagonistic
relationships by offering each side
some visibility into the motives and

constraints of the other, and they
ultimately help build trust among
the parties.

• Trust suffers without strong
mechanisms to share relevant and
accurate information. The provision
of relevant information is another
important rung in the trust-building
ladder, but information-sharing remains
an area of friction between operators
and regulators. There is a substantial
gap between the regulator’s need
of information to fulfill its mission,
and operator willingness to share
information, owing to concerns around
confidentiality and relevance of
information. Ultimately, the parties must
work together to make the informationsharing process productive.

© 2009 KPM G International. KPM G International is a Sw iss cooperative. M ember fi rms of the KPM G netw ork of independent fi rms are affi liated
w ith KPM G International. KPM G International provides no client services. No member fi rm has any authority to obligate or bind KPM G
International or any other member fi rm vis-à-vis third parties, nor does KPM G International have any such authority to obligate or bind any
member fi rm. All rights reserved.


5 BUILDING TRUST IN REGULATION

Introduction
The role of industry

regulation across the world
has risen in prominence with
an economic crisis brought
about – at least in part – by
regulation in a number of
sectors that appears to have
been inadequate to the task.

“As a consequence of the economic crisis, we are in a
fundamentally different place than we were fi ve years
ago,” according to Lord Carter, former UK Minister for
Communications, Technology and Broadcasting, speaking
of the challenges facing regulators and policymakers in
today’s environment. Rapid response to problems posed
by the crisis is imperative, he says, but existing policy
frameworks do not necessarily allow for this.

Even prior to the global downturn,
however, the fundamental nature of
market regulation was already evolving in a
number of industries. Rapid technological
change and increased competition broke
the traditional, silo-based structure of the
telecommunications market, for example.
In many countries, increased environmental
concerns refocused regulation in the
energy and water sectors even as they
were being opened to competition.
Security considerations led to an
expansion, in some parts of the world,

of the regulatory purview in the
transportation sector.
To societies and governments, the effective
regulation of certain industries is a
necessity in order to ensure that the latter’s
services or products are made available to
the population in as affordable, safe and
efficient a manner as possible. This is
particularly the case when it comes to
services provided by existing and former
“ public utilities”, such as telecoms, water,
power, post and transport. The suppliers of
these services and products also benefi t
from good regulation in many ways, but
many of the largest suppliers tend to view
regulation less as a virtue than as an
unavoidable aspect of doing business.
Over the past two decades, markets for
these services have been liberalized to
some degree in many parts of the globe,
resulting in the emergence of competitors
to erstwhile monopoly providers. This has
not only made the regulatory agencies’
tasks more complex, but has greatly

© 2009 KPM G International. KPM G International is a Sw iss cooperative. M ember fi rms of the KPM G netw ork of independent fi rms are affi liated
w ith KPM G International. KPM G International provides no client services. No member fi rm has any authority to obligate or bind KPM G
International or any other member fi rm vis-à-vis third parties, nor does KPM G International have any such authority to obligate or bind any
member fi rm. All rights reserved.

BUILDING TRUST IN REGULATION 6

expanded the scope for potential confl ict
between regulators and regulated. In many
heavily regulated industries, the numbers
of people employed to deal with these
issues – both at regulators and commercial
providers (here termed “operators” for
convenience of use) – have expanded in
a like manner.
This expansion reflects a recognition on
the part of both regulator and operator that
smooth and effective interaction usually
benefits both the industry as a whole
and most of the players that operate in it.
In turn, effective regulation is now widely
acknowledged as a core foundation of a
sustainable industry growth framework.

operator is a crucial requirement of
regulatory effectiveness. Operators need
to trust the regulator’s ability to maintain
distance from both policymakers and other
operators, to deliver consistent, timely and
transparent decisions, and to have the
requisite authority to oversee the sector.
Conversely, regulators need to trust
operators to abide by established rules and
be co-operative. As this study makes plain,

the ability to build trust in regulation
requires enormous patience and fortitude
from regulators and operators alike.

Even as regulators become more engaged,
however, their effectiveness in increasingly
competitive environments has become a
function of their ability to act as – and be
seen to be – independent arbiters. In this
context, trust between regulator and

© 2009 KPM G International. KPM G International is a Sw iss cooperative. M ember fi rms of the KPM G netw ork of independent fi rms are affi liated
w ith KPM G International. KPM G International provides no client services. No member fi rm has any authority to obligate or bind KPM G
International or any other member fi rm vis-à-vis third parties, nor does KPM G International have any such authority to obligate or bind any
member fi rm. All rights reserved.


7 BUILDING TRUST IN REGULATION

The state of relationships
The level of operatorregulator trust in the fi ve
industries researched in this
study is surprisingly strong
in light of the expanding
role of regulation across
industries and countries
over the past ten years.
More executives in our survey characterize
the level of trust – between operators and
regulators – in their sector as “ high” than

those who think the opposite. Similarly,
trust-building seems to be moving in the
right direction: more participants believe
that operator-regulator relationships are
improving than those who see
deterioration. While by no means glowing
assessments of the mutual relationships,
these findings are encouraging in a global
context that has seen renewed calls for
a more vigorous and potentially more
intrusive approach to regulating
competitive markets.

