Author: cpradmin

 

Date: 29th March 2022

Speakers:

Mr K.P. Bakshi, Former Chairperson, Maharashtra Water Resources Regulatory Authority will be in conversation with Dr Abha Yadav, Associate Professor, Indian Institute of Corporate Affairs and Director of the Forum of Indian Regulators (FOIR) Centre at IICA, Dr Srinivas Chokkakula, Ministry of Jal Shakti Research Chair – Water Conflicts & Governance and Fellow, Centre for Policy Research and Ms Arkaja Singh, Fellow, State Capacity Initiative, Centre for Policy Research.

The background note can be accessed here.

Conversation summary:

Background to the establishment of the MWRRA

In the period around 1995-1996, the new political establishment in Maharashtra recognised that the state water resources department was not in a position to continue financing various ongoing irrigation projects. In order to raise finances for the sector, five irrigation corporations for the five river basins were conceptualised – one each for the Narmada, Tapti, Godavari, Krishna, and Konkan region. These corporations floated bonds for private markets and the general public to invest in. The funds so raised were then used to complete ongoing projects. Alongside continuing pressures to finance new projects, the World Bank stepped in for the Maharashtra Water Sector Improvement Project albeit with pre-conditions. One of the conditions was that the government had to set up a regulatory authority to ensure prudent use of funds. This led to the State Water Policy of 2003, the Maharashtra Water Resources Regulatory Authority Act and Maharashtra Management of Irrigation Systems by Farmers Act of 2005.

One-third of the reservoirs in the country are in the state of Maharashtra and water is a driver of economic development in the region. The establishment of the MWRRA in 2005 is a critical milestone in water sector development in Maharashtra.

The role of the MWRRA

The primary role of MWRRA is to figure out how to equitably and judiciously distribute limited water resources. The regulator needs to ensure that every user in each sector gets their allocation (as set forth by the Cabinet), has to recover charges, and minimise disputes. The mechanism to ensure this was that the MWRRA would set the tariff, the quantities to be allocated to each sector including users, and stop thinning of resources of the state government. The regulator must also prioritise projects such that the ongoing projects were completed first, especially those that were in the last leg of completion. Overall, the regulator undertakes the job of clearing projects sent by the state government, fitting these projects within the integrated water plan, and prioritising them. Further, the regulator also advises the government to raise awareness about water conservation, efficiency etc.

Regulatory independence

The creation of any regulator, including in this instance, a water sector regulator, is testament to the government’s preparedness to part with its powers and let another agency regulate and develop the sector. Further, generally, stakeholders do not have sufficient faith in the government to carry out regulatory functions. Their confidence is bolstered by the putative apolitical nature or independence of the regulatory agency. The establishment of regulators has not taken-off in the water sector as it has in several others. Now, however, the Union Government has stepped-up its focus on water resources, and with missions such as the Jal Shakti, many states are working quite actively on this. I am aware that states such as Meghalaya and Tamil Nadu are working actively on this sector, and others like Punjab and Haryana have already set up water sector regulators. Compared to older regulatory agencies such as the Telecom Regulatory Authority of India (TRAI), Tariff Authority for Major Ports (TAMP) or the electricity regulatory commissions at the state level, water regulators are fairly new. Further, water is a sensitive subject and can become a big political issue if handled incorrectly, therefore, these regulators have matured slowly.

The MWRRA Act itself has granted some level of independence to the authority. The selection process is such that the members and chairperson of the MWRRA is appointed by the governor on the recommendation of a committee headed by the chief secretary. The entire process is routed through bureaucracy, not elected representatives, for scrutiny of experience, eligibility and so on.

The MWRRA’s regulatory role

The government entities connected to water regulation are the 5 irrigation corporations, the Maharashtra Industrial Development Corporation (which has set up different industrial estates across the state), 27 municipal corporations, 289 municipalities (Categories A, B and C), all rural gram panchayats and zila parishads. Gram panchayats are individually regulated entities that have to adhere to the regulatory orders of quantities fixed for per capita consumption or amount to be recovered from each household. These are finally decided by the rural and urban development departments, but the broad tariff of bulk supply is decided by the MWRRA.

In the private sector, all industrial houses who directly draw from the reservoirs (bulk supply) are regulated by the MWRRA.

When I was in the MWRRA, we had proposed a fourth category of users (besides industrial, agriculture and domestic), that is, commercial establishments (water sports, clubs, swimming pools, IPL) where water is used for leisure or luxury. Commercial and industrial sectors are dominated by private players whereas most government institutions come under the domestic category.

Each river basin is supposed to have a river basin plan. The water allocation given by the tribunal for that particular river basin has to be used properly – hence the plan reflects the water received, water already being stored in existing projects and the remainder. The downstream areas are potential sites where the water can be stored. Based on such details, the river basin plan is drawn-up and the 5 water basin plans, together, become the Integrated State Water plan. This is the most important document for the MWRRA and the state government. Once approved, this document is referred to in the process of clearing projects. It sets the allocation for each category of use, and the projects which can be cleared (constructed or completed).

Awareness and participation of people/ activist groups/ unions in water sector development

There are competing interests that exist in this sector, and these precede the MWRRA. Thus, it is very difficult for the authority to set these right in a short span of time. For instance, the Godavari starts from Trimbakeshwar, goes to Nashik, Ahmednagar, entire Marathwada, then flows through Andhra Pradesh, Orissa and out. Before the setting-up of the MWRRA, there was an opportunity to set up many reservoirs. As a result, much of the water of Godavari was getting stored at Nashik. As a result, Jayakwadi and other regions in Marathwada did not get ample quantities of water. Thus, an inter-regional conflict started, with pressure from the Marathwada side to release water and pressure from Nashik to not release water. The MWRRA had stipulated that 65% of the reservoirs in both Nashik and Marathwada were to be filled up. Both sides fought this issue right up to the Supreme Court. Luckily, the dispensation given by the MWRRA was upheld by the apex court, because it felt that the resolution was judicious and equitable and that it was within the domain of the regulator.

There are also individual conflicts – well to well, farmer to farmer, taluka to taluka. These disputes come to the Primary Disputes Resolution Officer, who is normally a superintending engineer level officer of the Irrigation Corporation, and this order can be appealed before the MWRRA.

