governance, political economy, institutional development and economic regulation

TRAI

R.S. Sharma the new TRAI chairperson and  architect of “ersatz socialism” in the www. Photo credit: economic times.com

By ruling against Facebook’s Free Basics type of innovation, which offers, hitherto undreamed of, free but limited access to data services, Telecom Regulatory Authority of India (TRAI) has regressed to a version of “ersatz Nehruvian socialism”, which persist long after Panditji. It would have astounded him that his thoughts are still evoked to preserve the privileges of a thin crust of 250 million elite Indians whilst doing little for the 700 million poor Indians. Consumer benefit has been sacrificed yet again for ideology.

Nehruvian Socialism and Net Neutrality

Remember the car you used to drive in the 1970s? Most don’t, because it was an expensive, exclusive asset owned only by the rich. Even today Indian cars remain a rich person’s trophy because of the high cost of owning and using one relative to average income. Only 10 per cent of the 230 million Indian households own a car. Ironically, the TRAI order of February 8, 2016, is driven by a similar vision — preserving notional equity and freedom within a small bubble of 250 million well-off, “Internet connected” Indians owning smartphones.

poor buy

India’s poor- ersatz socialism permanently excluded them from the bubble of shiny cars. Net neutrality similarly excludes them from the virtual world. Photo credit: bbc.co.uk

Shunning innovation in the pricing of access to the Net under the garb of Net Neutrality has precisely this bubble effect. TRAI has decided to protect the existing ecosystem which privileges platform managers, content and app developers who today have unpaid access to 250 million netizens. But it ignores the need to grow this market to include 700 million Indians who are too poor to access data services other than phone calls and SMS.

TRAI’s vision of the www is like that of an owner of an expensive mall- keep the poor out.

The net is like a Mall except that you have to pay to get in and guards are actively instructed to keep shabbily dressed people out so that rich customers can float through an air-conditioned heaven- just like in Dubai. The good news is that in the real world business serves the needs of the poor through street markets because the municipality facilitates it. in a TRAI ruled internet the poor are to shunned, exactly as in expensive Malls and no street market is to be made available for the poor. The poor are to be kept invisible – as in China or Rwanda where the strong arm of the State keeps the poor severely controlled.

It is unsurprising that the Congress which has made ersatz socialism into a family business should support “Net Neutrality”. But that this should happen under a government led by Prime Minister Narendra Modi which has vowed to “free” India from the social and economic chains of the past, shows that this government needs to put on its “thinking” cap.

TRAI order equates porn with socially relevant content

TRAI’s decision is perverse and here’s why. It throws out the baby with the bath water. Whilst banning price “discrimination” for content, it also effectively disallows “positive discrimination” or “affirmative action” for access to socially responsible content. In essence it says a consumer must pay to access content whether it is porn or wikipedia.

Consider a large Indian company which may want to subsidise a telecom service provider (TSP) for providing free access to educational sites targeted at helping poor or dalit kids crack the JIIT exam. The TRAI order disallows this effort.

Similarly, it bars a poor, pregnant woman, say on the outskirts of Patna, from availing free access to check the cost of having her baby in a decent hospital in Mumbai, where her husband works. Sorry, says the TRAI order. You must pay the TSP to access the Net.

It is hypocritical to simultaneously support free content-unhindered by state control whilst arguing against “affirmative action” for providing free access to the poor to socially relevant content, developed just for them.

It is not just about Facebook

It’s not only about Free Basics. It is the principle of killing innovation that’s the real concern. The Trai order kills innovation in developing socially relevant content for the poor because there is no way now of getting the content to them.

Free Basics is driven by commerce. Free access has to be paid for by someone. Today it is Facebook subsidising access, tomorrow it could be a Tata CSR project. In Africa, Net subscriptions of the poor are subsidised by foreign donors.

Net neutrality is bad economics

More practically, there is money at the bottom of the income pyramid. Activists, platform managers, content and app developers are being short sighted in ignoring the role of “free access” in getting them there. They lack the business vision of Hindustan Lever which innovated shampoo sachets two decades ago to give every woman an affordable taste of luxury. Or do they fear that international players with deep pockets may get there first before they get their act together? Are they using the garb of “Net Neutrality” as a fig leaf for self-preservation? Do existing Indian players, TSPs want to keep Facebook out so they can do the same once they become big enough?

Predatory pricing based on enormous private equity funding is the essence of the IT start up.

