What is regulation?

Independent regulatory agencies have become an important part of the governance landscape in
India and elsewhere. Some regulators have achieved useful outcomes. However, the creation of
independent sectoral regulators in India has not been accompanied by critical reflection on their
role, or attention to the political, legal, and institutional contexts within which they operate. The
study explores the role of regulators in various department for infrastructure development.

Why it is important?
Regulation is of critical importance in shaping the welfare of economies and society. The
objective of regulatory policy is to ensure that regulation works effectively, and is in the
public interest. Regulatory policy, a comparatively young discipline, is taking shape in
different ways across OECD members and beyond. Different pathways, however, are
tending towards common objectives. Many OECD countries did not have a regulatory policy
ten years ago; nearly all do now. There is growing interest in using regulatory policy to
address broad societal concerns such as distributional equity and sustainable development.
There is no room for complacency for the work which lies ahead to transform regulatory
policy into a truly effective support for meeting public policy goals.

BACKGROUND
Independent regulators have appeared in the last two decades as a fourth branch of government.
This movement has been driven by the privatization of state-owned resources in infrastructure
sector. Infrastructure development is the creation of basic foundational services in order to restore
economic growth and quality of life improvement. India and many countries have adopted the new
style that is Independent regulatory authorities (IRA), which is a step towards private sector
involvement through privatization. Over forty countries have set up regulators in the last two
decades. Independent regulatory agencies have been set up in India for electricity and
telecommunications in the last seven years. Establishing regulators in petroleum, natural gas,
aviation, and rail industries is also being considered. In parallel, India has also established the
Competition Commission of India (CCI) under the Competition Act, 2002, for regulation of industry in
general. The overlap between the central and sectoral regulators is as yet unexplored. Thus, the
Indian regulatory landscape is complex and formative.
Post-independence, India experimented with a “socialist mixed economy model" with the state
retaining control over the commanding heights of the economy – heavy industries and utilities.
While private sector activity was allowed, the government tried to control it through a web of
controls such as high tariff walls. Thus, the government was not only a producer and regulator of
strategic and important goods and services; it also made an effort for direct control over the output,
and sometimes even associated prices, of private sector activity. Given that electoral pressures
exerted by various interest groups did affect regulatory actions by the government, such regulation
can hardly be labeled as “independent”.
After 1985, the Indian economy embarked on a process of domestic reform, which involved the
following elements – delicensing of industries and abolition of output quotas or bounds on outputs
of firms, permission for private entry into sectors, which were hitherto the monopoly of the
government, and liberalization of quotas and tariffs on capital goods imports. From 1991 onwards,
liberalization of the external sector meant that tariff reductions were extended to almost the entire
spectrum of merchandise trade and conditions for foreign investment were simplified and
liberalized. The process of domestic reform and external liberalization is still ongoing. However, the
producer profile in various sectors has undergone a significant change with private firms co-existing
with government firms in many sectors, which were previously government monopolies (e.g.
electricity, telecommunications). The consensus among decision makers has been that independent
regulation is required in such sectors to guarantee a level playing field. As a result, independent
regulators have been constituted in various sectors, starting with electricity and
telecommunications, and the number is still on the rise. Regulation in India can be seen under three
broad categories: economic regulation, regulation in the public interest and environmental
regulation.
 Economic regulation, which primarily addresses the problems of natural monopoly power in
infrastructure;
 Social regulation, which addresses the problems of market access and affordability and;
 Other regulation, which would include regulation that is common to all industries as well as
regulatory issues that, may be specific to an infrastructure sector (health, safety,
environmental).

