The later part of the 1980s and the 1990s have seen the expansion of the private sector on a large-scale. Instead of government control and public sector diversification, there has been a renewed thrust towards markets and open competition. Privatization is being considered an important strategy to improve the management and performance of the public sector.
With the creation of a competitive environment and the expansion of the private sector on a massive scale has emerged the problem of regulation of the economy. An effective regulatory system is essential for furthering socio-economic development in a developing Indian economy. In the context of globalization and liberalization, regulatory administration is seen as a major instrument available to the government to enforce adherence to national requirements. It has assumed considerable significance with the object of exercise effective economic sovereignty and control over country’s resources.
The term ‘regulation’ in its traditional meaning refers to the control function of the government. To regulate means to govern or direct according to law or constituted authority. Regulatory administration is therefore related to the control function of government. It is in mixed and liberalized economies, where market forces and government intervention combine to run the economy system that the role of regulatory administration assumes particular importance. Ours is still a mixed economy where varying degrees of government intervention exist not only in economic but also in social and environmental activities.
In the context of Indian economy, regulation has a threefold aspect. The first aspect of regulation comprises government action to induce, encourage or promote the private sector for development, be it economic or social. This may be termed as a ‘positive aspect’. It includes encouraging private individuals or organizational units to contribute to raising the living standards of the people, to facilitate the building of the infrastructure necessary for development of the economy, and to protect the rights of women, working classes, minority communities and so on. The second aspect of regulation, which is a ‘negative’ one in essence, is understood to prevent or discourage private individuals or units from undertaking certain activities which are against the interests of the country. Examples of negative regulation include prohibiting the sale and use of narcotics which have a harmful effect. The third aspect of regulation is creative. It comprises government action to create competition at the national and international levels with a view to improving the performance of public sector enterprises.
Government regulation in economic and social activities to achieve broad policy objectives has been carried out in three modalities – promotional, managerial and planning. As in the case of public utilities, government has either regulated or managed itself.
Since the private sector has a role of far-reaching importance in the development of an economy, it should be developed and managed along with the public sector. Healthy competition between the two improves the performance of public enterprises. Making a public enterprise compete in an ideal environment of fair competition forces it to adopt new techniques and methods in order to stay in business. If it does not compete effectively it may have to disappear. A public enterprise can be exposed to competition only by ending its protected status. This would require the deregulation and elimination of government barriers that prevent the entry of private firms in the same business as public enterprises are engaged in the policy of openness and making the private sector enter the economy on a big scale would require regulation of industries and firms.
The exercise of government regulation is often necessary for the achievement of the following objectives:
- To set guidelines and standards for the successful operation of the economic system;
- To protect and promote the general interests of the people;
- To prevent concentration of economic power to the common detriment; and
- To prohibit monopolistic, restrictive and unfair trade practices.
These objectives are in tune with Article 39 (c) of the Indian Constitution which states “that the operation of the economic system does not result in the concentration of wealth and the means of production to the common detriment.” Since the position of the consumer is relatively weak in developing countries, he has often depended more on government for protection action of government includes regulation not only of the prices of commodities & services but also of the working of the market mechanism. This includes taking action against the formation of trusts and the growth of monopolistic activities.
Regulation also ensures reasonable wages and other working conditions and maintenance of certain health standards. Standardization is an important activity which becomes necessary for the purpose of facilitating production and trade.
Regulation of the private sector has become essential not only for achieving economic development but also for improving the general welfare of the people, including a more equitable distribution of income and fuller mobilization of human energy. It acts as a watchdog for ensuring provision of water supply, electricity, transport and communications, and the like, which otherwise can be monopolized by the private sector. Promotional work in this regard becomes an important part of government intervention.
Finally, regulation has a special role to play in the maintenance of internal order and the establishment of the rule of law which are important components of national development. It may be stressed that development can take place only on a sound foundation of law and order. It is wrong to hold the view that the law and order function is a non-development component of development administration. On the other hand, it is very much an integral part of national development. It is also an important element in regulatory administration.
By 1991, a large number of developing countries had received loans from the World Bank and/or from the international fund agencies. The loans were conditioned on the promise, that, the recipient countries would adopt free-market policies and bring about structural adjustment. Those structural adjustment programmes aimed at both macro-economic and micro-economic changes. On the micro side, the main objective was to improve efficiency in the use of resources by removing price distortion, opening up more competition and removing administrative control(deregulation). It also aimed at reducing government’s interaction in areas where private sector can operate more efficiently. Thus, the structural adjustment aimed at less government, freer trade and greater role of private sector. This is opposed to the philosophy of state intervention for economic development and commanding heights of public sector.
