Lei das Agências: An analysis of Draft Law on Regulatory Agencies This note is a follow up work on the World Bank report: Back to Planning – how to close Brazil’s infrastructure gap in times in austerity. World Bank, 2017. © 2017 The International Bank for Reconstruction and Development/ The World Bank Group 1818 H Street, NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org Email: feedback@worldbank.org All rights reserved This volume is a product of the staff of the International Bank for Reconstruction and Development / The World Bank. The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work and accepts no responsibility whatsoever for any consequence of their use. 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For permissions to photocopy or reprint any part of this work, please send a request with complete information to the Copyright Clearance Center Inc., 222 Rosewood Drive, Danvers, MA 01923, USA; telephone: 978-750-8400; fax: 978-750-4470; Internet: www.copyright.com All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street, NW, Washington, DC, 20433, USA; fax: 202-522-2422; email: pubrights@worldbank.org Lei das Agências: an analysis of Draft Law on Regulatory Agencies I. Background .......................................................................................... 4 II. Preliminary Considerations .................................................................. 5 III. Institutional Scope ............................................................................ 5 IV. Autonomy: functional, financial and administrative.......................... 6 V. Appointment and Substitution of Directors ......................................... 6 VI. External Control, Accountability and Transparency ........................... 7 VII. Decision Rules: regulatory impact analysis ........................................ 8 VIII. Management Tools: 4-year Strategic and Annual Management Plans, and the Regulatory Agenda ........................................................................ 8 IX. Division of Competencies: ministries and agencies ........................... 9 X. Inter-Agency Cooperation .................................................................... 9 XI. The perception of the Agencies and other actors ........................... 10 Lei das Agências: an analysis of Draft Law on Regulatory Agencies I. Background In 2003/04 there was an attempt by the government to “rein in” the regulatory agencies which never translated into actual legislation. During the Dilma government, there was significant centralization in decision making power at the Casa Civil (Chief of Staff Office) in matters which were previously dealt by both Ministries and Agencies. Since 2013, a new legislation is being drafted by the Senate, in response to the perception that the Agencies often lack financial, administrative and decision making autonomy, are subject to capture by both overt and tacit political interference, with appointees lacking the necessary skills and independence. Importantly, investors in regulated sectors (and consumers to a lesser extent) resort to the judicial system (a phenomenon known in Portuguese as “judicialização”) to contest decision of the regulatory agencies, perceived as inconsistent with accepted rules and contractual arrangements which the agencies oversee. In infrastructure, regulatory uncertainty and the resort to the court of law in matters that should normally be decided by the agencies and accepted by affected parties is particularly harmful when government faces excess (and growing) demand for infrastructure services. At a time of dwindling fiscal space at all levels of government, with the cut down of discretionary spending – investment in particular - the need to attract private investment has become imperative. To the extent that investors adjust expected returns by perceived risks, including those of regulatory nature, a solid piece of legislation geared at supporting agencies as independent, judicious public interest technical bodies, is clearly of great importance. To a significant degree, the Draft Law that was approved by the Senate does exactly that – it is a supportive legal framework providing sufficient autonomy in all key realms that Agencies can function effectively, if they have access to the material means. At a time of fiscal stringency, this of course cannot be taken for granted. Autonomy does not ensure that resources will be put at the agencies´ door steps; in fact, no government entity has such a “luxury”. But neither will the agencies have to beg to the line ministries to which they are connected. This is a significant change. Other momentous changes include improved process and more stringent criteria for the appointment and replacement of directors, reducing the probability of political interference; greater transparency in decisions and accountability; and the provision that agencies employ improved management and decision making tools, including mid-term four-year planning; setting annual objectives and related means; and a systematic use of regulatory impact analysis. II. Preliminary Considerations After being discussed and approved in two key Senate commissions, the draft law (DL) was approved unanimously by the Senate Special Commission on National Development with no need to go to the floor. It should be underlined that amendments to the legislation that would defeat some of its purposes – mostly by decreasing the autonomy of the agencies – were defeated. One amendment from the opposition which was incorporated led to an additional barrier to revolving doors and potential conflict of interest. The draft law was then sent on December 6, 2016 to the Lower House (under PL 6621/2016), waiting for a Special Commission to be set up in order to discuss it. This is an important piece of legislation that needs to be brought to the limelight in