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POLICY The Dependent Regulator India's newly-created regulators are fighting to win their independence from the very government that created them. BT presents the rulebook for independent regulators. By Swati Kamal
TERMS AND CONDITIONS OF EMPLOYMENT. All
bills incurred by the regulator will be scrutinised by the ministry concerned. Travel
abroad must be cleared by the minister. Salaries and perks will be equivalent to that of a
secretary, but status will be lower. Extreme prejudice? Not if you consider the experience of India's so-called independent regulators. By now, the pattern has become predictable. With much fanfare, the Government Of India (GOI) announces-usually, in a budget speech-the creation of an independent regulatory body. In a year or two, the relevant laws are amended to confer statutory status on it. After that, the GOI ignores the recommendations of the regulatory authority, stymies its day-to-day functioning, and, in general, clips its powers. Fumes a member of one of India's new regulatory bodies: ''Regulators have to be set up for political reasons, but are meant to be non-entities by design.'' Almost from the day it began functioning, the Telecom Regulatory Authority of India (TRAI) has been embroiled in a series of legal battles with the Department of Telecommunications (DOT). India's first independent infrastructural watchdog is spending most of its time fighting the GOI in court; at last count, DOT vs TRAI feuds accounted for more than 20 cases. With the DOT once again taking the TRAI to court in June, 1999-this time, over the latter's arbitration powers-hostilities are bound to escalate. That does not augur well for a body that has been entrusted with the tricky task of overseeing the transition from a licence-fee/duopoly regime to a revenue-sharing/multipoly regime. Other regulators are not faring well either. The Securities & Exchange Board of India (SEBI)-India's oldest and, arguably, the most successful regulatory authority-is still perceived as a department of the Union Ministry of Finance. Four years after an interim Insurance Regulatory Authority (IRA) was set up, it is in legislative limbo, awaiting official status. The newly-created Tariff Authority for Major Ports (TAMP) is facing resistance. And even the Central Electricity Regulatory Commission (CERC), which has just begun functioning, has had to deal with an intrusive ministry. As per the newly-amended Electricity Supply Act, the CERC is responsible for regulating transmission tariffs. But it was the Ministry of Power that notified the rates for Powergrid Corp. as recently as May, 1999. Exclaims S.L. Rao, 63, Chairman, CERC: ''The GOI is not ready for regulators.'' Yet, that has not stopped it from proposing a clutch of independent regulators. Among them: an independent Road Board, which will allocate funds for road-development, and an aviation regulator, to monitor air-fares and safety-standards. Currently, the National Highways Authority of India and the Director-General of Civil Aviation perform these two tasks, but both are departments of the GOI. State governments are following suit. All the states-except Bihar, Maharashtra, and Punjab-are in the process of setting up State Electricity Regulatory Commissions (SERCs). And Andhra Pradesh and Tamil Nadu have even proposed regulatory bodies to monitor water-rates. This rush can be explained by one word: investment. Points out T.V. Ramachandran, 53, Executive Vice-Chairman, Cellular Operators Association of India: ''You need to have an independent mechanism for securing and protecting investments in these areas. Leaving it to the ministry only creates confusion, and conflicts of interest.'' He's right. Investment-flows, be they public or private, hinge on getting user-prices right for infrastructural services. And cross-country experience has demonstrated that the task of tariff-rebalancing is best left to independent authorities, which are less vulnerable to political meddling. However, as demonstrated by India's experience, independent regulators without independent powers are not going to encourage investment. Based on an analysis of that experience, and a study of successful regulatory regimes abroad, BT presents the Rulebook For The Real Regulator. 1 Powers are clearly defined when the underlying Act itself is unambiguous. Agrees G.V. Ramakrishna, 69, Chairman, Disinvestment Commission: ''The first step to building a strong, independent regulatory agency is to lay down clear-cut statutory provisions that spell out the regulator's powers.'' Yet, in most cases, these provisions have been ambiguous, ensuring that the foundation itself is shaky. For instance, Section 11(2) of the TRAI Act, 1997, spells out the powers of the telecom regulator. But what Section 11 bestows, Section 38 takes away since it specifies that these provisions are in addition to the Indian Telegraph Act, 1885. Ergo, nothing in the TRAI Act will affect any jurisdiction, powers, and functions exercised by the Telegraph Authority, i.e. the DOT. Similarly, the CERC Act does not define the relationship between the CERC and the SERCs, leaving plenty of room for conflict. There is also room for meddling by the GOI. According to Sections 54, 