Michael Pinto: The problems with regulators

The jury is still out on whether they have served the purpose for which they were appointed

In modern India it would seem that there is no field of public activity where the visible or invisible hand of a regulator is not needed. The latest is the railways, where press reports say that the ministry has asked for an expert report on the modalities of setting up a regulator.

No one can deny the need for regulation and the vital role it plays in ensuring that the rights of the consumer are fully protected and that crony capitalism does not negate the benefits of globalisation. But regulators have been appointed in several fields and the jury is still out on the question of whether they have served the purpose for which they were appointed.

To begin with government still has the right to issue policy directives to regulators. And this right is not just sanctioned by custom or usage. It is actually enshrined in the statute book. Thus the Major Ports Act authorises government to issue directives to the ports regulator on policy matters. A similar provision exists in respect of Trai. If government has the right to issue policy directives to independent authorities charged with an oversight function, how effective will their oversight function be? And how do you ensure the independence of the regulator, who is supposed to be a watchdog against arbitrary acts of the executive?

The track record of the regulator, especially in the port sector, has been mixed. There are several instances when operators have gone to court against the tariff fixed by the regulator on the grounds that it has made their working uneconomical. The hiatus between the principles followed when the tariff was fixed in 2005 and those followed for subsequent investments has led to a piquant situation in which investors who took the plunge at a later date are governed by a friendlier regime than those who invested earlier. (Clearly, our faith in the proverb that the early bird invariably gets the worm is misplaced.) Since the regulator fixes tariffs on the basis of principles laid down by government, the blame for this must rest with the government.

Unfortunately, the situation in cases where there is no regulator has sometimes been even more puzzling. Recently the civil aviation ministry, which is not hamstrung by a regulator for private airlines, toyed with the idea of fixing a ceiling on fares that could be charged by these airlines. The argument was that anyone wanting to fly at short notice would be subject to very high fares. It is true that emergencies like a death in a family result in last-minute decisions to fly and such tickets cost a packet. But if we do not regulate fares at the lower end how do we get the right to impose ceilings? Airlines make money by selling at low rates well in advance of the date of travel, and jacking up the rates as the date of travel comes nearer. This is a well-known strategy for filling planes. So if airlines take a hit when passengers book well in advance, how can we restrict their right to make up for this at the time of last-minute bookings?

The fact is that regulators have often failed to set the right balance between the claims of service providers and users. The port regulator, especially in the case of container terminals, goes out of its way to protect the rights of shipping lines - almost always at the cost of those who invest in terminals. No less than 95 per cent of India's container trade is carried by foreign shipping lines, which will not pass on to users even a tithe of the reduced terminal handling charges mandated by the regulator. But terminal operators complain of regulator-mandated irrational tariffs that do not allow them even to recover costs, let alone make a profit. So, when we reduce rates charged at terminals, we penalise those who invest in such terminals to protect outsiders (foreign shipping lines) who do not let local users benefit from this largesse. Hardly an advertisement for 'Make in India'!

In the case of airlines, the approach is equally ham-handed. My wife and I recently booked a return flight between Mumbai and Delhi. Less than 24 hours before we were to return to Mumbai the airline casually informed us that the flight had been cancelled. There was no attempt to offer alternative flights or to book us on some other airline. Instead of taking part in the wedding celebrations for which we had come, we spent the rest of that day trying to get fresh tickets, while hanging on to phones that assured us that our call was important to Jet Airways. With the greatest of difficulty we were promised one ticket but had to make alternative arrangements for the second. We finally ended up buying a ticket on another airline at a hugely inflated cost because we were buying it at the last minute.

Nor is this an isolated instance. Not long ago, Air Asia cancelled its Chennai-Bangalore flight at equally short notice without making alternate arrangements for its passengers. Needless to say, the beneficiaries were other airlines that charged hapless passengers huge sums because they were buying tickets at the last minute. Is there a pattern and a cosy agreement between airlines in all this?

The fault here lies not with the high cost of last-minute bookings, but with an airline's ability to cancel a flight without having to compensate those booked on it. Note that you or I cannot cancel a ticket once booked without losing a substantial part of the fare. Indeed, some tickets just cannot be cancelled, so you lose the full amount if you do not fly. Yet the airline can cancel not just a ticket but an entire flight without paying any penalty. Stranded passengers must look out for themselves or be prepared to spend long hours trying for alternate tickets.

This is where we need regulation. Let airlines charge higher sums for last-minute bookings. But make sure they compensate for cancelled flights by accommodating all passengers booked on them, just as they penalise their passengers who are rash enough to cancel tickets booked earlier.

The writer is a former Secretary for Shipping