Public Private Parternership-Regulator Framework

7/31/2019 Public Private Parternership-Regulator Framework

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Public Private Partnership in Infrastructure

Development A Regulatory Perspective

..

The Eleventh Five Year Plan has set an ambitious target of

increasing total investment in infrastructure from around 5% of

GDP in the base year of the Plan 2006-2007 to 9% by the terminal

year 2011-12. Around 30% of the required investment of around

Rupees 2056,150 crore (US $ 514 billion) will have to come from

private capital. The ability to mobilise private resources on this scale

depends critically upon the creation of a supportive investor-friendly

environment and the regulatory system is a critical component of

that environment. 1

- Montek Singh Ahluwalia,

Deputy Chairman,

Planning Commission

A. INTRODUCTION - CHOOSING AND EXPLAINING RELEVANT GOALS ANDCONSTRAINTS

Inadequate infrastructure constitutes a significant constraint on Indias growth

potential. Improvement in physical infrastructure has thus emerged as an extremely

high priority area. However, infrastructure development is highly capital intensive and,

therefore, requires huge resources. Public resources available for investment in

physical infrastructure are limited because of the increasing demands for investments in

social sectors like health, education, etc., and also due the fact that the demands of

sovereign governmental functions such as defence, policing, etc., further impinge upon

1 Foreward to the Approach Paper titled Approach to Regulation of Infrastructure, published by theSecretariat for the Committee on Infrastructure, Planning Commission, Government of India.


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the availability of public resources. In view of this, increased private participation is

necessary for mobilizing the resources needed to bridge the resource gap for investment

in infrastructure sector, also known as infrastructure deficit. The Eleventh Five Year

Plan Document recognizes that adequate cost effective and quality infrastructure is a

pre-requisite for sustaining the growth momentum and that investment in physical

infrastructure would have to be increased from about 5% of the GDP (Rs. 8,87,794

crore including an investment of Rs.1,75,203 crore by the private sector)2 during the

Tenth Plan (2002-07) to about 9% of the GDP by the end of the 11 th Plan period. The

projected investment by the private sector for the 11th Plan period is Rs.6.19,591 crore.

In effect, it is expected that private capital would fund about thirty per cent of the total

investment in infrastructure during the Eleventh Plan as compared to 20% during the

Tenth Plan. The need of the hour is, therefore, to identify the constraints in achieving

these goals and in finding appropriate ways and means for overcoming them.

Infrastructure constraints can be seen in various sectors. The following

paragraphs briefly discuss the constraints in some of the key infrastructure sectors.

Power: The lack of reliable and reasonably priced power is perhaps the single biggest

constraint on the countrys businesses. Indian industry has had to respond by installing

captive power generation plants. The cost of grid power is fairly high at about Rs. 5/-

per unit. The fuel cost of generating power varies between at Rs 7-9 per unit.

The Tenth Plan targeted additional power generating capacity of 40,000 MW,

but actual achievement was only 21,180 MW3. The Eleventh Five Year Plan doubled

capacity addition to 78,700 MW4, and generating capacity aggregating to 80,610 MW is

under execution, comprising 19% hydel, 77% thermal and 4% nuclear energy.

However, actual capacity creation may be just 62,000 MW. The period 2003-04 to

2007-08 has been characterised by high growth in peak demand and total energy

requirement. Consequently, the deficit in power supply in terms of peak availability and

total energy availability rose continuously.

2 Source: "Private Participation in Infrastructure, published by the Secretariat for the Committee on

Infrastructure, Planning Commission, Government of India (January, 2010)3 Annual Report (2009-2010), Ministry of Power.4 ibid


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The main reasons for under-achievement of capacity addition targets are

difficulties in acquiring land; obtaining necessary approvals from the Ministry of

Environment and Forests; delayed allocation of coal blocks; inadequate availability of

power generating equipment delayed and non-sequential supply of material by

suppliers; shortage of skilled manpower; contractual disputes between project

authorities, contractors and their sub-vendors; delay in readiness of balance of plants by

the executing agencies, design problems in CFBC boiler and shortage of fuel. Coal

based generation of power, which constituted around 80% of thermal generation and

around 66% of the total generation of power, was constrained by shortage in domestic

coal supply and the non-materialization of planned imports during April-December

2009.

Roads: Road transport accounted for around 87% of passenger movement and 60% of

freight movement in 2005-06. About 30% of the total length of national highways is

single-lane/intermediate lane, about 53% is two-lane standard and the balance 17% is

four-lane standard or more. Although the national highway network doubled in size

between 1997 and 2007 almost 35,000 kms were added during this period soaring

demand has far outstripped supply. According to the Economic Survey (2009-10),

against the target of developing about 3,165 km length of national highways under the

NHDP in 2009-10, the achievement till November 2009 has been less than half at about

1,490 km. Against the target of awarding projects for a length of about 9,800 km under

the NHDP during 2009-10, projects have been awarded for about 1,285 km up to

November 2009. The reasons for the delay include new procedures for approval of PPP

projects, modifications in the model concession agreements (MCA), new Request For

Qualification (RFQ) process, cap on maximum number of pre-qualified bidders, and

time involved in evaluation of voluminous information.

Some of the above irritants that substantially slowed down the process of

awarding the PPP projects in road sector have been removed recently, following the

recommendations of B K Chaturvedi Committee Report.


