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Regulating the regulators

January 11, 2016


WHILE the history of regulation in the region is not ancient, Pakistan is far behind other peer countries in this area.

With mounting investment in the private sector in the last three decades, a wide network of regulators has been visible in all major sectors, such as electronic media, power, oil, banking, trade, corporate, telecommunication and education etc.

The prime mandate of a regulator is to rationalise pricing while aligning the balance to safeguard the interest of all stakeholders. And setting tariffs does not mean simple mathematical and financial calculations; it is a complete science and takes a solid business plan to make a utility financially and operationally viable while setting social, economic, commercial and financial goals.

The financial viability of any sector is vital for its existing and potential consumers. But just for the sake of financial viability, inefficiencies should not be transferred to end-consumers

The regulators are supposed to transform the policymakers’ socioeconomic goals though pricing. While setting prices, they need to ensure that the rates, say of energy companies, will be affordable by everyone so that the government does not have to enter into any subsidy regime.

The financial viability of any sector is vital for its existing and potential consumers. But just for the sake of financial viability, inefficiencies should not be transferred to end-consumers. A well-designed and judicious pricing framework is inevitable for eliminating inefficiency and cross-subsidies. In order to remove inefficiencies, regulations should be sophisticated and mature enough to be exercised.

There are foreign bodies getting licences through the Securities and Exchange Commission of Pakistan, which is contrary to the ICMAP Act and the ICAP Ordinance. This not only raises questions on the regulatory mechanism but also severely affects the economy as it facilitates huge outflows of hard-earned foreign currency.

Meanwhile, the Higher Education Commission protects the interest of academia by ignoring professionals who can enter and rise in an academic environment. There is a need to regulate this side whereby professionals should also a have career track in universities.

This will not only help the universities in producing graduates who will have practical knowledge but will also let them become sources of attraction for the corporate sector to induct fresh graduates without putting the experience bar.

Similarly, the fees of schools and universities are not regulated. There are government boards and school-monitoring authorities but they seem to be ineffective or least concerned about setting and controlling fees, even though it is a major public concern.

In the power sector, the ongoing crisis could have been over much earlier if Nepra had acted at the right time. The circular debt emerged due to delayed tariff determination and non-reflection of the actual cost of generation in the tariff. Nepra came into existence in 1999 but determined the first tariff in 2007. Meanwhile, the distribution companies filed their first tariff petition in 2003, which then remained pending with Nepra for a long period.

Fresh tariff petitions were followed by review petitions against Nepra’s decisions. The severity of the power crisis and the emergence of the circular debt deepened after the determination and notification of Nepra’s tariff.

When Nepra works under the influence of a political government, it favours short-term gains over long-term market objectives. And if any political government concedes autonomy, the authority tends to overlap its mandate. The power sector couldn’t bring efficiency, equity and even cost recovery after the activation of Nepra in the country.

After going through cumbersome procedures, Nepra fixes tariffs and sends them to the federal government for notification. Here, a political government has to take the responsibility to rationalise the tariffs to make them affordable for the end-consumers.

The financial viability of the power sector is pivotal, but it does not mean transferring all the unjustified inefficiency costs to the end-consumers.

Instead of setting competitive and acceptable prices, Nepra leaves it to the government to devise the pricing mechanism.

The regulators and the policymakers are strategic partners. It is Nepra’s primary responsibility to make the power sector efficient. If there is some idle capacity, it is the regulator’s responsibility to intimate the government at the right time to take appropriate measures to optimise production. It is not sufficient to only publish a report at the end of the year mentioning that there had been idle capacities.

Nepra’s pricing mechanism — cost-based tariff for ex-Wapda discos and multitier tariffs for K-Electric and Fesco — has not delivered, as demonstrated by the circular debt and the power subsidies.

Then the question is, who should to regulate the regulators? The answer is the regulators themselves. They have to build their capacity in areas of pricing, operations, standard setting, legal, economy, customer services, IT, overall market and future global regulatory trends.

The writer is Vice-President, ICMA Pakistan

Published in Dawn, Business & Finance weekly, January 11th, 2016