All IT start-ups attract customers by subsidising prices. Take Uber, Flipkart or any other. The fear that they will start increasing prices once they get bigger is misplaced because unlike the bricks and mortar world entry barriers are low in the digital economy which ensures sufficient competition to keep each big player on their toes. Guarding against predatory pricing is a slippery slope for TRAI. It can result in taking the fizz out of e-commerce which is growing by out-pricing the corner mom and pop store and traditional taxis by relying on serial funding from investors, not profits to fund unheard of price discounts. In any case India has laws and the Competition Commission of India to regulate dominance and monopoly. TRAI is hardly equipped to rule on anti-trust issues.

Today’s startup is tomorrow’s business biggie

flipkart

The Bansals of Flipkart- value $ 15 billion and counting- give Amazon a run for its money. Photo credit: livemint.com

Ironically, whilst making it easy to do business for “start-ups,” we are killing commercial innovation by business biggies. Can an “innovation” friendly eco-system really be sliced and diced, such that it is a “free market” for start-ups but a stiflingly regulated environment once they become a business biggie, like Facebook? In the virtual economy startups grow on the strength of innovation not government protection. In any case, the record of ersatz socialism in growing small industry via protection is miserable. The Indian Telecom industry, the only success story of privatisation and reform, has grown from being yesterday’s “start-up” to today’s business biggie. Why discriminate against it because it has been successful?

The digital eco-system must be fair to all stakeholders, not just the software and content developers

There is a symbiotic relationship between TSPs, content providers and app developers. TSPs, represented by Cellular Operators Association of India (COAI), buy expensive spectrum from the government, install and maintain the telecom network to link-in netizens and ensure that the number of eyeballs grows. If the content available is attractive, netizens spend more time surfing, thereby boosting TSP revenues. They enrich app developers by buying an app off the Net.

To access content on Flipkart, Snapdeal, Amazon, Uber or Myntra there is no additional charge other than the Internet access cost. So are these companies just plain generous? No. Like Facebook or Google, they make their money by selling the data they gather from the netizens — demographics and preferences — to market analysts and sometimes to governments; they leverage their eyeball score to increase advertising revenue and get additional private or public equity funding. This is the money they burn to offer fantastic discounts and out-compete brick and mortar pop and mom stores.

So why does National Association of Software and Services Companies, an Indian IT lobbyist, support the Trai order? Because it is in the interest of the software developers and content providers they represent to try and hang-on to the freebie they have — the roving eyeballs of netizens for which they pay nothing.

Why do the parents of the www (US & the Brit Sir Tim Berner) support net neutrality?

Berner

Sir Tim Berner-Lee inventor of the www. Photo credit Wikipedia.com

Indian activists are fond of using the United States as an exemplar of non-discriminatory pricing access and the trenchant advocacy of Tim Berners-Lee – the inventor of the www-for net neutrality. This is their Brahmastra to clinch the argument for “Net Neutrality”.

This is unsurprising. For most netizens, the US is the mother lode of innovation, which it certainly has been. But cut-paste is bad tactics for good governance. The context in which things work is key. Activists and governments routinely overlook the difference in context in a slavish tendency to adopt best practice international templates.

Why the US is different

US poor

The poor people of the US: photo credit: rediff.com

In the US, the poverty level income is $2,000 per capita per month. Data access costs just 5 per cent of income or $100. In India, the poverty level income is $30 per capita per month. Data access costs $10 or one-third of a poor woman’s income. The cost of Internet access is not an economic barrier in the United States. The US is under no compulsion to abandon “Net Neutrality”, an ideology which sounds noble. For India, TTAI’s ideology of “Net Neutrality” means the economic exclusion of 700 million poor people.

TRAI’s technical incompetence drives the ban on differential pricing

The bottom line  is that despite its rhetoric on “net neutrality” TRAI is technically incapable to monitor data services to detect instances of blocking or preferential access for content favoured by TSPs. This why it has opted for the blunt instrument of a complete ban on commercial innovation in pricing and financing. This is the worst option driven by regulatory incompetence not by high minded adherence to principles. A sad comment on the state of regulation and of consumer protection in India.

