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Who supervises the supervisors?

The TAM tragedy fuels the debate on regulatory agencies

CARLOS HAAG | ED. 139 | SEPTEMBER 2007

 

Churchill was absolutely right when he stated that “war is too serious to be left in the hands of the military.” Does this saying also apply to the State which, as many people believe, should not remain in the hands of politicians elected by popular vote, but rather in the ‘neutral’ hands of technicians? “We were elected and those people have more power than we do. How can this be possible?”, said an exasperated Vice President José Alencar recently, referring to the independence of the so-called regulatory agencies. “The independent agency model exists to restrict the discretionary power of politicians, for their own good and for the good of the country. We need to watch out for ideas such as the one voiced by Alencar, which disregard more than 800 years of institutional evolution, without which humanity would still be living in the Middle Ages,” argued former Finance Minister Maílson da Nóbrega. Nonetheless, the nonchalance with which Milton Zuanazzi, the chairman of Anac (Brazil’s air travel industry’s regulatory agency) answered Congressmen’s questions in the aftermath of the tragedy in Congonhas generated a lot of controversy. Zuanazzi made it very clear that he had no intention of resigning from his position, in spite of requests in this respect from the President’s Office and from sectors of society.

“The combination of the interests of the ‘regulators’ and the ‘regulated’ in this relationship is a perverse one. The party supposed to regulate has become hostage to the party supposed to be regulated. It is a kind of privatization of the State,” states economist Luiz Gonzaga Belluzzo. Vicente Faleiros, associate professor of social policies at the University of Brasilia (UnB), has just completed a research project funded by CNPq that analyzes the reform of the State and of the regulatory agencies. The result of the study is very similar to the Belluzo’s statements. ?The agencies were created during the Fernando Henrique Cardoso administration to defend citizens’ interests and regulate corporate activities. Less than ten years later, they defend the market much more strongly than they do the consumers. Take the case of Anac: many employees of the GOL and of TAM airline companies are part of the regulatory agency; Anac has just recently created the position of ombudsman – more specifically, in January this year; of its 22 board members, only two represent consumers,” says Faleiros. “A market citizenship situation was created, and not a State citizenship one, and citizens’ rights are ensured by their buying capacity in the market, by their power of consumption.  There is no such thing as citizenship of equal opportunities.” The researcher states that the election of Lula raised hopes that changes would be made in the model, but instead “we witnessed more continuity and very little change, with a loophole created by the regulatory model that benefits the market.”

The so-called regulatory agencies were created in the mid-nineties, in the midst of the privatizations implemented by the Fernando Henrique Cardoso administration. The expansion of the public services concession granting possibilities generated the need to redesign the State’s regulatory functions. As the State divested itself of the responsibility of providing public services, it became crucial to prevent and remedy, by means of regulations, the market’s ‘failures’ by supervising the public services provided by private sector companies in the telecom, power, transportation and other industries. “Between the 70’s and the 90’s, the Brazilian State had a very powerful role in the creation of  infra structure for the country’s development according to the paradigms of the nationalistic-developmental framework. But from the 90’s onwards, the role of state-owned companies was modified and a number of these companies were transferred to the private sector. In most of these sectors, the creation of regulatory agencies with the task of regulating and supervising the new private sector agents took place after privatization,” emphasizes Regina Pacheco, a professor at the business administration school of the Getúlio Vargas foundation and author of the article Agências reguladoras (Regulatory Agencies). In the opinion of Cláudio Schüller Maciel, a professor at the school of economics at the State University of Campinas, “the institutional materializing of sector regulations was contaminated by the fact that it was pegged to the dictates and pace of the privatization process. The regulatory institutions derive from studies prepared by international consulting firms, with the support of the World Bank and the Interamerican Development Bank, which sought to adapt Anglo-American legal and administrative standards to Brazil,” the professor states in his article A supremacia dos mercados (The Supremacy of the Markets).