Many NGOs work in this field – Pani Foundation, Indus Water Institute, to name a few. These organisations feed information from the ground to the MWRRA, and this is helpful because the authority’s staff positioning is insufficient for it to be present in every part of the state. These inputs from NGOs help the authority in framing policies in a way that is acceptable to all stakeholders.

The MWRRA records all criticism, deliberates internally and accepts what it can, while more complex suggestions are kept aside for further consultation with the government. Criticism has helped the authority to mature and come up with policies that have not been challenged on too many occasions. Until May 2020, 60 disputes had come in since the authority’s inception and 38 were resolved. Save for the Jayakwadi case, none of them have been challenged in the High Court or the Supreme Court. This demonstrates people’s acceptance of the regulator’s actions.

How is the water sector different from other sectors in terms of regulation?

There are several distinguishing factors:

1. Water is absolutely essential for every household and livelihood, whereas electricity, telephone and so on come further down the hierarchy of necessities. This also implies that we cannot tweak water tariff or quantity my huge margins.
2. Electricity will only flow through the wires that are placed, but water will flow through anywhere depending on the gradient, which cannot be changed. Thus, water has a particular flow pattern that is not under the control of any authority.
3. One can switch off the electricity line of a place, say because of non-payment of dues, but stopping water from a dam is not possible because there are several other pockets where water has to reach because they have duly paid.
4. Water regulation is a new area. Many states have not even understood the concept of a water regulator, and states like Punjab, that have come out with a regulator, do not charge the agricultural sector yet. In Maharashtra, it has matured to the extent that farmers also pay charges.
5. While water is a natural resource, the collection, distribution and management system for water has to be done by someone and hence there is a need for a tariff/ charge. People are starting to realise the importance of paying tariffs and paying them on time to ensure timely delivery of water.

Regarding tariff rates for bulk use

There is a process for deciding the tariff structure:

1. According to the MWRRA Act, the tariff rates have to change/ be reviewed every three years.
2. The benchmark is the last tariff rate. Depending on this, the state government projects the cost of escalation, maintenance, etc. and then the water tariff is increased in the industrial sector, domestic and agricultural sectors.

The industrial sector bears the burden of 60-61% (Rs. 600 crores) of the total revenue collected as per MWRRA tariffs, though their water allocation is 10% and they use only 4%. Around 300 crores is coming from the domestic users (district nagarpalikas, etc.), and 100 crores from the agricultural sector. There needs to be an effort to reduce the load on the industrial sector. The domestic sector’s share should be increased. The farming sector is highly stressed in terms of input costs, hence the MWRRA decided that farming sector tariffs will not cross 3% of the total inputs (this is a directive from the government).

With this broad structure in place, the tariff rates are then opened up for public comments. The MWRRA has now made a portal for this – earlier prominent actors (state departments, NGOs, MIDC, etc.) were invited for comments, but now everyone can provide comments on the portal and every comment will receive a response on how much of their feedback has been taken in and reasons for not accepting it. These comments are used in finalising the tariff structures.

Working with local bodies to reorient institutions

In the water tariff structure and policies it declared in January 2018, the authority put some restrictions on the Urban Local Bodies regarding discharge of used water. It suggested that such water needs to be properly discharged in the river or nala or the ULBs can sell it. Prior to 2018, the water treated by ULBs was discharged into the river and it again became the property of the water resources department. Earlier, the local bodies would treat water because of court orders, the state government or the Pollution Control Board. Now, there is a  big shift in that the ULBs are mandated to treat water but they become the owner of the treated water. This is because the MWRRA said that whatever the body treats becomes its property. Earlier, the water resources department earned revenue from the freshwater, and again after the local bodies discharged the treated water, the department earned revenue from the use of the treated water. Now, the local bodies sell the treated water, with the MWRRA adding a condition that when the body sells it to a farmer it shouldn’t exceed 65% of the freshwater cost. This is because, if the treated water was priced the same as freshwater, the user would not be incentivised to buy the former. For industries, the MWRRA permitted the local bodies to mutually decide with the industry on the cost of the treated water; there was no cap. If the industry finds that taking freshwater from a distant reservoir is more expensive than taking treated water from the local corporation, it will prefer the latter. The local authorities could also come to a mutual arrangement where the pipelines could be laid so that the industry could further treat the water to bring it to the required purity.

The Commissioner of the Aurangabad Corporation considered this a good revenue-generation option. The 2030 Water Resources Group from the World Bank, in Maharashtra, worked with farmers to convince them to take the treated water. The farmers were incentivised because this assured supply of water, not dependent on rainfall. Additional incentives were that the water was rich in content and costs were lower. The laying of pipelines was agreed to be done by the municipal corporations as well as the farmers themselves. Thus, because of the Commissioner’s initiative and the 2030 Water Resources Group conceptualising and pushing for this, Zalta became the first village to take treated water from the Aurangabad Corporation.

Powers of the MWRRA

Executive functions of the MWRRA include clearing projects, monitoring whether the authority’s orders are being followed, receiving feedback from users and the public about the orders. As for the legislative functions of the MWRRA – in the past 3-4 years, the MWRRA has been requested by the state government to frame rules because of paucity of time of state’s officers but also the expertise of the MWRRA. After the authority drafts the rules, it is opened for public comments and then sent to the government for final acceptance. The MWRRA also drafts the regulations, which are then sent to the state government for acceptance. In terms of adjudicatory functions, so far, 38 disputes have been resolved in the last 3-4 years, as compared to 11 in the last 11 years. Awareness is also gradually spreading. Earlier, the authority needed visibility in the districts but now people are considerably more aware that the MWRRA is the go-to authority regarding water tariffs, etc.

MWRRA’s quasi-judicial power (equivalent to civil court): [Dr. Warghade] The first petition before the authority was against the government body with respect to the privatisation of one of the dams. The regulator could assert its power, in a first for a regulatory body, by asking the government body to withdraw the Expression of Interest for the privatisation process, and by taking up the role of vetting revenue of any such future privatisation projects. This makes MWRRA as a peculiar and independent regulatory body. [Mr. Bakshi] The Code of Civil Procedure gives the MWRRA power to seek information and presence of senior officers, and to go for prosecution in case of default. The MWRRA of course has never gone for prosecution because the relationship with the dept would be jeopardised. Generally, the department and the regulator have maintained a complementary relation.

