4. Internal governance of the Regulatory Agency for Rail Transport

The section briefly explains the seven OECD Best Practice Principles of the Governance of Regulators, which aim at improving the performance of regulatory agencies. For each principle under consideration, it describes the institutional arrangements and practices of the ARTF comparted with each principle.

    

The current section is mainly based on the Best Practice of the Governance of Regulators (OECD, 2014[1]). The objective of the principles is to establish an effective regulatory policy which comprises “a consistent policy covering the role of functions of regulatory agencies in order to provide greater confidence that regulatory decisions are made on an objective, impartial and consistent basis, without conflict of interest, bias or improper influence” (OECD, 2012[2]). The seven principles are the following and will be described in detail in this section:

• Role clarity

• Preventing undue influence and maintaining trust

• Decision-making and governing body structure for independent regulators

• Accountability and transparency

• Engagement

• Funding

• Performance evaluation

Role clarity

The basic idea of the role clarity principle is that an effective regulator must have clear objectives and clear functions, embedded in a complete regulatory framework and other policy instruments. These functions shall be sufficient enough to accomplish the institutional objectives that gave origin to the regulators’ creation. This principle’s main justification: only through clear objectives and statements can the institution achieve the expected results and goals.

These regulators’ objectives should not be in conflict or competing with goals; they can otherwise undermine institutional performance. Only when clear benefits surpass potential costs should they be joined. However, in a situation where a regulator combines competing objectives, a regulatory framework and guidelines must be developed to help the institution trade off such functions. On the other hand, within the institution, these objectives should reflect separate and specific functions, goals, budget, personnel, etc. Therefore, a multi-purpose regulator would face important challenges in planning and executing all responsibilities and functions.

The legal framework should indicate the co-ordination mechanisms by which the regulator must co-operate with other institutions, such as congress, ministries, autonomous bodies, etcetera, on topics of shared responsibility. On the other hand, any co-operation agreement, memorandum of understanding or formal agreement should be published on the regulators’ websites to promote transparency in the roles of the regulator.

Finally, clear separation of functions and co-ordination with ministries is a relevant issue. The role of the regulators with regard to supporting the policy objectives of ministries can vary across countries. A common practice, however, is the independence principle of regulators, which would limit the responsibility to supporting ministries on policy issues. Notwithstanding, support on policy issues is a fact and regulators’ involvement in different stages of policy formulation is also desirable as co-ordination between promotion and regulation reduces uncertainty and misleading expectations over the role of regulated entities.

The objectives and functions of the ARTF are scattered in several legal documents. The Decree SCT-26-01-2015 ordering the creation of the agency was published on January 26, 2015 in the Official Gazette. This legal instrument establishes the basic attributions of the ARTF and the SCT regarding the regulation and promotion of the rail sector. For instance, the SCT has the objective of planning and developing the public policy of the rail services, as well as regulating its development. On the other hand, the agency is in charge of several regulatory duties.

The ARTF, however, was created as a deconcentrated body of the SCT until August 18, 2016. The agency was granted with technical, operational and administrative capacity. The Decree SCT-18-08-2016 states additional operative and regulatory functions to those established in the Decree 26-01-2015. The former reinforces the both types of attributions of the agency, regulation and promotion of the rail sector.

The Law on the Regulation of Rail Services was reformed in 2015 and 2016, through which changes to the legal framework of the rail sector took place. Additionally, in 2017, the law was amended to include the current attributions of the agency, and in 2018 further changes on tariffs regulation were included. Notwithstanding, the regulatory framework of the agency is not complete and operational matters are yet to be defined more clearly. For example, some attributions of the ARTF are carried out by the General Direction of Rail and Multimodal Transport Development (DGDFM), and vice versa; and some attributions may not be carried out at all.