However, currently some disillusionment has set in owing to the failure of state intervention leading to corruption, arbitrary exercise of power, dismal performance of public sector and non-satisfactory services to the people. It is argued that “in recent years more interventionist states have experienced lower growth rates, as well as less liberty, than states whose development strategies relied more on the private sector.” In the context of current disillusionment in the developing countries, may be, we are forgetting the past disappointment with the private sector resulting in unfair trade practices, exploitation of consumers and reduction in non-agricultural employment. Even the institutional foundations of free market are generally weak in developing countries and the existing environment does not favour efficient competition resulting into malfunctioning of markets. Given the imperfection of both the market and state, the developing countries must instead of debating on “state versus market”, should opt for synergic relationship between state and market.
On the basis of governments role, the functional goals of state can be redefined by adopting three-fold classification, namely the ‘core’, ‘participatory’ and ‘auxiliary’. The ‘core’ activities may relate to those aspects which are given by the Constitution and which the government is supposed to perform at all times. That role is governed by social expectations and thereby the government should have the exclusive responsibility. This may include atomic energy, defence, forest, space, science and technology, and public order. The ‘participatory’ role may include those activities where private sector may supplement and complement the government’s responsibility of providing goods and services. Some of these activities can be in the sectors of coal, chemical and fertilizers, civil aviation education, energy, information and broadcasting, health and family welfare, petroleum, post, steel, surface transport, and telecommunication. The ‘auxiliary’ activities mat include those areas where the private sector has managerial capability and endowed with competitive edge over public sector. Taking cognisance of this classification, the government has already adopted some policy initiatives and administrative reforms in this direction beginning with “New Economic Policy” of 1991. Those include ‘corporatisation’, ‘outsourcing services’, ‘disinvestments’ and ‘privatisation’.
IMPLICATIONS OF STRUCTURAL ADJUSTMENTS
The proposed structural adjustments are bestowed with a large number of policy and administrative implications. The most important consequence being the executive authority would no longer be the regulator. The regulating authorities/commissions should be created by legislature and bestowed with statutory powers. The success of the proposed structural adjustments lies in the changed paradigm. The new paradigm can be represented in the following form:
1) Socio-economic policy formulation: Exclusive role of the executive and legislature. ) Policy regulations/enforcement Respective statutory of socio-economic policies: independent regulatory
3) Implementation of socio-economic policies:
Gradually increasing role of NGOs and encouraging public-private partnership model
The extent of privatization and the role of NGOs would depend on:(i) political acceptability; (ii) administrative feasibility; (iii) maturity of the private sector and that of the NGOs; and (iv) support of labour and trade unions.
PUBLIC ADMINISTRATION VS. NEW PUBLIC MANAGEMENT
The global tendencies are leading to a convergence of capitalist and socialist systems both economically and politically. There is an emergence of a global model of governance. There is a strong feeling that privatisation of public assets has resulted into large-scale discrimination and rent-seeking tendencies in the developing countries. It may not provide satisfactory services to citizens. Moreover, efficiency is not the function of ownership; it relates to efficacy of management. This supports the argument that instead of selling of stocks or non-productive assets, the “traditional public administration” based on Weberian model of bureaucracy is replaced by (NPM). Sometimes, privatization is considered politically easier and soft option. Owing to a diverse range of economic and political system, it may not be possible to adopt a generalised approach. Despite this, there is a dominant view that where government is major or a secondary provider of goods and services, and for those activities where the public sector is to compete with the private sector, to establish a level-playing field, replacement of irrational public administration system by NPM is needed. It is supported by international experience of both developed industrial economies and the developing and transitional economies. The arguments in favour of reforms are: (i) as ‘traditional’ state model has consistently failed to deliver appropriate policies or effective services, hence there is a need for an alternative approach; (ii) the market and its mechanisms may offer a more efficient gain through the application of NPM/principle; (iv) public managers now have more autonomy and better incentives to perform well; (v) citizens with more awareness and choices , can hold managers directly accountable ; overall efficiency gains mean improved restraint on public administration has been transformed from a “bureaucratic” culture into an “entrepreneurial” one. The arguments critical of NPM reforms are: (i) as market remains as a flawed alternative to the state; the evidence on efficiency becomes indecisive and ambiguous; (ii) increased managerial autonomy has bought blurred accountability and higher risks triggering confliction rather than collaborative bodies; (iii) there has been considerable demoralization of public workforces; and (iv) in several cases public services have manifestly got worse rather than better.