order to be voted, approved and turned in law, insofar it is sufficiently mature. In this respect, here we suggest that the Senate bill be approved as is, and eventual topical changes be dealt in a separate legislation. A close reading does not reveal major flaws or omissions that would need to be addressed by the Lower House. III. Institutional Scope Does the DL have an appropriate institutional scope? Does it include all relevant regulatory agencies? The explicit object of the DL is the ten Federal agencies which are focused on: infrastructure (6); Health (2); Oil and Gas (1); and the movie industry (1). There are reasonable exclusions, in areas such as competition policy (CADE); capital markets (CVM); banks and financial markets stability and regulation (Central Bank), among others, all dealt in separate legislation. Arguably, the DL could be extended to apply to mining and its new agency1. Moreover, state (and municipal) legislatures should be encouraged to follow many of the principles and approaches of the DL. In infrastructure, the DL contemplates all the relevant agencies, namely ANEEL for the power industry; ANATEL for telecoms; ANTT for highways and railways; ANAC for aviation and airports; ANTAQ for all modalities of water transportation and ports; and ANA, which regulates water and its multiple uses. State and municipal regulatory bodies address, inter alia, urban mobility, and urban water supply and wastewater disposal. 1 The Agência Nacional de Mineração was created by Provisional Measure (MP – an executive order) 791 on July 26th 2017, yet to be voted (Congress has a total of 120 days, after which the MP is void). Further, in view of its importance (and past inoperativeness/leniency), Previc (Superintendência Nacional de Previdência Complementar) should be transformed into an Agency in a separate legislation, consistent with the norms of the draft law. IV. Autonomy: functional, financial and administrative Lack of formal and often de facto autonomy with respect to the executive branch and the Ministry to which the agency is connected has been a recurrent criticism. Even in instances when agencies have considerable leeway, the relevant Ministry remains the budgetary unit, and thus the agency depends on the good will of its senior officers – generally political appointees – for access resources, suffering often from budget impoundments. The DL provides the agencies with considerable formal autonomy, being no coincidence that this is made explicit at the outset of the legislation (Article 3). Thus the Article states: “The special nature conferred to the regulatory agency is characterized by the lack of tutelage or hierarchical subordination, by functional, decision-making, administrative and financial autonomy, and by an investiture of its leadership for a set period and a stable mandate…” (free translation). In practical terms, the agencies (and the funds which are linked – “vinculado” - to the agency) become budgetary sectoral units of the Federal Planning and Budget Systems, and not a budgetary appendage of the ministries. So, for financial – and administrative purposes – the agencies´ counterpart is the Ministry of Planning, Management and Development, as are all other level one units of the federal government. V. Appointment and Substitution of Directors The Brazilian political system of representation and electoral rules, have generated a very high degree of party fragmentation in Congress. The system can be characterized as a hybrid in which the federal executive concentrates an enormous amount of power and governs by dispensing resources and allocating positions in government, while politicians often use such positions – in addition to the ability to legislate - to favor through legal, and sometimes illegal means, interest groups. The system has been characterized as a coalition presidency grounded on non-programmatic, though systematic cooptation. One relevant corollary is that any presidency is tempted to muster political resources using the power to appoint senior positions in the agencies upon the recommendations of the political parties as bargaining chips. Although it is not possible to completely exclude this possibility through purely legislative means, the DL makes very significant inroads by establishing in Article 44 procedures and criteria to improve the selection, appointment and substitution processes, which improves upon and strengthens Law 9.986 (18 July 2000). The DL also avoids the perpetuation of individuals in these positions by having Directors´ mandates defined as one 5-year term without renewal. Further, by having mandates be non-coincidental, political influence is also contained while institutional memory preserved. The DL actually borrows from the Law of State Enterprises (13.303/June 30th 2016) the criteria for appointments in terms of experience, training and conflict of interest. In particular, it excludes, among others, elected politicians (and up to third degree relatives); union heads; those that have been condemned for crimes (after appeal); and anyone who has (or had in the last 12 months) a material interest in regulatory outcomes in the sector (such as shareholders, directors of regulated firms or employees of trade associations). Obeying such criteria, a commission is instituted at least 120 days prior to the end of the mandate and submits a list of 3 names to the President, with the same procedure in case of an unexpected vacancy, in which case the commission submits the list within 60 days of the fact. In order to ensure that the Agency does not suffer from long vacancies – a very significant issue in recent years2 -, in 60 more days a name must be chosen either from the list, or in its absence, under the discretion of the President as long as it fulfills the appointment criteria. This name will then be submitted to the Senate hearing for final approval. Note