Institutional Issues
Principles for sound regulation
Key principles for determining how to regulate railways are as follows:
- The regulator is independent of industry and government
- The regulator has clear legal authority and can extract industry information required to carry out its specified duties
- Transparency and openness prevail
- The regulator is accountable for action, inaction, and related costs
- Regulatory decisions are consistent and predictable
- Simple regulatory design clarifies roles and responsibilities, which can help avoid misunderstandings and legal disputes.
All aspects of regulatory activity should reflect these principles.
Independent regulators
Independence from industry and government is desirable for any regulator. This is because the decisions of an independent regulator are more likely to be, and be perceived to be, free from vested interests and consequently less liable to controversy and legal challenges. Independence reduces the scope for ‘regulatory capture’—when a regulator champions special interests, such as short-term industry objectives or political outcomes—rather than upholding the public interest. 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.
Economic regulation should be independent of any railways industry player; this is even more critical after introducing competition, to maintain a level playing field and the perception of fairness.
Ministers should have no authority to influence regulatory decisions. If the industry is regulated by a ministry with financial interests in the railways, or ministry policy objectives conflict with commercial objectives, the private sector will walk away and the goal of developing market competition will be unrealized. Independence should also ensure consistent and predictable decision-making as decisions are separated to some extent from the political process.
Before investing, the private sector will be concerned that regulations and rules may be introduced or changed which may undermine the profitability of their investments, or even worse, renders their assets vulnerable to expropriation. Independent regulation provides greater certainty than if decisions depended entirely on government. Regulators often oversee complex and contentious situations, and should be allowed to seek professional advice and find apolitical solutions.
However, even though regulation should function outside the political process, regulator authority and scope of responsibility are established through government legislation, and members of the regulatory body should be appointed by government.
How can countries establish regulation that is genuinely independent? Many countries lack experience of independent regulation or the financial and human resources to regulate effectively. Consequently, some national governments opt to regulate using concessions. However, without some independent regulation, concessions can be problematic.
To achieve genuine independence, the regulator must be adequately resourced, typically from a dedicated funding source that emanates from the industry it is regulating—through fees for licenses or concessions. Independent funding insulates the regulator from government budgets and reinforces independence from government. Parliament should establish the regulator’s budget, separate from that of the ministry responsible for railways, to ensure budgetary accountability and independence. Genuine independence is also reinforced through stringent processes to appoint and dismiss the regulatory board and senior staff (see section on staff below).
In practice, countries may be unable to implement all elements of regulatory independence immediately. A small fledgling regulator could benefit from established government administrative procedures, and financial independence from public subsidy is unlikely given the substantial start-up costs to set up the regulator. However, the long-term goal should be regulatory independence.
Clear legal authority and duties
The powers of the regulatory authority should be fully articulated in legislation, avoiding the need for the regulator to seek ministerial approvals. The legislation should specify the regulator’s legal authority and scope of responsibility. In particular:
- The roles of the regulator and other bodies should be clarified to avoid overlapping responsibilities.
- The regulator's authority must be sufficient to execute specified responsibilities; for example, the regulator must be able to access industry information.
- All aspects of regulatory processes should be transparent, including all decisions and the justifications for them.
- 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.
- Permanent consultative arrangements should be established with key sector stakeholders, including ministries, ports (where appropriate) and major customers.
For example, the duties of the British rail regulator are in Section 4 of the 1993 Railways Act.110
Transparency and openness
Transparent and open decisionmaking processes conducted through formal channels reinforce regulatory independence and provide market confidence that there has been no undue influence from government or industry. This 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.
Accountability
The regulator must be accountable to the public it serves, to the industry it regulates, and to parliament, which authorizes its operation. Therefore regulatory reporting procedures and access to information for consumers and other stakeholders must be open and transparent. The regulator must demonstrate accountability in staffing procedures, lines of authority, and decisionmaking. Also, accountability requires a coherent, robust, and open appeals process for industry to challenge regulator decisions.
Of course, independent regulators are capable of exceeding their mandates and increasing their internal costs to unjustifiably high levels. Therefore, checks and balances must be established through 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.
Consistency and predictability
Regulators need enough flexibility to improve the regulatory regime by adapting processes and decisions to reflect lessons learned in carrying out their work. However, inconsistent or unpredictable shifts in regulatory requirements increase risk for the private sector, generating suspicion and reducing credibility about regulatory independence, thereby raising the cost of capital and discouraging investment in the industry.