Role of the State Water Council and Integrated Water Resource Management Plan

The river basin plans are prepared by expert committees and then integrated. It finally goes to the State Water Board, which is headed by the Chief Secretary, and Secretaries of the water resources department, finance department, planning department, and the Command Area Development Authority. They examine it to see if the plan will work for the next 10-15 years and then recommend it to the State Water Council, which comprises the CM and nine ministers. The Council gives its final approval. This is an effective mechanism. For instance, when the Godavari plan was made and sent to the Council in 2017, the Council objected to only one point – in the upper side of Nashik, the state water plan prohibited small reservoirs and village tanks. The expert committee, headed by me then, had made this recommendation because it found that there were already many reservoirs upstream and if village tanks were permitted then no water would reach Jayakwadi and downstream. The State Council however said that it is too stringent, and that although the area had big reservoirs the villagers needed small tanks. Thus, the State Council formed a study group for this aspect and approved the rest of the plan. On the basis of the Godavari plan, the Krishna, Narmada and Tapti plans were prepared and integrated.

Composition of the MWRRA

MWRRA has a chairperson and four experts – one each from law, economics (water economics/development economics), engineering (dam construction/water construction/maintenance/water flow/evaporation/losses), and the field of groundwater. The engineering expert is usually a former Secretary of the Irrigation Department, the law expert may be anybody from the field, the economics expert comes from academia (former professors who have taught water economics and agriculture), whereas the groundwater expert is usually a former employee of the Union/State government or ex-member of the Groundwater Survey and Development Agency of Maharashtra.

The administrative structure is headed by a Secretary, independently appointed by the MWRRA, but the practice has been that someone from the government is posted on deputation for 3-4 years and then returns to the government. Below this level, there is the permanent staff, contractual staff and consultants who come from the water sector and help with a specific project or for a survey, impact study, creating a portal etc.

I think the state government should think of merging the administrative staff of all the regulators – registrar, finance officer, administrative officer, clerks – and create a hierarchy. This was a proposal we had made to the state government. Otherwise, if you are in one regulator’s office, with hardly 10-15 employees, there is hardly any scope for growth.

Dynamic between MWRRA and the state department regarding scope of function

The history of water resources departments across the country will reveal that they are construction-oriented – construction of dams, maintenance of canals, release of water and in certain states, recovery. Use efficiency, water conservation, micro-irrigation were not issues in focus for water resources departments except for CADA in certain years.

In Maharashtra, the MWRRA and the state dept complement each other’s’ efforts. This is due to a few reasons:

1. The department realises that the MWRRA approves/ blocks projects on technical grounds and not for political reasons.
2. The MWRRA also needs inputs from the field that the department provides.
3. The department understands that reasonable projections, if accepted by the authority for the purposes of revenue collection, would allow it to generate monies which it otherwise would not be able to collect.

Way forward for the MWRRA, issues and challenges

1. Groundwater development: The Groundwater Development Act was passed in 2009 but it took a long time for the water supply and sanitation department to frame the rules. While they have now been framed, the final comments are yet to be decided and the rules are to be notified into existence. The State Groundwater Authority was merged with the MWRRA but nothing has been done from the authority’s side because the enabling provisions have not yet come. There are critical areas in Maharashtra where water has been overdrawn and unless it is regulated now, the situation will only worsen. The MWRRA has so far only given some instructions to the Groundwater Surveys and Development Authority (GSDA). The GSDA has selected certain wells and is studying the groundwater recharge and use. There are about 35000 wells in the state that are monitored for recharge and withdrawal. If recharge is more than withdrawal, it is good but if the withdrawal is more, it is critical. If the recharge is very low and withdrawal very high, like in cash crop areas, it is highly critical and needs to be stopped. There are pockets in the state that have been identified as sensitive, and GSDA has been working in this area. The GSDA has claimed that in some of these wells the water level has gone up by 1 or 2 meters, which means that their control has been effective.
2. Real-time data collection: The latest position of water storage in every reservoir, on a daily basis, needs to flow to the MWRRA and to the state department so that they are in a position to do the releases properly and avoid flooding in the downstream areas. For example, the Sangli floods could be avoided if there is real-time feeding of data so that one can prepare in advance for inflow of water. Real time feeding and management of data is not here yet. The MWRRA is supposed to procure and disseminate data to the district or state department authorities who store and release water. This is an important aspect that has not been done yet. Such a situation has arisen not due to budgetary allocations, which is often more than sufficient for MWRRA (at some point the authority even thought of returning the money because it was not able to spend all of it). The constraint was the time available to the authority – when it really thought of real-time data it had only one year left for conceptualising, tendering, etc.
3. Water loss in the drinking water sector (theft, no revenue) and evaporation loss in reservoirs (too much surface area): There are no rules or studies on this, however, flatly 20% is taken as evaporation loss. This may be incorrect. One needs to study the problem and prescribe methods to curb the loss. The regulator has not been able to do much in this regard.
4. Measurement: In South Australia, there are arrangements to release the desired quantity of water in your field irrespective of the physical presence of the person. This system of measurement and release is absent in India.

Cost-related issues

There are three kinds of costs: economic, development, and subsistence related costs.

Economic cost of 1 cubic meter of water is much higher in Maharashtra than in Odisha or Bihar. This is because the GDP conversion of 1 cubic meter of water in Maharashtra is very high compared to those states. Thus, we cannot get to an ideal economic cost immediately.

Development cost is the cost from construction of dams, maintenance, staff payments, all other incidentals. In a robust arrangement of the state government, we should have been able to recover the development cost at least.

Finally, there is the subsistence cost, below which the department cannot survive. Currently, recovery is at this level. We are nowhere near the development and maintenance cost, and the economic cost is out of question. The aim of the regulator is to gradually move towards the development cost.