Lord Carter, for one, is not surprised by
the improvement in relationships and the
relatively high levels of trust registered in
the survey. One reason for this, in his view,
is a vast improvement achieved in the
quality of regulatory execution in recent
decades. “ In the UK and elsewhere in
Europe, we have seen a ‘professionalization’
of the regulatory discipline in the last 25-30
years.” An increasingly professional and
thorough approach on the part of regulators
helps also to engender respect – and trust
– from operators.
The assessments of trust are not uniformly
positive across all groups of executives.
Operators, for example, are more guarded
than regulators in their appraisal of existing

levels of trust. Among operators, views
also differ between executives based in
developing economies – where 42 percent
of operators say relationships are
improving – and those in developed
economies – where only 23 percent say
they are.

© 2009 KPM G International. KPM G International is a Sw iss cooperative. M ember fi rms of the KPM G netw ork of independent fi rms are affi liated
w ith KPM G International. KPM G International provides no client services. No member fi rm has any authority to obligate or bind KPM G
International or any other member fi rm vis-à-vis third parties, nor does KPM G International have any such authority to obligate or bind any
member fi rm. All rights reserved.


BUILDING TRUST IN REGULATION 8

How would you characterize the overall level of trust that exists between
operators and regulators?
1%

Very high
4%

High
Neither high nor low

8%

10%

8%

15%

Low
Very low

21%

Don’t know
33%

39%
61%

Operators

Regulators

Source: Economist Intelligence Unit 2009

How, if at all, has your operator–regulator relationship changed in the
past year?
2%

It has improved
It has remained the same
It has deteriorated

10%

12%

Don't know

30%
42%

48%
56%

Operators

Regulators

Source: Economist Intelligence Unit 2009

© 2009 KPM G International. KPM G International is a Sw iss cooperative. M ember fi rms of the KPM G netw ork of independent fi rms are affi liated
w ith KPM G International. KPM G International provides no client services. No member fi rm has any authority to obligate or bind KPM G
International or any other member fi rm vis-à-vis third parties, nor does KPM G International have any such authority to obligate or bind any
member fi rm. All rights reserved.


9 BUILDING TRUST IN REGULATION

The varying assessments may be
explained by different levels of maturity of
the relationships or sector dynamics at a
given point in time, among other factors.
Operators, moreover, who do not benefi t

from all regulatory decisions, may be
expected to display a slightly more critical
perspective on relationships. Still, the
larger point remains that regulatorregulated relationships appear to be
evolving for the better.

What’s going right?
Precisely what is working better will also
vary in line with individual and institutional
experiences, but there are some common
threads. The regulatory manager of an Asia-

Pacifi c electricity provider points to the
clarity of the regulatory framework in his
national market and the clear demarcation
that exists between those who make the
rules and those who enforce them. While
this contrasts with many markets where
responsibility for both regulatory rules and
their implementation lie with a single body,
clarity as to where accountability lies
remains key.

is particularly the case in areas of operatorregulator interaction that are process-driven
and clearly outlined. “ The level of trust is
higher when an issue is subject to global,
objective analysis and scrutiny,” says Sean
Williams, Managing Director, Retail
Strategy, with BT, the United Kingdom’s
largest fixed-line telecoms operator.

“ Lower levels of trust exist,” he maintains,
“ concerning issues that are susceptible to
political influence and unpredictability.”
“ Routine functions tend to go smoothly,”
agrees Julie Veach, Acting Chief of the
Competition Policy Division at the US
Federal Communications Commission
(FCC), “ while larger policy issues bring
tougher discussions.” 3

More transparency of regulation, at least in
some markets, is contributing to better
relationships. Patricia De Suzzoni, Director
of Markets with France’s energy regulator
CRE, believes that regulator efforts to
increase the levels of transparency have
contributed positively to building trust. This

In w hich operational areas does interaction between operator and regulator
work smoothly? (Top responses)
0

10

20

30

40

50

60

70

80

49%

Licensing

65%
42%

Monitoring and reporting on regulatory compliance

52%
41%

Consumer protection issues

44%
37%

Transfer of operational data

50%
36%

Tariff regulation

42%
35%

Quality of service issues

58%
31%

Policy consultations

54%
21%

Market definition

29%
19%

Resolution of disputes with competing operators

38%
6%

None

4%

Operators

Regulators

Source: Economist Intelligence Unit 2009

3 Julie Veach’s remarks, here and elsew here, reflect her personal view s only and are not necessarily the official position of
the FCC
© 2009 KPM G International. KPM G International is a Sw iss cooperative. M ember fi rms of the KPM G netw ork of independent fi rms are affi liated
w ith KPM G International. KPM G International provides no client services. No member fi rm has any authority to obligate or bind KPM G
International or any other member fi rm vis-à-vis third parties, nor does KPM G International have any such authority to obligate or bind any
member fi rm. All rights reserved.