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Civil Aviation: The deregulation of Indian aviation since 2003-04 resulted in average

annual growth rate of air market at 27% till 2008. Passenger traffic is forecasted at

205.4 million and cargo traffic at 2683.47 thousand metric tonnes (TMTs) by 201112.

Additional capacities of about 29.70 million international and 103.57 million domestic

passengers would require to be created at 45 major airports by the end of Eleventh Plan.

Government has liberalized FDI in aviation, but its growth is hindered due to high sales

tax on Aviation Turbine Fuel (ATF); high service tax on premium class tickets,

overflight and landing, and airport charges; infrastructure related issues for providing

(Maintenance, Repairs and Overhaul (MRO) services in India; and, facility related

issues for Air Cargo industry. Airport development suffers from land issues,

infrastructure for passenger & parking facilities, and connectivity to airports.

Ports: India has 13 major seaports and 200 minor seaports along a coastline of 7517

km. During 2008-09, major ports handled 72% of the total cargo traffic while the minor

or non-major ports accounted for the remaining 28%. In recent times, India has

witnessed a significant increase in cargo traffic. Against a compounded annual growth

rate (CAGR) of 6.74% during the post liberalization period (1991-92 to 2003-04), the

traffic growth at major ports has risen to around 10% since 2003-04. Moreover, growth

in cargo traffic across all ports has been approximately 19% for the last few years. By

the end of the 11th Plan, the total traffic at ports has been projected at 1,009 MMT, out

of which 708 MMT will be handled at major ports. 5 As such, capacity augmentation

and modernization of ports has assumed great importance.

Development of ports is facing issues like lack of autonomy to major ports, poor

connectivity, complex administrative processes, and taxation issues. Shipping industry

is also encountering problems due to taxation issues, high cost of finance,

discontinuation of subsidy for shipbuilding, and high port tariffs affecting viability of

coastal shipping.

Railways: Planning Commission has recently lowered investment in railways for the

Eleventh Plan to about Rs. 2 lakh crores, out of which Rs. 8,316 crore is expected

5 Source: Private Participation in Infrastructure, document published by theSecretariat for Infrastructure, Planning Commission (January, 2010).


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million in March 2005, started declining to 40.22 million in March 2006, 37.96 million

in March 2009 and 37.06 million in December'098. The share of the private sector in

total telephone connections has increased to 82.3 per cent in December 2009 as against

a meagre 5 per cent in 1999. Rural tele-density, which was about 1.2 per cent in March

2002, increased to 9.5 per cent in March 2008 and further to 15.1 per cent in March

2009 and 21.2 per cent at the end of December 2009. Urban tele-density increased from

66.4 per cent in March 2008 to 88.8 per cent in March 2009 and stands at 110.7 per cent

in end- December 20099.

Though telecom is the major driver of growth in the infrastructure sector, rural

connectivity is still lagging. Issues related to Tower construction approvals, tower

sharing and standardization, providing backhaul for broadband connectivity to all

villages, electricity power at reasonable price, and pragmatic approach for collection

and usage of USO Fund are some of the issues which require to be addressed. The real

barriers to penetration in rural India is the smaller population to area ratio and the

higher cost of setting up telecom infrastructure to cover larger geographical areas. This

gets further aggravated by factors like difficult terrain, lack of other basic facilities like

electricity, etc. In such a scenario, even with the setting up of some infrastructure with

USO Fund assistance and with the sharing of such infrastructure by more than oneservice provider, the recovery of sunk costs on creation of the telecom infrastructure in

a given time frame and the balancing of such recovery of costs with the provisioning of

services at affordable price for the rural poor, would become possible only with some

kind of additional support. This support can be given in the form of tax holidays to the

service providers.

Urban Infrastructure: As per the 2001 Census, about 27.8 per cent of the population

lives in urban areas. Further, the Registrar General of India estimated in 2006 that 67

per cent of the population growth in the next 25 years is expected to take place in urban

areas alone. Hence improving urban infrastructure including basic civic services

assumes critical importance. Municipal institutions responsible for providing these civic

services are facing acute shortage of capacity and resources.

The Jawaharlal Nehru Urban Renewal Mission (JNNURM), the governments

flagship programme for urban development, was launched in December 2005. An

8 Annual Report (2009-10), Department of Telecommunications9 Economic Survey 2009-10 (Chapter 10).


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amount of Rs.50,000 crore is earmarked during the seven year period (2005-2012) for

the JNNURM to part-fund urban projects over a period of seven year period10.

However, many reforms are pending. While states such as Maharashtra, Gujarat, Tamil

Nadu, and Andhra Pradesh have shown good progress in urban sector reforms, most of

the States have failed to promote devolution of power and pushing local accountability

reforms. Under JNNURM, the Mission cities have agreed to include promotion of PPP

through appropriate policies and projects. However, there is no policy framework for

the urban infrastructure sector, where the presence of the third tier-city administration

in addition to central and state governments makes things difficult.

B. MEASURES TAKEN FOR INCREASING INVESTMENT IN

INFRASTUCTURE - THE MARCH TOWARDS THE GOAL AND THE SHIFTING OF GOALPOSTS

The Government is spending billions to improve infrastructure. The Planning

Commission has indicated that investment in the infrastructure sector in the XI Plan

(2007-12) will be close to the target of $514 billion (Rs. 20,54,205 crore), thanks to a

better-than-expected show by the telecom sector. The Government has laid special

emphasis on rural infrastructure as is evident from the impressive doubling of allocation

for infrastructure, from Rs 0.86 lakh crore in 2007-08 (the first year of the 11th Five

Year Plan) to Rs 1.73 lakh crore in 2010-11. The Union Budget for 2010-11

substantially stepped up allocation for infrastructure development especially for NHDP,

JNNURM and Accelerated Power Development and Reform Programmes (APDRP).

