Rajat Kathuria: Trai - Autonomy or independence?

Granting formal autonomy to regulatory bodies is no guarantee of independence in practice.

There has been a paradigmatic change in the regulation of the communication sectors, principally telecommunications since the 1980s. This transformation exemplifies the move from the interventionist "positive" state to the pro-competitive regulatory state. The US-style independent regulatory authorities have proliferated, as protectionism and public monopoly of the utilities have given way to free market competition. Sustaining the independence of such institutions, however, has been a challenge. One of India's leading newspapers recently ran a story on how "poaching by private companies and discontent among senior staff members over pay and perquisites is threatening to eat into the regulator's talent pool". Attracting and retaining talent has been an issue for the Telecom Regulatory Authority of India (Trai) since inception. I, however, wish to address a broader point in this article, one that is related to hiring practice but concerns the independence of the regulator.

But first, let us consider the different types of independence. Two related aspects of independence are important, independence from government, and independence from the regulatees, that is, service providers. On both fronts, Trai has been weak, although one must admit that political independence per se has not been a universally accepted stipulation. In the US, where the model of independent regulation was first invented, the political independence of the Federal Communications Commission is not a given. Even in Europe, appointments to posts in the telecom regulator have been political, except in the UK, where apolitical experts have been appointed to office. However, research has shown that over time, this pattern changed in Europe as regulatory authorities became more independent and acquired expertise, reputations and political weight.

In India, on the other hand, there has been a weakening of political independence over time. Trai was created in 1997 and restructured in 2000 after several bruising disputes with the Department of Telecommunications (DoT) during its initial years. While the new legislation of 2000 signalled an attempt to re-establish a credible regulator, the new Act has led to a weakening of the guarantee that was provided in the previous Act with respect to the five-year working period for the Trai chairman and members. This statutory guarantee was done away with, and the revised Act provides for less stringent conditions for removal of any authority member or chairman. The term of the authority was reduced from five to three years. Although Trai has never been dissolved under the new Act, the possibility exists, which in turn could affect its conduct.

Another dimension of political independence relates to financing of the regulatory body. International best practices suggest that Trai be funded from a percentage of the revenues of the sector. While this has been proposed a number of times by Trai, it has not found favour with the government.

A central purpose of telecom reform was to create regulatory capacity so that judgements could to be made according to neutral criteria, thereby establishing the second type of independence, that is, independence from industry. This is also mentioned in the reference paper on regulatory principles in the WTO. A number of governments felt that explicit regulatory principles should be drawn up for telecom, particularly in order to guard against anti-competitive behaviour. This was based on the view that the telecom sector normally has a dominant supplier who could alter the market situation to the disadvantage of a newcomer. The regulatory principles contained in the reference paper address situations where major suppliers exercise control over essential facilities or where these suppliers are capable of abusing their dominant market position. The reference paper includes, inter alia, commitments to establish an impartial regulator independent from any service supplier.

On this score also, the regulatory process in India has been compromised. A number of officers from the incumbent operator have been recruited to the regulatory body, some of who have returned after completing their term with the regulator. In the early phase of liberalisation, telecom-related expertise in the country was scarce and largely available only with the incumbent operator. Naturally, it provided a resource pool to tap such expertise. But allowing this pool to return to the incumbent clearly compromises the regulatory process. And now, as competition has intensified, private sector operators too have begun to lure expertise away from the regulator. This was expected since one cannot have different sets of rules for public and private sector service providers. It is one thing to assert that the regulator has been captured by powerful private vested interests through aggressive lobbying, but quite another to observe that the process itself is weak.

It is fair to say that as a general rule, independence increases the credibility of regulation. The two aspects of independence described above have become blurred in India since the state retains a stake in the incumbent telecommunications operator. With the creation of Trai, DoT surrendered its regulatory role, although it retained policy making, licensing and service provisions. In 2000, BSNL was created out of DoT, separating the policy maker from the service provider. In Europe too, the state has often retained a significant stake in the "national champion" companies, although over the course of the last few years, some EU countries have privatised their incumbents. In the UK, the incumbent was wholly private by 1991. But, one could argue that the privatisation of the incumbent may not be a necessary condition for generating independence in practice. Likewise for financial autonomy for the regulator. Therefore, a distinction could be made between formal autonomy and independence in practice. But generating independence in practice becomes that much more difficult without formal autonomy. If we are able to achieve the former without the latter, it will be a model worth emulating.

The author is Professor of Economics at the International Management Institute (IMI).