GENESIS AND RATIONALE
For significant part of 20th century in most of the countries, various public utilities and some of the social activities were under state monopolies and executive control. With a desire to protect the public interest in industries supplying essential services as also to develop infrastructure and the concern about private monopoly power has forced governments to conclude that control over these services could not be entrusted to the motivations and penalties of free-market. Therefore, during the past two decades there have been significant changes in views as how public utilities and social services should be owned, organized and regulated. Here new model calls for increased reliance on private participation to improve efficiency, promote innovation, augment financial resources, and enhancing quality of services. Some of the expectations have fallen short of requirements along with financial crises, corporate scandals and collapses in the stock market. This raises important question for the policy-makers and those who are engaged in restructuring, expanding, and regulating social activities and infrastructure development. The World Bank has been encouraging its client countries to create independent regulatory commissions/authorities. The reasons for suggestion were largely owing to the failure of a system of non-independent regulation. When the Bank encouraged privatisation in the early 1990s, there was a consensus that private investment would not be possible unless it is backed by a “de-politicised” independent regulator. The bank wanted the policy-makers to create regulatory entities whose decisions would be both transparent and independent of government/political authorities.
Thus, the most critical task for the developing and transition economies is to design and implement stable and effective regulation for all those activities where both public and private sectors are the operators and providers of socio-economic goods and services. There is a need for regulation that provides credible commitment to safeguard the interest of both investors and customers. Regulatory procedure must be predictable, accountable and transparent. Regulatory bodies should: (i) have competent, non-political and professional staff; who are expert in relevant economic, accounting, engineering and legal principles and familiar with good regulatory practices; (ii) operate a statutory framework that fosters competition and market-like regulatory policies and practices; and (ii) be subject to substantive and procedural requirements that ensure integrity, independence, transparency and accountability.
When economic reforms were introduced, the developing countries had few precedents to guide the design of regulatory mechanism. However, the decades of 1980s and 1990s witnessed a global reassessment of the state role in restructuring and privatization of some of the economic activities, especially those related to infrastructure. The developing countries were required to look up to the developed countries like Canada, New Zealand, the United Kingdom and the USA for bringing administrative reforms related to economic restructuring. But the advanced industrial countries have long traditions of market capitalism supported by strong legal institutions. Under the pressure from international agencies and investment banks, more so from the World Bank and Asian Development Bank, a large number of developing countries had to hastily adopt regulatory mechanism prevalent in industrialized countries, especially the UK and USA. But studies have indicated that owing to lack of checks and balances, low credibility, widespread corruption, limited technical expertise, and weak taxation regime, accounting and auditing systems in the developing countries, such adopted changes had limited success and in many cases it had been a damp squib. Further, public sector enterprises in developing countries were often organized to achieve political objectives rather than to solve market failure. Some of the state enterprises have been tools of vested interest groups. There is, apparently, a danger that such rent-seeking coalitions aiming to avoid financial losses from privatization and competition may subvert regulatory mechanism. Regulatory institutions and processes are exploited even in advanced industrial countries, but there is greater risk in the developing countries. International funding agencies should not impose the regulatory mechanism of developed countries on the development ones. To contribute to the social welfare, the regulatory process must reflect the local conditions and capacity.
The world Bank studies in relation to regulatory mechanism for network utilities in some of the countries, namely, Argentina, Bangladesh, Brazil, Chile, India, Indonesia, Latvia, Pakistan, Peru, Philippines, Malaysia, Mexico and Morocco, reveal that expected objective from the regulatory commission following general tariff principle, a commercially viable option that benefits both consumers and investors-has not been realised. The basic problem, as reported, seems to be a “weak governance environment”. Following three reasons for such a failure have been identified: (i) most commissions were never really independent; (ii) some commissions were granted only limited legal independence; and (iii) some commissions faceted with a legacy of tariffs, fell far short of covering costs, were understandably reluctant to take the politically explosive step of raising tariffs to cost recovering levels.