BUILDING TRUST IN REGULATION  10

The survey indings support these views. 
Both operators and regulators, for example, 
highlight licensing as one area that has 
beneited from largely problem­free 
interaction, with monitoring and 
compliance, consumer protection issues, 
and data transfer also cited as areas of 
relatively smooth interaction. 

The impact of market structure
on trust
The ability of market participants to develop 
and maintain a relationship of trust is also a 
function of the dynamics that shape the 
overall operating environment. Operators in 

markets with high competitive intensity, for 
example, seem to offer a dimmer view of 
relationships with the regulator. The highly 
competitive telecoms sector provides an 
illustration: only 32 percent of operator 
executives in this sector characterize the 
level of trust in their market as high, 
compared with 52 percent of their 
counterparts in other sectors. 
“This is a very dificult environment,” 
states Karabo Motlana, CEO of South 
African telecoms regulator ICASA, about 
his country’s telecoms market. “As the 
regulator introduces more competition in 
the sector,” he says, “people tend to be 

suspicious of the drivers of and the 
inluences on decision­making.” 
Important though they may be, market 
dynamics are only one part of a 
complicated equation. Trust is also in the 
eye of the beholder, with each player’s 
perception of the other party shaped by its 
own experience, culture and market 
interests. “Trust in the regulator is largely 
an issue of corporate culture,” says Ms De 
Suzzoni. Some operators may regard 
regulation more favorably if they are set 
to beneit from it, while those that stand to 
see their position negatively impacted by 

regulatory action may be more guarded 
towards the regulator. 
Regulatory conservatism induced by a 
sense of self­preservation can develop into 
a full­blown suspicion of any regulatory 
action. Steve Smith, Managing Director, 
Networks at Ofgem, the UK energy 
regulator, points out that some operators 
have an inherent conservatism that makes 
them more guarded about regulatory 
action. “It’s not that operators don’t trust 
the regulator”, says Mr Smith. “There is just 
a risk aversion ingrained in operators that 
makes them sometimes not give the 
beneit of the doubt to the regulator.” 

A modicum of structural stability is also 
important in building trust. The tenure of 
the regulator, a track record of reliability 
and – as already discussed – transparent 
processes are critical foundations. Ofgem, 
for example, has been regulating the 
British energy sector for the past twenty 
years, a tenure that has built some 
goodwill for the regulator. 
More broadly, trust in the regulatory 
process is also often an extension of 
market participant trust in the political and 
policy processes. Regulatory bodies are a 
relection of the institutional framework 

within which they evolve, argues Michael 
Pollitt, Assistant Director of the Electricity 
Policy Research Group at the University of 
Cambridge. In turn, the best regulatory 
agencies – or at least those perceived as 
such – are typically found in countries that 
have strong political and competition 
institutions, notably in western and 
northern Europe. To illustrate this point, 
around one­third of the operators in our 
survey that had noted a deterioration in 
their relationship with the regulator pointed 
to political uncertainty at government level 
as the primary factor, with 36 percent also 
pointing to excessive government 
inluence. 

© 2009 KPMG International. KPMG International is a Swiss cooperative. Member irms of the KPMG network of independent irms are afiliated 
with KPMG International. KPMG International provides no client services. No member irm has any authority to obligate or bind KPMG 
International or any other member irm vis­à­vis third parties, nor does KPMG International have any such authority to obligate or bind any 
member irm. All rights reserved. 


11 BUILDING TRUST IN REGULATION

KPM G Comment
Working more constructively together

Building trust in the regulatory relationship
is about improving the efficiency but not

changing the fundamental dynamics
of the relationship between a regulator
and operator.
Respondents indicated in the survey
that a better understanding of business
operations and risks on the part of
regulators, and a better understanding of
policy objectives on the part of industry
were the best means of improving the
overall levels of trust. The ability for
respective stakeholders to put themselves
‘in the shoes’ of others is clearly, therefore,
a key competence for all engaged in the
regulatory sphere.
It is clear that this means setting the
appropriate ‘tone at the top’: the
relationships between the regulator and
the regulated and the example it sets for
the rest of their respective organizations.
The survey results suggest that
respondents agree, citing good senior level
relationships as the key contributor to
effective regulator–industry relationships.
In some instances, however, the
relationships are fundamentally fractured
and more drastic action is required. By the
late 1990s, relations between the UK
telecommunications incumbent, BT plc,
and former regulator, Oftel, were
considered poor by many commentators

and in the words of former chairman,
Sir Christopher Bland, ‘adversarial’ 4.
From its creation in 2003, Ofcom and BT
were able to use the different environment
and personalities

brought by the change to establish a more
trusting and effective relationship, as
evidenced by Sean Williams, formerly
of Ofcom and now at BT.

Equally, business, both through boards and
regulatory functions, can play its part in
understanding the policy agenda and
communicating its operational agenda.

It is striking that the UK government has
been considering extending Ofcom’s
powers to incorporate the responsibilities
currently held by PostComm, the postal
regulator. In his report on the UK postal
system as chairman of the Independent
Review of the Postal Services Sector,
Richard Hooper writes that he is:

Moreover, as KPMG’s report Bringing
Regulation into the Boardroom (KPMG LLP
(UK), 2007) demonstrated, good
communication within business, and
particularly between the board and

regulatory team, is a precondition for a
robust but effective regulatory strategy.

