The Hindu Business Line : Regulatory authorities — Role in a deregulated economy

THE transition of the economy from being a regulated one to a deregulated one is a momentous step. But if a deregulated economy is not to lead to cut-throat competition or predatory exploitation of the consumer, it does need some transparent, normative regulation.

There are regulatory authorities for the power, insurance and telecom sectors, but merely setting them up is no automatic cure-all for every problem. The agitation by the Left parties against the decisions of the Andhra Pradesh Electricity Regulatory Commission (APERC) some time ago, leading to a law and order problem, is a case in point.

In that case, the Leader of the Opposition in the AP Assembly not only alleged that the World Bank was dictating terms to the State Government and the APERC but went to the extent of suggesting that a telephone call from the Chief Minister to the APERC Chairman was all that was necessary to roll back the hike in the rates! It is, therefore, necessary to be clear about the exact role of a regulatory authority in a deregulated economy.

Even in a so-called free market, there is always some special legislative regulation on matters of safety, pollution, industrial relations, taxation, and so on. But it is not such peripheral regulation that is meant when reference is made to a regulatory authority, which is meant to regulate the core activity of enterprises in the economy.

Why do we need a regulator in a liberalised economy? Is there is a real social need, or is it just the manifestation of a lingering reluctance on of the government to let go?

In respect of ordinary consumer goods and services for final consumption, a liberalised economy is expected to encourage the entry of a large number of private producers, none of them in a position to dominate the sector by sheer size (unless it is through the sheer inimitable excellence of their product or service).

For example, we do not need a watchdog body for the soaps and toiletry business or in other areas of the FMCG sector.

Consumer interests are taken care of, by and large, by competition and the threat of the consumer `voting with his feet'. Such aspects as quality and complaints are taken care of by institutions like the ISI, the consumer courts and the Competition Commission.

But there are some sectors either dominated by government monopolies or which are likely to attract fly-by-night operators. Examples of the first are power and telecom, and of the second non-banking finance companies and airlines (insurance would seem to fall under both categories).

The former are considered natural monopolies, where it is not possible to promote the type of intense and widespread competition as in common consumer goods.

In such areas, because of the essential nature of these services, the consumer may be forced to put up with high tariffs and/or bad service without having an effective option of choosing another supplier. It is in such cases that, once the government withdraws control, there is need for a regulatory authority. The government policy is to set up watchdogs as independent, quasi-judicial, statutory bodies, often with wide-ranging powers matching those of a High Court. But issues and problems do not vanish with the mere setting up of such high-power bodies. . Moreover, the functioning of these bodies may itself lead to the following problems:

The regulator may routinely adopt the rules and regulations followed earlier by the government departments concerned. Dealing with independent quasi-judicial high-power bodies with impersonal, rigid procedures may sometimes be more frustrating for the stakeholders than interaction with the bureaucracy or the political executive. The danger is real because the regulatory bodies may sometimes be manned by people from the bureaucracy or from the very public sector organisations they are supposed to regulate, and the earlier attitudes and mindsets are liable to be carried over to their new job.

This is exactly what happened to the `autonomous' public sector enterprises when they were first set up with the noble intention of breaking away from the government mindset.

If, as happens in government often, the watchdog agencies are headed and manned by generalists lacking a deep understanding of the important sectoral issues, they will be unable to dynamise the sector or envision its future creatively. The technical experts of the regulatees may manage to stampede the regulatory bodies into partisan action.

Like any other institution created by government, the regulatory organisation may be `packed' with politically pliant people and the government may succeed in doing backseat driving while maintaining a facade of deregulation and autonomy.

When the regulatee is a public sector organisation and the watchdog outfit is headed and manned largely by people drawn from government, the latter may see its primary task as not one of promoting efficiency and protecting consumer interests but as one of baling out the public sector regulatee (who is usually in a financial mess) and reducing the government's budgetary burden and tolerate a cost-plus pricing formula.

Because of the high, statutory status given to the watchdogs, any appeal against their orders can only be to a high court, and that too only on matters of law and not the facts or merits of the case, which are unappealable.

As has happened with many public enterprises, regulatory bodies may also remain headless for long periods due to government inertia or extraneous considerations making it frustrating for the stakeholders and allowing a vital economic sector to stagnate.

Even if everything else is perfect, there may be external compulsions making it difficult for the government and the regulators to be genuinely independent, as in the case of World Bank agreements, whose stipulations have to be complied with however unpopular they may be.

Balancing the pros and cons, we may now try to indicate broadly how a regulatory authority should attempt to function if its avowed purpose is to be achieved: Promoting the development of the regulated sector so as to satisfy consumer needs efficiently and profitably on a sustained basis. The following suggestions are made:

Though the bodies are expected to take a holistic view of the development of the sector and the legitimate interests of all stakeholders, the key figure is surely the consumer. Unfortunately, statutes setting up the authority, though they do refer here and there to `consumers' interests and `consultation with those affected', have no overriding, clear customer-friendly focus or ring about them.

There is no exclusive chapter on consumer rights or any mention of a consumers charter which is now an accepted component of citizens' empowerment. The Statement of Objects and Reasons of one State legislation setting up an Electricity Regulating Authority (ERA) does not contain the word `consumer' at all!

The Acts are all couched in the usual long-winded legalese leaving, most things to the good sense and discretion of the authorities. It should be possible to redraft these in simpler, more operational and consumer-friendly language.

As modern Acts are usually generally worded and the devil is in the regulations made thereunder, effective prior consultation with consumers is essential while framing them. Transparency and interactive accessibility should be the twin cornerstones of rule-making.

The watchdog bodies have a genuine difficulty in regulating a sector dominated by public sector monopolies, such as power. Such monopolies usually have a record of operational inefficiency, financial non-viability and political interference (which has caused the former).

As soon as a regulatory authority is set up, consumers may expect an immediate, dramatic improvement in operational efficiency and quality of service in such monopolies, and consequent benefits to consumers. What is feasible is for the regulators, during the first two to three years, to protect these enterprises from political interference, unmistakably emphasise operational efficiency, stabilise their financial status and then gradually tighten the pricing norms and pass on the benefits to consumers thereafter.

This aspect is likely to generate controversies and political agitations as in the AP case referred to earlier. This calls for a high level of communication and stakeholder management capability on the part of a regulator. Quasi-judicial bodies usually keep a low profile and, in order to avoid a perception of being amenable to pressures, communicate with stakeholders minimally and only in a formal, court-like mode.

The authorities would do well to engage work study experts and get their procedures and work methods streamlined and not adopt conventional government procedures of paper-work and processing.

They should have visible, effective mechanisms for interacting with consumers and not allow their quasi-judicial status to become a barrier of look-down condescension. An active, open and frequently-convened Advisory Council is a must.

It is of the utmost importance that they should convince all stakeholders that their objectives are to ensure the following:

Only serious, sound, long-haul players are allowed to enter the sector,

There is transparency in their working,

No restrictive practices are resorted to,

Acceptable minimum standards of operational efficiency are adhered to in production and supply, and

Prices charged are consistent with efficiency, equity and sustained healthy development of the sector.

These will not happen automatically merely because high-status regulators are set up as statutory bodies. The overseeing bodies have to be effectively managed as an innovative combination of not only authority, rationality and objectivity but also sensitivity, and statesmanship.

Stakeholders should not be driven to ask: Who will regulate the regulator?

(The author is a former member of the Indian Administrative Service.)

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