The bank felt that it would be possible to create a regulatory system that would be fair to both investors and consumers by creating new regulatory institutions with nothing more than the formal elements of independence. The Bank has further argued that to be sustainable, regulation must achieve two goals: (i) it must protect consumers from monopoly prices and inferior quality of service; and (ii) by attracting investors who will make the investments to provide the service at affordable prices. The main purpose is to have best of both worlds and to define the trade-offs between these two conflicting regulatory objectives. There is a need to limit the discretionary power of regulators in those areas which deter investment; while at the same time developing a system that may remove uncertainties for investors created by politically motivated micro-management changes in governmental policies. To achieve the stated objectives, regulation by “contract” has been suggested, as an alternative to regulatory independence. The essence of regulation by “contract” is pre-specification, in a more formal or explicit agreements, of the formulas that determine prices that the investors will be allowed to charge from the consumers. The agreements are between the government and the investors. This would result into having regulation without a regulator, as it would be totally self-contained and self-administrated like a commercial contract. In fact, it will not only reduce the role of regulators, it will substantially limit regulators discretions. The World Bank views this regulation by ‘contract’ as a new name for old paradigm.
THE INDIAN SCENARIO
Owing to internal fiscal crises coupled with international experience and competition, the process of liberalization in India started in early 1990s. Like many other countries the need for establishing “independent regulatory commissions/authorities” was also felt in India to deal with the anticipated problems generally associated with liberalization and privatization. Prior to New Economic Policy of 1991, some regulatory mechanism was existing in India for professional activities, like medical, engineering, accountancy and legal profession. Most of the socio-economic activities were being enforced, monitored and regulated by the executive authority of the state. There has been a paradigm shift with the creation of statutory authority of the state. These authorities enforce and regulate some of the social and economic activities impinging upon public interest.
Government action or intervention takes the form of an executive order, legislative measure or judicial decision, and the exercise of such an action involves both policy-making and policy implementation. Regulation is generally based upon certain policy measures of the government, such as licensing policy, industrial policy, labour policy, agricultural policy, and so on. The regulatory machinery provided for this purpose can itself make and implement policies only within the framework of such broad policies. Another aspect of regulation is the adjudication of the rights of private individuals or units. The adjudication action of a regulatory machinery may be challenged in a court. Unless intervention is sought through the court, the regulatory unit itself exercises its quasi-judicial function. The regulatory units also execute the regulatory policies which are set by the legislature or by the units themselves either through the rule-making or the rule-adjudication process.
In both aspects, however, the regulatory units have to depend on the executive branch of the government for three reasons. First, regulation requires detailed administrative actions which are difficult for the legislative and the judicial branches of the government to handle. Courts generally lack specialized knowledge or have constitutional limitations in handling specialized types of regulatory functions. As for the legislatures, they neither have sufficient time nor the necessary technical information nor adequate technical personnel to handle complex regulatory problems. Second regulatory administration requires a considerable degree of flexibility since it seems difficult to devise rigid rules governing all situations. Regulatory agencies should be better able to anticipate and prevent unwanted results. Third, each regulatory agency normally performs specialized types of activities which are technical in nature. It has a better opportunity both to attract the necessary specialists and to accumulate experience in its regulatory functions. The internal structure of a regulatory machinery should be (i) conducive to both autonomy and continuity and, (ii) able to deal with regulatory functions effectively and efficiently.
Currently, the government is in the process of setting up more regulators. Bills are pending before the parliament for their enactment, including those related to broadcasting, ports, coal etc. The union government has also drafted Model Real Estate (Regulation of Development) Bill suggesting a regulatory authority for providing a safety net to buyers and investors. Draft of the proposed Broadcasting Services Regulation Bill aims to provide for regulation of broadcasting services in India. The knowledge commission has also suggested for creating independent regulatory authority in addition and even replacing the existing University Grants Commission. Ministry of Shipping has finalized the draft Major Ports Regulatory Authority bill. The Standing Committee on Finance of the parliament headed by M Veerappa Moily has recommended formation of a regulatory body to maintain Railway’s financial autonomy. In fact, there is a wide scope for creating a number of more regulators. However, in India, regulatory mechanism for economic activities through independent authorities is of recent origin. Except some sporadic studies by the world bank relating to power and telecom sectors and some studies in respect of Securities and Exchange Board of India (SEBI) and Telecom Regulatory Authority of India(TRAI), no systematic studies have been done in respect of other existing regulatory authorities. Regulatory Reform Bill which aims to improve the regulatory mechanism in India is still pending in parliament.
