New Delhi January 14, 2005
Report
Recommendations
- Clarity and coherence in legislation and policy is the key determinant of regulatory efficacy, therefore a ‘model’ legislation for infrastructure regulatory regime in India be developed and recommended to the Government. The essential attributes of independent regulation referred in this report elsewhere should be considered while framing such model legislation. Incumbent regulation should get a specific mention in that, up front.
- Identify and compile good practices provided in different existing regulatory regimes in India, and elsewhere as well, so that a good template could emerge for adoption across the board.
- Sector specific apex regulatory bodies are required at the centre, given the volume of work most Indian regulators have to deal with, which should be complimented by well-endowed and supported economy-wide regulatory and competition authority in the states.
- An omnibus Regulatory Appellate Tribunal for all appeals against sectoral infrastructure regulators needs to be established, which will include subject experts and judicial persons. If the work load increases in any one sector, it can be hived off.
- Interface between regulators and the competition authority needs to be formalised, so that there is no conflict between them, and impugned parties do not take advantage of the same.
- Capacity building efforts on regulatory issues need to be scaled up immediately. Such training programmes should cater to the specific needs of different stakeholders, which should incorporate the local context.
- Multi-stakeholder participation should be the way forward, which can effectively take care of several concerns with regard to regulatory efficacy and accountability.
- Consumer organisations need to be strengthened with resources so they can be effective advocates. Financial resources can be raised through a consumer cess on billing.
- Benchmarking followed by an independent review over the years; and resourcing CSOs to perform a watchdog role; these are highly recommended to hold independent regulators accountable.
- Compliance with regulatory directives in the electricity sector needs to be investigated to assess the extent of their efficacy. That will help in understanding the practical challenges regulators are facing presently.
Background
In collaboration with the Planning Commission of India, CUTS organised a seminar on 14 January 2005 at New Delhi. The aim of the seminar was to facilitate brainstorming amongst stakeholders and contribute to the Planning Commission’s ongoing work on developing an appropriate regulatory framework for infrastructure sector in India.
In his opening remarks, Dr. Montek Singh Ahluwalia, Deputy Chairperson, Planning Commission, presented a strong case for having an independent economic regulator irrespective of the extent of competition in a market. Outlining the broader regulatory objective of facilitating competitiveness, he emphasised upon the need for having independent regulation, especially in the case of government monopolies. This is necessary because establishing transparent systems and protecting consumer interests are the major responsibilities of any independent economic regulator.
More than 100 participants from across the country representing different groups of stakeholders including the Planning Commission, regulators, policy makers, civil society organizations, diplomats, academia and media participated in the seminar.
Scott Jacobs, noted US-based expert on regulatory issues, also shared his experiences from across several developing countries in Asia. Many of the problems that he identified in his presentation applied to India also.
Here follows the interpretative summary of the discussions that took place in the seminar:
1. Need for Independent Economic Regulation
1.1 An independent and accountable regulatory framework is a specific response to the general mantra of promoting economic growth. Given the fact that most of infrastructure services are inherently non-competitive, establishing a transparent and coherent regulatory regime can attract necessary investments to meet out the huge demand-supply gap and unlock economic growth potential.
1.2 A regulators’ role is vital in establishing transparent systems, especially in matters such as cross-subsidy and taxes. An Independent regulator is needed to establish transparency and protect the interests of consumers particularly in not-so-competitive sectors such as the infrastructure services. Therefore, transparent regulation is essentially desirable even in case of government monopolies.
1.3 In addition to tariff setting, the independent regulator has to look at achieving the other important objectives such as promoting competitiveness and efficiency, protecting consumer interests, maintaining quality of services, safety and so on.
2. Deficiencies in Existing Regulatory Approaches in India
2.1 More than ten years’ experience of independent regulation in India suggests that so far the government has not been able to create and follow a cogent and coherent approach vis-à-vis independent regulation. Quite often, the policy objectives that the government wishes to achieve out of independent regulatory regime are not spelt out clearly in the legislation. At times, the regulatory mandate falls short to achieve the stated policy objectives. Multi-stakeholder approach is nearly missing in most of the sectors and given the rather ambiguous regulatory mandate as well as the limited regulatory capacity, this evolving form of governance is falling short of the expectations so far.
2.2 For instance, existing legislation in most transport sectors remain nearly silent on several important aspects such as Universal Service Obligation (USO), quality of services, safety etc. Even good practices in one sectoral regulatory legislation do not find place in others. Appointment and removal of regulators is practically left with the executive for their discretion, and these ‘independent’ bodies are not empowered to even determine the nature and number of their staff or to appoint consultant without approval of ministry concerned.
3. Essential Attributes of Independent Regulation
3.1 Spelling out a regulator’s role in an unambiguous manner is the precondition for having effective regulation. Therefore it is necessary that the legislation as well as the policy, both should specifically set the regulatory agenda in rather concrete terms. So far, the policy makers in South Asia, and in India as well, have not tapped the potential of the market to meet out the unmet demand for these services. Doing that would require a credible and consistent policy environment and predictable regulation.
