In Media : November 2010

Policy & Politics: Regulatory Reform?
CNBC-TV18 / Moneycontrol News, November 27, 2010

This week we shift our gaze to the issue of preferential allotments of the political kind. Now the 2G license and spectrum allocation scam is an ugly comingling of policy and politics. One should have been prevented by the existence of a supposedly independent regulator—the Telecom Regulatory Authority of India or TRAI. But as the CAG report points out that telecom ministry either circumvented TRAI’s recommendations or did not follow them in spirits such that and I quote “The role of Telecom Regulatory Authority of India would also appear to have been reduced to that of a hapless spectator as its recommendations were either ignored or applied selectively”—that is from the CAG report.

The circumstances under which the 2G scam was perpetrated, that is, the pressures of coalition politics—important ministerial portfolios being handed that are unsuited for the job and the subsequent corrupt implementation of policy—are all frequently occurring circumstances in India. How then do you build a Chinese wall between policy and politics? Is the strengthening of the regulatory bodies key to this solution?

CNBC-TV18’s Menaka Doshi discusses these issues with Sanjeev Aga, MD of Idea Cellular; Gajendra Haldea, advisory to the deputy chairman of the Planning Commission; Pradeep S Mehta, secretary general of Consumer Unity & Trust Society and Gopal Jain, senior advocate of the Supreme Court.

Below is a verbatim transcript of the interview.

Doshi: It is your sector that is currently in the eye of a storm. Do you believe if the allocation of 2G licenses in spectrum had been handled by the TRAI as oppose to the Department Of Telecommunications (DoT) that we would have seen a far more efficient and far process play out over the course of the last two years?

Aga: Technically, the licenses need to be signed by the government because it is dealing with the sovereign resource. But I would also add that I think pretty much what is in the license should be determined by the TRAI. I need to add for that to happen the TRAI should be very different from what it is today or has been for the last 10 years. In fact, one could add that after five-10 years do we need a Telecommunication Ministry at all?—so it is a bundled answer.

Doshi: We need to read between the lines. There are currently allegations that even the current TRAI chief is a minister’s man. He comes from the Telecom Disputes Settlement and Appellate Tribunal (TDSAT) and he had ruled in favour of the ministry, if I am say so, in several cases with regards to the allocation of licenses and the procedure involved.

Aga: I cannot speak on individuals. But again taking a 10-year perspective the government originally envisaged that very much like the Office of Communications (Ofcom) in UK or Federal Communications Commission (FCC) in the US, the TRAI would be an absolutely topnotch specialist, professional and independent autonomous body with the counter point in the TDSAT, which is fast track tribunal.

But subsequent to that determination in 2000 in the 10 years, various ministers have actually clawed back what the government in fact wanted to hand over and today you have, by and large, regulatory capture of various institutions.

Doshi: Is that the biggest failing of the TRAI—the constant intervention by the ministry? Is that why it is not the body it should have been that you pointed out?

Aga: When there is a collapse—I won’t say it is a collapse, it is a lot better than that—but it has not been topnotch across. You must have a regulator, you must have a tribunal where not just the chairman but every member for their competence, their character, should be something you just can’t dream of questioning. It hasn’t been so. It has something to do with your Indian body politics. You have seen all of that we have always known all of that.

A lot of it has to do with the fact that there was a large element left with the political ministry and we have had good ministers, we have had indifferent ministers, and we are paying the price for that.

Doshi: You work with several companies and you have a several cases dealt with several regulatory bodies. Would you say that the TRAI example is standalone example of a regulatory that has not lived up to its expectations or is that the more common occurrence across India’s regulatory architecture?

Jain: Yes. I think this is a common malaise, which cuts through most regulatory bodies, and there are reasons for this. The foremost of them being that is looks as if all regulatory bodies are a retiring ground for bureaucrats. We have had not a single sectoral expert become a regulatory in any field—you can take electricity, you can take airports, you can take telecom. The only TRAI chairperson who was truly independent and impartial, they sacked him and suspended the entire body.

Government never wanted to voluntarily see turf to an independent body. They did it gradually and as Sanjeev was saying they tried to claw it back. The first problem is that you need to get either good economist academic or sectoral experts to make it an autonomous body, as well as an expert body, which we do not have. That seems to be the trend which has been followed in other regulatory bodies as well.

