A regulatory framework for Pakistan Railways - III

Regulation is basically done through tools called 'regulatory instruments' where it is essential that proper mandate in this regard is provided in the underlying legislation that establishes the regulator of railways. The mandate should be in the shape of properly defined overall policy objectives, criteria, and procedures for applying the instruments. Here, while the simplest regulatory instrument applied by the regulator is called rule-based legislation, for example, tariff control, yet over time railways industry went towards commercialization and privatization through the use of contracts. With regard to contracts, as per the World Bank's 'Railway reform: toolkit for improving rail sector performance' (2017) report, 'The most important of these are licences and concessions or franchises. Licencing is a type of discretionary regulation that may cover economic, safety, and environmental issues. Concessions or franchises cover only economic issues.'

All the four proposed regulators where ROR basically coordinates the other three regulators working within it should work towards formulating a particular license in negotiation with the involved company, so that the license effectively '...specifies obligations, risk allocation, and enforcement procedures... however, regulators should have the authority to impose changes on any operators that disagree with the regulator's proposals, and operators should have the right to appeal or refer to the competition body or other appeals bodies, requesting an investigation.'

At the same time, primary elements of a concession include, 'a) a negative concession (usually for loss-making passenger services) where tariffs and services are normally regulated and the government pays the concessionaire; b) a commercial concession-operators pay government for operating rights, usually for freight, without rates or services regulations; and c) a combination of these two.'

Moreover, while concessioning could be only about contract enforcement, it could also be employed in a broader way as well, whereby it 'can be divided between the concession-monitoring body (either government or a government agency) and an independent regulator... [which, in turn]... may give the private investor more confidence by providing a check on government, or preventing a concession-monitoring agency from terminating a contract before the concessionaire has an opportunity to rectify any problems.' Also, 'many failed concessions could have been reinforced to make them more effective if discretionary regulation had been used... economic regulation should be passive... especially because there is often intense competition from road services.'

While setting up the regulator for railways through the proposed ROR, and within it EROR, SROR, and ENROR (defined earlier in part-I of the article), it needs to be understood that the main underlying reason for its creation is to put in place an independent entity whose sole purpose is to provide independent regulation, and in the process establish an environment that makes the rail industry more competitive; so competition being the more efficient way, in time there is less need for regulation.

Hence, according to the same World Bank's (2017) report, the institutional setup being placed for the creation of regulator should ensure that it is being 'set up as an independent authority not a government agency, which would lack the necessary independence.' Moreover, it is important that the regulating authority is properly backed by law, since 'a regulatory authority, operating within a framework defined by government in legislation, will ensure that decisions are consistent and sufficiently predictable to assure investors, rather than based on short-term political gains such as elections, or financial constraints.'

Building the capacity of a regulator is indeed an important task, given the specialized and unique nature of tasks being performed by the regulator. Staffing should be made through an independent 'board for appointments', so that there is no influence or role of either the Ministry of Railways (MoR), or Pakistan Railways (PR). Hence, '...staffing should not be dominated by former railway employees who may also be overly intrusive and attempt to direct the running of the railway.' Moreover, 'an effective regulator must have sufficient numbers of competent staff, which could encompass skills in law, economics, accounting, and engineering, depending on the duties of the regulator.'

Within the office of regulator 'board members and senior staff should have tenures of four or five years to ensure their allegiance is to the regulator and not to their former assignment, typically the industry or the ministry. Board members or senior staff should be exempt from dismissal except under extreme circumstances of moral turpitude or gross incompetence.'

Overall, the guiding principles of sound regulation determine the way hiring is done in terms of bringing on board the right kind of skills, and experience. Hence, it is important to understand these guiding principles both for proper hiring, but before that in laying out the proper legislation for creating the regulating authority. The main guiding principles, therefore, include; firstly, the regulator being independent of government and industry, internalizes that 'a clear delineation of tasks is needed between the government as policy maker, the regulator as referee, and industry players as infrastructure and service providers.'

Secondly, that the regulator is able to extract all required information from railway industry to perform its work properly, and that the legal authority it has is clearly laid out and appropriately provided. This requires that the legislation that sets up the regulatory authority completely articulates the powers of the authority, so that the regulator does not require ministerial approvals for performing its responsibilities. At the same time, 'the regulator should be legally accountable for procedures and decisions through an appeals procedure, which provides a reputational incentive for the regulator to base decisions on evidence and sound reasoning.'

Thirdly, it needs to be ensured through proper legislation that regulatory decision-making process is based on transparency and openness, which includes 'opening regulatory processes and procedures to public scrutiny and disclosing all decisions, procedures, appointments, financial information, and means of appeal. Communication channels should include annual reports, a continually updated website, and perhaps a telephone call-in facility.'

Fourthly, the regulator should stand accountable to public in terms of delivery, and for the finances it incurs in the performance of its duties. For ensuring that appropriate checks and balances are properly put in place, there is a need to put in place effective 'governance structures, mandatory public information disclosure, independently audited accounts, and judicial reviews and investigations of regulator decisions. Regulators should submit an annual report to parliament disclosing finances, planning, achievements and failures, and a parliamentary body, such as a public accounts committee, should oversee this. Moreover, 'accountability requires a coherent, robust, and open appeals process for industry to challenge regulator's decisions.'

Fifthly, there should be due consistency and predictability governing regulatory decisions, while making either fresh decisions or adjusting processes in the light of experience. However, a lack of these brings in an element of unpredictability and inconsistency in the way regulatory requirements are formulated or adjusted, which enhances the risk for the private sector, and ultimately negatively impacts private investment in the rail industry.

Last but not the least, regulatory design should define responsibilities and roles in a simple and straightforward manner. This not only helps avoid misunderstandings but also reduces legal disputes. Moreover, complexity enhances costs for both the rail industry and the regulator, and therefore 'Regulatory design should be aimed at limiting regulation to the absolutely essential, and streamlining regulatory structures and processes, leaving as much as possible to the market and the industry.' Having said that the extent of regulation after all depends on the extent of competition existing within the rail industry. In the case of Pakistan Railways (PR), however, lack of underlying competition requires bringing in appropriately extensive regulation only to be reduced as the rail industry becomes more competitive over time.

(Concluded)

(The writer holds PhD in Economics from the University of Barcelona; he previously worked at International Monetary Fund)

He tweets @omerjaved7