Table ‎4.1 includes a selection of the regulatory and non-regulatory duties of the ARTF according to the legal framework. The agency faces competing objectives regarding its regulatory role in the rail sector and the promotion and expansion of the system. In principle, the promotion of the industry is mainly carried out by the Ministry of Transport and Communications, through the DGDFM. Ideally, the ARTF should not have any promotion activities, as it implies an overlap of functions and it may create opposite incentives, as promotion and regulatory duties may clash with each other.

Table ‎4.1. Selected functions of the ARTF
Law on the Regulation of Rail Services
Regulatory functions	Non-regulatory functions
Define technical standards of the rail transport and infrastructure and verify its compliance	Promote the expansion and use of the rail network; and identify the short lines underused to take them back under state control
Guarantee interconnection services and determine interconnection tariffs in cases where agreements cannot be reached	Provide recommendations on security issues
Determine the tariffs and regulatory bases if there is lack of competition	Elaborate and publish statistical records and indicators for rail services
Impose fines and sanctions due to non-compliance of the obligations established on the concession titles and other regulations
Source: Adapted from the Law on the Regulation of Rail Services.

As seen in Table ‎4.1 the ARTF has the task to promote the use of the rail network and identify underused lines. The usage of the network may be promoted through regulatory functions, but encouraging the expansion of the network may imply the handout of incentives, such as regulatory moratoriums, that may be opposite to the regulatory duties. Furthermore, the Law does not establish a hierarchy of duties.

A fundamental part of the role of a regulatory agency is to have the necessary resources to discharge its functions effectively. When the ARTF was created and its roles defined, some gaps in terms of organisational structure and regulatory framework were left unattended, which are likely to undermine the performance of the agency. This includes limitations to carry out inspections, gaps in regulation to carry out sanction duties, and lack of sufficient staff and personnel.

One of the issues arises with the lack of installed capacity for ARTF to carry out inspections. The ARTF has an annual inspection programme which aims at inspecting the entirety of the railroads with an operational prioritisation following the accidents of previous years – the 2018 programme established 909 inspections as a goal. However, the creation of the decentralised Agency was not accompanied by a formal structure to effectively enforce the law. When the regulatory functions were part of the SCT, the inspections and data gathering across the country were made through the SCT Centres – the SCT Centres are the local representatives of the SCT across Mexico.

The creation of the ARTF as a decentralised body reduced its actual capacity to inspect in Mexican states, as the SCT Centres still belong to the ministry. Nowadays the SCT centres support the ARTF; however, this co-ordination is not made through formal agreements. This lack of formalisation can create tensions in the effectiveness of the inspection process to meet the agency’s standards.

Another issue has to do with sanctions and fines. Currently, the ARTF does not have specific guidelines about imposing fines and sanctions, making it harder to effectively sanction regulated parties.

The final issue is related to the endowment of sufficient personnel. During the elaboration of this review, the ARTF did not have enough personnel to accomplish its duties – 18 officials in total. One of the causes of this situation is that the DGDFM has not yet transferred the remaining staff with regulatory powers to the agency – 49 officials. Due to these circumstances, there was an overlap in functions, personnel and roles between the staff of both agencies. It is worth mentioning that the transferring of personnel follows an administrative procedure that goes beyond the scope of the SCT and involves the participation of the Ministry of Finance (SHCP) and the Ministry of Public Administration (SFP).

Preventing undue influence and maintaining trust

The notion of the principle is that regulators need to instil trust between stakeholders and institutions. In order to build this trust, close communication must be maintained with regulated entities and other parties; at the same time, the regulator must avoid any undue influence that may lead to regulatory capture.

The work of the regulators must be grounded in objectivity and impartiality. Thus, if there is a situation in which the scope of the regulator covers government and non-government firms, competitive neutrality is required to avoid distrust and reduce the risk of undue influence by public firms.

Formal and situation independence can promote objectivity and impartiality. Legal statutes can grant legal independence of regulators while independence can arise from institutional strength or the implementation of better practices. Both schemes face advantages and challenges. The choice between the two depends on several conditions, for example, the need to demonstrate independence, the dynamics of policy at the national level, the institutional strength of the country, etc.