In relation to drinking water supply, whatever cost is recovered from the household has to go for maintaining service standards, purity of water and supply at proper timings and in proper quantity. This is absolutely essential. What has happened is that despite the entity having enough water for the city, the arrangement or terrain is such that if the downstream areas keep getting more water beyond the slot given to them, while higher levels are getting water. Urban and rural local bodies have not addressed this problem, but now they are considering ways to fix the supply arrangement.

Commodification of water

The MWRRA always thought that if you give water as an input to a company for producing bottled water, the cost increases by many times. The input cost of water for bottled water was thus kept quite high, compared to the input to other industries.

The metering system was envisaged by the authority but the government wanted some time since they were not in a position to implement it.

Ensuring accountability and prevention of mismanagement of financial resources

The MWRRA has made provisions for water accounting. There are water accountants and auditors at the state level and levels below as well. There is the thinking that water auditing and budgeting should become part of the activities of MWRRA and there should be trained auditors. Once this is in the public domain, there is pressure on the entity to bring improvements. If you put the water audits in the public domain, half the job is done – people will hold the entity accountable, neither the state government nor the regulator need to do much.

The State Capacity Initiative at the Centre for Policy Research (CPR)’s talk series titled: ‘Know Your Regulator’ is held in collaboration with the National Council of Applied Economic Research (NCAER), the Forum of Indian Regulators (FOIR) and the Indian Institute of Corporate Affairs (IICA). In this talk series, we are talking to chairpersons and members of India’s regulatory agencies about regulation of Indian markets and the economy.

Our guest for the fifth event in the series was Mr. Supratim Bandyopadhyay, Chairperson, Pension Fund Regulatory and Development Authority (PFRDA).

He was in conversation with Dr KP Krishnan, Former Civil Servant and Dr Abha Yadav, Associate Professor, Indian Institute of Corporate Affairs and Director of the Forum of Indian Regulators (FOIR) Centre at IICA.

Mr Praveen Kumar, Director General and CEO of the Indian Institute of Corporate Affairs and Ms Arkaja Singh, Fellow, State Capacity Initiative, Centre for Policy Research made introductory remarks.

Date: 21st January 2022

The background note on PFRDA can be accessed here. 

Conversation summary:

What were the problems that PFRDA was set up to address? How did it address these problems?

Serious conversation around the pension system, particularly the common pension system, started in mid or late 1990s. There were two reports – one by OASIS (Old Age Social and Income Security Project) and another by a High-Level Committee headed by Mr. B.K. Bhattacharya (senior civil servant) – that pointed out that the current defined benefit scheme is becoming unsustainable. The growth in pension bills, especially after factoring in defence pensions, were taking away large parts of revenue for both central and state governments. The political will of the leaders at the time enabled them to undertake strategic reform in the pension sector. Another thing that happened was the increase of 2 years in retirement age (58 to 60 years) in 1998.

The moment you go from an unfunded to a funded pension system (which is the basic difference between the earlier and the current system) – there has to be certain regulations, rules on fund management so that the benefits of employees are protected.

When we were planning this shift, we also thought about the unorganised sector, retail customers, and so on. So at that time, even though we started with the central government, and now all but two state governments have joined. Thereafter, we opened up to retail segment in 2009 and then to corporates as well. Today, the net addition from government sector has come down for obvious reasons while there is growth in contributions from the retail segment, corporates and unorganised sector. Hence, the purpose for which the PFRDA was set up is being fulfilled to a great extent, and unless we have platform to see that all subscribers, fund managers, data keepers are integrated, the purpose wouldn’t be served – hence we have ensured data security and robust connectivity between all intermediaries.

The PFRDA is a unique system because we work with 5-6 intermediaries, each of whom do different jobs. For example, pension fund managers only offer fund management service but don’t keep data. The PFRDA has a big role in ensuring the system works seamlessly and robustly.

Has PFRDA been pushed into a narrow box of looking after NPS, and should EPFO and other sectoral issues be brought under the PFRDA’s jurisdiction?

The birth of PFRDA was under some kind of a conflict – if you look at the pension sector, pension was already a part of IRDA’s domain and insurance companies are selling pension for over six decades. But pension is too serious a business to be left to different segments and regulators. There should be a single-point focus for pension.

Concerning gig workers, we had some discussion around a universal pension scheme, which has now received a mention in the Code on Social Security, 2020. This needs to be notified soon since gig workers really need pension today. Atal Pension Yojana is doing quite well, with 7 million new customers joining this year. While we are expecting around 10 million, the number we are actually looking at is 460-480 million, which is the number of people in the unorganised sector looking for some kind of old-age support. The question is: how do we reach out to them? There are self-managed superannuation products that don’t come under any regulator’s ambit. They get income tax approval and manage on their own. So we do not know whether contributions are made regularly, whether employee’s benefits are protected and if they get the right kind of payouts. So, in the long run, it will be prudent to place pension as a whole under one regulatory body.

Organisational structure of PFRDA

PFRDA is headed by a chairperson, and has three whole-time members (finance, economics, law). The board also has three part-time members, usually senior government officials nominated from the Department of Financial Services, Department of Personnel and Training, Department of Expenditure, and so on. We are supported by employees, all in the officer cadre. Currently our strength is 75-76 people, and we are in the process of recruitment. In two years’ time, we plan to have around 130-140 people, because certain activities like pension-related research, and we need separate inspection teams. We need presence in other regional centres, starting with Mumbai.

PFRDA currently has no independent or private members, but the  PFRDA Act does not prohibit this. The three part-time members can be anybody, including experts in their fields.

Regulatory method: elements of executive, adjudicatory and legislative functions

PFRDA has all three functions: legislative, executive and adjudicatory.

Under Section 52 of the PFRDA Act, we make regulations for all intermediaries – pension fund managers, central record keeping agencies, trustee bank, NPS trust (trust structure that manages the assets on our behalf).  The executive part is that we go for registration of entities, supervise and monitor their performance, audit and inspect them, determine their fees and charges. Through those inspections and monitoring systems, if we find breaches in regulations, we adjudicate under Section 30 of the PFRDA Act. We have the power to call for all their records, and if we find a breach we can impose penalties.