According to Schüller, activities related to drawing up regulatory policies had to consider the new entities (the agencies), which had to conduct a dialogue with the different Ministries. However, surprisingly, the direct administration was relegated to the sidelines. “The Ministries dealing with infra structure issues were left on the sidelines of the process, and remained seriously unprepared to carry out their classic functions throughout the two terms of the Fernando Henrique Cardoso presidency.” The purpose of creating the agencies was based on the need to provide expertise and efficiency for this function, which, as was believed at the time, the Ministries were unable to perform, due to their small and overly bureaucratic staffs. The agencies are regarded as being specialized in given activities, and their staffs have better organized career plans and more flexible structures than the Ministries do. The regulatory agencies were given this autonomy for the purpose of addressing specific issues out of the realm of short-term policies, to provide continuity to long-term planning policies and to avoid any possibility of horse-trading. All of this was to be done to protect the public interest, the permanent target of regulatory actions. This initiative, albeit innovative, was not entirely unfamiliar, as pointed out by Marcos Pó, coordinator of the Idec consumer protection institute and by Fernando Abrúcio, from the Getulio Vargas foundation, in their paper on Desenho e funcionamento dos mecanismos de controle e accountability das agências reguladoras (The Design and functioning of control and accountability mechanisms in regulatory agencies).

“The first actions towards making the state bureaucracy more professional were taken in the 30’s by the Getulio Vargas administration. However, the model at that time included horse trading, state protectionism, and the isolation of sectors of the government bureaucracy from politics,” they point out. In the 60’s, under the military regime, the public administration drowned in the isolation of  bureaucracy from any kind of accountability, while at the same time developing a technocratic view of actions of the state. The big administrative reform took place during the Fernando Henrique Cardoso administration, through the implementation of the Master Plan for the Reform of State Administration. The Plan’s objective was to change the bases of the state to improve it and make it more democratic. “Non-essential activities” were handed over to the private sector, which led to the implementation of the “management of public administration” and the creation of regulatory agencies. This change, according to the researchers, was implemented in three stages: (i) between 1996 and 1997, with the establishment of the agencies linked to privatization and the ending of State monopolies. This gave rise to Aneel (the National Electric Energy Agency), Anatel (the National Telecommunications Agency), and ANP, (the National Petroleum Agency); (ii) between 1999 and 2000, with the objective of modernizing the State. To this end, the government created Anvisa (the National Sanitary Surveillance Agency), for the pharmaceutical industry, and ANS (the National Health Agency); and (iii) finally, between 2001 and 2002, the government created ANTT (the National Transportation by Land Agency) and, showing a loss of frame of reference, Ancine (the National Cinema Agency) for the film industry and ANA (the National Water Agency) for the water supply sector. “The government copied institutions within diverse contexts and problems.” Anac, the regulatory agency of the air transportation industry, was the last one to be created – it was established in 2006, during the Lula Administration.

Brazil was not alone in this endeavor. In the 90’s, regulatory agencies were created in 150 countries. “The problem mirrors this change, inspired in the Anglo-American tradition, built up during a unique experience, which was totally ignorant of the autocratic tradition of the developing and peripheral economies and societies around the world. The transplanting of an unfamiliar legal and institutional tradition is the primary source of the problems in the new regulatory framework in Brazil, which has led to controversial adaptations of the model being imitated,” says Carmen Alveal, from the Institute of Economics of the Federal University of Rio, who wrote a paper called Estado e regulação econômica (The State and economic regulation). In her opinion, Brazil, due to historical circumstances, embraced the concept of the merger of the State and the power of its community; therefore, the union between politics and regulatory issues in this country was always a strongly centralized decision-making process at the Executive level of government. “The need to swiftly create positive expectations of credibility regarding the process of reforming the State limited strategic decision-making to a decision-making scenario pressured by the limited scope of the situation’s objectives.” The researcher believes that these factors led to “the obscure birth of regulatory agencies,” in which the separation of the political and the regulatory scopes resulted in the “obliteration of the Ministries’ responsibilities.”