38, and 60 of the ERC Act, the central government can make rules, give directions, and intervene in case the ERCs run into an implementation problem. Similarly, as per the amended Major Ports Trust Act, 1963, the regulator's authority is confined to setting tariffs. Everything else is the responsibility of the Ministry of Surface Transport and the port trusts even though the Expert Committee on India's Infrastructure had recommended that a regulator supervise all the issues relating to private sector participation, operation, and maintenance of ports. In the case of the telecom regulator, the GOI has reserved the right to step in on all ''matters of policy.'' Since the country's regulators have been provided with a minimal set of powers-determination of tariffs, resolution of disputes, and monitoring of service quality-matters of policy, often, constitute a maximal set of powers. International experience seems to suggest that the exact opposite works better. ''Whenever the policy-framework is general, regulators have been successful,'' argues Pranob Sen, 45, a consultant with the Planning Commission. ''Lay down the ground-rules for entry, and empower the regulator to implement those rules.'' Which would mean, for instance, that the CERC would also be able to license generation. Or, that the TRAI would be empowered to issue licences, allocate frequencies, set standards, and work out the modalities of the revenue-sharing system. Granting regulators operational autonomy helps insulate the process of reform from bureaucratic interference and political uncertainty. More importantly, it provides them the flexibility required to deal with the advances in technology that are redefining market structures. Telecom, broadcasting, and infotech services are all converging on a single pathway; electricity, gas, and coal are all part of a broad energy sector. Points out Virat Bhatia, 34, Managing Director (Corporate Affairs), AT&T: ''If you try to address these challenges each time with a new policy, time and resources will be wasted. The real work of the regulator is to respond to changing technologies and market structures.'' Already, in the US, the sweep of regulatory supervision has widened. While the Federal Communications Commission (FCC) oversees all aspects of communications, apart from regulating electric utilities, the Federal Energy Regulatory Commission (FERC) also monitors the transportation of oil and natural gas. 2 If the GOI controls the purse-strings, the regulators will be kept on a tight leash. While the TRAI Act contains provisions for independent funding, it continues to be funded by the GOI. However, the ERC Act and the proposed IRA Bill do not even include such provisions. Why should this matter? For starters, it hinders day-to-day functioning. The CERC cannot issue cheques; its expenditure has to be cleared by the Ministry of Power. In fact, the Commission's budget was slashed without holding any discussions with the body. Operational irritants are not the only problem. Without financial autonomy, bureaucrats can use-or rather, abuse-their discretionary authority to vary regulator remuneration and perks. Says Adrian Howcroft, 35, a privatisation expert at the consultancy firm, PricewaterhouseCoopers: ''Whoever holds the purse will pull the purse-strings.'' Indeed. Over the last 1 year, there have been 3 notes from the Ministry of Personnel tinkering with the terms and conditions of employment at the CERC. Salaries have been re-classified, housing allowances have been cut, and all kinds of conditionalities have been imposed on travel. Says Rao: ''This has reduced the status of the Commission's members in relation to their counterparts in the government.'' To avoid these conflicts, regulators could, instead, draw on a consolidated fund, which, in turn, would rely on fees from the private players in that sector. For instance, the operations of Oftel, the British telecom regulator, are funded entirely by licence-fee collections. The FCC is financed by a mix of budgetary support, licence-fees, and other service-charges. Such independent funding does not automatically imply an absence of accountability. Nor does it mean that regulators run the risk of being 'captured' by private industry. Oftel, for instance, is directly accountable to Britain's Parliament, and its accounts are regularly audited by the National Accounts Office as part of a mandate to determine value-for-money in public services. It is important for regulators to report directly to the legislature since, in general, such scrutiny tends to be more crucial than executive scrutiny by the relevant ministry. 