PFRDA has independence in these matters. Most of these decisions are with the board – the board is the final authority in this. The central govt comes into the picture to the extent that the benefits of central govt employees are concerned. For instance, three years back the government decided on the recommendation of the 7^th Pay Commission to increase their contribution from 10 to 14%. Further, PFRDA has no say in the CCS and NPS Rules, which comes from the Department of Pension and Pensioners’ Welfare. Apart from this, the government does not interfere with PFRDA’s independence in the above-listed functions.

Main features of the terms of engagement set by PFRDA between savers and the sellers of pension products

NPS is a given product, pension fund managers manage funds on our behalf. Points of presence (POPs) are distribution channels of this given product. PFRDA tries to ensure that there is transparency in the system, to ensure that whoever comes into the system will know what the costs are like. NPS is probably the lowest cost financial product not only in the country but possibly in the world as well. We can say this because we engage with many international organisations of pension supervisors. IOPS looked at our overall cost structure and told us that we were outliers. We’ve also looked at lowest cost jurisdictions across the world and we are far below them. So we give low cost benefits, lots of information and data and lot of flexibility to the customers.

One important thing that came out in the High-Level Committee report was the issue of portability: govt employees who had not rendered a certain number of years of service wouldn’t get pension, and wouldn’t be able to transfer this either. The biggest advantage that the current system has is portability. Regardless of whether you are in the govt or private sector or on your own, you will have your unique account. You’ll just have to pay Rs.1000 annually to keep the account alive.

On the issue of sustainability, we aim to make the operation of intermediaries sustainable. At regular intervals, we look into their cost structures. For example, we have rationalised the cost structures of central record keeping agencies. Now we are looking at the cost structures of POPs. In order to take NPS and APY to the masses, we are telling POPs now that they can induct individuals into the system as well. In April 2021, we rationalised the fund management charges of the pension fund managers because they were running into losses. We have had 3 new licenses being granted for pension fund managers since then (we had 7 earlier). So it’s fair play between subscribers and service providers.

Who are the key players in this system beside the employer, employee and pension fund? What is the role of state and central goverments?

Each job in this system is done by a group of experts.

• For example, we currently have 93 POPs – these are banks, NBFCs, and so on.
• We also have retirement advisors, though this hasn’t gone quite well. Now we are going into individual players in the distribution market.
• Central record keeping agencies (CRAs) keep the data of the customers, instruct banks (through which the money flows in) on which fund manager the money should go for investment. They are the central piece of the system. We currently have three – Protean E-Gov Technologies, KFintech and CAMS (they will start operation from next month).
• We have a single trustee bank – Axis Bank – that manages the entire fund, right from the POPs and customers, to the pension fund manager, based on the direction of the CRAs.
• Pension fund managers: There are 7 active ones and 3 licenses have been recently issued, so in the next 3-4 months they’ll be up and running.
• Annuity service providers: Today, in the Act, the only way of exit is through annuity. You can take back 60% of your corpus tax-free and 40% has to be converted into annuity. This conversion process is tax-free of course, but the annuity is taxable. We have about 14 annuity service providers, all of them being IRDAI-conferred entities. We have been looking at other pay-out products as well, and it is part of our proposed PFRDA amendment bill. If it comes through, it will give a lot of options to the retiring public who are subscribed to NPS.
• The nodal officers of governments are our intermediaries – they ensure that when the monthly salary is paid, the exact amount is deducted from the salary, and the contribution of the central/ state govt is added together and then sent to the system. Here, the biggest challenge we face is the delay: (i) not deducting in time; (ii) even if deduction happens, the money is not coming to the system in time. The system is very dynamic today: if you give the money today, it will get invested today itself; hence a delay of 20-30 days entails an opportunity loss. For the first time, in CCS-NPS Rules, a provision is brought in that if there is a delay there will be a penalty, including individual penalty. The proposed amendment bill also provides that the dues will be treated like any other statutory dues.

Justification for pensioners’ benefits being market-linked

Chairperson, PFRDA: The previous and the current pension schemes are not comparable at all. Firstly, no amount of contribution was required in the previous pension scheme. Secondly, retirement ensures a 50% replacement rate and is adjusted to inflation every six months, in the new scheme; recovery and wage rise with every pay commission also brings adjustments to old pension.

In a market-linked scheme, we monitor the performance of pension fund managers, we have strict investment guidelines with some scope for growth, and we ensure that they do not become too adventurous because these are retiree’s monies. Since 2009, we have managed the private sector as well, and over 13 years the CAGR under our equity scheme is 13.5%. Even corporate bond funds have given a CAGR of 9.72%, despite several corporate market events. The government bond performances are a little lesser, but that is around 9.3-9.4%, because the interest rates are hardening today. If you look over a period of time at blended return of an equivalent amount in equity, corporate bond and govt securities, it will still be over 10%. We have benchmarks in place and ensure that pension fund managers work close to them, and if there are huge deviations we hold them accountable. Financial markets have volatilities in the short term, but over a period of time we ensure that the right kind of securities are chosen for subscribers and they get a sizeable corpus.

Dr. KP Krishnan: This discussion takes us to the knife-edge job of the regulator, it is not the regulator’s job is not to ensure good returns to the subscribers but to ensure no malpractices and that the regulated entities act according to the prescribed behaviour, and a lot of the risks are to be taken by the informed investor. What you have brought out nicely is the difficulties in a pension situation where the choices are not necessarily exercised by the investor, so there is a dilution in the role of the investor, which then is performed by various actors.

On the issue of early withdrawals and annuitisation of the pension corpus: individuals tend to be less concerned about building a long-term corpus for themselves than society is.  How much of this should be done by the regulator and how much of this should be done by educating the public and letting individuals take a call?

The biggest challenge with annuity is that once you enter it you are stuck for a lifetime, whatever the rates may be. Whatever we see today are fixed rate annuities. There is no variable annuities in the market; it does not move along the interest rate scenario. Currently the annuity rates are varying between 5-6%, and this is normally for those asking for annuity and after death for the corpus to be refunded to the nominee. In Indian psyche, 90% people go for this – they feel that after they die it is their duty to give the corpus to close ones, regardless of whether they need it or not. They choose to trade off higher annuities for getting the money right after death. This is a big challenge in the system today.