Technicians
This process, points out Enrique Saravia, from the FGV foundation, in his paper O modelo regulatório (The regulatory model), weakened the State’s governability regarding the existence of technical staffs able to design coherent and effective policies. “This leads the regulatory entities to make decisions that extend beyond their authority as mere implementation agents of sector policies.” Thus, the statement made by Jerson Kelman, the general director of Aneel, comes as no surprise: “the agencies are not an end in themselves; they exist to create an appropriate environment for private sector investments,” an argument that, according to the study Análise e avaliação das agências reguladoras (Analysis and evaluation of regulatory agencies), prepared in 2003, at the request of the President of the Republic and under the sponsorship of the Office of the Chief of Staff, reinforces the idea that “Brazil, contrary to the desires of the existing agencies, must align itself with most other countries, where the regulatory authorities are not responsible for drawing up sector policies, which should be established by the ministries, so that the sector policies are not viewed as economic regulation and vice versa.” Still according to the study, which was the basis for a project to implement changes in the agencies, forwarded to Congress by the Government in 2004 (and still not voted on), “regulatory independence is not a solution for the challenges of the State’s regulatory actions. The distance from the Executive Branch, for example, can give rise to a disregard for the regulator’s authority in relation to other powerful players from the Executive and Legislative Branches.” The biggest weakness of the regulatory agencies, the study warns, seems to be related to their strength, surprising though this may seem.

“It is possible for an independent agency to become so powerful and independent that it will act as a power within the State; if it is not restrained, it can go beyond the role established for it when the agency was created.” In the words of Abrucio and Pó, “the proliferation of regulatory agencies can lead to the phenomenon of ‘agentification’, resulting in new challenges to democracy because of the creation of domains controlled by technical bureaucracies with little or no public accountability.” Even those who defend regulatory agency independence insist on their transparence. “This is crucial to provide social legitimacy to the agencies’ independent actions. The highest possible number of communication channels with consumers has to be ensured by means of statutory structures and practical mechanisms in order to obtain a multi-sided and balanced notion of the specific points of view of interest groups,” state José Cláudio Pires and Andréa Goldstein in their research study Agências reguladoras: avaliação e desafios (Regulatory agencies: evaluation and challenges), prepared by the economics department of the BNDES, the National Social and Economic Development Bank.

“However, Brazilian tradition consists of  opaqueness and the technical-bureaucratic criteria that guide the decision-making process. These characteristics make the issue on “who controls the controller”, that is, “who regulates the regulatory authorities” even more critical,” says Regina Pacheco. Strangely enough, according to the said researcher, the source of this misleading perception lies in the acceptance of a successful experience in the field of regulations: the United States, which has experienced regulatory activities for over a century. The problem is that these institutions were imported with mixed signals and diametrically opposed objectives. In the United States, the creation of regulatory agencies was fueled by the New Deal reformers, from 1930 to 1960. “However, the new dealers, committed to the re-distribution of wealth and to the creation of new social rights, supported the creation of independent agencies with the objective of increasing the regulatory powers of the Executive Branch. In the United States, unlike Brazil, the protection of regulation by means of agencies meant a more active participation of the State, which contradicts the prevalence of the states over the Federal Government. The idea was to have a ‘stronger State’ to promote social justice,” says the researcher. “In Brazil, the creation of independent regulatory agencies comes in the aftermath of a long period of State intervention in the economy and in the markets. Under a vigorous State where decisions are frequently political and affect the logic of infra structure sectors, it stands to reason that the debate on regulatory issues tends to enhance less or no politicizing.”