Though, each regulatory body in its status, composition, powers and working arrangements is different, some general conclusions can be drawn for the purposes of revamping those institutions. As a part of economic reforms, creation of statutory independent regulatory mechanism is gaining wider support. The independent regulatory commission has emerged as the institutional framework by which varied objectives which include ensuring universal and equitable access, consumer protection and maintaining safety and health standards etc. are sought to be met. While policy making, framing legislation, rule making and the ownership of enterprises had earlier converged in the relevant department headed by the Minister, these functions are dispersed in the new regulatory environment. The independent regulator is positioned between the legislature, executive and judiciary on the one hand and the market on the other. Even this skeletal description alerts us to the novel institutional framework in which regulation takes place and the attention it requires for ensuring that constitutionally and legally viable institutions are put in place.
But over-emphasis on regulation may be detrimental to the development of competitive markets. Anti-trust view towards privatisation also needs to be reassessed to provide sufficient autonomy to the private sector to bring innovation and technological up-gradation that may provide incentives to augment investment. This approach in the final analysis would increase productivity, improve quality of service and would lead to lower prices.
One of the major drawbacks in regulatory administration is lack of coordinating among the regulatory agencies on the one hand and between them and the government departments on the other. Take the example of mode of transportation. In several developing countries, there are separate agencies for the regulation of railroads, highways, airlines and shipping which are independent of one another, and each tries to promote the mode of transportation under which it is established. In such circumstances they tend to work at cross-purposes, and this leads to duplication and waste of scarce resources.
In addition, there are three practical difficulties facing regulatory administration. The first is delay which is generally due to lack of administrative capability. The second difficulty arises from undue influence from pressure groups. In all countries, especially the developing ones, regulatory agencies succumb to political pressure. The third is the problem of corruption which is quite common in the regulatory administration of most countries. It may be emphasized that regulatory administration cannot play a decisive role in its efforts to achieve development unless it is without these three problems. Finally, there is the lack of ‘coordinating unit’ of the regulatory administration in several countries. There appears to be no central authority responsible for the coordination and harmonization of all regulatory activities at all levels of government. As many regulatory agencies specialize in specific tasks and are charged with the responsibility of accomplishing specific ends, it is useful to have an overall review of them (regulatory agencies) periodically. As the regulatory function of government involves executive, legislative and judicial powers and the exercise of such a function involves policy-making and policy implementation, there is the need to take a systems approach to regulatory administration. The three processes – policy making, policy implementing and adjudication – should be linked together and treated as a systems approach to regulatory administration.
Another issue, which needs attention, relates to granting regulatory authorities an additional role to settle disputes by giving a statutory status of tribunals. The constitution of India under Article 323B empowers, “the appropriate Legislature may, by law, provide for the adjudication or trial by tribunals of any disputes, complaints, or offences with respect to all or any of the other matters specified in clause (2) with respect to which such Legislature has power to make laws”. The Real Estate Regulation and Development Act, 2016 intends to oversee the real estate sector through a Regulator and an Adjudicating body. This example can be replicated in other sectors as well. International experience reveals that the success of regulators emanates from their interaction with other institutions like, legislature, political and permanent executive, judiciary, and civil society.
The creation of independent regulatory agencies has in the last 2 decades proceeded on a sectoral basis, where each line Ministry or State Government, often prompted by a multilateral funding agency has constituted a regulator for a particular sector of the economy. This sectoral approach has resulted in an uneven regulatory environment. Not only has there been considerable delay in setting up of these institutions, similar issues have emerged relating to the relationship of the regulator with the ministry, the composition of the regulatory body, its functions and its accountability. This model of regulatory evolution is bound to be very expensive in terms of economic growth and welfare.
The divergence among different sectors is significant in several respects as illustrated below:
- The electricity regulators enjoy extensive powers including rule making, licensing, enforcement, imposition of penalties etc. On the other end of the spectrum is the port sector where the regulator only sets tariffs and that too with restricted powers.
- The telecom regulator must promote competition as one of its functions whereas this is not a function specifically assigned to the electricity regulators.
- The tenure of regulators varies between 3 to 5 years in different sectors.
- Generally, members of regulatory commissions and appellate tribunals cannot be reappointed. But in the case of electricity appellate tribunal, the members can be reappointed for a further period of 3 years.