SCOPE
Regulation broadly defines mechanisms of government intervention in industry. It is a rule
maintained by the authority for transparency as well as for enhancement of infrastructure sector.
Typically, regulation entails intervention in price, entry, market structure, procurement, and quality.
Regulation has always implied the existence of private ownership in the regulated industries, and is
primarily meant to mitigate market failure. Sectors that have scope for price-based competition
electricity generation, telecom, oil, and gas have incumbents with dominant positions. Market abuse
in both cases is possible, and requires regulation. Since incumbents are state owned and have clout
in ministries, the regulators need to be independent from the politicians/bureaucracy. By clearly
setting out the regulators of the infrastructure sectors, it should be possible to eliminate divergent
mandates currently set out for sectoral regulators. The main functions independent regulators are to
identify regulations, to review and assessment, licensing, inspection, corrective actions,
enforcement. There are various independent regulators of distinct sectors involved in development
of infrastructure.
Theories of Regulation:
The development and techniques of regulations have long been the subject of academic research.
Two basic schools of thought have emerged on regulatory policy, namely, positive theories
of regulation and normative theories of regulation.
Positive theories of regulation examine why regulation occurs. These theories of regulation include
theories of market power, interest group theories that describe stakeholders’ interests
in regulation, and theories of government opportunism that describe why restrictions on
government discretion may be necessary for the sector to provide efficient services for customers. In
general, the conclusions of these theories are that regulation occurs because 1) the government is
interested in overcoming information asymmetries with the operator and in aligning
the operator’s interest with the government’s interest, 2) customers desire protection from market
power when competition is non-existent or ineffective, 3) operators desire protection from rivals, or
4) operators desire protection from government opportunism.
Normative theories of regulation generally conclude that regulators should
encourage competition where feasible, minimize the costs of information asymmetries by
obtaining information and providing operators with incentives to improve their
performance,6 provide for price structures that improve economic efficiency,and establish regulatory
processes that provide for regulation under the law and independence, transparency,
predictability, legitimacy, and credibility for the regulatory system.
Principal-agent theory addresses issues of information asymmetry, which in the context of utility
regulation generally means that the operator knows more about its abilities and effort and about the
utility market than does the regulator. In this literature, the government is the principal and
the operator is the agent, whether the operator is government owned or privately owned. Principle-
agent theory is applied in incentive regulation and multipart tariffs.

file:///C:/Users/91920/Downloads/Independent%20Regulatory%20Agencies.pdf (Public & Private Theories)

Issue:

 Politicisation - As economic agents inherently intend to maximise profits, market

misconduct happens in every domain.
 Whenever such incidences occur, they have to be dealt with pragmatically but due to
political pressures, policy makers go overdrive and frame restrictive policies and denounce
regulators.
 The politicisation of such events has made the regulators in India overcautious & frightened
in order to dodge any blame game.

 Performance - In many cases, non-experts are selected to lead the regulatory bodies
thereby affecting technical aspects.
 Second, the review mechanism for the functioning of the regulatory bodies is not very
robust.
 In particular, it does not include the role of regulators in the development of the market.
 Upgrading - The inventions and innovations in the sector and the society at large influence
the direction of the market.
 Hence, regulatory mechanisms need to update in consonance with the above mentioned
changes without much delay.
 If these issues aren’t addressed, the development of the mature and well regulated markets
will take a serious beating.

Public Interest:
“Public interest” is a broader concept, and often carries with it legal implication. “Public interest is a
common concern among citizens in the management and affairs of local, state, and national
government. It does not mean mere curiosity but is a broad term that refers to the body politic and
the public weal.” Simply put, public interest is something that a policy makers should take into
consideration when making policies, especially in the first step of doing so, which is to define a
“policy problem.”

Public Policy:
A public policy is a goal oriented course of action adopted an implemented by the govt. bodies and
officials in pursuit of certain objective or goals of public interest. Public policy is the regulated guide,
to action taken by the administrative executive branches of the state, with regard to some issues, in
a manner consistent with law and institutional customs.
Public Order:
Public order includes not only the maintenance of physical order but the organization of society in a
manner that strengthens the functioning of democratic institutions and preserves and promotes the
full realization of the rights of the individual.
  Judicial Review

Judicial review deals with three aspects-

 Judicial review of legislative action.

 Judicial review of the judicial action.
 Judicial review of administrative action.

When it comes to administrative law judicial review of administrative action becomes a vital part of
it.

An administrative authority must have discretionary powers to resolve real-time issues. However,
the decisions taken by exercising these discretionary powers must be reasonable. Reasonableness is
the ‘Rule of Law’s’ response to the challenge of discretion. It brings discretionary powers closer to
‘rule of law’ ideas of transparency, consistency and predictability. Through the process of judicial
review- administrative action and discretion are checked and controlled.

Judicial review ensures the legality of the administrative action and keeps the administrative
authority within its bounds. The Court inquires if the administrative authority acted according to the
law. However, the Courts cannot and do not substitute the opinion of the administrative authority
with their own.

Courts, in a matter challenging administrative actions, hence look, if there was a failure in the
exercise of the power of discretion, if there was an abuse of discretionary power, if there was any
illegality and/or procedural impropriety.

 Delegated Legislation

When the functions of Legislature is entrusted to organs other than the legislature by the legislature
itself, the legislation made up by such organ is called Delegated Legislation. Such a power is
delegated to the executives/administrators to resolve the practical issues which they face on a day-
to-day basis.