In the professor’s opinion, the need to provide the regulatory authorities with independence focuses on creating credibility in the eyes of investors, now from the private sector, in the sense that the rules will not be changed and that prices will not be controlled according to political criteria. “Thus, the main difference between Brazil and the United States concerns the relationship between the regulatory authorities and the State. For the New Dealers, the autonomy of the regulatory agencies reinforced the power of the State, whereas in Brazil in the 90’s, the granting of independence to the new regulatory agencies sought to reduce the uncertainties felt by investors, resulting from the legacy of State intervention.” However, points out Gustavo Binenbojm, author of Regulação e democracia (Regulation and Democracy) and professor of administrative law at the UFRJ, “as the years went by, and in view of the growing intrusiveness of the agencies into private sector activities, their questionable efficiency in terms of overseeing the regulated markets, and the fact that they were not subject to accountability mechanisms, the independent agencies in the United States were submitted to criticism and pressure from political and economic agents.” Thus, in his opinion, the broad matter for discussion on agencies in the United States has, for quite a while, ceased to be autonomy as the condition required for them to exercise their functions in a technical and politically neutral manner, but has turned to discussions about their political control, social accountability and democratic legitimacy. “Here, the implementation of a model capable of eliminating the regulatory framework from the political and electoral process turned into a veritable tour de force of the reform of the State, as an institutional shielding of a model that even resisted  the victory of the left in elections.”

Copy
Therefore, Murilo Ramos, a telecommunications expert and professor at the University of Brasília is right to a certain extent when he states in his study Agências reguladoras (Regulatory Agencies) that the “copy of the American model was badly made, as it was based on the introduction, into Brazilian legislation, of the concept of political, administrative and financial independence; however, this was done in an inconsistent manner, as the agencies were given the status of independent administrative authorities, which is incompatible with the administrative organization constitutionally accepted in Brazil.” Or, as Binenbojm states, “whereas in the United States the regulatory agencies were devised to lead to change, here they were created to ensure the preservation of the status quo; whereas in the USA the agencies sought to make basic economic freedoms relative, such as the right to property and the independence of the will, here their mission was to ensure their authority against possible attempts of mitigation by future administrations.”

In the opinion of Regina Pacheco, this shows how the debate around the level of autonomy of the regulatory agencies in Brazil is yet to make the necessary distinction between political control and hierarchical control, or between political control and social control, tending to compare autonomy to lack of control. “Hierarchical control does not ensure accountability, but rather alignment and can, therefore, fail to create the required accountability mechanisms.” This issue is as ancient as bureaucracy itself and was already discussed in great detail by Max Weber in his texts on the challenge of the delegation of powers to specialized bureaucracies by politicians elected through the voting process. Weber wondered how to reconcile the requirements of administrative efficiency with the demand that political-administrative decisions adequately translate the interests and the preferences of voters, as vice-president José de Alencar pondered. According to Weber’s logic, while the complex nature of state functions imposed increasing knowledge requirements, which justified the reasoning of the administration and the delegating of decisions to technical staffs, this same delegation might give bureaucrats more room in which to exercise their power. The risk was that administrative decisions might fail to mirror the political preferences of the elected representatives, thus frustrating the expectation that the voters’ interests should materialize into public policies. “I find out about the increase in gasoline prices from the newspapers. The Brazilian state has been outsourced,” President Lula complained recently.

Of the 47 positions held by the directors of the regulatory agencies, 37 will expire only in 2010, at the end of Lula’s second term in office. This is why the Executive Branch has increasingly manifested its wish to adjust the model, as the administration has always felt that the agencies enjoyed too much autonomy, which allowed the regulatory entity to take on the task of formulating the policies for the respective sector, thus making it unfeasible for the Executive Branch to exert any control over it. Any attempt to do otherwise, as the study prepared by the Office of the Chief of Staff pointed out, is viewed by sectors of society and of the media with mistrust, given the government’s ‘interventionist’ or ‘state control’ mentality, for which reason any proposal that might affect the status quo is criticized and questioned even before it is analyzed and considered in regard to its merits. “The transfer of the granting power from the regulatory agencies to the Executive Branch arouses the risk of undesired political influence in the analysis of issues that should be strictly technical,” warns a study prepared by the CNI, the National Confederation of Industries. This attitude, the Study Group evaluates, prevents the creation of new ways of insertion of the regulatory agencies, such as the necessary implementation of an independent ombudsman within each agency (most of them do not have ombudsmen), or the implementation of the so-called management contracts. The intention is to oblige the agencies to enter into management contracts with the granting authorities. These contracts would have to provide for, among other things, administrative performance and supervision goals, accountability in relation to these goals, budget estimates and a schedule of disbursements.