- The selection process varies from sector to sector. In the case of electricity sector, there is a selection committee specified by law while in some other cases, there is no such selection process.
- In some cases, the qualifications and experience are prescribed while in others this is left open-ended.
Policy and operational uncertainties in India in respect of role, function and powers of regulatory authorities have become deterrent factors in attracting private investment in many infrastructure ventures. Decision-making must be made more transparent by resorting to public hearings and inputs from concerned stake-holders. Despite creation of independent authorities, there seems to be reluctance on the part of the government to provide necessary autonomy and functional responsibilities. In addition to lack of proper consultation, there is lack of coordination between regulators and government departments responsible for formulating and implementing investment related policies. This has resulted in sub-optimal outcomes. For instance, the private sector has shown very little interest in investing in the power sector due to lengthy procedures for granting of licenses, despite there being a single window clearance facility in place. Clear information may empower stakeholders and can inform the decision making process. However, such information should be taken into account by the regulator while making decisions. This can be ensured through accurate documentation of consultations and recourse to effective legal action against the regulator to redress bad decisions.
The regulators also need functional and financial autonomy. The government must develop a market-oriented outlook. The regulatory authorities should be allowed to generate their own financial resources through licensing, administrative fee for regulations, and charges for settling dispute. Operational autonomy is hampered further owing to the staffing of regulatory authorities. Most of the legislations setting up the regulatory authorities include an enabling clause to have persons with administrative experience on their board of directors. Taking advantage of this discretionary power the government appoints either retired or even serving civil servants.
This not only brings in bureaucratic culture; but also sends wrong signals to the private operators. Even when administrative experience is not a qualification, overwhelmingly the choice seems to be for civil servants. Political constraints and ministerial preferences over time seem to have dominated the process resulting in corruption, favouritism, politicisation etc.
The effectiveness of the regulation will depend on to extent the regulatory authorities are made professional by appointing person of high integrity and proven technical competence. The government may devise some mechanism to set up a professional pool for managing the regulating authorities as also to work out a system of creating an independent personnel agency to deal with all matters relating to staffing and service conditions.
EMERGING ISSUES AND AGENDA FOR REFORMS
The aforesaid discussion demonstrates that it is difficult to make any sweeping comment regarding the performance and effectiveness of the existing regulatory commissions/authorities. Overall they have not been fully effective and their performance has been varied. This is mainly due to faulty structure, inadequate financial and functional autonomy, lack of professionalism, and failure on the part of the government to bring in necessary administrative reforms consistent with global experience, technological changes, operational aspects of market, and bureaucratic resistance to relinquish its control. The discussion throws some issues for further analysis and highlights agenda for reforms.
The focus areas should be institutional framework for regulatory commissions, their role and functions, their relationships with the executive and legislature, and their interface with the markets and the people. The processes and methods of regulation, including rule-making and dispute resolution, should also be standardised and streamlined.
The proposed approach should establish an overarching regulatory framework for the orderly development of infrastructure services, enable competition and protect consumer interests in securing access to affordable and quality infrastructure. By clearly setting out the objectives of regulating the infrastructure sectors, it should be possible to eliminate divergent mandates currently set out for sectoral regulators.
It should be recognised that competition is the best safeguard for consumer interests. Regulation should aim at removing barriers to competition and eliminating abuse of market power. In those segments of infrastructure services that are amenable to competition, regulation should be light handed and tariff setting could be left to competitive markets whereas segments that have elements of monopoly should be subjected to close regulation.
Several infrastructure services and projects are governed by concession agreements or contracts signed between the government/public authorities and private entities. These agreements also address tariff determination and performance standards that are typically subject matters of independent regulation. A well-defined contract can lend greater predictability and enforceability for provision of infrastructure services whereas a flawed contract may lead to the contrary. Prior consultations with the regulator and stakeholders can help create an appropriate contractual framework and eliminate unintended outcomes. A regulatory process for evolution and finalisation of standardised concessions/contracts should form part of the overarching approach to regulation. Resorting to “regulation by contract” can help to overcome regulatory discretion.
For achieving the desired objectives, it is necessary to ensure that the regulatory institutions remain independent and autonomous. The selection, appointment and removal of chairperson and members should be insulated against any perceived interference or manipulation that may influence the outcome. Selection should not only be fair; it should also appear to be fair.