Budget allocation for infrastructure development accounts for over 46% of the total

plan allocation. Thus, the Government has been promoting investment in infrastructure

sectors through a combination of public investment, private investment and Public

Private Partnerships (PPPs). As a result, PPPs are increasingly becoming the preferredmode for construction and operation of commercially viable infrastructure projects in

sectors such as highways, airports, ports, railways and urban transit systems. As on

December 2009, the status of PPP projects is 241 completed, 292 under

implementation and 412 in pipeline.

If infrastructure in the country is to match with the growing economy,

investment in infrastructure during the XII Plan (2012-13 to 2016-17) has to be doubled

10 Prototype Interactive Public Questions and Answers - Document published by JNNURMDirectorate, Ministry of Urban Development


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(c) the constitution of the Public Private Partnership Appraisal Committee

(PPPAC) under the chairmanship of the Secretary, Department of Economic

Affairs, Ministry of Finance (with Secretary, Planning Commission, Law

Secretary, Secretary, Department of Expenditure and the Secretary of the

concerned administrative Department(s) as Members) which approves PPP

projects after they are appraised by the Planning Commission, thus

simplifying and streamlining the approval process for PPP projects;

(d) the establishment of an inter-ministerial Empowered Committee for

appraising and approving projects for availing grants under the Viability

Gap Funding Scheme (under which grant assistance of upto 20% of capital

costs is provided by the Central Government to PPP projects undertaken by

any Central Ministry, State Government, statutory body or local body and

an additional grant upto 20% can also be provided by the sponsoring

Ministry/body;

(e) the Scheme for Financial Support to Public Private Partnerships in

Infrastructure (Viability Gap Funding Scheme of the MoF);

(f) the setting up of India Infrastructure Finance Company Limited (IIFCL) as a

non-banking company for providing long-term loans for financing

infrastructure projects that typically involve long gestation periods;

(g) the launching of the India Infrastructure Financing Initiative a

collaborative effort of IDFC, IIFCL, Citigroup and Blackstone to deploy

capital of approximately US $ 5 billion for infrastructure projects including

PPP projects in India; and

(h) 100 % FDI on automatic route in most of the infrastructure sectors.

C. POLICY AND REGULATORY ENVIRONMENT - AT THE CROSSROADS

Public Private Partnership projects typically involve transfer or lease of public

assets/resources, delegation of governmental authority for recovery of user charges,


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operation and/or control of public utilities or services in a monopolistic environment

and the sharing of risk and contingent liabilities by the Government. They require a

framework which assures a market driven return at reasonable levels of risk to the

private investor and adequate service quality at an affordable cost to the users. These

pre-conditions are more difficult to establish than is commonly realized. Because of the

nature of the risks and the involvement of multiple stake-holders (project sponsors,

lenders, government agencies, users and regulatory authorities) makes it difficult to

draw up appropriate project agreements and even make the process for awarding such

concessions very complex and difficult to manage. Hence, it becomes imperative to

involve detailed legal and contractual agreements that clearly set forth the obligations,

risks and rewards of different participants. The use of standard documents, in this

context, streamlines and expedites the decision-making process and also helps in

adopting a procedure which is fair, transparent for the bidding process in such projects.

The adoption of model documents such as concession agreements and other bid

documents has, therefore, been mandated as the preferred approach. Projects which are

based on model documents benefit from fast-track appraisal and approval. Model

Concession Agreements have been published by the Planning Commission for National

Highways, State Highways, Operation and Maintenance of Highways, Six Laning of

National Highways, Urban Rail Transit Systems (Metros), Operation of Container

Trains, Non-metro airports, Greenfield airports, Re-development of railway stations,

Port Terminals, etc. Model documents and standard guidelines approved by the CoI

have also helped in incorporating key principles and best practices in the bid processes

for PPP projects.

D. ANALYSIS OF THE APPROACH TO REGULATION AND THE

PROPOSED REGULATORY REFORMS BILL - FRAMING OF THE ISSUE

In order to appreciate the issues involved in creation of an appropriate policy

and regulatory environment for any sector, it is important to first understand what is

regulation, what is economic regulation and how it helps in the development of any

sector. Regulation may be broadly understood as the effort by the sovereign State to

address social risk, market failure or equity concerns through some kind of rule-based

control and direction of social and individual actions. Economic regulation is that part

of regulation which seeks to achieve the effective functioning of competitive markets.


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Where such competitive markets are absent, economic regulation attempts to mimic the

outcomes of a competitive market to the extent possible in order to maximize consumer

benefit. Economic regulation is considered necessary only when there exists a natural

monopoly or where a dominant player in the market abuses its monopoly power or

when there is some other form of market failure. Economic regulation performs two

core tasks:

(a) setting of maximum tariffs; and

(b) enforcing service standards.

In the infrastructure sector, economic regulation identifies and addresses subsidies and

cross-subsidies in the prices of services. Apart from the objective of fixation of

reasonable and affordable price for services, economic regulation is also used to

achieve non-economic market objectives such as ensuring equitable access to services,

consumer protection, maintaining safety standards, etc.