Complexity should be minimized
Minimizing the cost and complexity of regulation is a key objective in regulatory design. Complexity increases costs for the regulator and the industry, uses scarce human resources, and can stifle commercial activity. Regulation must strive to avoid reducing rail industry competiveness, particularly since most governments want to shift transport traffic to rail from less environmentally friendly modes. 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.
Institutional arrangements and staffing
Within the context of the principles set out above, several inter-related options exist for regulatory institutional arrangements.
- Should economic and safety regulations be combined in a single body?
- Should rail have its own regulator or share a regulator with other sectors?
- Should the regulator be designated as an agency or an authority (implying more independence)?
There are also staffing options, which are discussed below.
Combine economic and safety regulation?
A single body can carry out economic and safety/technical regulation, or tasks can be shared by separate bodies. Some countries have opted for separate bodies, such as the United States, and initially, Great Britain. Later, Britain decided that safety and economic regulation should be combined, which would help to ensure that safety regulation took more account of the commercial implications of decisions. This creates some potential for safety to be compromised by a greater focus on commercial outcomes, but combining economic and safety regulation offers the advantage of sharing staff, especially technical staff. It addresses the important issue in designing regulatory frameworks of ensuring smooth coordination between those responsible for different aspects of regulation.
Single sector or multi-sector regulator?
The legislation setting up the rail regulator should take account of other regulators whose authority may take precedence or whose mandate may overlap with that of the rail regulator. For example, would it make more sense for existing regulators to add rail regulation to their responsibilities? Or is a dedicated rail regulator a better option? This relates to the broader issue of whether a single rail regulator or a multi-sector regulator (MSR) should be responsible. Box 9.9 offers examples.
Few transitional or developing countries have sufficient resources to establish a single regulator for the rail sector, or even for the transport sector, so most developing countries have established rail regulation within multi-sector regulators. For example, in Tanzania, the Surface and Marine Transport Regulatory Authority (SUMATRA) regulates economic, safety, and environmental aspects for all transport sectors, except air. Useful synergies can result when a single body regulates multiple sectors.
- Lessons learned from regulating one sector can be applied to other sectors.
- Specialist staff (e.g., lawyers) can be utilized across sectors, creating full work programs and more effective and efficient regulation.
- Utility and transport sectors share the need to plan and finance long-term capital investment, to determine tariffs, and the need for licensing.
- An MSR should facilitate regulatory policy that is more consistent and transparent across sectors.
- An MSR may be less likely to succumb to ‘regulatory capture’ than a single sector regulator, because an MSR has more status and authority, and works across multiple industries and ministries.
MSRs have some potential disadvantages:
- Because of MSR power and influence, leaders can abuse their position. Specialist technical knowledge for individual sectors may be insufficient; this risk can be reduced if each sector is represented at board level, and if sector-specific technical groups are retained at operational level.
- An MSR’s size and relative complexity may present more challenges to establish and manage.
- A larger bureaucracy could delay decisions.
Authority or agency?
The regulator should be set up as an independent authority not a government agency, which would lack the necessary independence. 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.
Staffing
Many countries have little or no experience of independent regulation so building regulatory capacity is a key issue.111 The challenge is to recruit and retain experienced qualified staff that can perform the unique and difficult roles required by the regulator.
Regulators should not depend on a government department for their staffing. To increase independence, appointments should be made independently of government or the minister, possibly through an independent appointments board. 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. This precaution insulates decisionmakers from external pressures, thereby upholding regulator independence. Grounds for termination should be specified in law and termination procedures should incorporate strong checks and balances, such as a requirement for parliamentary ratification.
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. Also, railway technical skills will be required for safety regulation, and possibly for economic regulation, to ensure that decisions take account of rail industry realities. Since the regulator should be a catalyst for change and take a fresh look at railways, staffing should not be dominated by former railway employees who may also be overly intrusive and attempt to direct the running of the railway.
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110 http://www.railwaysarchive.co.uk/documents/HMG_Act001.pdf.
111 R. Bullock, V. Foster and C. Briceno, C., Africa’s Infrastructure, A Time for Transition, (World Bank, 2010). http://www.infrastructureafrica.org/aicd/flagship-report.
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