Sunil Jain: Why have regulators?

RATIONAL EXPECTATIONS

Over the past few years, this column has concerned itself with examining decisions of various regulators, to see if they're fair or not. And, thankfully from a journalist's point of view, there have been a host of regulatory decisions that have been one-sided, in areas like telecom especially, giving this column plenty to rail about. The assumption all along has been that while the regulatory framework is a fair one, it is the individual regulators who go wrong. While that is undoubtedly true many times, an equally serious problem is that the regulatory system is often designed to ensure regulators give the kind of judgements they do""the "bad" regulators add to the problem, but even a "good" regulator would have no option but to give a bad judgement given the framework.

The latest trend in this saga of poor regulatory framework is the Petroleum and Natural Gas Regulatory Board Act, which been gazetted recently. If the regulator steps out of line, the government has the power to remove him/her before his/her term comes to an end after just an internal inquiry! In the TRAI Act, in comparison, the government can also get rid of the regulator on grounds of abuse of office, but the matter has to be referred to the Supreme Court, which has to satisfy itself. Now that this condition has been diluted, pity the poor regulator who dares take on the government.

But the regulations that really take the cake are those pertaining to the ports sector. The purpose of allowing the private sector in is to increase competition, efficiency and so on, basically improve service levels while lowering tariffs if possible, right? Well, not if you go by the revised guidelines issued by the Tariff Authority for Major Ports (TAMP) after the government issued it policy directions (https://bsmedia.business-standard.comtariffauthority.gov.in/htmldocs/rev-guideline.pdf). Guideline 2.4.1 says TAMP will continue with the existing policy of cost plus return on capital (that is, a firm gives its cost and the TAMP allows it a fixed proportion of this as profits""if the costs are padded, the returns also increase) but would also try to look at efficiency benchmarks. Fair enough, you'd say, till you read on and find that the efficiency levels being talked of are just the past performance of the same operator. "This would", say the guidelines, "therefore, naturally exclude any comparison of an operator ... with ... different operators"! So there's no really compelling reason to get more efficient.

The other gem, Guideline 2.8.1, deals with the royalty paid by the concessionaire to run the port/berth. The guideline says that if a deal was signed before July 29, 2003, the royalty paid can be counted as an expense subject to certain conditions! That is, a firm can win a bid saying it will give 99.9 per cent of its revenue to the government, count this 99.9 per cent as a cost, and bill hapless users of the port for this. In the case of the Chennai Container Terminal Limited (CCTL), the company won the bid by offering to share 37.1 per cent of its revenue with the port authorities, and once it factored this into the cost, it suggested a 50 per cent hike in tariff levels! While dealing with this in March 2002, the TAMP chief observed that TAMP had not been made a party to this revenue-sharing clause, and then talked out how even a 99.9 per cent revenue share could be offered if it was going to considered an expense. Given this, TAMP rejected the expensing and found CCTL still got an average return of 19.5 per cent. CCTL filed a review petition, which was also rejected. So, CCTL went to the ministry, which then directed TAMP, which had a new chief by then, to allow some part of the revenue share (27 per cent as compared to the bid of 37.1 per cent). So much for reduction in tariffs post-privatisation or the regulator's independence. Allowing CCTL this would probably add up to several thousand crore rupees over the life of the concession.

The best example of what such policies do, of course, is the Nhava Sheva International Container Terminal (NSICT). But for that, you have to understand Guideline 2.13 on how unforeseen gains are to be apportioned between the terminal operator and the users, and before that, a word on how tariffs are fixed. If a port's costs are Rs 1,000 and it expects 1,000 traffic units, then Re 1 per unit will cover its costs. If, however, the traffic units double to 2,000, the port's profits surge. This is precisely what happened at the NSICT. In 2000, the NSICT's tariffs were fixed by TAMP on the basis of the NSICT's traffic projections with the standard proviso that if the projections were exceeded, the next tariff would take this into account""the actual traffic, however, was around two-thirds more. Now since Guideline 2.13 says a company gets to keep half the extra profits that accrue (in this case, Rs 236 crore over 2000-01 to 2004-05), the NSICT got a 33 per cent return on equity instead of the 20 per cent or so it would have got otherwise. So, if a company provides lower traffic projections it stands to gain, and there is little the regulator can do. If you add to this, the benefit of the royalty that the NSICT is allowed to expense, the return on equity spirals once again. And the best part is that all of this is sanctioned by the law.

Postscript: None of this should suggest the problem is only with the regulatory rules and not with the regulators. But that story will have to wait for another day.

suniljain@business-standard.com