Doshi: Two issues that have come up in the conversation: constant ministry or political intervention and the quality of people heading our regulatory bodies. Do you believe these are two big flaws in our current regulatory system or would you like to add that list?

Mehta: I think there is a very important point about TRAI, the TRAI I was far better that and more independent than TRAI II. TDSAT was created and took away some powers of the telecom regulator.

Jain: The adjudicatory functions are with TDSAT, all regulatory functions are with the TRAI. There is a clear separation. The creation of the TDSAT did not take away any power of the regulator. All that it did and said is that the regulator cannot make regulations and pass tariff orders and judge them. So to judge them, they created an independent expert adjudicatory body which is the TDSAT. That is the separation of the powers in the constitution. They just separated these two functions.

Doshi: Which is in fact positive and, in fact, echoes with what the planning commissions seem to have suggested…

Mehta: But even the electricity regulator has quasi-judicial powers. In spite of the fact that there is an Appellate authority the distinction between TDSAT and the Eectricity Appellate Tribunal is that the Appellate Tribunal is clearly an Appellate Tribunal body as against being also the original jurisdictions for dispute settlement. That is one distinction, not that it is a major distinction.

But going back to the original question that you raised about the function of licensing, I do not think the TRAI has the power to avoid licensing. It is purely a recommendatory body so in theory the government can say that we have listened to TRAI and it does not mean that we have to always accept the recommendations. There is a very analogous situation with the petroleum and natural gas regulatory board which has powers of licensing but that also had been of a help for a long time before they were finally granted and that also, as we all know, to suit a particular industrial house.

Doshi: Mr Haldea, dissimilar powers is another flaw of the system that plagues the regulatory architecture. The work that you have been doing for the past several years on a regulatory reform bill – I would like to talk about how you hope to correct or at least right all these wrongs, and some of the key recommendations in the draft bill that you make is:

  • Empower regulatory institutions to make regulations, issue licenses, set performance standards & determine tariffs
  • Insulate the appointment of Chairmen & members from interference
  • Removal should be preceded by enquiry by sitting judge and approved by the President/Governmen
  • Give financial autonomy by allowing regulator to get budget approval from Parliament
  • Make the regulator accountable to Parliament

Let me focus on the last point first because accountability is also one of the key issues. Why do you believe Parliamentary scrutiny will work?

Haldea: Before I comment on accountability, allow me to just make a mention about the TRAI episode. You know, as you yourself mentioned, one of the recommendations in our draft bill is that all licenses must be issued by the regulator because he has to regulate. He has to enforce the license conditions and he can even modify license conditions and is actually meant to do so. There is a departure in the case of telecom compared to electricity for example where all licenses are to be issued by the regulator.

In case of TRAI, licenses are not issued by the regulators. So it simply becomes recommendatory body. It does not end up regulating. Secondly if someone else has issued the license, power to cancel the license, or penalize the licensee also typically vests ith the authority that has issued the licenses. So there is an anomaly in the whole structure of TRAI in so far as award and enforcement of licenses is concerned. That has actually played out in a quite a damaging way. The way recommendations are overlooked, the way somebody who is responsible or somebody has the powers but not the accountability and so on. If the regulatory bill eventually is passed by the Parliament, some of these anomalies will get addressed, hopefully.

Coming to the issue of accountability— it is a very well established principle that you cannot exercise powers if you are not accountable. The two have to go hand in hand. There are two sides of the same coin. The regulatory structure we have created somehow in India is actually completely free of accountability. We have borrowed the elements of the UK system and US system.

Let me mention what happens in UK— in UK the regulator is answerable or accountable to the Minister, who in turn is accountable to the Parliament. So there is Parliamentary accountability. In UK, the regulator can report to the Minister because the government is not a service provider. In India, the government is also a service provider.

Therefore it was thought best that the regulator should not be under the ministry. That is a correct argument. Then we went down to adopt the US model where the regulators were statutory authorities independent of the ministry— so we created that model. But in the US model the regulator is accountable to the Congress but we happily overlooked that. So the result is that our regulator is not accountable to the Minister, to the government, the Parliament or the people. As a result you can see hordes of lapses and also regulatory capture occurring in one sector after the other be it ports, be it electricity, be it telecom… and airports is yet to emerge.

