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Monday, October 25, 2021

Regulating regulators

Why regulatory reform cannot wait

Written by Yoginder K. Alagh |
June 5, 2009 1:20:15 am

The fact that public sector banks are hardly touched by the meltdown,and that public sector companies are doing well,is because reform has been delayed. In particular,because of the delay in pushing reform that ensures transparency in the corporate sector. This will hopefully be remedied by a new Companies Act and a functioning Competition Commission — rather than through tinkering with the public sector. After all,the rules governing the public sector are so archaic that only the very brave had global links — and their home turf was largely in areas where,again,only the brave in the corporate sector would tread. And so they benefited when the massacre started for the wrong reasons. We designed the opening up and public sector reform at the same time but one took off,while the other stayed put. Why?

In the mid-’80s,the Narasimhan Committee designed the movement away from controls to financial regulation. It was a good and detailed design,and it worked. It is not talked about

because Narasimhan was an independent type,because other reformers who really didn’t do much claimed credit for the Bretton Woods line — never successful in India — and because the original details faded away. The design for the public sector was as detailed. Arms length relationships with governments,MOUs to define mutual responsibilities in areas of social profitability,cost centres if profit centres were not possible and well-defined drills for investment and other commercial decisions. The MOUs became a farce as government departments ignored their part of the bargains. Politicos interfered in appointments and other decisions; at

political levels questioning the working of the enterprise on a day-to-day basis rather than policy analysis is the norm. There was no effort to implement reform. For the corporate sector,if you don’t want to read India-based economists,Arvind Panagariya set at rest the characterisation of ‘80s policy as ad hoc by asserting that “in contrast to the isolated ad hoc policy measures taken to release immediate pressures prior to the 1980s,[the ’80s taken as a whole,constituted significant change and an activist programme. For example,by 1990,approximately 20 per cent of the tariff lines and 30 per cent of imports had come under OGL… import licensing on many other products was eased up.” But for the public sector no such change took place.

Take the electricity sector. The CERC bill setting up Central and state regulators was not allowed to be introduced in Parliament in 1996,though I managed to get that done in August 1997. But the successor government,instead of following through the patient political process of negotiating the legislation,forced it through as an ordinance. So they then had to withdraw two of the original bill’s main provisions: the mandatory nature of the CERC orders and a minimum tariff rule. These infirmities continued in modified form in subsequent legislation.

Also,the provision for young professional regulators was given up. Regulators now are almost all retired civil servants,and the original intent in the legislation of 1996 to avoid this and set up a transparent process for professionally qualified persons was later amended.

No wonder India’s first professional regulator Surendra Rao says that “the ministry and executive control the electricity enterprises under the Central and state governments,and the enterprises look for all direction,policy and procedures from them. The enterprises especially in the states function in an administrative and not an enterprise fashion… Advisory committees to the departments are more window dressing than true consultative mechanisms.” And again,“search,selection and appointment of regulators have so far been left largely to government servants and have resulted in filling most appointments with former government servants. The relative lack of commercial and enterprise expertise is unfortunate since there is no understanding on what state electricity enterprises must do to develop such cultures. Members invariably are appointed at an age when they are nearing retirement or have retired.”

But nobody seems to be listening. No wonder the power ministry’s “ultra-mega” projects have run into trouble. The first tender was reopened,with unseemly wrangles on a global plane and only two have led to financial closure,earlier Tata’s Mundhra and now,much later,Anil Ambani’s SasanGir. One state minister,when asked why signed projects were not implemented,reportedly said they don’t have land and finance! Once upon a time,a project without land and financial closure would never have been listed. Even I can sign an MOU if you don’t demand access to land and money. Policy has to get away from pipe dreams.

The writer,a former Union minister,is chairman,Institute of Rural Management,Anand

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