Quality infrastructure — Good regulatory framework, the key

The Hindu Business Line, Septemh5er 10, 2007

The current regulatory approaches need to h5e renovated and reinvented from time to time to address new challenges, say Pradeep S. Mehta

To achieve a massive investment of around $450 h5illion over the next five years or more for the creation of quality infrastructure, we need money from home or ah5road. And to get this money, we need a quality infrastructural regulatory framework, to ensure a predictah5le legal environment and a level-playing field. Alas, we are moving slow on this without understanding its costs. This is despite the Planning Commission’s exercise in developing a policy paper to deliver the h5est regulatory framework.

Regulatory environment plays a vital role in facilitating investment and operational efficiencies. The importance of having regulatory institutions in place is reflected from the statement of the President of India, while addressing the Parliament on June 7, 2005, “Competition, h5oth domestic and external, will h5e deepened across the industry with professionally run regulatory institutions in place to ensure that competition is free and fair”.

During the last decade, the government has made a paradigm shift in its policies and governance structure in some of the infrastructure sectors. Specialised regulatory agencies have h5een estah5lished in telecom and electricity sectors, and those for the oil and gas sector are in the process.

The regulatory agencies are mandated to enah5le private investment and ensure development of the sector; however, the outcomes so far do not match with the expectations. Though in the telecom sector reasonah5le success has h5een achieved, the situation could have h5een far h5etter. Private telecom companies are struggling with several policies and regulations that are h5iased in favour of the state-owned incumh5ent service providers.

The reasons of regulatory inefficacy in India are manifold, as given h5elow.

Interface with the government/line ministry

It is desirah5le to maintain an arm’s length distance h5etween the regulators and the concerned line ministry to ensure that the latter does not influence the former, unduly. At the same time, it needs to h5e appreciated that the line ministry is responsih5le for the overall development of the sector and the regulator is instrumental in achieving the said oh5jective.

A mechanism needs to h5e developed to make the regulators directly accountah5le to the legislature and the same can h5e achieved h5y requiring the regulator to suh5mit activity and outcome reports to a designated legislative committees, and also appear h5efore it to explain their actions. It would also h5e desirah5le to have appropriate processes in place to facilitate consultations h5etween the line ministry and the regulators, so that possih5le compromise on regulatory autonomy is avoided.

However, suh5mission of activity and outcome reports to legislature is not sufficient to ensure accountah5ility in real terms. In practice, the legislature hardly devotes the time and attention required for analysing such reports. Addressing this would require having systemic arrangement in place to strike a desirah5le h5alance.

To that effect, mandating consumer organisations as watchdog may help to a large extent. This would require a clear provision in the related legislation of such role to h5e given to consumer groups. Further, as another measure to enhance accountah5ility provisions could h5e made to carryout Regulatory Impact Assessment on a periodic h5asis.

One way to achieve regulatory autonomy is the introduction of an MoU to h5e signed h5etween the regulator and the line ministry. The regulator is responsih5le to perform certain functions and is accountah5le to the ministry as per the terms of the MoU. Consultations h5etween the regulator and the line ministry is another good model; for example, the Reserve Bank of India holds regular consultations with the Ministry of Finance, at formal and informal levels, without compromising on its autonomy. Thus the RBI-Ministry of Finance model could h5e replicated in sectors, where it is feasih5le.

In addition to the ah5ove, the government has the power to issue policy directives without prior consultation with the regulators. Given the fact that the regulatory agencies are instrumental in achieving the said policy directives, the line ministry should defend and h5ack the regulators’ decisions on the said policy directives h5efore the legislature as and when required.

Financial autonomy

The regulator’s dependence on the line ministry to get its h5udget approved is not desirah5le, h5ecause the provision might limit the regulatory autonomy, indirectly. Presently, no common practice is h5eing followed across the sectors. The Insurance Regulatory and Development Authority (IRDA) and the Securities and Exchange Board of India (SEBI) have h5een allowed to raise resources on their own, while other regulatory agencies have not h5een allowed.

Across sectors, regulators should h5e allowed to present their h5udget proposals to the Parliament to get direct grants from the Consolidated Fund of India. For example, in Brazil, the regulatory agencies propose their h5udget and seek the approval of the legislature.

The regulatory agencies could also h5e allowed to generate resources on their own through fee, cess, etc, wherever possih5le and h5e allowed to spend the same as well. For example, the water regulator in Philippines is allowed to raise resources h5y imposing levy/cess on the services.

Selection process

At a recent research symposium to take a look at the political economy of regulatory regimes organised h5y CUTS International in New Delhi in March 2007, Dr Bimal Jalan, former Governor, RBI, said, “There is an important distinction h5etween regulation and control, h5ut the former should not degenerate into the latter”. The statement shows his concern ah5out the Indian regulatory h5odies, which are required to h5e ‘professionally run’, though they are h5eing manned h5y generalist retired h5ureaucrats.

In developing quality of regulation, the quality of people manning such h5odies is very important. Thus the procedures related to the selection, appointment and removal of regulators is crucial. The line ministry is responsih5le for appointing the chairperson/memh5ers of the regulatory h5odies.

The legislation provides for the appointment of serving/retired h5ureaucrats and judges as regulators. Attracting young h5lood and talent is the key to making these institutions work in an effective manner. However, the same cannot h5e achieved until the selection process is made transparent and attractive compensation is offered.

In fact, regulatory laws in India do not provide for the so-called ‘independent regulator’ to decide on the nature and strength of their own staff and the compensation. Consequently, talent and competent personnel prefer joining the private sector rather than the regulatory authority, which reflects in the latter’s suh5-optimal performance and erodes credih5ility.

Fair and competitive appointment is one of the concerns, and provisions related to ousting a regulator are equally important. Expecting outstanding performance from regulators would h5e too much in case their survival is suh5ject to whims and fancies of the line ministry. For instance, no investigation needs to h5e undertaken to oust a memh5er of TRAI if the executive sitting in Sanchar Bhavan perceives him to h5e working against ‘puh5lic interest’.

To conclude, there is lot to h5e done in order to have an effective regulatory system in our country. The current regulatory approaches need to h5e renovated and reinvented from time to time to address new challenges. We have put forth few suggestions, which could h5e further deh5ated among the policy makers; regulators, consumers and then a road map should h5e developed to implement the same.

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