Mehta: Under every law the regulator is accountable to the Minister and that is where the problem is. I think Gajendra Haldia is a bit off the mark. Every law has a clause on where a policy directive can be issued to the regulator by the ministry and the regulator cannot even question it. It’s a very draconian clause, number one. Another draconian clause is any regulator can be superseded or thrown out with very flimsy due process, if any. Every law has these couple of blank check clauses.

Doshi: That’s the extant position. If that is to be changed, as the Planning Commission is proposing, do you believe accountability to the legislator is going to be more effective? Yes it may do away with the intervention by the line ministry and therefore some amount of politicking but how effective is the legislature going to be in demanding that accountability?

Mehta: A former regulator had once even jokingly said at one of our seminars that a regulator is joint secretary regulation and ministry because he actually does have to cow down to the secretary of the ministry. Now answering your question, particularly, I think accountability to the legislature would make much more sense including the budget provision of the regulator should also be done by the Parliament directly and this is a model which exists in many countries including in the US, as Gajendra Haldia pointed out.

Doshi: Is the Parliament or the legislator going to able to hold the regulator accountable so to speak? Are they going to ask all the right questions, are they going to really make him accountable?

Aga: I think philosophically why do you have a regulator at the first place? Because there are situations where the ability or the bipartisanship of the elected representative is inadequate. You require either continuity, you require specialization, you require professionalism. Now that is why you have a regulator and therefore to go back and say that the regulator should go back to their elected representative is a contradiction. Now the problem is that the quality of the legislature or the Parliament is not good enough and so your question is apt but it has no answer and if that is so which indeed it is so the problems of out country are very serious.

Doshi: But would you prefer a TRAI that’s accountable to the legislator as opposed to accountable to the ministry?

Aga: It has to be accountable to the legislature. I wish the quality of the legislature was not what it is but to question being answerable to the ministry begs the reason why you had a regulator in the first place.

Doshi: Would you agree with that?

Jain: I think the regulator must first and foremost be accountable to its stakeholders, which, at the moment I don’t think they are. Second, in Europe they follow an example which I think would be very apt. They have independent experts who rate different regulators. It’s called a score card. There are certain given parameters on which they rate various regulators and then you have a summit where you discuss it with all the stakeholders who are present. I think that’s a far better form of accountability because you are then being judged by people for whom you are making the regulations to get feedback… (interrupted)

Doshi: That sounds more like a grading system than actually holding the regulator accountable so to speak. It’s like a credit rating system as opposed to RBI regulating debt issues… I mean that’s not the best way to go.

Jain: But what happens is as you also know that there is (A) peer pressure and (B) nobody wants to be rated as being poor or not doing a good job.

Doshi: Who mans the body that rates these regulators? Who makes those appointments? We are running around in circles with this issue then!

Jain: You can look at global experts who have no axe to grind, who are truly independent and impartial and there are several such people who work across the globe, who work with regulators… (interrupted)

Doshi: Let me give it to Mr. Haldia for the comments that you have made as well as our submission that maybe accountability to the Parliament is better than Ministerial interferences or political interferences?

Haldea: Accountability has to be institutionalized and made effective. The way this issue is addressed in the draft bill prepared by us is that at the beginning of every year, the regulator must undertake public consultations and prepare an annual plan and place it in the public domain before the Parliamentary Standing Committee and say what he proposes to do in the forthcoming year. And at the end of the year he must with reference to the annual plan comment before all on what he was able to achieve and reasons for non achievement and both these documents can be debated by the Standing Committee of the Parliament. Now it is possible that some standing committees will be more erudite and effective than others but you have to allow parliamentary process to take the course. If that is not done, then the regulators are accountable to no one.

Doshi: But if we have no faith in the Parliament, then, like Mr. Aga pointed out, we have a bigger problem than regulatory weakness! I want to come to the second key issue in this—which is the appointment of regulators and thereby the key issue of independence. What is it that you are recommending that is very different from what is currently being applied to the appointment of several different regulators across this country? How do you believe that your recommendations will ensure that the person in that hot seat is going to be more independent than the results that we currently have, with the exception of the TRAI? I am told that the Minister has a veto?

