Tuesday November 3, 03:27 AM

Source: Indian Express Finance

Financial autonomy to regulatory agencies

By Pradeep S Mehta
An important feature of infrastructure regulatory reform relates to separation of policy-making, regulation and operation functions. It is generally observed that separation of the three functions is seldom effected in true sense and they continue to be interlinked. The most prominent being cases where an independent regulator has been set up, but is made to report to a line ministry, which also manages state-owned incumbent. Thus independent regulation is given the short shrift, which will adversely affect our investments. A study done by CUTS across the regulatory architecture in select developing countries in Asia (India, Indonesia, Vietnam and Cambodia) and Africa (South Africa, Kenya and Zambia) that developing countries pose unique challenges in implementation of regulatory regimes and that experience of developed countries are not directly transferable to the developing world. The study threw up some interesting learnings, such as the regulatory framework adopted by Zambia in water supply and sanitation sector as a good example of separation of policy-making, regulation and operation functions. The standard arrangement of post-regulatory reform is to leave the development of policy framework in the hands of ministry, whilst implementation becomes the function of regulatory agency. Confusion, however, prevails over what is a policy matter and what is a regulatory matter, and government departments seek to deal with typical regulatory issues under the grab of policy matters. This severely undermines the ability of a regulator to function independently. The practice with respect to the Electricity Authority of Cambodia (EAC) is quite revealing in this context. The enabling Act specifies clear separation of EAC s function as regulator from that of the ministry concerned, and interaction between EAC and the ministry is clearly stated in the Law. This provides clarity in respective roles of ministry and regulator. When it comes to regulating the state-owned incumbent or taking measures that could impact its interest, cases of micro-management by the line minister are observed, and independent regulators are perceived to be ineffective or powerless. Eskom, the dominant vertically integrated state-owned utility in power sector reports to Department of Public Enterprises, and not ministry of minerals and energy, the line ministry for energy sector. In this scenario, the line ministry does not have any interest in protecting Eskom, and regulator is able to take action that affects SOE s interests. The regulator s assertiveness was shown when in year 2004 it turned down Eskom s request for an above-inflation tariff hike of 8.5% and instead approved a low 2.5% rise, which resulted in Eskom appealing to the ministry of minerals of minerals and energy, but the minister upheld the order passed by regulator. An important objective of regulation is to protect consumer interest and involve stakeholders in decision-making process. The regulators in energy, telecom, and water supply and sanitation sectors in Zambia have formed joint consumer watch groups. These groups act as regulators link between consumers and service providers. They serve as an important contact point to channel consumer complaints, queries and other concerns pertaining to quality of services. The concept has proven to be very successful in establishing the regulator s presence on the ground. In the past we have argued for creating a fund to support consumer advocacy in the country, with which the Planning Commission has concurred. This would ensure effective consumer participation in the regulatory process. In most cases, the line ministry or government department plays a decisive role that ultimately limits the capacity of regulator. In India, for instance, there is general, if not proactive, indifference towards granting financial autonomy to regulatory agencies. Relevant provisions of law that seek to ensure financially autonomy are also not implemented. Regulatory authorities often compete for qualified personnel, which becomes more important in a country where regulatory skill is in scarce supply. Weak financial autonomy can greatly damage regulator s ability to compete in this area. The problem is further compounded if regulator does not have freedom to appoint staff and determine their salary. Here again, the state of India s regulators is precarious. Most of the staff in regulatory agencies is on deputation from various government departments. The central government prescribes salaries and other terms and conditions of service of regulator s staff. Regulators in Kenya, in contrast, have the powers to appoint (This is part-I of a two-part series. The second part will appear in the next edition) The writer is founder secretary-general of Consumer Unity & Trust Society (CUTS International)