Making regulation more democratic

Published July 6, 2020
Between sugar and digital technology, the regulatory culture in Pakistan is such that hand-outs are offered to uncompetitive sectors whereas infant industries remain mired in red tape. — File photo
Between sugar and digital technology, the regulatory culture in Pakistan is such that hand-outs are offered to uncompetitive sectors whereas infant industries remain mired in red tape. — File photo

“THERE is nothing magic about regulations. Too much is bad, too little is bad,” said Hillary Clinton in one of her talks at Goldman Sachs.

On one hand, overregulation deters economic activity. But on the other, unchecked deregulation leads to grotesque levels of inequality. Good regulation, however, is correlated with foreign direct investment (FDI). It is also negatively correlated with income inequality. Owing to the economy’s dire condition, the PTI government is forced to operate within a narrow fiscal and monetary space. This leaves regulation as the only viable lever for kick-starting growth. Unfortunately, our existing regulatory structure at both federal and provincial levels enables the very market failures it is supposed to preclude.

Take the example of the sugar industry. The government treats sugar as an essential food item with the supposed objective of protecting the farmer and consumers’ interest. This translates into government intervention across the supply chain starting from the grower and ending with the retailer. It stands to reason that if an industry is overregulated, it will develop direct links with policymakers. Our sugar sector is a grotesque manifestation of this phenomenon as top-tier politicians own or co-own mills, which control 50 per cent of the entire sugar market.

Policymakers can encourage the enforcement of regulatory laws by incentivising the private right of action through courts

The recent crisis ensued because the Sugar Advisory Board — a high-level body that monitors the national stock — failed to ban the export of sugar even when it had information that stocks were depleting and local prices increasing. The board consists of government officials and representatives from the Pakistan Sugar Mills Association (PSMA) and growers’ associations. No member from civil society organisations or a government body like the Consumer Protection Council sits on the board. The purported reason for their exclusion is the belief that bureaucrats are perfect guardians of public interest. One consequence of the bureaucratic incapacity is the poor recovery rate of sugar.

On the flip side of sugar is digital technology. It was fascinating to witness the botched attempt by the Pakistan Electronic Media Regulatory Authority (Pemra) to regulate online content producers (web TV or over-the-top TV) by suggesting an expensive licensing regime, which creates steep barriers to entry. If the architects of the suggested regulations understood the industry at all, they would be talking about extending infant industry protections instead of generating revenue through a costly licensing regime — not to mention the serious implications the proposed regulations had for freedom of speech.

Between sugar and digital technology, the regulatory culture in Pakistan is such that hand-outs are offered to uncompetitive sectors whereas infant industries remain mired in red tape. Needless to say, the opposite should be happening. While the final solution will involve a bureaucratic overhaul, which is beyond the scope of this piece, there are other effective and short-term routes to better regulation that have been employed by many countries. One is tripartism: the practice of giving public interest groups (PIGs) a seat at the table, preferably the driving seat.

The need for regulating a particular sector arises because the government wants to maximise societal well-being by reining in market forces. Thus, those directly affected by the said sector should be at the centre of the regulatory effort. PIGs may include trade unions, professional associations, consumer rights bodies, community-based organisations and others that ultimately bear the brunt.

For instance, under a triparty arrangement, occupational health and safety regulations will play out in a way that the safety inspector (regulator) will carry out factory inspections with the company safety officer (private sector) and an elected union health and safety representative (PIG). The union representative will be a part of all communications between the regulator and the company. In some cases, they will have the same standing as the regulator to enforce a particular action, such as shutting down an unsafe machine. Many Australian states have written their regulations on the same model.

To some degree, regulators in Pakistan already accommodate PIGs. All regulatory authorities have governing boards or oversight/steering committees, which have representation of experts and the private sector. But in most cases, these PIGs are under-represented or are in no position to influence the policy of these authorities.

The Drug Regulatory Authority of Pakistan has a policy board where bureaucrats and experts are in a ratio of 9:6 whereas the board chairman is a government official.

A more interesting example is of building control and town planning – a high-stakes government function involving the oversight of the construction industry. In a first, the Punjab government appointed the Lahore Development Authority’s vice chairman from the private sector in late 2018. However, it has no meaningful representation from civil society despite its direct implications for Lahore’s urban planning. In fact, it can be argued that civil society representation is even more critical to offset the representation of private-sector property developers in the body. It is worth mentioning that Pakistanis have more faith in civil society than they have in the government. While aiding the regulator’s work, civil society participation essentially serves the purpose of democratising regulation by making it inclusive.

Another ingenious way of complementing the regulator’s work is private enforcement. Policymakers can encourage the enforcement of regulatory laws — especially in a country with a tradition of common law — by creating and incentivising the private right of action through courts.

For example, the US regulatory system has a diffuse set of regulators, primarily dependent on private parties instead of a centralised bureaucracy for enforcement. These incentives include the development of class action device, damage multipliers, statutory and punitive damages and fee shifting. Without getting into the reasons behind the Congress’s decision to encourage private enforcement and limit the authority of executive agencies, it can be said that it offers some distinct advantages. Conventional wisdom dictates that private parties have most knowledge about private wrongs, which gives them informational advantages over an often-distant public regulatory body. Moreover, unlike public regulatory agencies, a system of private enforcement does not lend itself to political capture owing to the multiplicity of stakeholders.

Policymakers in Pakistan have toyed with the idea of private enforcement. A recent landmark decision by the Lahore High Court allows banks to enforce mortgages under the Financial Institutions (Recovery of Finances) Amendment Act, 2016. As a result, banks will be able to auction mortgaged property of loan defaulters without having to obtain a court order. There are other numerous avenues, which will benefit immensely because of private enforcement. Either way, unless contract and private enforcement improve dramatically, there is no way for the country to project itself as an investment-friendly destination. From high-profile cases of Reko Diq to the Competition Commission of Pakistan’s inquiries into cement cartels, courts have displayed inadequate understanding of commercial matters.

Policymakers must stop complaining of bureaucratic intransigence and start thinking of new ways to make regulation more open, inclusive and democratic.

The writer is director of the Sindh government’s Doing Business Reforms Implementation Unit

Published in Dawn, The Business and Finance Weekly, July 6th, 2020



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