So far as exits are concerned, the biggest complaint against NPS is that it discourages early access to the funds. But after considerable deliberation, we now allow three times partial withdrawal (25%) for the same reasons that EPFO allows – for construction of house, marriage of children, meeting medical costs, and so on. Beyond this, we do not allow withdrawal because as we have seen with EPFO, early access being freely accessible leads to depletion of corpus, culminating in a situation where a person gets no corpus on retirement. Since the system is for old age security, a substantial part of the corpus should be left at retirement.

The ideal view is that individuals have different instruments for different goals – NPS is not ideal for instance for medical costs or housing, but in a developing country there will be competing claims on limited amount of savings. In this context, what is the NPS doing for greater education of its customers?

PFRDA has training agencies in place and are involved in online training. For annuities, retirement and related matters, we have annuity literacy programs. For the last 2-2.5 years, we had around 30 sessions, with physical sessions before the pandemic; in Patna for instance, we had 300 people inside the auditorium and 500 outside. People have asked if they can contribute post-retirement. Now these sessions are conducted online, where 70% of the session is dedicated to audience questions. We also bring in pension annuity service providers, CRAs, fund managers.

Apart from this, we are trying to create an industry body. The NPS trust is already trying to do that, by bringing together fund managers, CRAs, POPs to create awareness.

We are trying to have a resource person -like concept that SEBI also had, who will go around and talk about pension in general.

I also believe that pension, health insurance and life insurance should be taken together. By contributing to NPS, the corpus may go up but the person and their family are not protected – hence, it has to be a combination of all these things. I strongly believe that different regulatory bodies like IRDA and us should work together towards a common forum through which we can educate people about these things.

During my 35 years in the insurance industry, pension has never been a top seller – ultimately if someone is really insisting on a pension will the insurance company sell it. No agent or advisor will actively talk about pension – but pension is one of the very important segments but everyone should be talking about.

There are changing demographics, people have longer lives and fewer babies. Is this the context for necessary focus on the issue of pensions? Has this transition happened?

The life expectancy at birth in India is close to 69 years now, and life expectancy at 60 is another 18-20 years; female longevity is 2 years more than male longevity. So we have to start quite early to think about longevity. We do a lot of industry sessions with CII, FICCI and so on – and we get questions, mostly from people in their 40s and 50s, about how much they need to accumulate in 10 years’ time for their post-60 life. In most situations we see that it is too late by the time they are starting; but we encourage them to start anyway. NPS in that sense is a very flexible system, where a person can contribute just Rs.1000 a year to keep the account alive, when they have restricted cash flows, and when they have higher cash flows they can contribute more and secure what you need at the end of your life. Regarding replacement rate, take for instance, IT graduates aged 25 years having a salary of Rs.30,000 a month with an annual increment of 8%, with inflation around 5% – and they depend only on the mandatory benefits of provident fund and gratuity – their replacement rate will be around 25% of their last earned salary. This cannot be adequate given the biggest cost incurred post-60, i.e., medical costs. Morbidity experience – the quality of life after 60 or 65 –  entails huge costs as the pandemic has shown us. This is why we need to be prepared since the longevity issue will catch up with us in a big way.

Now we have opened it up for the retail and corporate customers to continue after 60 years till the age of 75 years – they are free to close it any time in between and take their 60% money and go for annuitisation of 40%.

Regulatory capacity of PFRDA – staffing, technical expertise, etc.

The year 2021 was a turnaround year for the PFRDA since it became financially independent. We now run on regulatory fees and did not take a single budgetary grant to run our operations. This maintains our autonomy to a great extent. This helps us in recruiting people of our choice, improving our IT infrastructure and so on without depending on govt support. We have also set up a small fund to have our own office building.

We do not have any monetary constraint with regard to recruitment of capacity building and of experts. In our latest recruitment, we recruited actuaries for the first time, with the long term purpose of NPS being only one of many financial instrument with which the PFRDA will be working. Between 2004, when we were established, and now, NPS has changed its structure and shape quite a bit, since we added many flexibilities, but we need other kinds of products as well. The first thing we started, that was also given in the statute, is the Minimum Assured Returns Scheme (MARS). This again is very difficult in a market-linked scheme but we hope for the first basic product to be available in the next 6-8 months. It will look into many aspects – the moment you bring in the concept of assured returns in a market-linked scheme, we have to look at the solvency aspect of fund managers. Currently, I give them a fund and they give a certain kind of return net of their expenses. But if they are asked to give a certain kind of finite return regardless of market conditions, the concept of solvency comes into play – they have to be adequately capitalised. Once MARS is successfully implemented, we’ll be looking into other kinds of products. If the PFRDA amendment bill allows us to go into exit-related products, we’ll look into that – we have in mind a systematic withdrawal plan as an alternative to annuity.

Apart from actuaries, we are recruiting chartered accountants, cost accountants, company secretaries, economists, statisticians (for research), and so on. Our report from BCG, our consultant, looks into several aspects like operation of NPS trust, entire HR aspect of PFRDA and the areas that PFRDA should look into, kind of personnel PFRDA needs, and revamping of PFRDA’s IT infrastructure. This is a one-year project and these things are on the agenda.

Sources for principles, technical expertise and establishment of norms

We depend on three sources –

• looking at other financial sector regulators and their best practices;
• international practices – everything can’t be imported and immediately applied here, but we are working on that. For example, we are engaging with other countries on how they’ve made systematic withdrawal plans work; feedback from customers, intermediaries – we work with many CPSEs (central public sector enterprises) that are shifting their superannuation funds to us; here too we get feedback on what their employees want.

The State Capacity Initiative at the Centre for Policy Research (CPR)’s talk series titled: ‘Know Your Regulator’ is held in collaboration with the National Council of Applied Economic Research (NCAER), the Forum of Indian Regulators (FOIR) and the Indian Institute of Corporate Affairs (IICA). In this talk series, we are talking to chairpersons and members of India’s regulatory agencies about regulation of Indian markets and the economy.