3 A part from specifying that the chairman of the TRAI should be a judge, no criteria have been laid down for the selection of the regulators. Certainly, there is nothing wrong with that. Points out Sen: ''Regulation is a discipline of its own. You cannot have a group of technical specialists regulating the sector.'' In fact, most members of the FCC have little or no background in telecommunications; the technical expertise is provided by an associated secretariat. By and large, India's regulatory authorities too have been given the freedom to hire such expertise albeit at salaries specified by the GOI. However, without clear-cut selection- procedures for the commissions, there is a risk that the government is using them as dumping grounds for retired bureaucrats. Adds Howcroft: ''Nobody is questioning the competence of retired bureaucrats. But experience shows that individuals drawn from the private sector tend to be more independent.'' Yet, all the TRAI members are retired bureaucrats even though the TRAI Act specifies that they should be a mix of people with backgrounds in industry, consumer affairs, law, and accounting. Worse, neither the chairperson nor the vice-chairperson has a say in these recruitments. Contrast this with the rigorous selection procedures that are employed abroad. In Argentina, for example, 5 of the 6 directors of the Comision Nacional de Telecomunicaciones (CNT) are selected by an independent private recruitment company after screening more than 125 professionals. The sixth director is proposed by the provinces. As a result, regulatory performance has improved dramatically. Standards and processes for issuing licences-which had been delayed for nearly 3 years-were clearly laid down, and customer concerns were effectively addressed in that country. Not so in India. 4 For the first time in its history, the GOI itself is among the ranks of the regulated. Explains Kirit Parekh, 63, Director, Indira Gandhi Institute of Development Research: ''In most countries, regulatory authorities oversee private monopolies to ensure that they do not charge excessively high prices. Here, regulatory authorities have to deal with public sector monopolies that charge very low prices.'' And these monopolies are closely linked to their ministries. For instance, the secretary of the DOT-the nation's dominant telecom carrier-is also the ex-officio chairman of the Telecom Commission, the apex policy-making body. And, until recently, the chairman of the General Insurance Corporation (GIC) also doubled as the chairman of the Tariff Advisory Committee. That has led to 2 types of problems. For starters, an entrenched bureaucracy is not going to take too kindly to regulatory oversight of what it perceives to be its turf. Concedes a senior Finance Ministry official: ''When both the operator and the policy-maker are same, there is bound to be friction.'' S.S. Sodhi, 64, Chairman, TRAI, is less circumspect: ''The bureaucrats' attitude should be one of co-operation, not confrontation.'' Indeed, when the TRAI proposed the rebalancing of tariffs in March, 1999, the DOT's officialdom, led by the minister, simply refused to implement the order. Ultimately, the Prime Minister's Office had to intervene to cobble together a compromise between the TRAI and the DOT. Second, if the incumbent player/policy-maker is facing competition for the first time, it is likely that policies will be skewed towards protecting monopoly revenues. Instances of such bias abound. According to the 1997 Civil Aviation Policy, the government is responsible for assessing the future growth of air-traffic in the country. Based on this, the incremental capacity should be allocated by the GOI among the various airlines, with preference being given to the State-owned airline, thus institutionalising Indian Airlines' dominance. Similarly, in order to protect the revenues earned by the DOT from long-distance services, the National Telecom Policy, 1999, has banned Net telephony. Worse, it restricts the regulator's role to largely providing recommendations. Sure, the TRAI will recommend the revenue-sharing formula, and, sure, under the new multipoly regime, it can provide advice on how many players should operate in a circle. But the government does not have to implement its suggestions. And since the TRAI has no jurisdiction over disputes between the licensor and the licencee, its ability to ensure a level playing field is limited. Which is why the linkages between the government as service-provider and the government as policy-maker first need to be severed. As a first step, departmental undertakings like the DOT, the Life Insurance Corporation, and the State Electricity Boards need to be corporatised. And then, privatised. The UK, Chile, and Argentina were able to create a credible regulatory environment largely because infrastructural reforms were kicked off by large-scale privatisation. Even in countries like Sri Lanka, which have opted for a more gradual approach, the government first committed itself to the strategic sale of equity in public sector monopolies, like Sri Lanka Telecom. Apart from a stray promise to hive off the DOT's service-provision function from its policy-making role, the privatisation of public utilities in India is not even a policy goal. A regulatory authority can have clearly-defined powers, comprise professionals, and be independently funded, but, if bureaucrats are reluctant to disengage themselves from business, it will still be ineffective. Remember, always, the fundamental rule of regulation: credible regulators require credible government (policy).
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POSITIONS
VACANT. (Nominally) Independent Regulators. Must monitor private
sector entrants into infrastructure sectors. Must not interfere with dominant public
sector enterprises. Must be prepared for ministerial attempts to whittle down assigned
powers. 