Good transport services contribute strongly to the productivity of an economy and extend the range of activities accessible to consumers. Good services require adequate infrastructure and reasonable usage conditions to that infrastructure. Much transport infrastructure is capital intensive and lumpy. Such cost structures imply that there will be few service providers. In some circumstances the structure of costs and technology is such that economic regulation is the best way to drive efficient outcomes. Achieving the right governance structures – including the question of when to regulate and how to regulate – is central to performance of the sector and the subject of this paper, which summarizes discussions at a Roundtable1 held in December 2010.

This paper discusses three connected aspects of regulation: 1) What makes a regulatory authority effective; 2) What is the legitimate role of a regulatory authority in the making and implementation of policy, and how that role may be regarded by others, and 3) The issue of independence of regulation from undue political intervention. It argues that regulators are usually established to carry out complex technical tasks which government is unable or unwilling to do, partly because government wishes to distance itself from responsibility for some decisions. However, having invested regulatory authorities with sometimes considerable powers, which are more detailed and intrusive than any possessed by government over state-owned entities or industries, political or bureaucratic impatience or intolerance of that power sometimes takes over, and undue governmental pressure or interventions follow. These interventions come about either because of regulatory failures, or because politicians wish themselves to exercise regulatory powers which they regret having transferred to regulatory authorities. Regulatory independence from political intervention and regulatory freedom from political considerations is internationally recognised as an important facet of effective economic regulation; but despite that, it can come under such severe pressure that the system will fracture, causing severe loss of confidence in the regulatory system and in the reputation of the host government for fairness and respect for the integrity of the system of checks and balances which has been established for the protection of investment. It argues that regulatory independence is as much about regulatory behaviour and legal status.

The paper suggests a set of recommendations arising directly from the (negative) experience of regulating certain transport sectors in Italy. The main proposals are as follows: .. Build alliances with other regulatory agencies, as well as at a higher level (European Commission). Isolation facilitates capture. .. Use extensive and transparent quantitative evaluation methods (cost-benefit analysis). Discretionary approaches also facilitate capture. .. From the start, define a strictly efficiency-oriented scope for the regulatory agency: social and environmental issues are prone to political interference. .. A special problem is the regulation of infrastructure investment: here further research is badly needed.