As part of the series, Mr Navreet Singh Kang, Chairperson, Real Estate Regulatory Authority (RERA), Punjab, was in conversation with Dr KP Krishnan, IEPF Chair Professor in Regulatory Economics, National Council of Applied Economic Research (NCAER) and Ms Arkaja Singh, Fellow, State Capacity Initiative, Centre for Policy Research. The event was held on 25 November, 2021.

Here is a summary of the conversation:

Why was RERA setup?

RERA is a relatively recently established regulatory authority but one that has made a significant impact on market conditions in the sector it regulates. It is seen as having set the rules of the game in what is a volatile and risky business (real estate). RERA is also unique since it is only India that has a specific Real Estate Regulatory Authority, and this is a unique Indian experience.

RERA was setup for a few reasons: to promote transparency about the promoters’ credibility; to provide necessary approvals to the promoters to start a project and lastly, to provide quick resolution through an adjudicatory mechanism. Before RERA, customers had to go to the consumer forum or to the civil courts to complaint against the promoters. The level playing field was a bit distorted and the allottee was at the receiving end of these issues. That was the trigger for bringing in this Act so that there is a focussed, dedicated agency to monitor these things.

How is RERA structured?

The RERA Act says that there needs to be a chairperson and at least two full-time members. There is an Executive Director, who is typically a retired or a serving IAS officer and then there are four teams: Legal, Finance, IT and Registration and Regulation. RERA subsequently added a Town Planning division so that an officer can look at the promoters’ plans. The town planning officer is supposed to investigate the promoters’ floor plans and find out if the plans are within the remit of the law.

RERA has a separate authority for adjudication headed by an Adjudicating Officer who is usually a serving or retired district judge. There was some lack of clarity between the role of the Authority and the role of the Adjudicating Officer, but the Supreme Court has clarified that the Officer decides only the quantum of compensation and cannot make a substantial determination of the rights of the parties. Complaints made by the parties should therefore be heard by the Authority. The Authority must pass the order that the customer will be compensated for by the promoter and the Officer will decide on the compensation.

At RERA, there is a balance between retired people from government and other people without the baggage of government. In the managerial level, there are 25% of people who were formerly in government employment, the rest are from the private sector. Every recruitment is only through an open advertisement with an objectively defined criterion. Initial recruitment and screening are done by a committee of managers and the educational qualifications is laid down in our regulations. Attracting and retaining talent has not so far been a problem at RERA Punjab. Although the organisation does not offer permanent employment, if someone has been with RERA for a longer time, they are promoted and a higher level of renumeration is given to them. In the present structure, the possibility that a person in the RERA staff could become qualified to be a member or chairperson had not been envisaged. However, it is perhaps time to re-look at the promotion system from this perspective.

Although RERA is not very different from a government body in some ways, it is autonomous and more flexible. RERA is more informal and faster than a civil court, but these courts have greater powers of enforcement than a RERA. For orders that the Authority cannot execute, the matter is taken to the civil court. In terms of compliance, when RERA passes an order on development, the experience is that there is reasonable compliance on ground. Even overall compliance has been much better after the Act came out, especially so for new projects. There are legacy issues but hopefully that is changing.

RERA’s regulatory functions

The RERA Act says that promoters cannot develop their projects without registering with RERA. When a promoter registers with RERA, she must submit disclosure documents including status of approvals, title of the land or property, financial status etc. and RERA will upload these details on the website for the benefit of a prospective customer. Along with this, the promoter agrees to comply with certain terms and conditions. This perhaps encourages a certain degree of voluntary compliance.

Additionally, RERA is a dedicated agency that provides adjudicatory mechanism for grievances of allottees. RERA is not a consumer forum for the real estate sector, but the body is a regulator that is focussed on balanced development of this sector. RERA aims to regulate and promote and is keen to ensure that both the consumers and the promoters’ interests are balanced. The RERA Act discusses ways to reset terms between buyers and sellers. For this reason, when there is a delay in a project, RERA encourages the promoters to finish the project and the Authority also brings the buyers and builders together and negotiates between them. However, the Supreme Court passed a judgement that the allottee has the right to ask for refund of the money “on-demand”.[1] Genuine home buyers usually stick to a project despite delays but there are a group of buyers who will go by the market rate and would want to get out of the project. But when the market is looking up, buyers prefer to stick with the project.

Transparency and creating a credible platform are very important in RERA’s regulatory strategy but classic textbook perspective on regulatory authorities include elements of adjudicatory, executive, and legislative powers. Where does RERA fit into that?

RERAs have the authority to make regulations, but rulemaking power under the Act is with the state government. RERA has framed sets of regulations in the past and is hoping to come up with more in the future. These are not only specific to internal processes like staffing, recruitment procedures and administrative processes for the promoters and the consumers to raise queries, but they also include substantial regulations that have binding effect.

Executive powers of RERA include powers to enforce these regulations that RERA makes, and to enforce provisions of the Act and the Rules. Like all classic regulators, RERA has some elements of all three functions of the state – legislative, executive, adjudicatory powers – combined into one body. On a theoretical level, this is fundamentally violation of separation of powers.

However, in reality there is not much scope for conflict of interest as the rule-making function is mainly with the state government. RERA’s regulations only fill in the gap. For example, when a RERA receives a complaint, there are regulations on how the complaints should be handled. RERA only has limited powers of regulation. Recently, RERA’s regulations that said that a single member bench of the authority can hear complaints was quashed by the High Court. The Supreme Court later reversed this judgement, but this shows that RERA’s regulations are scrutinised. There are limits to the Authority’s powers.

There are three spheres in which RERA operates: a) contract enforcement where RERA looks at the builder-buyer contracts b) grievance redressal for customers in the real estate sector 3) regulation of activities in the urban sector. But all these three spheres also involve other players.Urban is a very tightly regulated sector and there are multiple authorities (like the Urban Development Authority) who regulate this sector. Contract enforcement also has its own legal machinery.  RERA exists because the existing machinery is not working properly. While playing a regulatory role, the other development authorities also play a promoter role. Their entire focus is not on regulation. But RERA helps in converging focus on this sector, and the Authority shares suggestions to the development authorities.

From seeking permission to build on a land to ensuring that the papers are in order, a builder must run around multiple authorities. Will RERA help consolidate all these into a single window?

