Privatise yes, but the state must regulate

The decade of 1990s saw the liberalization and privatization of infrastructure services in a big way. For many years, there was a strong belief that infrastructure services can only be provided by natural monopolies as they alone enjoyed economies of scale. And whether the monopolies were in the private sector as in the US or in the public sector as in Europe and India, the service providers had the opportunity to set prices without providing commensurate value for money. There was also the belief in many countries, including India, that only the public sector could provide infrastructure services efficiently, that the entry of the private sector should be restricted, if not altogether prevented, and that the Westminster style of accountability of the public sector is adequate to ensure efficiency and protection of consumer interests. As a result, government was both the service provider and policy maker in various sectors such as electricity, telecom, ports, water, etc. Thus, in the absence of competition, operational inefficiencies, poor quality of services, and inefficient allocation of resources were common in the provision of infrastructure services. The inability of the infrastructure sector to deliver services in an efficient and cost effective manner led to a reassessment of the performance of these sectors in many countries including India and it was felt that commercialization of the sector could improve efficiencies and reduce costs in delivery of infrastructure services. There were also certain pragmatic and non-ideology related factors such as the need to attract additional investment in infrastructure from the private sector, the need to build quality infrastructure to remain globally competitive, advances in technology that made vertical and horizontal unbundling of services possible, and ability to access capital from across borders which compelled governments to resort increasingly to the privatization and commercialization of infrastructure services. Even with the commercialization of infrastructure services, and the prospects of competition, the market structure in infrastructure services tends to retain a monopolistic element in most countries. For instance, in UK, at the time of privatization of electricity industry (1989/90), the market share of National Power and Power Gen, the power generation companies in UK, was almost 78 percent. In India 95 percent (March 2000) of power generation, and almost all transmission and distribution are in the public sector. In order, therefore, to prevent exploitation by monopolies, governments had to continue to protect consumer interests. There was also a need to create a level playing field between monopolistic incumbents and new entrants. Further, the process of commercialization itself led to high transactions costs, which had to be mitigated. All this called for expertise which government did not possess. Besides, as governments and their agencies continued to be providers of infrastructure services, and as they themselves had to be regulated, there was a need for a mechanism outside governments, with adequate expertise and flexibility to regulate all players, ensure efficiencies and protect consumer interests. In short, there was a need for a new type of governance which is what independent regulation seeks to provide. The advantages of this ?new governance? are many. It makes the decision making process consultative and transparent, takes into account the views of various stakeholders during the regulatory process thereby reducing compliance costs, makes available services at affordable prices through creating or mimicing competition, sets quality of services standards, facilitates private sector participation in the infrastructure sector, and makes the sector sustainable through tariff reforms. The benefits of independent regulation are beginning to show up in India. Competitive prices in the telecom industry, rationalisation of tariff and reduction in T&D losses in the electricity sector are some examples. At the central level, the telecom regulator, TRAI (Telecom Regulatory Authority of India) was created in 1997, the port regulator, TAMP (Tariff Authority for Major Ports) also in 1997, and the CERC (Central Electricity Regulatory commission) in 1998. At the state levels, the electricity regulatory commissions have been established in 14 states. These regulators are autonomous, accountable for their actions, and have powers to ensure implementation of their orders and directions. Their functions include mandatory functions such as tariff regulation, recommendatory functions such as licensing as in the telecom sector, and advisory functions such as sector restructuring. The specific scope of regulation differs across sectors. An interesting feature of these new institutions is that they are neither administrative bodies nor judicial bodies. The decision making process of these institutions is mandated to be transparent and consultative unlike decision making in government departments which is usually opaque. They enjoy a quasi-judicial status, but unlike the judiciary which applies the law to facts, they are required to balance the interests of different stakeholders, and promote the development of the sector through the regulatory process. Most Indian regulators have accorded priority to tariff setting of various services and are yet to address their other functions. The telecom regulator rebalanced the tariff of various telecom services for the first time in 1999 through its tariff order, which, inter alia, increased the local call charges and rentals while reducing the long distance and international call charges in a phased manner. Similarly, the electricity regulators in states such as Orissa, Uttar Pradesh, Maharashtra, Gujarat, Rajasthan, Andhra Pradesh, Haryana and Karnataka have passed tariff orders which, in general, seek to rationalise tariff, reduce the cross subsidy across consumers, and align tariff with the cost of supply of power. The central electricity regulator has also stipulated availability based tariff for the central generating stations, and a grid code for enforcing discipline in the national grid. Another area where some regulatory initiatives have been taken is setting standards of quality of services. The Orissa electricity regulator has taken the lead in this area by setting such standards, and the other electricity regulatory commissions are yet to follow. The telecom regulator has also issued a regulation laying down standards for various telecom services. The impact of these regulatory interventions could have been visible had there been a mechanism for compensating a consumer if such standards of services are not met by the regulated utilities. In Sri Lanka, for example, failure to meet standards in telecom services automatically results in payment of compensation to the consumers. India?s infrastructure regulators face many constraints such as start up difficulties, lack of experienced personnel, inadequate information or non availability of quality data, lack of clarity of certain provisions of regulatory legislation, resistance from the government, lack of training facility on various regulatory issues, etc. Regulatory reforms can not progress unless the sector concerned are restructured and the archaic legislation governing the infrastructure sectors are revamped. And finally, the extent of government?s commitment to regulatory reforms coupled with how quickly the regulatory authorities earns legitimacy will determine the degree of its success in the coming years.