Haldea: In the present system appointments are by and large determined by the Minister. That weakens the selection process or its objectivity or its independence. The way it operates then it is quite often a person of the Minister’s choice actually gets appointed for services rendered or likely to be rendered. So that is one flaw.

Second, while the regulator is in no formal manner accountable to the Minister or the Ministry, it depends on the ministry for budget allocation, approval of foreign visits and approval of various peaks etc. which are effectively used at times to get the regulator to abide by the Ministers or the ministry wishes.

In the bill it is proposed that the selection process be independent of the ministry. It is also proposed that the functioning and funding of the regulator should not be dependent on the ministry. If these two things are done, then there can be an arms length relationship between the regulator and the Minister and he will not be at the beck and call of the ministry or will not be serving to them for minor perks and comforts. So this is the way it is addressed in the draft bill.

Doshi: Mr Mehta, you should have no complaints then. Both those suggestions seem constructive and seem to reduce the interference… (interrupted)

Mehta: No. On the appointment thing, which has been mentioned in the draft bill, I agree with Gajendra in all aspects except the recommendation of having a committee with the cabinet secretary. Our own experience is if you have a committee which is headed by bureaucrats, there is a proclivity to appoint retired bureaucrats. There is ample evidence of what I am speaking about. It does not require rocket science to know as to why it happens.

What we have already proposed to the Planning Commission is that let there be an independent committee comprising of at least two thirds of who are non-officials rather than to pack it with bureaucrats. I know one case where the chairman of the committee was the Supreme Court judge, a sitting judge, it was packed with four bureaucrats and at the end of the day you find only bureaucrats who are appointed. The judge did not even know about the application.

Doshi: With the exception of the bureaucrats issue that Mehta is raising— do you think if we move to appointment situation that is pointed out by the planning commission in its draft bill, we will have a more independent sort of regulator?

Aga: Yes. I do.

Jain: I agree with what Mr Haldea said, that we should have a global search. There is no reason why we should not look at the best expertise in the world and have them head our regulatory bodies. They will not only bring experience but they will be completely insulated from parties and politics that is normally being played out through these regulatory captures. So we would have the best regulator like the Indian cricket team once upon a time had a foreign coach…

Mehta: Incidentally, the first Chairman of the Central Electricity Regulatory Commission was an economist SL Rao and not a bureaucrat.

Doshi: What do you expect will be the timeline of when this bill gets passed?

Haldea: We are trying to evolve consensus. You heard many opinions now and we have set up many other consultative fora where we talk to different stakeholders to get their view point and we will produce another draft. My experience in drafting the electricity act is yes that- you have to go through this process. It takes a while to get people on board to build consensus so that the chances of the bill passing and getting accepted and implemented are that much greater. We also benefit from the collective wisdom of different stakeholders.

The consultative process is on. It might take a couple of months but we are definitely making progress and this we see a lot of support gathering momentum on the need for regulatory reform through an over-arching bill. So that is the good news. But it will be our endeavour to push it as early as we possibly can. It will all depend on how much time it takes to build the consensus both outside the government and within the government.

Mehta: All powers to your elbow, Gajendra!

Doshi: We started out with the premise that if we strengthen our regulatory system we might be able to break up the unholy alliance between policy and politics. Do you believe this will be the most effective solution to beat or deal with the kind of problem we have seen with the telecom ministry to the 2G allocation?

Aga: This is the second most effective solution. The most effective solution is basic example to be set by a leadership and not just political leadership, all round leadership, bureaucracy, private sector judiciary – there is no substitute for that. There is no amount of design which can overcome lack of character. But I think this is a good starting point.

Doshi: I also want to ask… you live in the real world and despite everything that has been discussed on this panel discussion today the question that I must ask is that do you believe the reality of this system will allow for this kind of bill to A) pass and B) will allow for truly independent regulators because then the ministry to some extent becomes powerless!

Aga: That will require a separate discussion but I will just go back – 1991 a whole set of vested interest was over turned in a matter of six months and people talk of the Finance Ministry but it was finance, industry and commerce acting together. So there are parallels. Change can be achieved, there is a technique of change and vested interest can be overthrown. I remain optimistic though what we are seeing around is horrible.

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