At present, tenures of the members of regulatory commissions and appellate tribunals vary between three and five years. An option could be to provide for a fixed tenure of four years in all cases. The qualifications and experience of members should also be specified by law with a view to ensuring a multi-disciplinary composition of the regulatory commissions and appellate tribunals. The terms of service should be sufficiently remunerative to attract qualified and experienced persons. Further, at least one of the members could be drawn from other than public sector background (such as academics, lawyers, chartered accountants, managers etc.). This provision for lateral entry would enrich the functioning of the respective regulatory bodies.
The regulator should have a fair degree of independence in determining the staff necessary to efficiently carry out its operations and in determining the compensation payable to the staff. In particular, the regulator should have the freedom to appoint expert staff on contract for upto three years on market determined compensation. The expenditure on staff would, however, be subject to approval by the Parliament.
The key test of the independence and autonomy of regulator relates to its everyday functioning relationship with the concerned Ministry. Wherever the Ministry chooses to issue policy guidelines to the Regulator they must be general in character and not relate to specific regulatory decisions. Such policy guidelines should also be preceded by consultations with the regulator. Further, these policy directives should be submitted to the Cabinet for approval and should be made available to all concerned stakeholders and the public at large.
Ensuring transparency in regulatory rule making is a crucial ingredient in ensuring accountability. The power to make regulations must be subject to the compulsory requirements of prior publication with sufficient time for notice and comment. Regulators must be compelled to respond to the comments received before any regulation is made. Once a regulation is made, it should be tabled before Parliament and subjected to scrutiny by the appropriate legislative sub-committee. Ensuring this rigorous process of scrutiny of rulemaking will help improve both the quality of rules made and the democratic legitimacy of such rules. The overall functioning of the regulator should be subjected to scrutiny by the Parliament.
The capacity of legislatures to scrutinise the functioning of regulators would be enhanced by the information and analysis presented in an audit report. The annual expenditure of the regulator must be audited by the C&AG and its report should be laid before Parliament. However, unlike the Audit Reports of Ministries and Departments, the audit of regulatory bodies should be limited to expenditure control and not policy review of regulatory decisions.
One important aspect that needs to be tackled is the identification of specific roles of the regulatory authority and the competition commission. Presently, the competition and regulation laws ignore the potential jurisdictional overlaps between the two areas of law. Sections 3, 4, 5 and 6 of the Competition Act 2002 which are the key substantive provisions of law are not market specific and apply generically to regulated and unregulated markets. So it is inevitable that sectoral regulators and the competition authority will issue directives to the same market players which are likely to conflict given the diverse perceptions of the respective authorities.
Drawing from international experience from several countries, India should consider opting for multi-sectoral regulators such as for (a) communications; (b) electricity, fuels and gas, and (c) transport. This would eliminate proliferation of regulatory commissions, help build capacity and expertise, promote consistency of approach and save on costs. In the case of States, a single regulatory commission for all infrastructure sectors may be more productive and cost-effective as compared to sectoral regulators for each sector. States should be encouraged to consider this approach and the scope of their existing electricity regulators could be extended to other sectors.
The effectiveness of regulators can be severely compromised if their decisions get locked up in appellate courts. Constitution of appellate tribunals on the lines of telecom and electricity appellate tribunals would help address this concern. These tribunals should be headed by eminent persons of judicial background and may consist of subject-matter specialists. Separate appellate tribunals could be constituted for the three major segments, i.e., energy, communication and transport. The other approach could be to constitute a single appellate tribunal for all regulatory commissions with regional benches.
Further, in an environment where regulatory experience and skills are limited, the need for capacity building assumes greater significance and requires attention.
BRINGING IN DEMOCRATIC ACCOUNTABILITY
To make the independent regulatory agency democratically accountable, three modes of responsibility need to be established. First, the regulator needs to be directly responsible to the legislature. While the Ministry will continue to be responsible for the policy objectives they set and the policy guidelines they address to the regulator, the regulator should be directly responsible to the legislature for the ways in which it chooses to administer the policy. This can be achieved by requiring the regulator to make periodic reports to the legislature, be present before the designated legislative committees to explain their actions and even making them subject to legislative questions. This will ensure that under no circumstances is the legislature unable to exercise oversight either over the minister or the regulator thereby ensuring complete accountability over important sectors of the economy. The legislative oversight in relation to the minister concerned should, however, exclude those areas where the regulator is directly accountable. Legislative oversight is also limited in one significant respect: those decisions of a regulator which are open to appeal before an appellate tribunal or court should be exempt from legislative scrutiny to avoid a clash of jurisdictions. However, it would remain open to the legislature to review the regulations or the policy underlying such decisions.