Undue influence can arise from any governmental institution (ministries, congress, the executive, autonomous bodies, judiciary power, etc.), regulated entities or the public. The regulator must interact with these parties to deploy the regulatory process, co-ordinating on issues of shared responsibilities, consulting over regulatory projects and receiving feedback about the strategy and instruments it applies. Within this interaction, however, the regulator must pursue the institutional objective in the short and the long term, avoiding undue influence.

Avoiding regulatory capture and maintaining trust ensures that regulators, in fact, pursue their underlying policy objectives. There are several practices, which contribute to reduce the risk of regulatory capture and therefore create trust. For instance; the “revolving doors” restriction for officials working in regulated firms after certain periods of time; transparent communication between regulators and stakeholders; a defined agenda and official channels of communication; the degree of formal and legal independence; the implementation of regulatory impact assessment (RIA) and the consultation process for regulatory production; the selection process and the terms of the board members, etc. Principles such as the governing body of the regulator, the degree of independence, the fundraising scheme, the accountability obligations and the evaluation of the performance, also help limit the risk of regulatory capture.

Regulators can range from ministerial to autonomous bodies. Challenges linked to undue influence and trust are different in both situations. In principle, influence may be more probable between ministerial regulators in comparison with governing bodies, but the former may face challenges in a timely and effective manner. The election between a regulator within a ministry or an autonomous body is dependent on institutional arrangements and institutional capacity, not only linked to the regulator but also public entities.

During the drafting of the report, the ARTF did not have yet an explicit cross-sectional strategy to prevent undue influence, as its first efforts focused on other priorities. For example, the assurance of financial and human resources to reach its duties. In contrast, the ARTF has scattered practices inherited from the previous organisation as a general direction under the umbrella of the SCT. Some of these practices focus on the institutional communications with the stakeholders:

• Regarding the regulated entities, the ARTF holds public and monthly case-by-case meetings with the AMF and representatives of the concessions holders. Besides, the agency meets with rail firms in response to specific problematics (e.g. vandalism, accidents, etc.).

• The relation with other public institutions is also conducted on a case-by-case scenario. For instance, the interaction with COFECE relies on potential cases of competition in the rail industry – at the time of drafting this Review, the COFECE was carrying out a second study to determine the existence of monopolistic behaviour in the rail sector. On the other hand, the institutional co-ordination with CONAMER focuses on the regulatory quality process, mainly through the implementation of the RIA for draft regulations – which includes the consultation process. Now, most of the discussion with CONAMER focuses on the accomplishment of the one-in, one-out rule, which requires the elimination of administrative burdens equal to that imposed by the new regulation. The ARTF also co-ordinates with SCT, through the General Direction of Preventive Medicine and the DGDFM. With the former, the agency works to issue the licences of the rail crews, which includes a medical examination. Regarding its relation to the DGDFM, the ARTF implements the obligations included in the concession titles and in the regulatory framework. With the later, the creation process of the ARTF has extended the efficient and effective co-ordination in practice; officials of both institutions and responsibilities are still mixed up.

• There is no evidence of systematic practices of interaction between the agency and the public.

Transparency and accountability are strong tools to ensure trust. The ARTF complies with the legal obligations established in the general framework of the Mexican government. However, independence demands more efforts on transparency and accountability

Finally, the ARTF has revolving door limits as officials cannot work for one year in the industry, after the end of its appointment period.

Decision making and government body structure for independent regulators

The design of the governing body and the decision-making powers have an impact on the effectiveness of the regulators, the delivery of the regulatory policy and expected results of institutional objectives. Additionally, the governing body has an influence on the regulators’ integrity as it can affect the risk of regulatory capture.

The governing body of the regulator can take different forms:

• The governance board model: oversight, strategic guidance and operational policy.

• The commission model: a board advises on regulatory decisions.

• The single member model: one individual takes the regulatory decisions.

The selection of the model per se has some effects on the effectiveness of the regulator. For instance, under certain conditions, a commission or a governance board model reduces the risk of regulatory capture and strengthens the decision-making in comparison with the single member model.