“These contracts, as an additional instrument of social control and of improvement of agencies’ management and performance, aim at ensuring compatibility between the means and the ends, enabling one to implement better operating conditions at the agencies and allowing for a better evaluation of the cost-benefit ratio of their actions for society as a whole, by indicating the need, within the arena of management, for adaptation,” says Luiz Alberto Santos, from the Government Policy Analysis Department of the Office of the Chief of Staff. Nowadays, the management of four agencies is linked to the signing of contracts. The Executive Branch’s proposal to Congress is that all the other agencies adopt the same model. Likewise, Regina Pacheco says that the Legislative Branch should take a firm stand regarding regulatory agencies. “Now, the core issue is how Congress will behave concerning this opportunity for review that has come up. In other words: if it is correct to surmise that when the Legislative Branch devised the regulatory model it decided not to attribute to itself significant political control duties, then it is fitting to ask whether now the range of incentives that informs the political calculations of the congressmen is more favorable to taking on tasks of this nature.” In her opinion, improving the regulatory framework means subjecting the agencies to social control, making them transparent, efficient and committed to the interests of consumers and users of public services, safeguarding compliance with concession contracts, fostering competitiveness, encouraging the universality of services, and preparing them not only to deal with the ‘failures’ of the government but also with those of the market.

There are many examples, as revealed by an article published in the Carta Capital news magazine: Autonomia de fachada (Misleading Autonomy). In 2005, consumer protection entities considered that charging for an additional cable TV connection was illegal. Anatel, the telecom’s industry regulatory agency, and the Brazilian Association of Cable TV Networks, subsidized the legal opinion prepared by Carlos Leifert, a member of the Social Communication Board, which handed back to Anatel the responsibility for the final decision in this respect. At the time, Leifert was the Director of Market Relations at the Globo TV network. The additional connection is still being charged nowadays. Detail: Globo owns the NET cable TV network. In the same article, the chief government attorney of the State of Minas Gerais, Paulo Calmon, pointed out that “ANP, the regulatory agency of the oil industry, was created in 1998 without the necessary infra structure. From one day to the next, price and distribution constraints were lifted and there were only 50 supervisors to monitor 30 thousand gas stations, hundreds of distributors and thousands of oil tank trucks.” The controversial issue of the five-year term in office of the regulatory agencies’ chairmen is questioned even by those who, in the past, were responsible for the reforms that generated the regulatory agencies.

Autonomy
“President Lula complained that it was impossible for an elected president, who has to be accountable to the population, to have less power than a director appointed for a five-year term in office and that cannot be removed from office. President Lula is right: this is neither reasonable nor democratic. With the exception of Aneel and Anatel, the other regulatory agencies should have broader administrative autonomy than departments or bureaus, but they cannot have political autonomy and should be subordinate to their respective Ministries,” wrote Luiz Carlos Bresser Pereira, former Minister of Finance and professor emeritus of the FGV foundation in a recent article published in the O Estado de S.Paulo newspaper. “Confusion is being made between administrative autonomy, meaning more flexibility in the management of personnel and financial resources, with political autonomy, as evidenced by the existence of terms in office for the directors and their power to define policies,” he criticizes. The economist points out that, when he was the Minister of Public Administration and State Reform under the Fernando Henrique Cardoso administration, he struggled against giving real political autonomy to agency directors. In Bresser’s opinion, both then and now, it makes no sense to give political autonomy to the agencies that regulate the oil, film, water supply, transportation, and air transportation industries. He says that this is undemocratic and risky. “It is a fact that politicians are not as trustworthy as we would like them to be, but there is no reason to believe that they are less trustworthy than the technicians. Both can be corrupted by the regulated industries; the politician, however, has to be accountable to the law and to his voters, who might refuse to re-elect him. This is the strength of democracy,” , as Churchill said, “Democracy is the worst form of government, except for all those other forms that have been tried from time to time.”


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