Where in the world are the watchdogs?

Financial Express, March 17, 2007

Jobs of such critical public concern should be thrown open to all, say Pradeep S. Mehta

At a recent finance ministry and CII meeting on infrastructure financing, Arun Nanda of Mahindra & Mahindra offered himself for appointment as a regulator, even if the salary was far lower than what he gets. He was responding to the finance minister’s observation that on such low salaries, they cannot attract good people from the private sector, and thus end up appointing retired civil servants. Nanda buttressed his offer with the condition that the regulator must be truly empowered, and that many in the private sector, having already accumulated substantial wealth, will be willing to work at low remuneration. His offer was dismissed with a business-as-usual remark—that sometimes regulators become a little too independent.

This whole debate took place in the light of an all-round understanding that the country does indeed need ‘independent and predictable’ regulation to attract sorely-needed investment.

As soon as Dr Manmohan Singh came to power as Prime Minister, he asked the Planning Commission to prepare a policy paper on infrastructure regulation, to examine the possible adoption of best international practices. The first draft of the paper is out on the website of the plan body, while the debate continues. It, too, speaks of the need of truly independent regulators if promises of delivering $350 billion in investment for Indian infrastructure are to come close to being realised over the Eleventh Plan period.

With good hindsight, it also suggests the adoption of a framework law on how regulatory institutions should be constructed, so that line ministries are bound to follow a firm set of fundamental principles.

Today, we see that different ministries have adopted different models of regulatory institutions. Thus, we have a pot pourri of approaches. This melee can be seen in many other countries, both rich and poor, though it stabilises over time with political maturity and develops an arm’s-length relationship with the government.

In one of our recent studies for the Planning Commission, we see that institutions in rich countries like the UK, Canada and Australia have graduated substantially. Even in developing countries like Brazil and Sri Lanka, some degree of convergence has evolved over time in different sectors’ regulatory approaches.

So called ‘independent’ regulation, or re-regulation, is the flavour of the day in India and many other developing countries. India has some experience in the telecom sector, electricity, insurance and ports, but that has been not too promising. On the anvil are regulators for petroleum, oil and gas; civil aviation; pension funds, posts and what have you. Not only that, but now and then we hear about super regulators for cognate sectors, such as energy: covering oil, gas, coal and electricity; finance to cover both primary and secondary markets, and banking and non-banking financing institutions; and transport to cover air, road, rail and water transport. Alas, we do not have much expertise in any single sector, and imagine the chaos if there are multi-sector super regulators.

In India, we see unique political economy behaviour in the existing approaches. Quite often, the law and the regulatory institutions are designed to be subservient extensions of the department and to create jobs for subservient retired civil servants. And to fool the world that we have independent regulators so that investors are assured of a predictable operating environment. So what do we get in the bargain? More often than not, we end up getting third rate regulators, who have scarce understanding of the law, economics and science of regulation, and are typically resistant to any further learning. There are exceptions, though.

Let me take the most recent example of the new petroleum and gas regulatory board, and the search for its head. We hear names of retired civil servants cropping up through a selection process, and nearly none is quite equipped for the job. When the process was questioned, one was told that there were no applicants, and that the choice was thus constrained by this circumstance.

Yet, if the same assignment is handled with some lessons from other countries, we could easily have had better choices. In Indonesia, vacancies are announced in the media and candidates undergo a rigorous test prior to being appointed as regulators. In South Africa, nominations are invited from people, and public hearings are held for each candidate. In some countries, such as the US, appointments made by the government are to be approved by the parliament. A person’s profession doesn’t matter, and it can be even some citizen at an advanced age who keeps closely in touch with relevant issues and developments. There is competition to allow people from all walks of life to apply for such appointments.

One proposal doing the rounds in Indian policy circles is to establish an Indian Regulatory Service, which will be open to all professionals. It should also allow lateral entry at higher levels to attract accomplished people from the non-government sector. Most importantly, by way of institutional hierarchy, it should be kept above the Indian Administrative Service . Otherwise, it will fail to attract the appropriate people needed to run independent regulatory agencies. Considering our political economy, this in itself is a difficult task. But it is not an impossible one. India needs public professionalism of an entirely new order, which means throwing open doors wide. Only then can we hope to get good regulators.

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