Membership to the governing body is an important institutional arrangement that would go against regulatory capture and promote transparency. In order to go in this direction, the policies, criteria and selection process of the terms of appointment must be transparent. Government body members can be elected by public opposition contest or by direct appointment from an authority. Public opposition contest, however, creates greater trust if carried out fairly and inclusively.

Direct election of the board is another common practice of regulators. A single authority or different public officials can elect this type of governing body. The model requires, however, more transparency in the selection criteria as there could be bias in the process. For example, stakeholders, industry and ministry representation can be in conflict with the need to have board members with a technical background. Regulators must follow their institutional objectives but members can be influenced or have a biased opinion due to their public position. Thus, clear statements over objectives and goals, as well as guidelines to reduce conflict are advisable.

A multi-member model also has more institutional memory when the replacement is staggered. Due to this reason, changes in the board are less costly and less likely to modify the work of the regulator completely. This model can remove the institution from the political process. For instance, the appointment of board members can go beyond the period of the elected government in place

In general and regardless of the governing model, corporate models have accommodating features to enhance the regulators’ accountability, transparency, effectiveness, integrity and independence. In contrast, a single member can be more adaptable to industry changes and more responsive. Regulatory capture is more challenging with a single member but institutional strength of the head ministry can be of support in this matter.

According to the Article 4 of the ARTF’s creation decree, the governing body relies in a single official, which is the head of the agency. The president appoints and removes the head by recommendation of the SCT without a defined period. Moreover, there are neither clear selection criteria nor well-defined professional profiles for the person in charge of the agency. Finally, there is not a public tender for applicants to the position. The selection process together with scattered practices to create trust may increase the risk of undue influence and the appointment of unfitted profiles.

The head is the maximum authority of the ARTF. It has both, administrative and policy-making functions. Thus, the head proposes and executes the annual budget, negotiates inter-institutional agreements. Besides, the head is the main responsible to implement rail regulation and to suggest draft regulations.

The governing body for an independent regulator should fulfil certain requirements:

• Set specific appointment periods in legal instruments, ideally in a primary law;

• Define the professional profiles of the candidates;

• Define early removal criteria and processes for the member(s) of the body;

• Establish an open public tender that takes into account relevant characteristics, such as technical profiles, experience and examinations results. The tender should be conducted by an unbiased evaluation committee;

• In the case of a board, the appointments should be stepped and ensure a complete quorum. If possible, the board should be separated from the technical areas of the agency.

The decision-making body of the regulator can be comprised by a single head or by a board. Regardless of the governing model, in general terms, corporate models have features more accommodating to enhance accountability, transparency, effectiveness, integrity and independence of the regulator. In contrast, single member decision-making bodies can be more adaptable to industry changes and the responsiveness can be faster. In contrast, regulatory capture is more challenging when there is a single member but institutional strength of the head ministry can support on this matter.

At the same time, single heads of regulators are more fitted when the institutional arrangements of the public system are stronger and favour independence. Besides, a board is more effective when there is a necessity to show independence in the decision making process.

Accountability and transparency

This principle highlights the relevance of accountability and transparency for economic regulators. In fact, accountability and transparency are the foundations of trust but also a mechanism to align expectations between regulators and stakeholders. The main message of the principle is that compulsory or self-imposed practices in accountability and transparency promote the decision-making process and provide elements to lower the risk of regulatory capture.

Governments usually keep transparency and accountability obligations for all public entities, including the regulators. Notwithstanding, independent regulators should go beyond these duties in comparison with all public entities; thus, as long as regulators advance on independence or autonomy, they should increase their accountability and transparency practices to strengthen trust.

Accountability obligations could include the executive, congress, the public and stakeholders. Of course, the areas to be accountable for are not necessarily the same for all the stakeholders. For instance, the executive may focus on policy objectives, co-ordination with ministries and budget execution; congress would focus on policy objectives and budget execution; and the public and stakeholders may focus on policy objectives. In these topics, it is relevant that regulators publish their operational plans for each year, so the stakeholders can compare the planned agenda with the achieved results.