Adapted from the authors article in Asian Age February 10, 2015 http://www.asianage.com/columnists/trai-s-socialism-kills-innovation-136

The latest public “dog and pony show”, unveiled on Thursday in Delhi, is the selection of 20 cities across the richest 11 states of India for accessing the governments Smart Cities fund.

smartcitiesindia

Photo credit: smartcitiesindia.com

The near-complete exclusion of the poor “cow belt” states, except Rajasthan and Madhya Pradesh, can be explained by the need to first push public money to where elections are to be held in 2016 — Assam, Punjab, Tamil Nadu and Kerala — West Bengal being a surprising exclusion.

But what takes the cake is the inclusion of the New Delhi Municipal Council (NDMC), comprising just three per cent of Delhi’s area, which is directly administered by the Centre. The Central government owns nearly 90 per cent of the 44 sq km it comprises with marginal ownership in and around the prestigious Lutyens’ zone of power brokers, lobbyists, old-economy business people, big time realtors and other hangers-on of this rarified ecosystem — the Indian equivalent of the Washington DC Beltway.

lutyens

Lutyens Delhi a lush, green bubble in the heart of the capital. photo credit: indiatravelite.com

The NDMC is already a profitable municipality, as indeed it should be. It spends over Rs 3,000 crore ($450 million) every year on serving just 300,000 people — a per capita expense of Rs 1 lakh ($1500) per resident, per year. Compare this with the average spend in the other three municipalities of Delhi of just Rs 7,300 ($110) per capita per year — all currently managed by the Bharatiya Janata Party. More starkly, the average spend for all urban areas, across India, is a shockingly low Rs 1,000 ($15) per capita per year.

Why is the selection of NDMC for yet another barrel of “pork” so disappointing? Three reasons strike out:

First, that this should happen days before the “reformist” budget expected to be presented by the Union minister of finance for 2016-17 is unnerving. The budget is, or should be, about spending public money well and wringing out the maximum public value from it. Allocating subsidies to the rich cannot be part of a pro-poor paradigm. It symbolises all that is wrong with a bureaucracy which is all “spin” and no heart.

crown

Second, the bane of China style “big government” has been soft budget constraints and poor accountability. Big budgets lead to profligate spending. Bureaucrats are more interested in shovelling money out of the public door into private pockets and marking up their “performance” sheets, than in ensuring that the money is spent in areas where growth and poverty reduction can most be impacted. The casual allocation of Rs 500 crore to the richest local body in India, with the highest per capita income, just so that it can shine even better, speaks of a pernicious tendency in new public financial management to mimic private finance by allocating money where it can be quickly absorbed, rather than risk it where it would create the maximum social and economic value.

Third, it is no one’s case that redistribution of wealth can be done by pulling down those who are well off. But Reserve Bank of India governor Raghuram Rajan’s recent diatribe against the lack of public concern about the optics of vulgar displays of wealth strikes a chord.

Lutyens’ Delhi is the “Kohinoor” of Delhi. A small self-absorbed bubble of power, privilege and wealth. One acre of land here costs Rs 500 crore and sales happen rarely. Why can’t the power elite pay for the privileges they enjoy? Why is it so difficult to convince the 4,000-odd large private property owners — each with a minimum net wealth of at least Rs 100 crore — to pay for retrofitting their beautiful municipality? Isn’t that what participative governance means? Why must poor Trilokpuri in east Delhi comprising the marginalised, poor and the shabbiest of public services pay for keeping Lutyens’ Delhi shining?

 

Trilokpuri

Trilokpuri, East Delhi, a festering sore where only the marginalized exist. Photo credit: Indianexpress.com

Had Thomas Piketty been part of the Smart City selection committee he would have torn out his hair in a fit of Gaelic rage at the callousness with which public money has been wasted and inequality worsened. What indeed was the selection process which has generated such a warped result?

The allocation instrument is a “challenge fund” devised by the usual suspects: Fly in, fly out consultants. As expected, on paper, the process appears transparent and efficient. It is a beauty contest. Municipalities send in their proposals seeking Central government funds for up to Rs 500 crore ($75 million) over four years. But they must match the Central government allocation and also meet the criterion of performance efficiency which includes standard metrics like collection efficiency, proactivity, etc. Nothing wrong with that at all. The killer is that there is no criteria on what impact the project will have on reducing urban poverty or on reducing the depth of deprivation in access to basic public services in poor localities.

Is it any surprise then that the Smart City fund is merely ending up elevating the “boats” which are already afloat? And how is that so different from the infamous National Rural Employment Guarantee Act (NREGA) of the United Progressive Alliance, which similarly incentivised the ability to use funds quickly? Rich states like Tamil Nadu, with average informal wages way above the national average national, quickly pulled out most of the funds, whilst the poor, badly organised states faced an empty treasury by the time they got their act together. As before, the mightiest wins yet again.