3.2 More than anything else, an independent regulator is an instrument by which the government achieves its policy objectives. Therefore it is necessary for the government to spell out its policy objectives in a concrete manner and adequately empower the regulator through legislation, to accomplish the state policy objectives.
3.3 It appears, separating the policy-making function with that of service-providing is one of the major objective that the government wishes to achieve by establishing an independent regulatory regime, so that equal opportunities exist for all competing service providers to invest and earn reasonable returns. Nevertheless, actually doing that would require empowering the regulator through far more clear legislation and unambiguous policy objectives.
3.4 Regulating the incumbent, especially the government-owned, is a challenging task not just in India but elsewhere as well. There are several instances across the sectors when regulators find themselves unable to enforce compliance of their directives by the state-owned incumbents. Public sector service providers hardly compete with each other for better economic efficiencies. Therefore, incumbent regulation is a tricky area in any sector. This is one major challenge that regulatory authorities are facing across the board. As long as the regulator remains vulnerable to the discretionary powers given to the executives of the related ministry to whom normally state-owned incumbents report, it would be impractical to expect the regulator to effectively push the state-owned incumbent to a level-playing field with rest of the service providers. Addressing that would require regulators having specific strategies to ensure the compliance of their directives and developing an arms-length and objective relationship with the government.
3.5 This applies to the legislative provisions with regard to functional independence for regulators, including the provisions regarding their appointment as well as removal. Several other provisions too undesirably influence the regulatory process.
3.6 Imparting financial autonomy can substantially enhance functional independence of regulators. Therefore, it is desirable that the legislation allows a regulator to raise resources on its own, to the extent possible, through a fee/levy etc.
3.7 Once the independent regulator is assigned with a specific agenda, which is reasonably challenging in any case, it must be provided with the necessary wherewithal to perform the job effectively. Since the regulator’s job is demanding, it requires adequate skilled staff to attain the effective regulatory environment. Therefore it should be essentially left for the regulator to determine the nature and strength of its staff as well as to appoint consultants. Nevertheless, such decisions should always be subject to public scrutiny and comparison with standard practices being followed in other sectors and elsewhere in the world.
3.8 Regulatory powers with regard to dispute resolution are another gray area. It has been observed that at times market players take the avoidable route of litigation for seeking judiciary intervention, which costs the sector hugely in terms of delays. To the extent possible, the regulatory framework should aim at minimising the chances for judicial intervention. This can effectively be done by following a rigorous consultation process to reach upon equitable decisions; and by setting up a specialised appellate body. Anyhow, it needs to be explicitly examined whether sector specific appellate bodies are required, or an omnibus Regulatory Appellate Tribunal.
3.9 Furthermore, conflicts between the regulator and the new competition authority are envisaged due to both immaturity and legislative handicaps. These need to be sorted out by examining the sector-specific laws, and through a concurrence party decide on the forum where such cases will fetch the best solution. A competition authority has an economy-wide remit, while the sectoral regulator has a subject-wide remit, thus one cannot oust the competition agency’s jurisdiction over competition abuses in any particular sector.
3.10 Attaining a multi-stakeholder approach in regulatory process is highly recommended to arrive at logical, equitable and enforceable decisions. Active stakeholder participation offers effective checks and balances that largely determine the quality of regulation. Yet, so far this is largely missing for several reasons. Presently, regulators at large are not putting adequate efforts to proactively reach out and engage different stakeholders in consultations. Neither the important stakeholders, such as consumers, have the required capacities to comprehend this evolving form of governance that essentially involves a complex mix of techno-economic, legal, and polity dimensions.
3.11 Regulation is required because of the fact that a desirable level of competition does not exist in a market. Still, given the limited resources, the government must have a clear priority in various sectors to restructure, based upon the potential net outcome. Similarly, regulatory resources are limited as well. Hence, any regulator must set the priorities for it to work upon. Instead of exercising its powers on each and every aspect of the market, the regulator should deal with those areas up front which are intrinsic to promote competitiveness in the sector. For instance, interconnection should be the primary priority for telecom regulator, rather than engaging in issues like numbering patterns to be followed by service providers.
4. Capacity Building
4.1 Presently, capacity building on regulatory aspects is drastically lacking. Though independent regulation was introduced in India more than ten years ago, efforts to create necessary facilities to offer training on this subject are lagging behind. Some multilateral donor agencies such as the World Bank facilitate short-term training programmes on an ad hoc basis. Other than that, hardly any effort to create a sustaining facility has been attempted so far.
4.2 Importantly, capacity building on regulatory aspects is highly desirable, not just for regulators and their staff but for other stakeholders as well. Given the fact that regulatory decisions are essentially the outcome of stakeholder consultation, capacity building of other stakeholders is equally crucial to attain regulatory efficacy. For instance, government officials need to be adequately trained to negotiate with investors, and meaningful interventions from consumer groups can only be expected once adequate inputs and skills are provided with.
