Payal Malik contrasts the roles played by regulators in the telecom and electricity sectors

FE-INDICUS POLICY SERIES

Attracting the private sector to infrastructure industries requires a way for the state to credibly pre-commit to not behaving in an opportunistic way once private entry has been made. Direct regulation by the state is not viable, as it amounts to the fox guarding the chicken coop: it invites state actors (politicians and bureaucrats) to capriciously frame regulations to suit their ends, which are not necessarily congruent with the larger public interest. The creation of independent regulatory institutions is a way for the state to credibly tie its hands. In the past decade or so, India has seen the mushrooming of many independent regulators for infrastructure industries.

One of the important roles of the regulator is to foster competitive markets and where such markets are absent, to mimic competitive market outcomes to the extent possible. Telecom regulation in India has had better regulatory outcomes because of the efforts of the regulator to create competitive markets, which then reduced the regulatory burden.

 

 

The electricity sector’s regulation has failed precisely because of the regulators’ inability to introduce competition. Technology differences in these sectors offer only a part of the explanation. The general lesson that has emerged from more than a decade of independent regulation is that until and unless competition is introduced where feasible, there is little to be gained from this form of regulation.

The measures taken by Trai to reduce tariffs through encouraging increased competition included: introduction of a unified access licensing regime; introduction of the calling party pays regime; lowering of the access deficit charge (ADC) from 30% to 10% of the sectoral revenue and finally scrapping it from April 1, 2008; allowing cheaper handsets to be sold at the time of delivery (with the rest of the money charged in installments); and allowing cheaper intra-network calls, among others. The government encouraged the process by replacing the high entry fee with revenue share and reducing the revenue share further in 2001 and 2003 by accepting the recommendations of the regulator in this regard.

Once competition was established by the regulator, which was a necessary condition for the growth of the sector, the market took over. New entrants eager to expand their market share offered innovative services that increased affordability and consequent connectivity.

On the other hand, the absence of competition in any segment of the electricity sector made the task of the regulators onerous.

Continued interference by the government through the issuance of opportunistic ‘policy’ directives, resulted in legitimately mandated regulatory functions of this sector being routinely compromised. One of the major functions that took a hit was the introduction of competition.

With insufficient institutional distance between regulators and state-owned firms, especially when there exists no firewall between the state actors and the regulator, it was naïve to expect the regulators to promote competition. Being two aspects of the same entity, namely the Indian state, it is not credible that the regulator is even-handed. Regulatory capture by state-owned firms is a very real threat.

Creation and sustenance of independent regulatory institutions requires a substantial degree of political and judicial maturity. Ultimately, the state actors have to forbear routine interference in areas that they have hitherto considered to be a part of the state’s (i.e. their own) eminent domain. The line ministries have to commit to a mere supervisory function and steer the regulatory agency at arm’s length, with the policy guidelines being general and not prescriptive.

Transparency and accountability of these bodies requires that the officials manning these regulatory commissions are truly independent and accountable to the legislature and not to their line ministries to minimise the conflict of interest. Of the 18 electricity regulatory commissions we have data for, 71% of them had retired IAS officers as their chairmen. This kind of representation is not conducive to independent decision-making.

While multi-sector regulation may be a solution, as it is less susceptible to industry and political capture, it is also important that the competition authority performs its due role within the regulatory regimes. Relying on regulatory oversight alone without the backdrop of an effective antitrust body would leave both temporal and substantive gaps in enforcement. ‘Regulatory gaming’ undermines both the regulatory system itself and the longstanding complementary relationship between regulatory and antitrust law. Here, I would like to add a word of caution that the relationship between these agencies has to be necessarily complementary and not of dominance, with the regulator promoting competition and the competition authority being watchful of anti-competitive practices. Sectoral regulators as documented in the case of the telecom regulators have tools at their disposal to do so.

Thus, the institutional arrangements that can enhance the quality of regulatory governance are: clarity of regulatory roles, objectives and powers; a credible firewall between the regulator and the state actors to guarantee the regulator’s independence; participation in the regulatory process by interested parties such as consumers; and accountability of the regulator for his decisions. Yet, and here is the rub, the creation of institutions meeting these criteria and the implementation of complementary reforms are in the hands of the very political class that stands to lose the most from these changes. Slow and hesitant attempts to untangle the mess are underway in the face of pressure from consumers and other interested parties.

The author is an associate professor at Delhi University and advisor at Indicus Analytics, This e-mail address is being protected from spambots. You need JavaScript enabled to view it  

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