...struck by the depth and range of
disagreements between Royal Mail
and Postcomm. Even the most
basic facts are disputed… The
systems and necessary data
needed to build a constructive and
professional regulatory relationship
are not yet in place…
There is a lack of trust on both
sides.5

As Mr Williams of BT demonstrates, there
is some career ‘cross-over’ between
regulators and industry, and vice versa.
However, if there are concerns about
‘regulatory capture’, the survey does not
bear this out. Nor does the practice seem
particularly frequent. Rather, this suggests
that there are further opportunities to build
relationships and understanding between
regulators and industry without major risk
of regulatory capture, and that there may
also be improved mutual understanding
through some ‘cross-over’ – both better
operational and policy competency.

KPMG firms’ regulatory specialists have

been employed around the globe to advise
on the development of new regulators,
working with governments, law yers
and other stakeholders to identify what
powers, skills and competencies are
required where confidence in regulators
has been significantly eroded. In other
instances, we have worked closely
alongside regulators to help them identify
where they could perform more effectively
and effi ciently.

4 “ ‘New BT’ told it’s time to deliver - Broadband Britain benefits from lighter regulation”, The Guardian, 25 July 2002
5 “ M odernise or Decline: Policies to maintain the universal postal service in the United Kingdom”, Richard Hooper, 2009
© 2009 KPM G International. KPM G International is a Sw iss cooperative. M ember fi rms of the KPM G netw ork of independent fi rms are affi liated
w ith KPM G International. KPM G International provides no client services. No member fi rm has any authority to obligate or bind KPM G
International or any other member fi rm vis-à-vis third parties, nor does KPM G International have any such authority to obligate or bind any
member fi rm. All rights reserved.


BUILDING TRUST IN REGULATION 12

Turning the tables
KPMG firms are developing a new
approach, ‘Turning the Tables’, in which
managers and staff at operators and
regulators are taken through scenarios
developed by specialists and asked to take
a role on the “opposing team” and make
decisions that reflect realistic corporate

and regulatory challenges. Approaches
such as this are clearly needed to respond
to some deeply entrenched differences in
perception between parties.

© 2009 KPM G International. KPM G International is a Sw iss cooperative. M ember fi rms of the KPM G netw ork of independent fi rms are affi liated
w ith KPM G International. KPM G International provides no client services. No member fi rm has any authority to obligate or bind KPM G
International or any other member fi rm vis-à-vis third parties, nor does KPM G International have any such authority to obligate or bind any
member fi rm. All rights reserved.


13 BUILDING TRUST IN REGULATION

The consequences of mistrust
There is much that can go
awry in operator-regulator
relationships, but the
perception of what doesn’t
work may be colored by
each party’s own vested
interests.
Asked to identify specifically what goes
wrong, respondents to our survey point
primarily to those areas of regulatory
implementation that have a direct, negative
impact on their ability to operate or fulfi ll

their mission. Market participants are also
likely to assign a negative grade to an area
of interaction that has an adverse impact

on their primary constituency (whether
it’s the government, consumers or
shareholders). For example, operators in
the survey cite dispute resolution and tariff
regulation as the areas that are most
problematic in their relationship with
regulators. By contrast, regulators see
quality of service as the key area of
difficulty, although they also acknowledge
problems with dispute resolution among
competing operators.

In w hich operational areas does interaction between operator and regulator
work poorly? (Top responses)
0

5

10

15

20

25

30

35
33%

Resolution of disputes with competing operators

21%
31%

Tariff regulation

15%
22%

Market definition

17%
21%

Policy consultations

8%
19%

Monitoring and reporting on regulatory compliance

17%
19%

Quality of service

23%
15%

Licensing

8%
14%

Transfer of operational information

19%
10%

Consumer protection issues

19%

Operators

Regulators

Source: Economist Intelligence Unit 2009

© 2009 KPM G International. KPM G International is a Sw iss cooperative. M ember fi rms of the KPM G netw ork of independent fi rms are affi liated
w ith KPM G International. KPM G International provides no client services. No member fi rm has any authority to obligate or bind KPM G
International or any other member fi rm vis-à-vis third parties, nor does KPM G International have any such authority to obligate or bind any
member fi rm. All rights reserved.


BUILDING TRUST IN REGULATION 14

Breakdowns in the operator-regulator

relationship often occur when there is a
lack of transparency in a decision or with
an increase in the degree of subjectivity
required by the decision or rule-making
process. While most decisions involve
some degree of subjectivity, some
categories – for example, dispute
resolution – are more subject to
interpretation than others and are more
likely to create an aggrieved party.