Political pork, lazy bureaucrats, the use of public funds for private gain by the elites is all old hat in India and across the developing world. Nothing new in that. The pity is that it needn’t be this way. The anguish is that old style cornering of public funds with no regard for ensuring equity, persists like a deep-seeded rot.

Prime Minister Narendra Modi of all people, should know the negative feeling generated from being excluded by the establishment. He must have experienced the chagrin of public money being wasted on “gilding the lily” whilst millions of poor children, like him, had to make do with a subsistence existence. Or is human memory so frail that one quickly forgets the bad times? Former Prime Minister Manmohan Singh was fond of establishing his humble roots by saying that as a child he studied under the village lamp post. But in the 10 years that he was in power, millions of children continued to study in exactly the same way.

street light

The preoccupations of the “Delhi Durbar” are pretty compelling. That is why they say you can wear a crown in Delhi. But don’t sleep easy — it isn’t permanent.

crown 2

The lonely statue of King George V after it moved from under its domed canopy  in India Gate – since awaiting another incumbent-and relegated to a museum.

Adapted from the authors article in Asian Age January 30, 2016http://www.asianage.com/columnists/exclusive-cities-715

You have to hand it to the French. They look effortlessly stylish- think Christine Lagarde, the French Managing Director of the IMF.

lagarde

Even when they wear plain work clothes they come encased in an inherited frisson of elegance- the 1789 French revolution, it seems,  diffused aristocratic elegance more evenly rather than destroying it all together, as in Russia. But scratch the coiffed surface and an au natural savage surfaces, readily comfortable with the oddities of humanity existence – cigarette smoke, food smells, passions and emotions. This being the one real French connecion with India.

It is not surprising them that art, fashion and spiritualism constitute areas of instant rapport between Indian and France.

Amrita sher gill

Indian artists- Amrita Sher Gill in the early part of the 20th century; Fashion and art ace photographer Prabudda Dasgupta towards the latter half;

Prabuddha Dasgupta

and current enfant terrible of the fashion world- Manish Arora all made Paris their karambhoomi (home away from home)

manish arora

But art and fashion were far from President Hollande’s objectives. So what were the  first impressions from his three day, Indian safari

Hollande 1AIt must have struck him that there is no easy familiarity between the French and Indians. It goes beyond the language barrier. At the heart of the difference is the romantic, liberalism of the French, naively combined with a deep allegiance to preserving their culture. In India, traditional ways are so deep a social barrier for two thirds of Indians that the great hope is for rapid urbanization and industrialization to erode the embedded biases against women, the poor and the marginalized. Disruption rather than continuity is the order of the day in India today.

Too shy to Bhangra?

This difference showed, he must have ruefully thought. There was no spontaneous affection between the visiting French and the Indian people, unlike, he ruefully pondered, what was powerfully on display when Bill Clinton danced the Ghoomer with Haryanvi villagers in 2000. Nor did the French capture hearts and minds, in the manner Michelle Obama did last year, with her ready laugh and radiating warmth.

French President in Chandigarh

The French are formal people and their Presidents do not go around grabbing babies or unknown dancers. The familiarity never extends beyond a glacial airbrush, double kiss. Elegance, grace and exclusive glamour is the French game and it was played well, in Delhi, as President Hollande supped with the beautiful people.

Beautiful people

But the President banished such negative thoughts as he slipped off his shoes- hopefully made in France, unlike his spectacles. Sinking into the warm familiarity of his customized Airbus A 300-200, whilst reaching languidly for his favorite seafood aperitif and a well-deserved glass of French wine, he rooted around for “learnings from India” as all diligent leaders must.

Indian state 2

The brooding edifice of the Indian state

His overriding emotion was of envy at how solidly the State is in control in India and how deeply stabilizing is the role of our elites. Delhi, a city state of 10 million people was effortlessly turned into a fortress by 60,000 security personnel. It worked without a hitch. Compare this with Paris, where even his delegation may have had difficulty in getting a cab back home on arrival, because taxi drivers were on strike against the ubiquitous Uber’s entry into France. If only, the President must have thought, I had more Indians in France, things would work better.