that the Commission will ground its decision on the basis of the curriculum of the candidate, and anyone that clears the bar can submit his or her name to be considered by the Commission. VI. External Control, Accountability and Transparency While the DL provides substantial autonomy to the agencies, it also defines the mechanisms for external control and accountability in its second chapter. It establishes that external control will be exercised by Congress with the support of the Audit Tribunal (TCU), with each agency reporting annually on how it is fulfilling its mandate with respect to their predefined strategy and management objectives. The DL also establishes the need to have for an Ombudsman office in each agency, headed by an individual that will function outside the hierarchy of the agency, selected by the President and confirmed by the Senate for a one-time 3-year mandate, and on the basis of the same criteria applied to the agency leadership. Further, an administrative process against the ombudsman may only be initiated either by the Minister of Transparency, the head of the Controladoria Geral da União, or the Ministry to which the agency is connected (“vinculada”). One relevant concern addressed in different parts of the DL is the degree of transparency of the agencies´ decisions. In this regard, Art. 8 states that deliberative meetings by the collegiate of Directors will have the agenda made available at the agency site 3 days prior to the meeting, while the meeting itself will be open to the public and taped by electronic means. The minutes and the tape of the meeting will be available at the agency and the site within 5 and 15 working days, respectively. 2 A recent study noted the “opportunistic behavior” [of previous administrations] which left key positions open for long periods of time, weakening the agencies and opening their decisions to questioning when lower ranking officials were filling in for the position. See Sebastian López Azumendi, “Governança das Agências Regulatórias Federais do Brasil. Análise das Tendências de Configuração das Diretorias Durante os últimos 20 Anos de Reforma”, CERI/FGV, Rio de Janeiro, July 2016. In addition, the DL specifies two instruments which improve both the degree of transparency and make the agencies more accountable for their decisions, while promoting public participation and involvement in the deliberations of the agencies (arts. 9 and 10). In particular: • Public Consultation prior to all relevant decisions of Directors´ board or collegiate, with minimum duration of 45 days, and once documentation is made available to the public, after which all comments, suggestions and criticisms will be made equally public. The Ministry of Finance is also invited to comment on the regulatory impact of the proposed change (see VII below). • Public Audience called by the board or collegiate of the agency with at least 5 working days prior to the meeting. VII. Decision Rules: regulatory impact analysis The Draft Law reflects a significant concern with the agencies´ decision process (Chapter I), and the possibility of the agency imposing “obligations, restrictions and sanctions” beyond what is needed to serve the public interest. To contain the possibility of the agency overextending or misusing its power, the DL establishes that new regulations or norms of general interest will be preceded by a Regulatory Impact Analysis (RIA) or at least a “technical note” establishing the foundations of the proposal (Article 6). These would be instruments to improve the (time) consistency of decisions and reduce arbitrariness3. Such mechanisms would need to be progressively strengthened, consistent with the OECD “Best Practice Principles on Regulatory Policy”, which suggest – inter alia – the evaluation of regulatory decisions, actions and interventions of the regulator. VIII. Management Tools: 4-year Strategic and Annual Management Plans, and the Regulatory Agenda In Section II the DL addresses a recurrent criticism of some of the agencies lack of (governance and) management tools. It states that each agency will prepare a strategic plan for a 4-year horizon with objectives, targets, expected results, and exogenous factors which may affect its performance, updating it regularly. Again, for the sake of transparency, this plan will be made public within 10 working days of its approval. 3 A decade ago, a World Bank survey of 21 Federal and State agencies noted that while 18 out of 21 agencies were formally required to document the decision-making process, only 8 were required to cite jurisprudence in support of their decisions. See IBRD, “Regulatory Governance in Infrastructure Industries: Assessment and Measurement of Brazilian Regulators” PPIF, Trends and Policy Options n. 3, Washington, D.C., 2006. Similarly, an annual management plan – and a corresponding regulatory agenda - will detail the key normative themes that shall be addressed and the ensuing actions, targets and expected results, with the Senate, House and Audit Board informed of the plan (and publicized). The management plan will necessarily identify the actions which pertain to (i) improving the quality of the services delivered by the agency; (ii) promoting “research” relevant to the regulated sector; (iii) promoting cooperation with units in charge of competition, consumer protection and environment. Again, this is line with the OECD “Best Practice” recommendations, in particular that the regulator should “regularly report on the fulfillment of their objectives, including through meaningful performance indicators”. IX. Division of Competencies: ministries and agencies The DL is mute in this regard and fundamentally because no agreement was reached with regard to concept and language. Interestingly, both the government (through the Minister of PPI) and the opposition suggested some shift of responsibilities to