The blame game
As a result, determining the source of a
breakdown in trust can easily devolve into
a blame game. Operators, for example,

are prone to blame a breakdown in trust on
the performance of the regulator. Of the
respondents that say that their relationship
with the regulator had deteriorated, 63
percent blame poor regulator performance,
with another 37 percent pointing to unduly
close relationships of the regulator with
other players in the marketplace.
Most of the operators surveyed give a
rating ranging from mixed to poor on
regulatory performance on key items
such as timeliness, consistency and
transparency of decisions. A regulatory
manager in one Africa-based operator

interviewed for this study complains that

regulator performance has negatively
impacted market confi dence: “ The
regulator does not meet timelines, does
not digest all the inputs and does not
follow procedures. Over time, you start
questioning their abilities.”
On a more positive note, regulators
get their best rating on enforcement of
regulation, with 46 percent of operators
rating them as good or very good in
this area.

How would you assess the performance of the regulator on timeliness of
decisions and rulings?
1%

Very good
5%

Good

6%

17%

Mixed

21%

17%

Somewhat poor

17%

Very poor
Don’t know

26%

34%
56%

Operators’ rating of regulators

Regulators’ self-assessment

Source: Economist Intelligence Unit 2009

© 2009 KPM G International. KPM G International is a Sw iss cooperative. M ember fi rms of the KPM G netw ork of independent fi rms are affi liated
w ith KPM G International. KPM G International provides no client services. No member fi rm has any authority to obligate or bind KPM G
International or any other member fi rm vis-à-vis third parties, nor does KPM G International have any such authority to obligate or bind any
member fi rm. All rights reserved.


15 BUILDING TRUST IN REGULATION

How would you assess the performance of the regulator on consistency of
decisions and rulings?

2%

2%

Very good
3%

Good

8%

Mixed
Somewhat poor

28%

23%

29%

Very poor
Don’t know

26%

46%

33%

Operators’ rating of regulators

Regulators’ self-assessment

Source: Economist Intelligence Unit 2009

How would you assess the performance of the regulator on transparency of
decisions and rulings?
2%

Very good
6%

7%

Good
12%

Mixed
Somewhat poor

31%

17%

Very poor
Don’t know

21%

30%

28%

Operators’ rating of regulators

46%

Regulators’ self-assessment

Source: Economist Intelligence Unit 2009

© 2009 KPM G International. KPM G International is a Sw iss cooperative. M ember fi rms of the KPM G netw ork of independent fi rms are affi liated
w ith KPM G International. KPM G International provides no client services. No member fi rm has any authority to obligate or bind KPM G
International or any other member fi rm vis-à-vis third parties, nor does KPM G International have any such authority to obligate or bind any
member fi rm. All rights reserved.


BUILDING TRUST IN REGULATION 16

How would you assess the performance of the regulator on enforcement of
decisions and rulings?
2%

2%

Very good
Good
Mixed

5%

6%

10%

15%

10%

Somewhat poor
Very poor

19%

Don’t know
36%

37%

58%

Operators’ rating of regulators

Regulators’ self-assessment

Source: Economist Intelligence Unit 2009

It is probably not surprising that regulators
in the survey have a better opinion of their
performance in these areas than operators

have. The magnitude of the gap in some
areas, however – 77 percent of regulators
consider their performance in the area of
timeliness of decisions as good or very
good compared with only 22 percent of
operators who feel the same – is striking.
There may be a number of reasons for
such a divergence of views. First,
regulators are more likely to rate their own
performance positively, while operators
take a more nuanced view. Further, the two
parties often have differences on what

should be the key functions of the
regulator, or the focus of its activities at
any given point in time. In turn assessment
of regulator performance is based on a
distinct set of expectations. Whatever its
reasons, this gap in the assessment of
regulator performance points to often
tense relationships and highlights the scale
of the effort that must be undertaken to
build trust between the two sides.
Regulators are just as likely to ascribe
some of the blame for a breakdown in trust
to the other side. Regulator respondents,
for example, blame regulatory uncertainty

on insufficient resources at their disposal
but also point to inaccurate or inadequate

information submitted by operators.
Past operator behavior can play a role
in deepening the trust gap. Paul Foran,
Vice President, Regulatory Programs of
American Water, a US water utility, points
out that past abuses by some providers
often lead regulators to regard an entire
sector with suspicion. “ Utilities have to
do their share to engage in building trust,”
he says.

© 2009 KPM G International. KPM G International is a Sw iss cooperative. M ember fi rms of the KPM G netw ork of independent fi rms are affi liated
w ith KPM G International. KPM G International provides no client services. No member fi rm has any authority to obligate or bind KPM G
International or any other member fi rm vis-à-vis third parties, nor does KPM G International have any such authority to obligate or bind any
member fi rm. All rights reserved.


17 BUILDING TRUST IN REGULATION

Why does trust break dow n?
License conversion, litigation and
trust in South Africa
The South African telecoms market offers
a good illustration of the challenges of
maintaining trust between parties in a
context of rapid technology evolution,
increased competition and a policy
framework looking to keep pace. In 2005,
the country’s parliament enacted the
Electronic Communications Act (ECA),

a new law designed to replace one which
was deemed both complex and obsolete.
Where the previous law created silos
primarily based on the types of services
offered (for example, one for voice and
one for data), the ECA separated the
physical network infrastructure from the
communications services running on top
of the networks.
The task befell the relatively young
regulator, the Independent
Communications Authority of South
Africa (ICASA), to convert licenses issued
under the previous law to the new
licensing regime. In effect, ICASA was
to set the framework for transforming a
market with five major operators and an
array of value-added service providers
to one having nearly 300 market players
with varying degrees of fl exibility to
deploy their own network infrastructure.