In India, the regulatory frameworks for various infrastructure sectors have

developed autonomously within each sector with very little coordination or cross-

fertilisation of ideas across sectors. It has been acknowledged that political constraints

and ministerial preferences seem to have dominated the reform agenda in different

infrastructure sectors. The result is that the regulatory mechanisms in key infrastructuresectors have different legislative frameworks, administrative structures, varying degrees

of powers and functions. There is no coordinated approach to infrastructure regulation

as such. The broad legislative and institutional framework currently prevailing in some

key infrastructure sectors in the country is given below:

Sector Applicable Acts Regulatory body

1. Roads The National HighwaysAuthority of India Act, 1998The Central Road Fund Act, 2000The Control of NationalHighways Act, 2002

There is no separate regulatorybody. NHAI acts as regulatoras well as operator.Some States have set up theirown corporations/entities.

2. Transport . No sectoral regulator

3. Railways Indian Railway Board Act, 1905Railways Act, 1989

The Railways acts as theoperator as well as sectoralregulator.

4. Airports Aircraft Act, 1934Airports Authority of IndiaAct,1994

Air Corporation (Transfer ofUndertaking and Repeal) Act,

Till recently, AAI was operatoras well as regulator. AERA isnow regulating tariffs for

aeronautical services in majorairports. DGCA and Bureau of


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1994Airports Economic RegulatoryAuthority of India Act, 2008

Civil Aviation Security (BCAS)regulate licensing & technicalaspects and security aspects,respectively.

5. Ports Indian Ports Act, 1908

Major Ports Trust Act, 1963

Tariff Authority for Major

Ports (TAMP) regulates tariffsetting. No regulatory body inrespect of other matters(performance standards,competition, consumer

protection, dispute resolution,etc.)

6. Power The Electricity Act, 2003 Regulatory Commissions at theCentral (CERC) and at the Statelevels with defined powers andfunctions.

7. Oil and Gas Petroleum and Natural GasRegulator Authority Board Act,2006Petroleum Act, 1934Petroleum and Minerals Pipelines(Acquisition of Right of User inLand) Act, 1962Oil Fields (Regulation andDevelopment) Act, 1948

Petroleum and Natural GasRegulatory Board (PNGRB)established in October, 2007,regulates refining, processing,storage, transportation,distribution and marketing of

petroleum products.Director General of Hydrocarbons issues licencesand regulates exploration and

optimal exploitation ofhydrocarbons.

8. Coal Coal Bearing Areas (Acquisitionand Development) Act, 1957Mines and Minerals (Regulationand Development) Act, 1957Coal Mines (Nationalisation) Act,1973Coal Mines (Conservation andDevelopment Act, 1974

No independent regulatorybody. Ministry of Coal(through the Coal Controllerand through nationalizedcorporations) acts as theregulator as well as theoperator.

9. Broadcasting Prasar Bharati (Broadcasting

Corporation of India) Act, 1990Sports Broadcasting Signals(Mandatory Sharing with PrasarBharati) Act, 2007

Private participation allowed in

satellite television and FMradio segments. No regulatory

body for content regulation.Draft Broadcasting ServicesRegulation Bill, 2007 is openfor consultation. It contains

proposal for setting upindependent regulator for

broadcasting. Broadcastingservices have been notified astelecommunication services

under the TRAI Act, 1997.TRAI is the sectoral regulator


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(b) inability to effectively monitor the quality of service in the absence of well-

defined service benchmarks, performance standards and adequate trained

manpower;

(c) inadequate consumer participation and voice in the regulatory decision

making process;

(d) regulators still being perceived as policy makers and transgression by

political executives in the selection, appointment, removal and allocations to

the regulators;

(e) lack of professionalism in the absence of representation from professional

bodies and non-governmental experts due to appointment predominantly of

retired bureaucrats and technical personnel drawn from public utilities;

(f) lack of consistency and predictability in regulatory decision-making and the

development of regulatory jurisprudence;

(g) dissatisfactory compliance with regulatory decisions by dominant

incumbent service providers in the public sector.

As noticed above, the creation of independent regulatory agencies for infrastructure

sectors in India has, in the last 15 years, proceeded on a sectoral basis and this sectoral

approach has resulted in an uneven regulatory environment. This model of regulatory

evolution is bound to be very expensive in terms of economic growth and welfare.

There is no clearly defined regulatory framework in place and that the attempt to lead

transformation of these sectors through incumbent government functionaries as lead

agents has led to flawed frameworks and the absence of consistent or efficient reform

processes in these sectors. Uncertainties in the regulatory regime, coupled with lack of

coordination across sectors and the empowerment of different regulators differently

under different legal regimes applicable to different sectors , have impeded the growth

of the infrastructure services to levels far below the needs and potentials of the country.

It has given rise to similar problems arising again and again in many aspects of the

functioning of such regulatory agencies. While there have been concerns expressed

regarding regulatory accountability in some cases there has also been a view that

economic regulators in some cases are shackled, not duly empowered and ineffective.

This is the context of the felt need for evolving and implementing a robust mechanism

with focus on regulatory effectiveness as a key tool for good sector governance.


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Some of the major differences in the regulatory schemes in various infrastructures

can be illustrated with the following examples :

(a) the CERC and the State Electricity Commissions established under the

Electricity Act, 2003 having conferred with extensive powers covering rule-

making, licensing, enforcement, imposition of monetary penalties, etc. As

against this, the Tariff Authority for Major Ports (TAMP) has only the

mandate of setting tariffs for major ports and that too with limited powers.