the ministries, but at the end it did not prevail. In September 2016, at the time when Congress was approving the PPI, M. Franco – then secretary (now Minister) in charge of the PPI – argued that the responsibility to award and sign the concessions, the choice of concession models and the documentation regarding the corresponding public bids (usually auctions) should be defined and come under the purview of the line ministries. The argument was couched in terms of conflict of interest – the importance of the Agency remaining a neutral third party, whereas the government was one of the stakeholders, together with investor/operators and consumers. Still, beyond political interference, the government might also be conflicted and tempted to favor SOEs in the sector. In the Senate Report it becomes clear that with the approval of Amendment 13, some of the powers of the agency were going to be transferred to the Ministries. The amendment was rejected. The argument was that the division of powers should treated separately and not by means of a piece of legislation with broad applicability (“lei geral”). Thus, this discussion was deferred to sector-specific pieces of legislation and at a future date. X. Inter-Agency Cooperation Finally, the DL strongly encourages inter-agency cooperation, partly in response to a recurrent criticism regarding barriers facing firms when dealing with different government agencies – national and subnational. Thus, in Chapter III, it stresses the importance of cooperation and communication between the agencies and CADE in the sphere of competition policy, in order to enhance competition and to facilitate the implementation of the relevant legislation. In particular, the agencies are to communicate “immediately” to CADE knowledge of anti -competitive conduct and conversely, CADE is supposed to notify the relevant agency within 48 hours of a ruling or formal decision (“Acórdão”) pertaining to regulated areas or activities. Chapter IV deals with cooperation among regulatory agencies, whereas two or more agencies may jointly publish normative acts dealing with “agents” subject to more than a single sector regulation. Chapter V speaks to and encourages the interaction and cooperation between the agencies and the National System for Consumer Defense as well as the relevant unit within the Ministry of Justice and Citizenship. The DL formally authorizes the agencies to sign with individuals or firms a “Conduct Adjustment Agreement” in order to allow the agent to compensate for and redress its conduct, thereby reducing legal uncertainty around this instrument and its use by agencies. Chapter VI deals with cooperation between the Federal and subnational agencies, allowing the decentralization of its supervision, monitoring and auditing activities, as well as those that relate to the application of penalties and arbitration. The DL imposes relatively stringent conditions for such decentralization to take place with respect to the ability of subnational entities to effectively deliver and makes it clear that the Federal agency cannot delegate its regulatory authority or competencies. One additional point: in setting best practice principles on regulatory governance, the OECD first such principle concerns “role clarity”, within which the organization suggests that legislation should empower regulators “to co-operate and co-ordinate with other relevant bodies in a transparent manner”. Clearly, inter-agency seems to have become a major issue, and not only for regulators but for all stakeholders – firms and consumers – which depend on the ability of the regulator to perform effectively his or her role 4. XI. The perception of the Agencies and other actors During the discussions in the Senate, the agencies jointly drafted and submitted in March 2016 a detailed assessment of the Substitutivo PLS 52/2013 of Senator Walter Pinheiro, and a set of proposals which addressed content and language on an article by article basis5. This document seems to have been fully taken into consideration by Senator Simone Tebet, the Rapporteur of the Substitutivo in the Comissão Nacional do Desenvolvimento Nacional, the Senate commission with the power to approve the new legislation in the Senate. In particular, and as proposed by the Agencies, the DL provides for decision- making, administrative and financial autonomy (the latter within the overall budget envelope and constraints of the government, which the agencies´ suggested to 4 See OECD, The Governance of Regulators, Paris July 2014 (part of the series OECD Best Practice Principles for Regulatory Policy). 5 “Papel das Agências Reguladoras. Pontos Relevantes – Lei Geral”. circumvent but the DL correctly avoided), improved decision-making (through a regulatory policy impact analysis), greater transparency, external control and accountability. Finally, the agencies agreed that sectoral ministries would have among its responsibilities the grant of concessions (“concessão de outorgas”), while the DL – as already noted – purposefully did not manifest itself on the division of labor between agencies and ministries6. Finally, the National Confederation of Industry (CNI) in a “Technical Note” dated August 28th 2017, stated that the Senate DL should be approved as is, being “convergent” with its core legislative agenda (“Pauta Mínima”) for 2017. The fundamental reason for the support of the DL is the high degree of autonomy conferred on the agencies, guaranteeing independence of political interests, technical excellence, and greater transparency and accountability. 6 Further discussion with ANTT and ANTAQ reinforced the view that the legislation took into account all key points of concern of the agencies, with further improvements being the future outcome if infra legal changes, such as the allocation of penalties and fines to the agencies´ budget, as opposed to going to the Treasury.