ICASA’s task required the creation of
new processes and regulations across
a multitude of issues, from license
conversion to frequency licensing,
facilities leasing, interconnect, license
fees and others, each issue rife with
potential for acrimony. “ The market is at a
critical juncture”, remarks Karabo Motlana,

CEO of ICASA, “ and there are a lot of
fights on ancillary issues”.
The ECA provided a two-year transition
period during which ICASA was to
complete the license conversion process
and replace existing regulations, with a
possible six- month extension (to January
2009). After industry consultations, the
regulator determined that some smaller
players would receive services licenses
rather than network infrastructure
licenses (which some felt they should
receive). As a result, ICASA was taken
to court in a bid to force the judicial body
to provide an interpretation of established
policy that would allow those players
who wanted to do so to build their
own networks.
Following a court decision siding with the
operators, ICASA awarded licenses to the
relevant players, but not before levels of
trust between parties had effectively sunk
to low levels. Nonetheless, the market
had taken some important steps towards
legal clarity.

These differences in the perception of
what goes amiss raise some larger issues.
If the sides cannot agree on what is wrong,
fixing it becomes all the more diffi cult.

A key step in developing some common
ground is to devote more effort toward
understanding the motives of the
other party.
The precise role of regulators, for example,
can be a source of friction. Mr Foran notes
that there is an increasing trend of market
regulation overlapping with consumer
advocacy. A number of regulators are
perceived to straddle the fine line between
protection of the consumer interest and
consumer activism; this is particularly
the case in developing economies, or in
markets with a higher level of publicservice influence (water and postal
services, for instance). On the fl ip side,
many operators see the regulator as a
custodian for the sector, one that protects
the interest of the market at large,
including consumers and service providers.
As a result of these differences, operators
are typically accused of focusing
excessively on short-term fi nancial results
at the expense of the greater good of the
overall market. Regulators, on the other
hand, are blamed for either not holding real
power or, when they do, leveraging their
power in an unwieldy manner, acting
primarily as consumer advocates.

© 2009 KPM G International. KPM G International is a Sw iss cooperative. M ember fi rms of the KPM G netw ork of independent fi rms are affi liated

w ith KPM G International. KPM G International provides no client services. No member fi rm has any authority to obligate or bind KPM G
International or any other member fi rm vis-à-vis third parties, nor does KPM G International have any such authority to obligate or bind any
member fi rm. All rights reserved.


BUILDING TRUST IN REGULATION  18

Tangible costs of uncertainty
A breakdown in trust carries a variety 
of consequences, from direct inancial 
implications to a potential increase in 
litigation. For an operator, regulator 
uncertainty can be harmful to the business, 
either in the form of lost revenue, 
investments cancelled or diverted 
elsewhere, or initiatives simply put on 
hold. If widespread, such uncertainty 
can quickly translate into slower 
development and service penetration 
of the overall market. 

A full 41 percent of the operators polled 
say they have suffered a direct loss of 
revenue due to instances of regulatory 
uncertainty, and 44 percent say uncertainty 
has led directly to increases in operating 
costs. Of operators who state that 
regulatory uncertainty has had an impact 
on planned investments, nearly one­third 
claim the impact has been damaging to 

their business in monetary terms. The 
impact is more frequently damaging for 
developing­country operators, judging 
by the survey, as well as for those in the 
telecoms industry. 

For other operators, the consequences of 
regulatory uncertainty are more indirect, 
but still perceptible on a day­to­day basis as 
focus is diverted from running the business 
to dealing with regulatory matters. “For us, 
the regulatory function requires too much 
ireighting. That makes it tough to execute 
[on strategy]”, says a regulatory manager 
at one west African telecoms operator 
interviewed for this study. 
Another frequent outcome of uncertainty 
is litigation, as market players seek some 
inality to compensate for the lack of 
regulatory clarity. Regulators that 

Percentage of operator respondents stating that regulatory uncertainty has
had a “somewhat” or “severely damaging” impact on their investments,
revenue or operating costs.6
0

10

20

30

40

50

30%
24%
39%

Postponement or cancellation of planned investment
34%
26%
36%
33%

40%

Direct loss of revenue

44%
26%
37%
30%
45%
45%

Direct increase of operational costs
26%

Total

Developed Country

Telecoms operators

Other operators

Developing country

Source: Economist Intelligence Unit 2009

6 Other responses were “problematic but not severly damaging to the business”, “little or no monetary impact” and
“don’t know/not applicable”
© 2009 KPMG International. KPMG International is a Swiss cooperative. Member irms of the KPMG network of independent irms are afiliated 
with KPMG International. KPMG International provides no client services. No member irm has any authority to obligate or bind KPMG 
International or any other member irm vis­à­vis third parties, nor does KPMG International have any such authority to obligate or bind any 
member irm. All rights reserved. 