The practice of delegated legislation is not bad however the risk of abuse of power is incidental and
hence safeguards are necessary.

There are three measures of controlling abuse of power through delegated legislation (as adopted in
India)-

 Parliamentary Control

Parliamentary control is considered as a normal constitutional function because the Executive is

responsible to the Parliament.
In the initial stage of parliamentary control, it is made sure that the law provides the extent of
delegated power. The second stage of such control involves laying of the Bill before the Parliament.

There are three types of laying-

Simple laying

In this, the rules and regulations made come into effect as soon as they are laid before the
Parliament. It is done to inform the Parliament, the consent of the Parliament with respect to its
approval of the rules and regulations made are not required.

Negative laying

The rules come into force as soon as they are placed before the Parliament but cease to have effect
if disapproved by the Parliament.

Affirmative laying

The rules made shall no effect unless approved by both the Houses of the Parliament.

Procedural Control

Procedural control means the procedures defined in the Parent Act (Act delegating the legislating
power) have to be followed by the administrative authority while making the rules.

It involves pre-publication of the rules so that the people who would be affected by the proposed
rules know it beforehand and can make representations if they are not satisfied.

After pre-publication is done and once all the concerned bodies, persons and authorities have been
consulted the rules are to be published in the official gazette so that the public is aware of the
existence of the rules.

Judicial Control

The judiciary looks into the following aspects to determine the legal validity of the rules so made
using the power so delegated-

1. If the administrative legislation is ultra-vires the Constitution.

2. If the administrative legislation is ultra-vires the Parent Act.
3. If the administrative legislation is arbitrary, unreasonable and discriminatory.
4. If the administrative legislation is malafide.
5. If the administrative legislation encroaches upon the rights of private citizens derived
from the common law, in the absence of an express authority in the Parent Act.
6. If the administrative legislation is in conflict with another statute.
7. Power of the legislating authority to legislate the rule.
8. If the administrative legislation is vague.
Audi Alteram Partem

It simply includes 3 Latin word which basically means that no person can be condemned or punished
by the court without having a fair opportunity of being heard.

In many jurisdictions, a bulk of cases are left undecided without giving a fair opportunity of being
heard.

The literal meaning of this rule is that both parties should be given a fair chance to present
themselves with their relevant points and a fair trial should be conducted.

This is an important rule of natural justice and its pure form is not to penalize anyone without any
valid and reasonable ground. Prior notice should be given to a person so he can prepare to know
what all charges are framed against him. It is also known as a rule of fair hearing. The components of
fair hearing are not fixed or rigid in nature. It varies from case to case and authority to authority.

There are various bottlenecks which act as impediments for growth of infrastructure. The major
ones are summed up below:
Financing
Infrastructure projects are highly capital intensive and funding is considered as a major impediment
in achieving the infrastructure goals. The infrastructure broadly can be divided into two types, one
which is very essential for the public at large and have no or very little revenue potential and other
which has handsome revenue potential. The first kind of infrastructure must be totally government
financed whereas the later can be developed on PPP mode. Since resource constraints will continue
to limit public investment in infrastructure, PPP-based development needs to be encouraged
wherever feasible.
Land Acquisition
Another significant challenge in achieving the infrastructure goal is the way land acquisition is done
for infrastructure projects. Compensation fixed in terms of registered value is always the bone of
contention. There is always a substantial difference between the compensation offered and the
actual value of the land. The land owners always feel aggrieved which results in dispute and
litigation.
However, The Land Acquisition and Rehabilitation & Resettlement Bill would be able to tackle this
issue of land acquisition favourably.
Clearances from numerous agencies
Most of the infrastructure projects in India suffer from delays in completion. This is mainly due to an
inadequate regulatory framework and inefficiency in the approval process. Infrastructure projects
require multiple sequential clearances at various levels of government. There are various approvals
needed at every stage which definitely delay the infrastructure projects.
Environmental Impact Assessment (EIA)
Environmental safeguards and guidelines have proven to be one of the major reasons for delay in
infrastructure projects, especially in the power sector. While new projects need to comply with
these regulations, even a project under construction may need to comply with revised standards
midway through the execution stage.
Poor pre-construction planning
Due to the already adverse effect of various impediments like land acquisition, statutory approvals,
delayed financial closure, etc. the pre-construction phase of infrastructure projects is pretty long.
Therefore, there is delayed commissioning and completion of projects.