(b) The Telecom Regulatory Authority of India (TRAI) has a mandate to

promote competition in the sector (as mentioned in the Long Title of the

Act) but express provision of section 11 of the TRAI Act restricts the role of

the regulator to the making of appropriate recommendations to the licensor

(DoT). On the other hand, the Electricity Act, 2003 mandates the Electricity

Commissions specifically to keep in view the promotion of competition in

the sector while setting tariffs.

(c) In most of the regulatory commissions and appellate tribunals, the relevant

acts provide that members of such commissions and tribunals will not be

eligible for re-appointments. However, in the case of Electricity Appellate

Tribunals, can be re-appointed.

(d) The tenure of Chairman and Members of regulatory commissions and

appellate tribunals varies between three and five years across different

sectors. The qualification and experience for such appointment are

specifically indicated in some cases while in others this is left open-ended.

(e) The electricity sector, the telecommunication sector and the airport

infrastructure sector have got appellate tribunals which adjudicate disputes

and also decides appeals against the regulatory bodies while in other sectors,

there are no appellate tribunals.

The diversity in the regulatory framework can also be seen from the following

statement:


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SECTOR ASPECT OF

REGULATION

REGULATORY BODY

TELECOM

LICENSING DOTSAFETY DOT

TARIFF SETTING TRAI

QUALITY OF SERVICE TRAI

DISPUTE RESOLUTION TDSAT

PORTS

LICENSING MOST/ DGS

SAFETY MOST/IMO/CLASSIFICATIONSOCIETIES

TARIFF SETTING TAMP

QUALITY OF SERVICE DGSDISPUTE RESOLUTION COURTS (UK)

RAILWAYS

LICENSING RAILWAYS

SAFETY CRS

TARIFF SETTING PARLIAMENT/ RAILWAY.RATES TRIBUNAL

QUALITY OF SERVICE RAILWAYS

DISPUTE RESOLUTION RAILWAY CLAIMS TRIBUNAL

CIVILAVIATION/

AIRPORTS

LICENSING MoCA/DGCA

SAFETY BCASTARIFF SETTING AERA (FOR MAJOR

AIRPORTS)/AAI

QUALITY OF SERVICE MOCA/AERA

DISPUTE RESOLUTION AEARAT

ROADS

LICENSING RTOs/NHAI

SAFETY TRAFFIC POLICE

TARIFF SETTING -------

QUALITY OF SERVICE -------

DISPUTE RESOLUTION COURTS

OIL AND

GAS

LICENSING GOVERNMENT OF INDIA

SAFETY GOVERNMENT OF INDIA

TARIFF SETTING GOVERNMENT OF INDIA

QUALITY OF SERVICE PNGRB

DISPUTE RESOLUTION COURTS

COAL



TARIFF SETTING GOVERNMENT OF INDIA

QUALITY OF SERVICE GOVERNMENT OF INDIADISPUTE RESOLUTION COURTS


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POWER

LICENSING CERC / STATE ERCs

SAFETY CERC / STATE ERCs

TARIFF SETTING CERC / STATE ERCs

QUALITY OF SERVICE CERC / STATE ERCs

DISPUTE RESOLUTION CENTRAL AND STATEELECTRICITY APPELLATE

TRIBUNALS

BROAD-

CASTING



TARIFF SETTING TRAI

QUALITY OF SERVICE(CARRIAGE SEGMENT)

TRAI

DISPUTE RESOLUTION TDSAT

Apart from the diversity pointed out above, it is also noticed that there are

several infrastructure sectors wherein the process of economic reforms has commenced

without establishing a regulatory framework. Examples of this are the recent PPP

programmes for modernization of airports and the highway projects.

The sequencing of economic reforms is a crucial ingredient in ensuring its

success. If the State is hereafter is going to rely on private entities and public private

partnerships, then it should establish independent regulators in the early stages of the

reform process so that they can help to promote fair play and competition in the

evolution of policy and regulatory frameworks.11

E. INTERNATIONAL EXPERIENCE - LESSONS FROM ELSEWHERE

In the United Kingdom economic reform involved the privatization of State

utilities and the creation of independent regulators. During the Eighties and Nineties of

the last century, sectoral regulators i.e. non-departmental government bodies and quasi

non-governmental bodies were created in each sector. In the Nineties it was noticed

that there was considerable overlapping and clashing of jurisdiction amongst these

bodies in addition to a lack of common approach and consistency in their functions.

Therefore, since the mid-Nineties, regulatory reform has topped the agenda in the

11 Approach to Infrastructure Regulation, Approach Paper published by Planning Commission of India


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United Kingdom. This reform programme has been implemented in two ways. First,

multi-sector regulators have been created in number of utility industries under the

Utilities Act 2000. This Act regulates 3 utilities namely electricity, gas and water. This

Act lays down precise sectoral goals to be achieved by each regulator in these sectors.