19 BUILDING TRUST IN REGULATION

acknowledge increased regulatory
uncertainty in their markets highlight an
increase in litigation as among the leading
consequences of such uncertainty.
Litigation is by no means ideal for
operators. “As an operator, you only go to
court as a last resort – when all else has
failed,” says Nkateko Nyoka, Executive

Director, Regulatory Affairs with Vodacom,
South Africa’s largest mobile telecoms
provider. “ The inherent problem with
litigation is that, while sometimes
necessary, it is not the most effi cient and

expeditious method of resolving disputes,”
especially in cases where the parties seek
immediate remedies and relief.
One positive side effect, however, is that
litigation can often bring finality to a
lingering issue. In South Africa for example,
courts have been very involved – albeit
reluctantly – in helping to interpret
telecoms policy. “ Litigation can be drawn
out and tiresome,” observes one regulatory
manager working with an African
commercial operator, “ but it allows for the
exposure of policy contradictions.”

It should be noted that not all litigation
results from a breakdown in trust. In some
cases, an element of litigation management
and prevention is built into the regulatory
process. In the words of one regulatory
manager of an electricity provider
interviewed for this report, “ the regulatory
regime provides for court resolution of
those cases where one isn’t happy with a
regulatory decision, but it also discourages

vexatious appeals.”

© 2009 KPM G International. KPM G International is a Sw iss cooperative. M ember fi rms of the KPM G netw ork of independent fi rms are affi liated
w ith KPM G International. KPM G International provides no client services. No member fi rm has any authority to obligate or bind KPM G
International or any other member fi rm vis-à-vis third parties, nor does KPM G International have any such authority to obligate or bind any
member fi rm. All rights reserved.


BUILDING TRUST IN REGULATION 20

KPM G Comment
Emerging issues in emerging markets

The cost of regulation would seem to be
proportionately greater in small and
developing nations and yet they generally
have fewer resources in terms of
experience, available information and
often funding. The range of issues faced
by any regulator in a networked industry
is likely to be similar in any country: market
analysis, dominance, accounting
separation, retail and wholesale pricing and
merger control, to name but a few, are as
likely to apply to small island states as to
major global economies.
That is not to say that there are not
opportunities for ‘leapfrogging’ – avoiding
some costly regulatory remedies as the
course of time has provided lower cost or

simpler alternatives. Advancing faster up
the “ ladder of investment” (by avoiding
early versions of access such as Carrier
Pre-Select and Indirect Access) is but one
example from the communications arena.
However, these examples are the
exceptions not the rule.
Nor is it just the regulators who feel the
strain in emerging markets. Companies
– whether independent or subsidiaries
– face resource constraints managing and

responding to regulatory consultations,
data requests and negotiations with
regulators. Those resource constraints
are rooted in both staffing and information
retrieval capacity. It is clear from the survey
that levels of trust are lower in emerging
markets. Some of this is likely to be
through starting from a lower base than
their developed counterparts, but may also
relate to resource constraints.
A common and practical response on
behalf of regulators and governments is to
draw upon leading experience elsewhere
in the world. KPMG firms are regularly
asked to benchmark performance and
approaches, and to identify leading
practice. As discussed elsewhere in this
report, however, there are risks from not

sufficiently acknowledging the nuances of
local markets, crossing the line between
learning the lessons from others and
copying them blindly. ‘Cutting and pasting’
legislation and research from other markets
may minimize costs in the short term but is
likely to incur costs further down the line.
There can be no substitute for a
combination of local knowledge and
international experience.

Another issue is the comparative skills
base of regulators in emerging markets
– the “ chicken and egg” question being
how do you get the sufficient skills and
competencies required without having the
experience? They can also be augmented
by secondments to other industry
regulators or other markets. “ Pairing”
regulators from developed countries with
those in emerging markets has also been
deployed as a tool, but with varying results.
Increasingly, however, in countries where
similar skill sets are likely to be required
across a range of networked industries,
multi-sector regulators are being created.
This has the benefi t of maximizing
economies of scale, providing challenging
work for the brightest minds in the jobs
market, and providing more effi cient

means for managing the inconsistent
workflow associated with the regulatory
process.

© 2009 KPM G International. KPM G International is a Sw iss cooperative. M ember fi rms of the KPM G netw ork of independent fi rms are affi liated
w ith KPM G International. KPM G International provides no client services. No member fi rm has any authority to obligate or bind KPM G
International or any other member fi rm vis-à-vis third parties, nor does KPM G International have any such authority to obligate or bind any
member fi rm. All rights reserved.


