Monday, February 20, 2012

Guest Post by Anirudh Burman on "Nuclear regulation: Broader issues for regulation in India"

This blog recently posted an article titled “’Autonomy’ of nuclear regulator: The ideal and the reality”. The article contained an important critique of the so-called institutional autonomy of the nuclear regulatory framework in India. Some issues highlighted in the piece deserve greater consideration. This is because our nuclear regulatory framework epitomizes what is endemic to the institutional frameworks of many other regulators in India: lack of independence, accountability, and transparency.

Independence does not necessarily imply a total cleavage from the executive and legislative wings. However, I think we can agree that budgetary independence, discretionary independence, and an independent composition are minimum standards for an independent regulator. Budgetary independence assumes importance in light of the oft-debated experience of many regulatory agencies in the US where partisan legislatures keep increasing or decreasing their annual budgets. This has significant repercussions in their capacity to enforce compliance with regulations.

Discretionary independence and composition are linked to the issue of accountability as well as independence. Mr. Reddy highlights for example the fact that all members of the AERB were composed of members of the DAE and BARC. While independent composition is desirable, we must consider who it is we want regulators to be independent of. In the nuclear sector, all operators of nuclear plants are state-owned, so a case may be made for the AERB to consist of members who are not, and have not been members of the state machinery. Practically however, this outcome would be difficult to achieve given the state’s monopoly in the sector.

However, for many other regulators such as IRDA, TRAI and SEBI (civil aviation as well), it would be equally desirable to not have members of the private sector i.e. those who have conflicting interests with regulatory objectives serving on these regulatory agencies. The issue is however more complex. It can be argued for example, that a regulatory agency composed of members from the government as well as the private sector may actually be able to create a more cogent regulatory framework than one composed of members only from the government or the private sector. The issue of composition is therefore important, but having independent members does not in itself create a better regulatory framework. It may resolve conflicts of interest and satisfy precepts of natural justice, but in many cases, it may also compromise expertise.

Discretionary independence and accountability is of critical importance to a sound regulatory framework. While most legislation establishing statutory regulators detail the composition, and the powers and functions of regulators, they do not mention their relationship with the executive and the legislative wing. It is especially important to do the latter since Parliament hardly exercises any substantive policy formulation or oversight over regulatory agencies. The executive however shapes regulatory policy, often overrules decisions of regulators, and is the de facto controller of a regulator’s purse strings.

It is important that regulatory agencies be attuned to the broader policy objectives of the government and frame regulations to enforce market compliance with the same. So some amount of political accountability to the ruling government is necessary to ensure the fulfillment of a democratic mandate. At the same time, regulatory independence is necessary to ensure fair play and competition. If the relevant ministry keeps overruling a regulatory agency on individual decisions, it may induce those being regulated to indulge in rent-seeking activities, thus undermining the role of the regulator.

Lastly, who and what we want independent regulators for has to be thought about deeply. In the nuclear power generation sector, we have the AERB touted as an independent nuclear regulator. However, NPCIL, a wholly owned enterprise of the government owns and operates most, if not all the nuclear power plants in India. An independent regulator makes institutional sense if there is a multiplicity of competing players who need to be regulated to ensure the operation of an efficient, competitive and safe nuclear industry. In the absence of multiple actors, the need for an independent regulator is less clear. The IAEA may insist on an independent regulator to ensure the safety of India’s nuclear plants, and an autonomous body is essential to ensure the same. However, regulation of a sector, and ensuring safety are two very different policy objectives that need different institutional designs.

2 comments:

Ajat said...

Hi,

Some interesting issues raised. I'm not clear on what you mean by discretionary independence. Isn't discretion: a. fettered by law to a certain extent, i.e. the powers given by statute to the regulator for example; b. to the extent that it is not, isn't it inherent in the idea of discretion that the authority is independent. Does the combination of two words mean anything or do you just mean that they have to be independent?

Zilch said...

Thanks for the feedback Ajat. By discretionary independence I simply mean the amount of independence a regulator has in exercising its own discretion. Discretion may be conferred/ constrained in varying degrees and this degree of conferment/ constraint needs careful examination.

As my post explains, while complete independence may defeat the policy objectives of the government, complete restraint would impact the effectiveness of the regulator. So, there needs to be a debate on the amount of independence a regulator must have in exercising its discretion.

- Anirudh