Regulators can't pack a punch without financial muscle

A constructive relationship between government and the regulator is essential for the success of regulatory reform. Such a relationship can develop only when governments empower the regulators so that they can hold their own. It is, however, not easy to empower the regulators. Bureaucracies all over the world do not willingly give up the powers that they enjoy. Most countries have sought to provide for regulatory autonomy by setting up the regulators through specific legislation. In India too, where the bureaucracy is powerful, regulation has been established through legislation in order that the regulator?s autonomy is not left to the magnanimity of the bureaucracy. However, legislation alone cannot ensure autonomy unless the legislation provides for certain essential safeguards to ensure autonomy. Safeguards that have been considered essential the world over are a transparent selection process, clearly stated qualification and disqualification criteria, prescribed tenure, freedom to obtain expertise and authority to incur expenditure independent of government approval, and finally criteria for removal. All the regulatory legislation in India provide for qualification criteria for selection of regulators, and these invariably include sufficient experience in economics, finance, law, administration, consumer affairs, or industry. Sector experience has not been considered essential. At present, a majority of the chairmen of regulatory bodies are either retired civil servants or judges. It is often argued that since regulatory authorities exercise the functions and powers which were earlier vested in government and enjoy quasi-judicial powers, they are best manned by persons who have served in government or the judiciary. But regulators are neither fish nor fowl; they are not the government and certainly not the judiciary. And their mandate extends beyond tariff setting to taking measures as are necessary to introduce competition, increase efficiency, provide quality of service standards etc. These call for a thorough knowledge of the sector and a vision for its future, and both these qualities are not necessarily possessed only by retired civil servants or judicial officers. They can also be found in the industry, amongst professionals, and the academia, but the process of selection and conditions of service do not encourage a wider selection. All the regulatory legislation contain provisions that restrict the scope of employment of regulator once he demits office, and this discourages younger and competent people from the industry and professions from accepting appointments as regulators. The post of Chairman, CERC which has been vacant since February 2001 was reportedly offered to a highly reputed professional in the electricity industry and was turned down. All the regulatory legislation in India provide for a fixed tenure for the regulators. The tenure is normally five years subject to an age restriction. So far, early termination of regulators? tenure has occurred only in the case of TRAI where six of its seven members were removed from office when the Authority was reconstituted through an ordinance in 2000. Interestingly, the port legislation has a provision for superseding the TAMP. A regulator cannot be independent unless he enjoys both financial and organisational autonomy. The Indian regulators, unfortunately, enjoy neither. CERC and the state electricity regulators such as OERC have to depend on the government for determining their annual budgets. CERC?s budget is charged to the Consolidated Fund, but this does not provide for autonomy as CERC has to seek government?s approval for incurring expenditure on individual activities. TAMP is wholly dependent on government for its budget. The TRAI Act provides for a Regulatory Fund, which TRAI can administer. But this fund is yet to be established and TRAI continues to depend on government for funding. One of the reasons for establishing regulatory authorities outside government was that they could draw expertise from the market which governments cannot at civil service salaries. Unfortunately, the regulators in India are not free to hire staff of their choice at salaries they command. The result is that regulatory authorities are largely manned by staff drawn on deputation from government or the regulated public utilities. Given their background and mind set, they lack a commitment to the regulatory cause and suffer from a conflict of interests. Training of regulatory staff, thus, assumes great importance. The regulator clearly should have powers to call for information, and conduct an inquiry into the working of any service provider and issue such directions as are necessary for the proper functioning of the service providers. While TRAI enjoys these powers, they are not available to TAMP or CERC. The regulators should also have access to reliable data, and this is particularly important for tariff setting. The data mostly rests with the regulated entities, and is not always reliable. Regulators should, therefore, have powers to prescribe the accounting standards and information systems that the regulated entities should adopt. The legislation that envisages independent regulation should also provide for all the safeguards necessary to ensure autonomy. The Indian legislation have not gone far enough in this direction largely because there has not been a coherent policy on regulation. Drafting of the legislation in each sector has been left to the Ministry concerned, and the ministries have been reluctant to let the regulators become independent. It is now time for government to identify the lacunae in the legislation and initiate changes in order to empower the regulators. Empowerment of the regulators is a necessary but not adequate condition to improve regulatory governance. In the United States, infrastructure services were largely provided by the private sector, and independent regulation became necessary to regulate private monopolies and oligopolies. The situation in India is different. Infrastructure services have so far been largely provided, and continue to be provided, by the government and public utilities like VSNL and MTNL in the telecom sector and the SEBs in the electricity sector. Independent regulation is all the more difficult when the regulated entities are powerful, government owned entities. It is, therefore, necessary that even as regulators are empowered, regulatory reforms should be accompanied by the restructuring of the public utilities and their privatization.