RERA does not have the power to do these things, but the Authority has suggested to the government that there needs to be more cohesiveness to the entire project.

RERA has powers to levee fees and retains the fee for upkeep of RERA. In government, this is prohibited. The fundamental principle of government is that it cannot retain the fee and only legislature appropriates the budgets for government body. In RERA’s case, is there a potential conflict?

RERA’s budget comes from the state government and the fees that RERA collects from promoters or agents is enough to run the organisation. Unlike Income Tax, the Act itself says that the fee will be retained as part of Real Estate Regulatory Fund. It also says that that fund will be used for meeting the day-to-day expense of the Authority and for the Appellate tribunal headed by a retired High Court judge. However, this fee is set up the government, and not by RERA.

On the other hand, funds collected through penalties levied by RERA are not retained by RERA, but go to the consolidated fund of the state. In this way, there are some checks and balances built into the system.

You (Mr Kang) were the first chairperson of the Punjab’s Real Estate Authority. How did the setting up happen?

Punjab was the third state in the country to set up the Authority. We started from scratch where we walked into the office of Punjab Urban development authority, and we told them that they should help us since they have constituted us as an Authority. We got a pantry and a room with a veranda for starters. We also got a personal assistant. We have changed locations since. Finding a place for the office, recruiting staff, formalising regulations, seeking government approvals for the administrative regulations we made. All this was part of the process of setting up a new Authority.

What is AIFORERA?

The All India Forum of Real Estate Regulatory Body (AIFORERA) is a registered society, a central body with a Chairman, Vice President etc. It is also a central coordinating body. Mr Kang has been an office bearer at AIFORERA for the last two years. It provides a very useful platform for the state RERAs to meet and there are usually quarterly meetings. AIFORERA collates all the orders passed by other RERAs, the body takes up issues with the Ministries and the members also help in research activities. It helps to have a common voice. Currently, AIFORERA is headed by the chairperson of Tamil Nadu RERA.

Are there measures to assess RERA’s successes?

AIFORERA has been hosting a web series every month where various stake holders including private sector developers, financing institutions etc participate. They have agreed that this has made an impact. There is no quantification yet but qualitatively, we know that the Act has made a difference. If there were to be external evaluation, one would need data and all that data (complaints received, complaints resolved etc). is out there in the public domain. This data can help evaluate RERA’s successes as well.

Regulation and Public Interest

From its inception to setting up, RERA has been a unique regulatory authority in the real estate space. There are many nitty gritty challenges here and not many want to engage with the details to understand regulatory capacity. For example, in the areas around Chandigarh, the relationship between the builder and the landowner is quite transactional, unlike in the rural areas where people are closely attached to their land. But several rural landowners and farmers have themselves become promoters. The development of the sector is dependent on the market cycles.

Regulation is part economy, part society and part politics. Regulatory purpose is ultimately in the public interest. The regulatory challenges at different parts of the country are very different for each RERAs although all the RERAs come under the RERA Act. RERA is not a consumer forum, and the Authority’s interest is to promote a balanced development of the sector. If the Act is implemented properly, it will be a big step towards ensuring this development. RERA Punjab is focussed on improving capacity and improving interaction with its stakeholders.

[1] Newtech Promoters and Develpers Pvt Ltd VS State of UP & ORS etc. https://main.sci.gov.in/supremecourt/2021/5013/5013_2021_14_1502_31099_Judgement_11-Nov-2021.pdf

Navroz Dubash is a Professor at CPR’s Initiative on Climate, Energy and Environment. His research interests include climate change, energy, air pollution, water policy, and the politics of regulation in the developing world. In this interview as part of the Leading Policy Conversations series, he discusses the climate-related challenges India confronts in 2022.

What do you think will be the climate-related challenges for India in 2022?

The past year was dominated by short term considerations of battling COVID-19, but at the end of the year, climate change re-emerged, driven by a high profile global meeting at Glasgow. In the build-up, countries were pressed to upgrade their national climate pledges. Our Prime Minister announced that India will reach net zero emissions by 2070, along with a series of other announcements.

In 2022, our challenge will be to figure out a way of credibly work toward these announcements, but also to clarify and deepen our collective understanding of their implications. A high carbon route to industrialisation is no longer desirable or possible, because a high-carbon path is a technologically backward path, and one that is likely to undercut India’s competitiveness. India has to embrace low-carbon development, but also has to do so while eradicating poverty, creating jobs, and building a just society. This is not an easy set of challenges.

2021 also threw up diplomatic challenges, as developed countries put a great deal of pressure on developing countries to update pledges. Yet, finance support from the north was limited, as were indications of leadership on carbon reducing policies. In 2022, climate negotiations will start a ‘global stocktake’ to assess progress. India will have to position ourselves for this process. It is not enough to claim the importance of climate equity; we will have to show what this means in terms of emission futures and development needs in different countries.

Finally, 2021 saw climate damages in India, as well as around the world. Climate change, it would seem, is no longer a future problem, but a now problem. Like other countries, India needs to reckon seriously with the ravages of climate impacts when we make development decisions.

How should policymakers address these challenges in the year?

• First, India can more fully develop and implement a model of low carbon development, oriented around decarbonising the electricity sector, preparing for a decadal just transition away from coal-based power, building a renewable energy infrastructure that creates jobs, building public transport systems that support enhance quality of life and other such measures. To seize this opportunity, India needs to base its ‘nationally determined contribution’ around sectoral low carbon transitions that enhance development and job creation.
• Second, these changes won’t happen automatically – they should be enabled by government institutions. This includes a low-carbon development commission that also supports states and cities to experiment with low carbon futures and work toward a dedicated climate law. The legal framework should enable and facilitate low-carbon development rather than forces carbon regulation.
• Third, India has to take seriously the risks of climate impacts and plan for a more resilient society. This includes deepening state action plans, but also mainstreaming resilience into development decisions. The centre needs to help ensure financial resources are accessible for more vulnerable states.
• Finally, India needs to proactively engage the global negotiation process, championing climate equity by both calling on richer countries to do more while serving as a model for low-carbon development and building resilience at home.