In perspective, transparency is a sort of accountability for the public and the value of the information published is worth the additional work involved. Thus, regulators should publish all possible information about their operation, including budget execution, industry statistics, annual working plans, meetings with stakeholders and their summaries, goals and objectives achieved, etc. This information should be readily accessible for most potential users and in manageable formats. It is also advisable that regulators pay attention to the information needed by users and include it in day-to-day statistics. Regulators should follow a transparency policy as a mechanism to obtain trust.

Regarding transparency obligations and accountability, the ARTF is subject to the same regulations as any public institution in Mexico. For instance, the officials’ contact information, salaries, profiles, functions, etc. are available to the public through web portals. In terms of financial information, the agency publishes its budget plans and execution.

Currently, the ARTF – as a deconcentrated body – is accountable to the SCT and to the SHCP. However, it is not directly accountable to the Congress.

The ARTF publishes statistical information of the rail industry (tariffs, tonne-km, routes, accidents and vandalism, amongst others), mainly through a yearbook or quarterly reports. Nonetheless, this information is neither exhaustive nor detailed and it is not published in handily formats. The main sources of information are the railway firms, which submit part of the data as the agency requests it and not following a standardised calendar, formats or processes. As a result, several areas of the SCT may ask for the same information more than once. At the moment of this Review, the ARTF mentioned that it is building up a digital platform to collect and publish statistical information.

Stakeholder engagement

The engagement principle refers to an integral policy of interacting with regulated entities and other stakeholders. The relevance of engaging with stakeholders is down to the fact that regulators learn from the industry how it works; from the public the effects of regulation; and from public entities how to work together.

Engagement with stakeholders is also a mechanism to produce quality regulation as they can provide feedback about a specific problem and proposals to solve them. Through engagement activities, regulators can improve the relationship with stakeholders, as they can offer opinions about potential problems and the effects of regulation as well as anticipate regulation and reduce implementation costs and uncertainty.

It is important that regulators commit to a policy on stakeholder engagement. Most regulators have active contact with their regulated firms and other actors but this is slightly different from a policy approach. A policy on stakeholder engagement requires objectives, a scheduled and planned agenda to discuss regulatory issues, analysis of the discussion topics, etc.

Engagement undertakings are highly recommended but regulators must take into account best practices in such activities to avoid risks of regulatory capture and conflict of interest. At the same time, regulators must be clear on the purpose of these activities, so the stakeholders fulfil their expectations. Finally, all exercises should fit the purpose; this means that activities need rationality criteria. For example, it may be excessive to undertake a complex, expensive and full consultation in situ for a proposed small regulation with few expected potential effects. Thus, consultation practices as early consultation, regulatory impact assessment and ex post consultation (under ex post evaluation activities) should be adopted as part of the engagement policy.

The main contact points between the ARTF and its stakeholders are the programmed meetings and the consultation process during the draft of regulations, which is managed by CONAMER. As mentioned above, there is not a systematic planning of the meetings and the relevant topics to be addressed by the sector. Since the ARTF does not have a regulatory stock to comply with the one-in one-out rule which limits its capacity to issue regulation, the participation of relevant stakeholders in the drafting of rail regulation has been limited.

Another channel for the engagement with stakeholders is the early consultation process. Its main objective is to identify potential problems and alternatives before creating a draft regulation. Currently, there is no evidence about the systematic use of this practice.

Funding

The principle has at least two branches. In the first place, funding is the channel that allows the regulator to achieve the goals according to objectives. On the other hand, funding sources can contribute to ensuring independence (mainly from the government but also from the regulated firms) in the decision-making process and the implementation of the regulation.

