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Regulatory Neutrality

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Practice Advice in Regulatory Policy and Management

Regulatory Neutrality (OECD) 

Summary AdviceThe OECD recommends evaluating government participation in regulated markets on a regular basis in order to ensure that policies do not unduly restrict competition, create cost-asymmetries and distort the market.

Main Points:  Regulatory quality is essential to improve the efficiency of the public sector, to correct market failures and to level the playing field among all types of businesses. Many governments have undertaken regulatory reform across all levels of government to eliminate outdated regulations, simplify requirements, reduce regulatory burdens, and lower compliance costs.  As a result, the cost of doing business was lowered in many economies, and regulatory reform has been a key driver in promoting open and competitive markets, economic efficiency and consumer welfare.

In sectors where business activity still remains mostly in the hands of the state, regulatory reforms have aimed at requiring that SOEs operate, to the largest extent possible, in the same regulatory environment as private enterprises. For example, in government-controlled financial sector, or other settings where unincorporated government entities are closely integrated with the executive powers, state-owned entities were found to be subject to a lighter regulatory approach. The "advantages"of non-neutrality  and the uneven regulatory burdens that SOEs enjoy occur in the form of:

  • exemptions from compliance with disclosure or new requirements (new environmental regulations, etc.)
  • exemptions from restrictive business practice laws, sovereign immunity laws, bankruptcy laws
  • exemptions from competition law
  • exemptions from building permit regulations or from zoning regulations, preferential access to land

Regulatory neutrality can be provided by governments enforcing a non-discriminatory and transparency policy - especially if commercial and non-commercial priorities are explicitly identified and accounted for separately.  When this is not the case, differences in regulatory treatment must be made explicit, specially in sectors with natural monopoly tendencies.  An SOEs legal status, as established by corporate law, charter, or statutory authorisation, should clearly identify its relationship to the government, any exemptions from legal or regulatory frameworks, and any other special privileges, need to be identified.

The OECD stresses on the need to separate the role of market regulator with ownership functions of SOEs, especially in newly liberalised industries. Further, exemptions to the application of general laws and regulations on SOEs need to be removed.  The operational form of SOEs needs to be streamlined to ensure that the SOEs relation to the government is made explicit. The legal form of SOEs should allow creditors to press claims and to initiate insolvency procedures.

 An extensive checklist for Regulatory Decision-Making can be found under "OECD 1995 Recommendations on Improving the Quality of Government Regulation"  and the "2005 OECD Principles on Regulatory Quality and Performance" as well as in the relevant sections of the Practice Map.

Source: OECD (2012) "Competitive Neutrality: A Compendium of OECD Recommendations, Guidelines and Best Practices" at http://www.oecd.org/daf/corporateaffairs/50250955.pdf  (accessed February 12th, 2013).

Page Created By: Khilola B. Zakhidova on February 18th, 2013. The content presented on this page is drawn directly from the source(s) cited above, and consists of direct quotations or close paraphrases. This material does not necessarily reflect the official view of the publishing organization.

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