Regulation under threat

THE energy minister accused the Planning Commission of holding back energy projects. The Planning Commission countered by arguing that ministries did not like the accountability and scrutiny that it provided. There was a similar exchange between the planning and petroleum ministries as well.

There have been news items, over the last few months, regarding the executive’s unhappiness with electric power regulator Nepra and Ogra, the oil and gas regulatory authority. It has been suggested that the government at times has even contemplated doing away with some of the regulators or, at the very least, clipping their more troublesome powers.

Is there an assault on regulatory bodies and structures in Pakistan? Is the executive feeling the heat to show performance and is it finding it hard to cope with the regulatory structure that has been created over the last couple of decades?

Effective regulators are needed to provide at least a semblance of checks on the executive.
There is no doubt that there are significant problems with regulatory structures and bodies here. It has become harder to navigate the regulatory environment, and a more active National Accountability Bureau and judiciary have made things even more difficult and unwieldy: look at the continuing saga concerning the appointment/removal of the chairperson of Pemra, the electronic media regulator.

Regulatory bodies have problems too. Many do not have the competence and capacity to deal with the areas they are supposed to oversee. The inept and ineffective handling of media issues by Pemra, and repeatedly, is again a good example. Most regulatory bodies are staffed with retired bureaucrats, police officers, generals and judges who have little or no experience of industry issues and little or no training in economics and other relevant areas. They know little, if anything, about the private sector. To suppose these people can create ‘conducive environments’ for business and not act as rigid mandarins is too much to expect.

Even the majority of the technical staff in many of these regulatory bodies does not have the capacity, the requisite training or experience of regulation. Having read a number of judgements that the Competition Commission of Pakistan has given on issues of fair practices, cartels and pricing, and seeing how these decisions come about and having studied the problems, I can confidently say that the concerned authorities need a lot more training in industrial economics and game theory.

I cannot comment on the legal issues, including legal expertise, but even with other regulators such as Nepra, the Pakistan Telecommunication Authority and Ogra, I can safely say on the subject of competence on economic issues that similar problems of lack of knowledge and expertise persist here as well.

At the same time, it is also clear that we do need regulators and very competent ones at that. The executive will always want to avoid accountability. They usually want to do things in a hurry — see how quickly and without due process some of the transport projects have been undertaken.

The same is true of big business and players in the private sector. We have to have bodies that look after the interest of the people and ensure that the playing field is ‘fair’ for all sides. This is especially the case for areas that are and are likely to remain oligopolistic ie dominated by few larger players. The energy sector, banking/finance, media, large-scale manufacturing and the communication sector are all examples. In each case, there are significant degrees of economies of scale and scope, so the average player is going to be fairly large and there will only be space for a few such players in the market.

If a regulator is not there to protect the interests of the people as well as those of smaller players and/or new or potential entrants, the sector will have a tendency to become monopolistic and exploitative.

To cap it all, there are serious and entrenched issues of corruption and nepotism that need to be challenged and tackled in Pakistan. Has there ever been a sizable project or an initiative undertaken by the public sector in Pakistan that has been transparent and has not been found to have some element of corruption or nepotism? From the privatisations carried out over the last 20 years to land acquisition deals by the Defence Housing Authorities, from the award of infrastructure development projects to favourites to rental and independent power producer investments in energy, we have seen plenty of scandals and many still remain to be investigated. Effective regulators are needed to provide at least a semblance of checks on the executive as well as large-scale private players.

It should be borne in mind that regulation is not just for accountability and ensuring fair competition; it is important for ensuring optimal functioning of markets and for setting the appropriate incentives for economic growth. If potential investors cannot be certain that their investments will be protected, copyrights or contracts enforced, the competition will be fair and there will be no re-negotiation of contracts post investment, only then will they be confident enough to invest.

We have to have an efficient and competent regulatory framework in place. This is necessary to provide due checks and balances in the system. It is also important for ensuring that we are able to shape the competitive environment for the future. Currently, the regulatory framework, weak and incompetent that it is, is under attack from the executive. This is largely short-term interest trying to trump the long-term one.

But the weaknesses of the current system should not mean doing away with the regulatory framework; on the contrary, it should be an argument for building their capacity and providing them with the resources that are needed to make them more competent and efficient. Without a functional and competent regulatory framework and capacitated regulatory bodies, we will not be able to integrate into the global economy and compete in relevant goods exports and services markets.

The writer is a senior research fellow at the Institute of Development and Economic Alternatives and an associate professor of economics at LUMS, Lahore.

Published in Dawn, October 23rd, 2015