One of the key proposals of the bill on telecommunications that is under discussion in the Rada is the creation of a National Telecommunications Commission to act as a market regulator.
The degree of “independence” to be given to the proposed commission has given rise to some heated political debates with the involvement of Western donor organizations. This provides a clear example of how easy it is to be misled by appearances. The discussion has been reduced to a battle of labels: “independence” for such a body along Western organizational lines was labeled “pro‑reform,” while the alternatives were “anti‑reform.” The rhetoric suggested that only “forces of darkness” could be against replicating a Western model in order to create a telecommunications market environment similar to that in developed countries.
The reality, as always, is more complicated. The lesson is that any institutional reform must take into account the specifics of each country, its political and organizational culture, the legal environment and the rules of accountability. When we consider these, a Western‑style independent regulator is, in fact, more likely to be “anti‑reform” in the Ukrainian context. The main reason is that in developed countries, regulatory “independence” never means an ability to make decisions without external controls or a high degree of accountability. In fact, in most countries, considerable attention is paid to ensuring that “independent” regulatory agencies have relatively few degrees of freedom, that they operate within tightly defined criteria, and that they are subject to external oversight. Such constraints are lacking within the Ukrainian institutional context.
The importance of these constraints becomes clear when we consider the main reason for regulatory “independence.” Regulatory decisions frequently involve trade‑offs between competing commercial interests ‑ for example, of different telecommunications operators. It is important to ensure that a regulator is not captured by one or the other of these interests. Commercial capture of regulatory decision‑making can occur in a number of ways. One obvious problem is political interference: if one of the operators has better access to political leaders, it may be able to influence decisions in its favor. This is why it may be desirable to find some way to insulate the regulator from day‑to‑day control by politicians.
However, commercial capture of the regulators through the political process is only one of the risks. Any regulatory body can be captured through bribes, or through influence in appointing members of an “independent” body. In fact, if political leaders are more accountable (for example, through public scrutiny) than the appointed members, and hence are less prone to capture, too much independence from political oversight may be a problem in itself.
The risk of regulatory capture through political influence inside the government needs to be set against the risk of direct capture of an “independent” regulatory agency by commercial interests. In Ukraine’s case, the risk that commercial interests will exercise influence to appoint people to an independent agency, and that such people would then act without any accountability must be rated as very high. Hence, in Ukraine, perhaps more so than in other countries, it is critically important not to create an unguided missile out of an “independent” agency.
What are the requirements for ensuring that an independent regulatory agency is a viable option? “Independence” does not mean that such regulators are free to do whatever they want. In reality, independent regulators in most countries operate under very tight constraints: they are given detailed and precise criteria for making decisions; they follow prescribed processes; they are tightly held to account, including rights of appeal. The only independence they exercise is in judging how the circumstances of each particular case compare against the pre‑determined standards.
The criteria for regulatory decisions must be transparent, well understood and set out in legislation. The regulator must be provided with clear instructions that set out the objectives of regulation, the methodology to be followed, the criteria for evaluating information that may be supplied to the regulator, and the standards of information and analysis necessary for making decisions. For example, with regard to price regulation, laws dealing with the telecommunications sector in most countries specify that prices for regulated services are to be set equal to the long‑run incremental costs of providing these services. The long‑run incremental cost concept is very specific. There is a well‑established and reasonably objective methodology for calculating such costs. In other words, an independent regulator is given very precise guidance.
The area of competence of an “independent” regulator must also be very specific and narrowly defined. For example, in most countries, telecommunications regulators are given a narrow list of services whose prices they can regulate. A law change is required to change that list. This is necessary to manage the risk of empire building by regulators.
Moreover, the process of decision‑making must be carefully designed to ensure fairness and to prevent regulatory capture. For example, most countries specify detailed procedures for price regulation. The detail differs from country to country, but the basic outline is broadly similar. The regulator first issues guidelines outlining its approach and information requirements. All market participants are given an opportunity to comment. The regulator then calls for submissions on the specific level of price that should be set. All market participants are again allowed to present submissions. The regulator then issues a draft decision. Finally, all market participants are allowed to respond before the full determination is made. While this may seem slow and cumbersome, a process of this kind is necessary to ensure the quality of the decision.
Perhaps most importantly, while an independent regulatory agency should be insulated from day‑to‑day political pressures, it must have a clear accountability regime. The must common accountability tool used in such cases is the right of appeal to courts. Any market participant can ask the court to consider whether the regulator complied with its criteria, whether it followed a fair process and took all relevant information into account, and whether it made any mistakes in assessing the specifics of the case.
None of the above pre‑conditions for the “independence” of regulatory bodies is present in Ukraine. In their absence, an organization that looks like its Western counterpart is likely to lead to quite different outcomes. The adoption of the appearances of the Western model, without the institutional context, will do more harm than good, and the risk of regulatory capture will rise.
Alex Sundakov is the director of the New Zealand Institute for Economic Research and advises the International Center for Policy Studies in Kyiv on economic regulation issues. He spent three years with the International Monetary Fund in Ukraine as resident representative.