Secondly, the regulator needs to be made responsible to the people at large. This is possible by adopting processes and systems whereby interested citizens or. groups of citizens may seek and acquire information, make representations and be accorded full process and participation rights. This capacity of citizens must be extended to both the rule making and quasi-judicial aspects of regulatory functions.
The role of civil society organisations should also be recognised and enhanced. By requiring the regulator to rest decision making on publicly articulated rationale and persistently making them engage with the people at large is the most effective way for regulatory institutions to earn democratic legitimacy. Further, this is an effective safeguard against regulatory capture by special interest groups. However, it should be recognised that the requirement of engaging with civil society organisations would by itself fail to achieve the desired results unless the regulators are themselves made accountable to the legislature.
Finally, the appointment of regulators who possess the competence and integrity so that they may inspire public confidence will contribute immensely to the status of the regulator. There is a need to develop appropriate conventions, preferably enshrined in statutory rules, requiring that regulators are appointed on a fair and transparent basis with a view to ensuring that the regulatory system remains insulated from interference and capture.
Way Forward: The issues above should be subjected to an extensive debate with a view to arriving at a consensus. This could be followed by an Act of Parliament laying down the overarching principles of regulation cutting across different sectors. The proposed statute would be supplemented by the existing sector specific legislations that set out specific objectives to be achieved.
UNIFIED REGULATOR FOR FINANCIAL SECTOR
The regulatory and development roles of the regulators are perceived to be conflicting objectives. Each regulatory authority must spell its role more specifically. The growing number of regulatory authorities and their increasing role has raised issues as to whether there should be a single regulatory authority for certain common activities and functions, known as sector regulators, or there should be separate one for each separate function? The Government is engaged in resolving the issue and there is a possibility of creating a single regulatory for finance sector and communication activities. This emanates from the policy of convergence.
The Financial Sector Legislative Reforms Commission (FSLRC) has opted for a single or super regulator to replace those in equity, commodities, pensions and insurance sectors. The idea is to move from sectoral regulation to a broader framework of rules and principles. A multiplicity of regulatory agencies has created scope for regulatory arbitrage, apart from making it difficult to protect consumer interest. It has been observed that certain market players try to take advantage of multiple regulators by operating in grey areas not covered by regulation.
The Unified Financial Regulatory Agency (UFRA) will subsume SEBI, IRDA, PFRDA, and FMC. With banks being unique and specialized financial entities, the RBI has been kept out of the purview of the UFRA. The FSLRC has pointed out a number of benefits of the proposed UFRA. First, by dealing with all financial transactions other than banking and payments it would help in realizing regulatory economies of scale and scope.
Second, it would promote efficiency, by providing a common platform, as proposed, for organized financial trading in instruments, spanning equities, bonds, currencies and commodity futures. Third, unification of regulation and supervision of financial firms such as mutual funds and insurance companies would yield to consistency in consumer protection and micro-prudential regulation. The need for a UFRA has been felt in the context of confusion over the jurisdiction of different regulatory agencies over different financial products. The desirability of the proposed UFRA should be seen along with the role of other financial regulatory agencies which address resolution of financial disputes and appeals against regulators, apart protecting consumer interest.
Regulatory agencies exist to supervise the administrative functions of organizations for the benefit of the public at large. Regulatory agencies are authorized to produce and enforce regulations and are subject to legislative and legal review as they carry out their functions. Regulatory agencies must be designed to be transparent, such that their decisions and activities are able to be evaluated by the public and by legal review boards.
To be effective, all regulatory institutions should normally be empowered to make regulations, issue licenses, set performance standards and determine tariffs. They should also have the powers to enforce their regulations, licence conditions and orders by imposing punitive measures including suspension or cancellation of licences. In discharge of their functions, the regulatory commissions should be governed by the principles of administrative law and should be expected to act as quasi-judicial entities.
- With the creation of new regulatory agencies in the wake of a liberalisation, overlapping jurisdictions and conflicts became the new trend. Is there need for the creation of a super-regulator or unified regulator? (2010)
- “Rigidity in administration and centralization has greatly incapacitated the Central Social Welfare Board”. Examine, in the light of this statement, the organization and working of the Central Social Welfare Board. (1996)