This Act is significant in that it allows the existing sectoral regulators to continue, it

brings their objectives and regulatory functions under one umbrella statute apart from

streamlining the appointment qand removal of those regulators, the regulatory processes

followed by them and their accountability to Parliament. With the enactment of the

Legislative and Regulatory Reforms Act, 2006 (LRRA), OFCOM has been conferred

jurisdiction over telecommunication, television, radio and other wireless

communication

In Sri Lanka, the reform process for creation of multi sector regulators began

very recently. The enactment of the Public Utilities Commission of Sri Lanka Act,

2002 was the result of this reform initiated. This Act establishes the Public Utilities

Commission of Sri Lanka to regulate all public utilities sectors which are set out in a

separate schedule to the Act. Presently, the schedule includes only electricity and

water services. But it appears that several other sectors may be brought under this

Regulator in the near future.

The United States of America has pioneered the creation of independent

regulatory bodies with a view to improving the legal and institutional framework for

supporting a market economy. These bodies are created by Acts either as sector

specific regulator ( e.g. Federal Aviation Authority) or as Multi-Sector Regulators (e.g.

Federal Communication Commission. Regulatory bodies are considered to be a part of

the executive government but they are free from every day political interference. These

bodies are supervised by the Congress which vets appointments, requires all rules to be

presented before it and may also subject them to scrutiny through the Committee

system of the Congress. Service providers, both private and public, can be fined,

forced to close and even jailed for violating Federal regulations. The Administrative

Procedure Act, 1946, made by the Congress lays down the basic framework under

which rule making is done and this remains the basic legislative standard which applies

to all regulatory bodies. Under this Act, all proposed new regulations are required to be

published in advance in the Federal Register at least 30 days before they take effect.


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The Planning Commission has emphasized that it is very important to create a

supportive regulatory system which can ensure level playing field for competing

suppliers and protection of consumer interests in terms of quality of service and its cost.

The Planning Commission has, therefore, embarked upon the next stage of regulatory

reforms process by bringing out an Approach Paper on the subject, viz., Approach to

Infrastructure Regulation and has, based on the approach indicated in the said

Approach Paper and the feedback from the stake-holders put on its website a draft of a

proposed legislation, viz., the Regulatory Reforms Bill, _____ for public

consultation. The Approach Paper on Regulation of Infrastructure explores the future

path that regulatory reform in India must take, and considers the question whether an

overarching regulatory philosophy will speed up regulatory reform and standardise

some basic institutional features and regulatory processes across all regulatory

institutions to serve the objective of enhancing competition, improving efficiencies and

reducing costs. The draft Regulatory Reform Bill purports to give effect to the

principles contained in the Approach Paper and aims at providing an overarching

regulatory framework covering all important infrastructure services with a view to

eliminating divergent regulatory mandates and providing for consistency across sectors.

With a view to identifying the need for modifications in the present approach to

regulation of the infrastructure sector, we need a better understanding of the nuances of

regulatory governance. Ideally, these considerations should have informed our

decisions while designing the sector-specific regulatory structures and the regulatory

legislations. Because of the diversity in the approaches and objectives of various

sectoral regulatory legislations, there are inadequacies in these regulatory designs and

these inadequacies need to be addressed promptly. The designing of an overarching

regulatory philosophy, which will supplement the existing sectoral legislations and

address the inadequacies noticed in them, would serve the objective of enhancing

competition, improving efficiencies and reducing costs.

The three general principles which are critical to regulatory institutional design,

in the context of values enshrined in the Constitution, are:

(a) Separation of Power;

(b) Democratic Accountability; and

(c) the Federal Principle


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The principle of separation of power is complied with when the rule-making and

administration of rules are vested in the regulatory institution without combining

judicial functions which are reserved for a body constituted separately. The Approach

Paper brought out by the Planning Commission acknowledges that the institutional

framework that has emerged in telecom and electricity sectors broadly conforms to the

doctrine of separation of powers, with the regulators functioning as quasi-judicial

bodies while appeals against their orders are heard by Appellate Tribunals that resemble

judicial bodies in form and character and that this principle has also been applied to the

competition and securities regulatory regimes after a prolonged effort13.

The three modes of responsibility, which are required to be established to make

an independent regulatory agency democratically accountable are:-

(a) responsibility to the legislature (placing of regulations, annual

reports, etc. before the legislature);

(b) responsibility to the people at large (adoption of processes and

systems for acquiring information by citizens, full participation of

interested citizens in the decision making process, decision making

on publicly articulated rationale, etc.); and

(c) responsibility of Government to insulate regulators from

interference ( appointment of persons of competence and integrity,

adoption of transparent procedures for appointment of regulators,

offering attractive remuneration, etc.).

Regulatory reform in India should aim at developing a regulatory philosophy

and legislation that should reflect the lessons learnt and incorporate best practices from

around the world. The focus areas should be institutional framework for regulatory

authorities/commissions, their roles and functions, their relationships with the executive

and legislature, and their interface with the markets and the people. The Approach

Paper brought out by the Planning Commission suggests that the proposed approach

should establish an overarching regulatory framework for the orderly development of

13 Approach Paper titled Approach to Regulation of Infrastructure, published by the Secretariat forthe Committee on Infrastructure, Planning Commission, Government of India.


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infrastructure services and that by clearly setting out the objectives of regulating the

infrastructure sectors, it should be possible to eliminate divergent mandates currently

set out for sectoral regulators.

