Sunil Jain: Regulate the regulators

RATIONAL EXPECTATIONS

Now that an airport regulator is expected to be in place soon, most expect former civil aviation secretary Ajay Prasad to get the job. And when the current ports regulator retires, it is widely expected that current shipping secretary AK Mohapatra will succeed him. Not surprisingly, since with a few exceptions such as SL Rao, who was the country's first central electricity regulator and Justice Sodhi, who was the first telecom regulator, most regulators have been retired bureaucrats, and often from the same sector as well.

So, while Pradip Baijal was disinvestment secretary before he became the telecom regulator, the current telecom regulator Nripendra Misra was telecom secretary when he retired (the current telecom secretary hopes to become one of the members of the telecom dispute settlement tribunal!) and the central electricity regulator AK Basu was power secretary before he took up his new assignment "" indeed, the post was kept vacant for nearly ten months till Basu retired, whether deliberately or as a matter of chance is something that can only be a matter of speculation.

While the fact that most regulators are ex-bureaucrats does seem a bit odd, what really matters is their track record. Sadly, however, their record has been quite poor. In which case, while it is true the government has managed to get regulators at salaries which are not designed to attract the best in the business, the final impact has been to slow down growth in the sector "" again, SL Rao is the exception since, as the country's first power sector regulator, he did manage to put in place some basic rules to help govern the sector, though some of these got watered down after he left. Justice Sodhi, of course, got removed for his efforts at imposing discipline and behaving as if (to the government's horror) he was in charge of the sector.

As a result of this, perhaps, or due to the inherent nature of bureaucrats, most regulators have tended to toe the ministry's line. So, Baijal gave the recommendations that allowed Reliance Infocomm to legalise its mobile phone operations and the government was quick to accept them; and when the favoured firm was caught changing the telephone numbers on international calls to avoid paying the mandatory access deficit charges, Baijal refused to punish the firm even though it was part of his job. For one, he was the person that fixed the access deficit charges and second, by not paying these charges, Reliance Infocomm was able to offer cheaper long- distance services than its rivals "" maintaining a level playing field was one of Baijal's jobs.

Misra, who is now complaining that the government has cherry picked his recommendations, refused to take the opportunity he got to clean up the method of allocating scarce spectrum, preferring instead to follow the existing system and even gave contradictory recommendations "" while he recommended that no company be allowed to own more than 20 per cent of the equity in another telecom firm in the same circle on the grounds this reduced competition, he didn't think this flew in the face of the recommendation that CDMA mobile phone firms be allowed to offer GSM mobile services in the same circle! And he increased the number of subscribers required for each chunk of spectrum without even inviting the mandatory comments on the subject "" not surprisingly, this created the impression he'd done the minister's bidding since existing firms found their spectrum path choked off while Reliance found another back-door entry, this time into the GSM mobile space.

Frankly, if this is the record of bureaucrats who become regulators, the government needs to seriously reconsider the strategy of appointing them to these posts. More so since, as bureaucrats, they've either contributed to the mess in the sector or have paid scant attention to fixing the problem. Thus, as civil aviation secretary, Prasad failed to see that the evaluation process for the privatisation of the Delhi and Mumbai airports was biased in favour of the Anil Dhirubhai Ambani Group and even tried his best to award the deal to the group after this was pointed out. Nor did Prasad take any action against the global consultants who were caught fudging the marks. And, as the controversy over the Delhi airport snowballs, it may just be that the contract signed under Prasad's watch wasn't exactly ironclad.

Mohapatra's tenure as shipping secretary has been equally listless and little has been done to fix the cost-plus nature of tariffs. Indeed, while it has been shown that bidding on revenue shares is a bad idea, under Mohapatra's stewardship, two more ports were privatised with revenue shares of more than 40 per cent. If a company has to part with 40 per cent of its revenue and still make profits, the only conclusion is that the firm is charging monopoly tariffs "" if, however, the tariffs are fixed at competitively benchmarked levels, then the company offering to share 40 per cent of its revenues has to either cheat, go bust or renegotiate; there is no fourth option.

Given how important infrastructure is for the country's growth, and the billions of dollars that need to be invested here, not getting world-class regulators is asking for trouble "" to paraphrase Indiresan's law, second-class regulators will give you third-class infrastructure.