A separate function

The finance minister recently said that the government is planning to appoint regulators for aviation, railways and petroleum. Hopefully, this will be done soon, because all the sectors he mentioned have a heavy government presence and, as was seen in the case of India's most successful reform story, telecoms, if the incumbent is a government company, it can act as a major impediment to private investment. It was only after the department of telecommunications was brought to heel in 2001 that the real expansion in private phone services began. There is no reason to believe that this will not be true of other sectors as well.

Perhaps the maximum amount of resistance to the idea of an independent regulator will come from the Indian railways, which are amongst the last of the large government monopolies in the country and which are now beginning to think of bringing in private players in the movement of freight. Private container trains will soon be a reality, and with a dedicated freight corridor being planned, the time has come to set up a rail regulator. For technical, operational and personnel reasons, this corridor will, of necessity, have to be operated by the railways. But since private freight trains will run on it in competition with the railways, disputes are bound to arise. To adjudicate on these""some involving the railways and the private operators, and others involving private operators alone""an independent body will be needed. The question is: how independent of the railways will the regulator be? To everyone except the railways, the question is what the Americans picturesquely call a no-brainer because a player in a game cannot be the referee as well. But government monopolies prefer to short common-sense in pursuit of their own interests, which are carefully disguised in terms of national security and other such holy cows. But, as has been rightly said, institutional efficacy demands functional independence.

This requires maintaining an arm's length relationship from all interest groups, including government ones, which always masquerade under banners of public service obligations while serving purely the vested interests of entrenched players. Independence also entails certain other implicit attributes such as the status of the regulator, her ability to act freely, and, above all, the ability to demand and acquire submissions from the government. In short, the institution must not be one that the government can ignore, which will happen if the rail regulator is from within the railways. Simply put, the rail regulator must have statutory status, an independent budget, and the power to over-rule the minister. The latter is especially important since in India the issue has been muddied by making a self-serving distinction between policy and rules: the minister makes policy and the regulator makes the rules. This is an engaging concept but is actually quite nonsensical in the context of commercial services because it allows the minister an entry into operational issues. This is what must be avoided because, in the final analysis, the objective of the dedicated freight corridor is to provide competition to the railways and not, as the railways see it, a way of augmenting capacity.