The number of funding sources available for the regulators must be objectives-planned and set with goals in mind. The funding for regulators must be sufficient to achieve the expected goals in the given timeline – which can include yearly or longer aims. In fact, the planning of goals and budget is closely aligned. Still, the budget should not be the main driver, as sometimes a tight budget is assigned to accomplish high goals. This does not otherwise mean that regulators should be granted substantial budgets. More than that, there must be a balance between budget and goals and the key is planning.

Sources of funding and easy access to funds are also a relevant issue for independence purposes. Independence relies on institutional arrangements between the regulators and the entities responsible for providing funding. These arrangements could be strong and it may not be necessary to separate the regulators’ budget from other institutions, as is the case when the agency is part of a ministry or the former validates the budget. If the arrangements are strong over time, it is possible to maintain such structure but, if there is a perceived risk of change in policy, it may be sensible to separate the budget from the ministry through legal instruments. Assigning legal powers to the regulator to evaluate, propose, and implement the budget, helps to reduce the risk of capture and alleviate potential pressures to influence the regulator’s decisions. Particular arrangements about the budget depend on country profiles and institutional capacity, but it is worth mentioning that self-budget planning and execution works towards independence.

The creation decree of the ARTF in 2016 did not grant the agency with the necessary financial resources for its operation nor established a source of funding that ensures the compliance of its objectives. The transfer of regulatory obligations from the SCT to the ARTF was restricted by the impossibility of increasing the SCT’s budget at the time. This division implies an operational challenge, as the legal and managerial issues were addressed by the SCT. Currently, the agency requires administrative staff, which creates an extra burden on the budget.

According to the ARTF, the agency lacks human resources with technical skills, but the current budget limits the possibility of devoting resources to hiring additional personnel. Furthermore, the agency cannot conduct a proper inspections policy, as it does not have the necessary financial and human inputs. In order for the ARTF to follow a results-based approach, it must have enough resources and independency to allocate them.

The ARTF requires a stable and sufficient budget. Nowadays, in order to get resources, the agency negotiates with the SCT – meaning that the agency submits a proposal to the Ministry and the former decides whether it agrees or not. Most of the times there is a reduction in the budget presented by the ARTF, as the Ministry has to negotiate (with the SHCP) a general budget for the sector.

The ideal arrangement of the ARTF’s funding scheme implies a direct transfer of the existing fee that regulated entities must pay to the government (2% of their income) – which now goes to the Federal budget. The agency must manage its own resources according to its needs. An additional measure is that the ARTF negotiates its budget directly with the SHCP.

It is worth mentioning that the agency should not receive the resources collected through fines, as it creates incentives to sanction when there is no need.

Performance evaluation

This principle encourages regulators to conduct performance evaluation according to the underlying policy objectives. If the regulator does not evaluate its work and actions, it will never know if the effects of its intervention are in line with their objectives and if there has been a return on invested resources.

Performance evaluation allows regulators to strengthen the activities or actions that contribute the most to their goals and modify those with poor effects. Due to the relevance of the performance evaluation, it is important to conduct these exercises periodically. The frequency depends on the relevance of the policy and the type of evaluation. For instance, an evaluation of performance indicators regarding outcomes can be launched on a yearly basis, as they need “simple” statistical analysis, which is not as time-consuming. On the other hand, the actual impact or effects of the regulatory decisions require analysis that is more complex and advanced tools. At the same time, identification of the final effects may be blurred in the early stages of implementation.

Finally, the publication of the results is as important as the launch of performance evaluation activities. It helps with accountability and transparency issues.

According to the ARTF, it is working on the creation of the National System of Rail Indicators, which will include information of the sector. However, at the time of this Review, there is no information on the status or possible release date of the system.

Currently the agency does not have performance indicators to assess the effectiveness of its regulatory policy.

References

[1] OECD (2014), OECD Best Practice Principles for Regulatory Policy, OECD Publishing, Paris, https://doi.org/10.1787/23116013.

[2] OECD (2012), Recommendation of the Council on Regulatory Policy and Governance, OECD Publishing, Paris, https://dx.doi.org/10.1787/9789264209022-en.