G. RECOMMENDATIONS:

PART (1): ON REGULATORY POLICY AND FRAMEWORK:

It is now clearly recognized by economists all over the world that competition is

the best safeguard for consumer interests and that regulation should aim at removing

barriers to competition and eliminating abuse of market power. The Approach Paper of

the Planning Commission also recognizes this and, accordingly, points out that in

evolving the regulatory approach, it would be useful to distinguish within a sector

between non-competitive segments that consist of the physical networks orcarriage

that have elements of a natural monopoly on the one hand and potentially competitive

segments such as the content comprising of electricity, gas or voice (or data or video

or any other kind of intelligence for that matter) on the other hand. While carriage is

typically regarded as a natural monopoly, the content is eminently amenable to

competition. In order to enable competition in the content segment, carriage should be

subjected to non-discriminatory open access under close regulatory oversight including

determination of tariffs. Where technology or market structure enables adequate

competition in carriage, its regulation could remain light handed. The Approach Paper

of the Planning Commmission accordingly points out the need to have these aspects

clearly addressed in the over-arching approach to regulation.

Spelling out a regulators role in an unambiguous manner is the precondition for

having effective regulation. Therefore it is necessary that the legislation as well as the

policy, both should specifically set the regulatory agenda in rather concrete terms.

An independent regulator is an instrument by which the government achieves its

policy objectives. Therefore it is necessary for the government to spell out its policy


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objectives in a concrete manner and adequately empower the regulator through

legislation, to accomplish the state policy objectives.

Separating the policy-making function from that of service-providing is one of

the major objectives of the government in its current efforts to establish an independent

regulatory regime. This would require empowering the regulator through clear

legislation and unambiguous policy objectives. The test of the independence of a

regulator is whether it relationship with the Government gives it the autonomy to carry

out its everyday functioning without interference from the Government. Whenever

Government chooses to issue policy guidelines to the regulator, those guidelines must

be general in nature and not relate to specific regulatory decisions. Such policy

directives or guidelines should be made known to the public at large.

There are several goods and services in the infrastructure sectors where the

market does not set the price. These include rail services, oil and gas, road transport

and coal. Tariff in respect of these goods and services continues to be set by

Government. There is need for setting up independent tariff regulators in respect of

these goods and services. This would not only help depoliticize the process of tariff

setting, but would also help in setting tariffs based on costs in a transparent manner.

Transparency in the process of rulemaking by the regulator is a crucial

ingredient in ensuring regulators accountability. The power to make regulations must,

therefore, be subject to mandatory requirements for prior publication of such

regulations, the adoption of a notice and comment process before they come into force

and, most importantly, the subjecting of all such regulations to Parliamentary scrutiny.

Regulatory decisions other than those which require Parliamentary scrutiny should be

made subject to appeals by any aggrieved party before a specially constituted appellate

forum. Second appeals against the decisions of such appellate forum to the Supreme

Court should be only on questions of law. The regulatory mandate governing the

setting up of such appellate tribunals should make it clear that the appellate tribunals

must settle the interpretative questions of law and remit the case back to the regulator

for final orders in the light of such interpretation. Appellate Tribunals should be

mandated not to go into policy choices made by the regulatory institutions. This would


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incumbent to a level-playing field with rest of the service providers. Addressing that

would require strengthening of the legislative framework to empower the regulators and

enable them to adopt specific strategies to ensure the compliance of their directives and

to develop an arms-length and objective relationship with the government as well as the

stakeholders.

Imparting financial autonomy can substantially enhance functional

independence of regulators. Therefore, it is desirable that the law allows a regulator to

raise resources on its own, to the extent possible, through an appropriate regulatory fee.

There is also a need to tackle the problem of identification of specific roles of

the regulatory authority and the competition commission and the potential jurisdictional

overlaps between the two areas of law. Sections 3, 4, 5 and 6 of the Competition Act,

2002, which are the key substantive provisions of law, are not market specific and

apply generically to regulated and unregulated markets and so, it is inevitable that

sectoral regulators and the competition commission will issue directives to the same

market players which may conflict, given the diverse perceptions of the respective

authorities. (An extract of the above sections and some other relevant sections of the

Competition Act is given at Appendix-I to this paper.) The need to have these two

systems integrated in a more comprehensive fashion in order to avoid jurisdictional

conflicts needs no emphasis. Reference in this context can be made to the minimal

institutional interface between the sectoral regulators and the Competition Commission

of India in terms of section 21 of the Competition Act under which the sectoral

regulators whenever they are considering issues which have a bearing on the provisions

of the Competition Act, may refer such issues to the Competition Commission for its

opinion. However, this is optional and regulators may choose not to do so. Section 21A

of the Competition Act provides for the converse, i.e., references by the CCI to the

sectoral regulators, which again is optional. By creating an interface which is limited to

dispute resolution, the statute leaves open a wide scope for disagreement which may

best be resolved before they have matured into legal disputes. The Approach Paper

brought out by the Planning Commission fully recognizes this and accordingly

concludes that there is need to review these issues in greater detail with a view to

defining a workable division of labour between the sectoral regulators and the


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concerned High Court. Further, in the case of selection of members of an appellate

tribunal, the chairperson of such appellate tribunal (not a member nominated by him)

should be a member of the selection committee. The provisions of clause 4 of the Draft

Bill may, accordingly, require to be revisited.

The desirability of including provisions specifying the exact procedure for

appointments of members and chairpersons of regulatory commissions and appellate

tribunals as contained in sub-clauses (8) and (9) of the Draft Bill may require a relook.