21 BUILDING TRUST IN REGULATION

The mechanics of trust
If the market structure
and overall institutional
framework provide the
context for trust-based
relationships, the
mechanics of regulation
– information provision,
consultations and other
areas of direct interaction
– are the pillars upon
w hich trust is built on a
day-to-day basis.
As discussed earlier, surveyed operators
cite areas of regular interaction with
regulators as among the smoother spheres
of their relationship. But some operators
interviewed for this study also raise

concerns about the quality of interaction at
the point of relationship. Operators often
have to focus efforts on a single point of
contact at the regulator, and there are often
instances of disconnect between the
decision-makers – typically commissioners
– and the day-to-day regulator staff that
carry out research and render opinions, and
who are frequently unavailable for operator
contact. “At the best agencies,” notes
Cambridge University’s Michael Pollitt,
“ senior regulator staff will typically be
available for discussions with market
participants.” This may not always be the
case at lower levels, however. “ The
backroom people do a lot of analysis that
impacts on our business, and we never get
to see them,” explains Lew Owens, CEO of
ETSA Utilities, an electricity distributor in

the state of South Australia. In some
cases, however (for example, in North
America), regulatory rules often expressly
prohibit direct contact with regulators.

Conflicts between form and
substance
Some operators also voice concern with
the consultation process, complaining
that regulators treat consultations as a

formality, rather than as a tool to truly
integrate industry input. One regulatory
manager interviewed for this study
voices the opinion that “ the [regulatory]
engagement is not sincere. They know
what they want to do, they go ahead and
they do it.”
Generally speaking, operators tend to value
informal consultations over public ones.
One regulatory manager of an African
operator notes that the public hearings
favored by the regulator in his market
typically lead to superficial discussions and
grandstanding that do not go to the heart
of issues. The more valuable exchanges,
he says – of views and information – take
place on an informal basis. “ You need that
informal, one-on-one space to share
information,” this executive affi rms. By
contrast, regulators seem more wary of
such informal exchanges, which they see
as contradicting the need for transparency.
Notwithstanding the setting, it is critical for
the exchanges to remain civil and mature,
according to BT’s Sean Williams. “ If the
relationship is not mature, the parties
involved are not predictable and it’s a bit
more difficult to have open, informative
discussions”, he says.

© 2009 KPM G International. KPM G International is a Sw iss cooperative. M ember fi rms of the KPM G netw ork of independent fi rms are affi liated
w ith KPM G International. KPM G International provides no client services. No member fi rm has any authority to obligate or bind KPM G
International or any other member fi rm vis-à-vis third parties, nor does KPM G International have any such authority to obligate or bind any
member fi rm. All rights reserved.


BUILDING TRUST IN REGULATION 22

Are industry consultations always
productive?

In an African telecommunications market,

participate in similar future fora. Where

the decision-making rules explicitly require

the regulator saw an optimal process with

Many market participants recognize the

industry consultations, ostensibly in order

wide industry and public consultations,

need for frequent consultations as a

to ensure that major regulatory decisions

operators saw a process that was fl awed

foundation of a relationship of trust

are only made after widespread

and stacked against them.

between operators and regulators.

discussion with commercial providers.

But operators do not always view

The regulatory manager of one provider,

consultations kindly. In one Asian energy

however, deemed that the holding of a

market, a regulator carried out extensive

discussion forum open to the public “ led

consultations prior to releasing an

to grandstanding”. As a result, he reports,

important new draft decision. Despite

limited meaningful information was

the consultations, the directive turned

exchanged, and the operators withheld

out to be a surprise for operators, who

information they did not want made

complained that its substance appeared

public. In addition, in a country in which

inconsistent with what the regulators had

the success of the telecoms sector has

suggested during the consultations.

made it something of a lightning rod for
public opinion, the operators felt picked
on, hampering their enthusiasm to

Trust in information
The provision of relevant information is
another important rung in the trust-building
ladder, but information-sharing remains an
area of friction between operators and
regulators. As they seek to minimize
subjectivity in decision-making, regulators

increasingly build on past jurisprudence,
international benchmarking and objective
economic analysis to develop their
opinions. In this context, the accuracy,
relevance and timeliness of the information
become critical. Indeed, regulators in our
survey highlight inadequate or inaccurate
information as one of the primary causes
of regulatory uncertainty (along with their
own insuffi cient resources). “ Limited

information definitely hampers the ability
of the regulator to do its work”, says Patricia
De Suzzoni of CRE France.
Many operators, on the other hand, are
wary of seeing information they consider
sensitive made public. “ We provide
information informally and make clear it
is not for public dissemination,” says one
regulatory manager who declined to be
identified, “ but there is a concern that it
will be leaked.” For this and other reasons,
operators are reluctant to share information
with the regulator. Over 40 percent of
operators in the survey (and 49 percent
of telecoms operators) consider the
information requested by the regulator in
their market is sensitive enough to harm

These cases help to underscore the need

to strike a balance between the
transparency of decision-making (a critical
driver of trust) and information protection,
and also to find the optimal forum for
substantive consultations. Ultimately, it is
critical for regulators to create a
framework in which the objectives of the
consultation are established with clarity,
and the mechanics of such consultation
provide participants with some assurance
that their views will be heard.

their businesses. Half of operators deem
the volumes of data required too large.
And 28 percent believe the requested
information is not even relevant to the
actual situation of the business (a view
most in evidence among North American
respondents).
Regulators in the survey tend to disagree
with their operator counterparts on the
above points, and give operators mixed
ratings on the relevance and timeliness
of data submissions. At the same time,
there is overall satisfaction among
regulators with the accuracy of information
provided, with 73 percent saying it is
mostly or very accurate.

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