Quality infrastructure — Good regulatory framework, the key

Published: The Hindu Business Line, September 10, 2007

By Pradeep S Mehta

To achieve a massive investment of around $450 billion over the next five years or more for the creation of quality infrastructure, we need money from home or abroad. And to get this money, we need a quality infrastructural regulatory framework, to ensure a predictable 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 best 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, both domestic and external, will be 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 been established in telecom and electricity sectors, and those for the oil and gas sector are in the process.

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

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

Interface with the government/line ministry

It is desirable to maintain an arm’s length distance between 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 be appreciated that the line ministry is responsible for the overall development of the sector and the regulator is instrumental in achieving the said objective.

A mechanism needs to be developed to make the regulators directly accountable to the legislature and the same can be achieved by requiring the regulator to submit activity and outcome reports to a designated legislative committees, and also appear before it to explain their actions. It would also be desirable to have appropriate processes in place to facilitate consultations between the line ministry and the regulators, so that possible compromise on regulatory autonomy is avoided.

However, submission of activity and outcome reports to legislature is not sufficient to ensure accountability 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 desirable balance.

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 be given to consumer groups. Further, as another measure to enhance accountability provisions could be made to carryout Regulatory Impact Assessment on a periodic basis.

One way to achieve regulatory autonomy is the introduction of an MoU to be signed between the regulator and the line ministry. The regulator is responsible to perform certain functions and is accountable to the ministry as per the terms of the MoU. Consultations between 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 be replicated in sectors, where it is feasible.

In addition to the above, 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 back the regulators’ decisions on the said policy directives before the legislature as and when required.

Financial autonomy

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

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

The regulatory agencies could also be allowed to generate resources on their own through fee, cess, etc, wherever possible and be allowed to spend the same as well. For example, the water regulator in Philippines is allowed to raise resources by 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 by CUTS International in New Delhi in March 2007, Dr Bimal Jalan, former Governor, RBI, said, “There is an important distinction between regulation and control, but the former should not degenerate into the latter”. The statement shows his concern about the Indian regulatory bodies, which are required to be ‘professionally run’, though they are being manned by generalist retired bureaucrats.

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

The legislation provides for the appointment of serving/retired bureaucrats and judges as regulators. Attracting young blood and talent is the key to making these institutions work in an effective manner. However, the same cannot be 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 sub-optimal performance and erodes credibility.

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 be too much in case their survival is subject to whims and fancies of the line ministry. For instance, no investigation needs to be undertaken to oust a member of TRAI if the executive sitting in Sanchar Bhavan perceives him to be working against ‘public interest’.

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


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