The procedure as contemplated in these provisions of the Draft Bill involve a four stage

mechanism, namely, selection of two names by a selection committee headed by a

Judge of the Supreme Court, recommendation by the concerned Minister,

recommendation of one name by the Prime Minister and concurrence by the President

of India. The requirement of Presidential concurrence at the stage of appointment and

at the stage of removal would imply appointments and removals under a Presidential

warrant, i.e., under the signature and seal of the President of India, as in the case of

appointment of Judges of the High Courts and Supreme Court. It may perhaps be

worthwhile to consider whether such appointments can be cleared by the Appointments

Committee of the Cabinet instead of being submitted to the President of India for

express concurrence.

(b) The provision enabling regulatory commissions and appellate tribunals to

authorize any person or appoint any advocate, to represent the interest of consumers in

the proceedings before it [clause 9(6) of the Draft Bill] may require a relook. In its

present form, the provision creates an impression that a regulatory commission may

allow an advocate or a person to represent consumers at its meetings. In case a

regulatory commission considers that representation of consumers is necessary at any of

its meetings, the same can be done through participation of consumer advocacy groups

(and consumers directly) in the various consultation processes it undertakes by giving

them opportunity to respond to consultation papers published by it and by allowing

them to participate and express their views in open house sessions. The engagement of

advocates may not serve any purpose in this context. The reference to regulatory

commissions in this clause may create unnecessary confusion. The provision for

allowing participation by advocates may be desirable in the case of proceedings before

an appellate tribunal as the proceedings in their case will generally be judicial


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approvals from the sectoral regulator for all proposed mergers and acquisitions. The

provisions of clause 44 of the draft Bill may be supplemented with a provision as

regards the need to consult sectoral regulators by the Competition Commission on

matters entrusted to the sectoral regulators under the applicable sectoral legislation,

with a view to avoiding jurisdictional conflicts.

(f) The Approach Paper, on which the Draft Bill is based, has expressed the view

that legislative oversight should be limited in one significant respect, i.e., those

decisions of a regulator which are open to appeal before an appellate tribunal or court

should be exempt from legislative scrutiny to avoid a clash of jurisdictions but it would

remain open to the legislature to review the regulations on the policy underlying such

decisions. Conversely, decisions of the regulator which are open to scrutiny of the

legislature (subject to Parliaments scrutiny/approval and also subject to such

modifications as may be decided by Parliament) should be excluded from the appellate

jurisdiction of appellate tribunals. It is settled law that an appellate tribunal which is a

creation of the same statute which creates the regulator which has been conferred

powers to make subordinate legislation, shall not have jurisdiction to consider the vires

of such subordinate legislation. Thus, the distinction between regulations made by the

regulator which are subject to scrutiny by the legislature and other decisions of a

regulator which are appealable before the appellate tribunal should be clearly

highlighted in the draft Bill. Clause 48(1) of the Draft Bill may accordingly provide for

appeals from the decision of the regulatory commission other than a regulation

framed by it in exercise of powers conferred by this Act or under any other law to

the appellate tribunal.

Part III: Some sector-specific recommendations

Power: Distribution reforms would need privatization of large discoms, reduction of

AT&C losses, and peak load management. PPP in generation and increasing

manufacturing capacity for power generating equipment is also needed. Nuclear power

generation should be stepped up.

Roads: Road construction has to be speeded up. Under the revised strategy the Ministry

of Road Transport and Highways has set a target of completion of 20 km of National


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Urban Development: The provisions of 74th Constitutional Amendment Act need to

be implemented in totality by all the States in order to benefit entire urban population.

There should be a common democratic model across all the States providing uniform

electoral power to all the citizens. All the states should give uniform functional power,

revenue raising power and enforcement power to all the Urban Local Bodies.

Development of urban transport needs improved transport coordination and

interconnectivity.

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REFERENCES:

Compendium of PPP Projects in Infrastructure, Published by Secretariat of

Infrastructure, Planning Commission, Government of India (March 2010).

Approach to Regulation of Infrastructure, Approach Paper publied by

Secretariat of Infrastructure, Planning Commission, Government of India

(September, 2008).

Private Participation in Infrastructure, Brochure published by Planning

Commission (January, 2010)

Public Private Partnerships Creating an Enabling Environment for State

Projects - Brochure published by Government of India, Ministry of Finance,

Department of Economic Affairs (July 2007)

Prototype Interactive Public Questions and Answers - Document published by

JNNURM Directorate, Ministry of Urban Development

Economic Survey 2009-10 (Chapter 10).

Annual Report (2009-10), Department of Telecommunications

Annual Report (2009-2010), Ministry of Power.


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IMO

International Maritime Organisation

JNNURM

Jawaharlal Nehru National Urban Renewal Mission

MFC

Memorandum for Consideration The format in which information will beprovided by the sponsoring authority while applying for IIPDF grant.

Public Private Partnership (PPP)

Partnership between a Government body/authority or public sector entity(sponsoring authority) and a private sector entity (a legal entity in which 51 % ormore of equity is with the private players) for the creation and/or management ofinfrastructure for public purpose for a specified period of time (concession period)on commercial terms and in which the private partner has been procured through atransparent and open procurement system.

PPP Project

A project based on a contract or concession agreement, between a Government orstatutory entity on the one side and a private sector company or other private legalentity on the other side, for delivering an infrastructure service on payment of usercharges.

PNGRB

Petroleum and Natural Gas Regulatory Board

TAMP

Tariff Authority for Major Ports

TRAI

Telecom Regulatory Authority of India

Public Private Parternership-Regulator Framework

Documents