Whither Regulation: Sectoral Regulation in the Infrastructure Sector
The Ministry of Railways rang in the New Year with the release of a concept paper seeking comments on the proposed constitution of a rail development authority, envisaged as an independent regulator for the Railways sector.
- Apr 7, 2016,
- Updated Apr 7, 2016 4:58 PM IST
The past two decades have seen regulatory bodies (in varying capacities) instituted for electricity, telecommunications, major ports, airports and oil & gas. Such has been the glut of sector-specific regulation that the government has even mooted legislation to bring about "cogency of approach" in regulation.
Why the sudden preponderance of regulatory bodies? Essentially, regulation is viewed as a means of ensuring expeditious decision making and guaranteeing independent, autonomous and expert oversight of highly technical sectors that require knowledge of areas outside law (such as finance, engineering, commerce and management).
Important functions of these bodies include:
1. Regulation of the entry and exit of market players.
2. Tariff-setting free from political considerations and interference.
3. Ensuring a level playing field for market players, especially in sectors with fledgling private participation.
4. Ensuring maintenance of quality of service and technical standards.
5. Efficacious and time-bound dispute resolution informed by relevant sectoral expertise.
The government is betting heavily on the infrastructure sector to boost economic growth. Towards this aim, there has been a renewed focus on revitalising the sector, with the promise of regulatory certainty being one of the many measures being used to lure investors and assure the private sector of a conducive, stable and predictable business environment. Added to this, the Kelkar Committee has underscored the "criticality of setting up independent regulators in sectors that are going for PPPs", and has recommended sector regulators for roads, ports and unban transport. Thus, it appears that the trend towards sectoral regulation is only set to continue.
In this regard, it is of value to examine some of the lessons offered by the regulatory experience so far in a bid to ensure efficacious regulation:
First, regulation has its limits and is not a miracle cure for a sector's ills. Despite regulatory encouragement of tariff rationalisation, reluctance on the part of state governments, driven by a strong strain of populism, has perpetuated sub-par consumer tariffs that have, in turn, bogged down state-run distribution companies in record losses.
Second, there is such a thing as too much regulation. The American experience is useful in this regard - following the banking crisis, the sudden enthusiasm for regulation has been criticised as choking rather than reviving the sector.
Third, clarity of roles is essential. The multiplicity of regulators in the airports sector is a case in point, having resulted in an overlap in functions, sparking calls for arms-length decision making.
Fourth, for a regulator to be effective, it has to have adequate capacity, in terms of resources, expertise and funding. Understaffed, ill-equipped and over-burdened regulators are likely to face serious efficiency constraints.
Fifth, there is little to be gained from a regulator that is toothless and without the power to enforce its own orders, as seen with the Tariff Authority for Major Ports.
Sixth, these regulatory bodies operate side-by-side with the writ courts, a fact not without its drawbacks, as shown by the recent conflict between the directions of the National Green Tribunal and High Court of Bombay over the widening of NH-7.
Nevertheless, regulatory bodies can bring stability and predictability to a sector and play key roles in efficacious and time-bound resolution of disputes. Thus, going forward, it is imperative that the institution of regulatory bodies actively take into account the lessons of India's regulatory experience:
At the outset, any move towards the institution of regulatory bodies should be backed by a cogent policy that sets out a vision for the sector and aims to drive the sector forward in a manner that adequately balances the interests of the government, consumers and investors.
Furthermore, regulatory bodies must be suitably empowered to formulate necessary regulations in order to ensure regulation keeps pace with the changing demands of the industry, without having to resort to the (often slow) Parliamentary process to address such developments.
Added to this is the need to develop a shelf of bankable projects in each sector that can be bid out to the private sector.
Another possible area to be explored is the constitution of a 'super-regulator' for the entire infrastructure sector to allay risks of a 'too many regulators spoil the plot' situation.
In the ultimate analysis, regulation, done right, can well be the much-needed fillip for the Indian infrastructure sector.
The author is Associate at J Sagar Associates
The past two decades have seen regulatory bodies (in varying capacities) instituted for electricity, telecommunications, major ports, airports and oil & gas. Such has been the glut of sector-specific regulation that the government has even mooted legislation to bring about "cogency of approach" in regulation.
Why the sudden preponderance of regulatory bodies? Essentially, regulation is viewed as a means of ensuring expeditious decision making and guaranteeing independent, autonomous and expert oversight of highly technical sectors that require knowledge of areas outside law (such as finance, engineering, commerce and management).
Important functions of these bodies include:
1. Regulation of the entry and exit of market players.
2. Tariff-setting free from political considerations and interference.
3. Ensuring a level playing field for market players, especially in sectors with fledgling private participation.
4. Ensuring maintenance of quality of service and technical standards.
5. Efficacious and time-bound dispute resolution informed by relevant sectoral expertise.
The government is betting heavily on the infrastructure sector to boost economic growth. Towards this aim, there has been a renewed focus on revitalising the sector, with the promise of regulatory certainty being one of the many measures being used to lure investors and assure the private sector of a conducive, stable and predictable business environment. Added to this, the Kelkar Committee has underscored the "criticality of setting up independent regulators in sectors that are going for PPPs", and has recommended sector regulators for roads, ports and unban transport. Thus, it appears that the trend towards sectoral regulation is only set to continue.
In this regard, it is of value to examine some of the lessons offered by the regulatory experience so far in a bid to ensure efficacious regulation:
First, regulation has its limits and is not a miracle cure for a sector's ills. Despite regulatory encouragement of tariff rationalisation, reluctance on the part of state governments, driven by a strong strain of populism, has perpetuated sub-par consumer tariffs that have, in turn, bogged down state-run distribution companies in record losses.
Second, there is such a thing as too much regulation. The American experience is useful in this regard - following the banking crisis, the sudden enthusiasm for regulation has been criticised as choking rather than reviving the sector.
Third, clarity of roles is essential. The multiplicity of regulators in the airports sector is a case in point, having resulted in an overlap in functions, sparking calls for arms-length decision making.
Fourth, for a regulator to be effective, it has to have adequate capacity, in terms of resources, expertise and funding. Understaffed, ill-equipped and over-burdened regulators are likely to face serious efficiency constraints.
Fifth, there is little to be gained from a regulator that is toothless and without the power to enforce its own orders, as seen with the Tariff Authority for Major Ports.
Sixth, these regulatory bodies operate side-by-side with the writ courts, a fact not without its drawbacks, as shown by the recent conflict between the directions of the National Green Tribunal and High Court of Bombay over the widening of NH-7.
Nevertheless, regulatory bodies can bring stability and predictability to a sector and play key roles in efficacious and time-bound resolution of disputes. Thus, going forward, it is imperative that the institution of regulatory bodies actively take into account the lessons of India's regulatory experience:
At the outset, any move towards the institution of regulatory bodies should be backed by a cogent policy that sets out a vision for the sector and aims to drive the sector forward in a manner that adequately balances the interests of the government, consumers and investors.
Furthermore, regulatory bodies must be suitably empowered to formulate necessary regulations in order to ensure regulation keeps pace with the changing demands of the industry, without having to resort to the (often slow) Parliamentary process to address such developments.
Added to this is the need to develop a shelf of bankable projects in each sector that can be bid out to the private sector.
Another possible area to be explored is the constitution of a 'super-regulator' for the entire infrastructure sector to allay risks of a 'too many regulators spoil the plot' situation.
In the ultimate analysis, regulation, done right, can well be the much-needed fillip for the Indian infrastructure sector.
The author is Associate at J Sagar Associates