4.3 Equally important is incorporating the local context in capacity building and training modules. While learning from other’s experiences is desirable, there are certain local peculiarities which demand application of local wisdom to find optimal solutions. Therefore, any efforts to train the stakeholders have to incorporate the local context.
4.4 Nevertheless, for the government to establish such facilities is not recommended. Instead, the government and industry both should facilitate and support such efforts that can be initiated by professionally managed institutions of repute.
5. Independent Regulation and USOs
5.1 Given the fact that meeting the Universal Service Obligations (USOs) has to be a major policy objective for any government, it should unambiguously spell out the regulatory mandate, which often is not the case right now. It is desirable to incorporate the policy objectives, such as access to services, providing these services to poor at concessionary rates, and so on, within the legislation.
5.2 Cross-subsidies are essentially another form of tax. Therefore it should be the Parliament which decides the extent to which additional charges should be imposed on certain consumer classes/sectors to support poor sections. Currently, such decision making is vested with the related government department. In fact, excessive taxes on certain consumers are necessary at times to meet out social obligations. But, this has to be within reasonable limits.
5.3 Once such limits for cross subsidies are put in place at the highest level, it is the regulator’s job to establish transparent and objective-driven procedures so that public and private utilities both can get indiscriminate allocations to deliver social obligations, in a transparent manner.
6. Regulatory Efficacy and Accountability
6.1 As far as accountability is concerned, what is needed is a workable solution for holding the regulators accountable. Presently, most of independent regulators in India are supposed to present their annual report before the Legislature. Unfortunately, this has been followed merely as a token. In addition to this existing provision, empowered CSOs and consumer groups working as watchdogs can potentially hold the independent regulators accountable. This will work as an effective deterrent against possible ‘regulatory capture’ by service providers as well. Such arrangement can potentially offer a workable solution to the accountability concern, provided these CSOs are appropriately mandated and adequately resourced. Perhaps a part of the USO Fund in each sector can be set aside to fund consumer advocacy objectively.
6.2 Regulatory efficacy should be measured against the policy objectives that are spelt out in the regulatory mandate. To the possible extent, parameters for judging regulatory efficacy should be defined in quantitative terms in a transparent manner. Such evaluation criterion should be communicated to the regulators in advance so that the quality of regulatory decisions is broadly guided by the evaluation criteria.
6.3 Arranging for independent/peer reviews on periodic basis is another way to further strengthen the regulatory accountability mechanism. Though, in such case, the benchmarks should be set bearing in mind the prevailing conditions around, and increase them gradually.
7. Consumer Interests vis-à-vis Independent Regulation
7.1 All stakeholders are supposed to represent themselves before the independent regulators to raise their voice and put forth their legitimate concerns. Still, during the evolving days of independent regulation in India, it is apparent that some stakeholders, primarily consumers, are not in a position to represent their interests appropriately for varied reasons. In such circumstances, the regulatory framework should have enabling provisions to support these stakeholders so that their genuine concerns are adequately represented, and regulators could effectively balance the conflicting interests.
7.2 The Government offering performance-linked resources to consumer groups and facilitating the process of addressing their capacity building requirements are some of the measures that need to be taken up immediately. Unless these groups are sufficiently resourced to hire professionals and gather other necessary inputs to make meaningful interventions, the quality of regulations likely to remain compromised.
7.3 In those sectors where the regulatory bodies are not mandated to take up individual grievances, it is the responsibility of the regulator to ensure that some functional and effective mechanism to address such individual complaints is in place.
8. Interface and Overlaps
8.1 This can only be addressed through enabling and coordinated legislation for regulatory bodies. Overlapping mandates of regulatory and competition authority and that of appellate bodies and/or judiciary can only be avoided if government ensures that every new regulatory legislation follows certain essential norms in this regard. Perhaps the Ministry of Law can be entrusted to ensure such coherence and uniformity across the sectoral regulatory legislation.
8.2 It is not desirable to have separate regulatory bodies for each sector or sub-sector. Rather, an attempt should be made to restrict the number of sectoral regulatory bodies without compromising the quality of regulation. For instance, there is a strong case for having a regulatory body for the entire energy sector; rather one each for electricity, coal, gas and petroleum. Similarly, it is advisable to have one overarching regulatory body for the entire transportation sector, instead of having separate bodies for different modes of transport such as road, rail, aviation or marine. Similar logic applies for the financial sector too.
8.3 Looking at the volume of the work before the economic regulators, it is strongly recommended to follow the model of having a sector-specific regulatory body at the central level, which is effectively facilitated and supported by an omnibus multi-sectoral regulatory and competition authority in the states.
For more information, contact:
Rijit Sengupta
CUTS Centre for Competition, Investment & Economic Regulation (C-CIER)
D–218, Bhaskar Marg, Bani Park,
Jaipur 302 016, India,
Ph: +91(0)141-2282821
Fax: 91.141.2282485
Email: 7upmarkii@cuts-international.org