Illusions are the reality

Second, he brooded over the new Indian Rope Trick by which diversity and tradition are kept alive as a fond memory- a static picture in the head- whilst the real life incentives are all to become part of a national mainstream. The colorful floats, the folk dancers and the serried rows of soldiers- all marching in age old regimental silos in a manner reminiscent of 19th century India- all serve to highlight that they have transcended traditional cleavages. That their nationalism is not about one dress; one food; one drink, one language. It is something deeper and visceral. The President shook his head. Such flippant, multi leveled, varied allegiances to social norms would never do in France, where one culture is the leitmotiv of nationalism.

Social stability and change

Third, President Hollande mulled over the resilience of the feudal order in India, albeit mutated away from ancient entitlements to merit based access to State resources, with family and clan networks, patrimony and inherited wealth as the currency of convening power. Quite like Africa he must have thought.

He smiled at the contrast between the muffler clad, “peoples”, Chief Minister of Delhi, Arvind Kejriwal, with his socks insolently peeking through his open sandals loping around to be noticed at the Indian Presidents party and the haughty power exuded by the powder blue, baby soft, finely embroidered Kashmiri shawl, wrapped around a seated Finance Minister Arun Jaitley, like an impregnable cloak of influence.

Give me some air please

Fourth, he coughed as he felt the the smog and pollution which had literally taken his breath away. Despite the chirpy commentary on Republic Day, which ignored the oppressive mist and spoke joyfully of the bright skies, he could smell the smog through the glass screen and feel one’s throat constricting. Nuclear power, the President thought, is what India needs and the French can provide.

Money, money, money…

Fifth, the business potential warmed President Hollande’s heart. But could French business, used to high margin deals and troubled with low cash reserves work in the price sensitive Indian markets. Indians worry about the cost of fuel whilst buying a Porsche. How, the President, thought, can I make French business nimble and lean like the Chinese or the cash flush Japanese who casually drop down investment in dollops of $10 billion. How to shake the French industrial aristocracy out of their complacence?

Instant graphics

Sixth, Hollande reflected over how good Indians were at escaping into selective retention- their movies, our politics, our social norms all pay obeisance to this particular facility. They have retained Gandhijis spectacles-on top of a tractor float, as a symbol but discarded the topi; simplicity; erudition and the open windows of his mind. They air brush reality at will. Goa, it seems from their float, is a paradise of saree clad Indians dancing decorously to undistinguished folk music. But is that is the culture more than 1 million Indians and foreigners go to see over Christmas and New Year! What about the week long carnival of eclectic music; 24X7 partying; food for the mind, soul and spirit and sociable company right there on the redolent beaches! How lucky India is, Hollande thought. If only he could similarly airbrush away France’s social upheavals with just one master stroke of graphics!

The soothing ambience of his air-home away from home, relaxed the President. His beguiling, spaniel eyes drooped in weariness. His horn rimmed, foreign made spectacles slipped off. As he turned over he surrendered himself to the muted, distant roar of a Lion electronically mixed into the soothing, lapping sounds of the waters of a swachh Ganga- must build bridges around water was his last thought.

fly past

Prime Minister Modi smiles whilst President Hollande strains to find a French aircraft in the fly past finale- Republic Day, New Delhi, India, January 26, 2016

1148 words

Even as Davos was worrying over the haemorrhage of international capital from emerging markets and Finance Minister Arun Jaitley was at pains to point out that India was different, a different narrative was unfolding in the Telecom Regulatory Authority of India (TRAI) in Delhi. It had to do with a consultation paper issued by TRAI on “Differential Pricing for Data Services” inviting responses from the public. The consultation process closed on January 7.

The breaking news a few days back was the quixotic outburst by a senior TRAI official in a letter addressed to the $260-billion social media giant, Facebook, harshly rebuking it for inundating TRAI with template responses from nearly 2 million users in support of the Facebook-promoted Free Basics. The senior official was apparently outraged at the manner in which Facebook used its brute “majoritarian” muscle to intimidate TRAI with overwhelming public opinion and asserted that if such tactics were accepted, “it would have dangerous ramifications for policy making in India”

Facebook CEO, Mark Zuckerberg (AP Photo/Jeff Chiu)

Readers will remember that last year a TRAI consultation paper on Net Neutrality was similarly responded to by net neutrality fundamentalists to demonstrate the ground swell of opinion in favour of a strict version of neutrality. At the time TRAI was indulgent of this innovative way of crowd sourcing opinion. This time around it is Facebook, not indigent activists, on the front foot; the leadership in TRAI has changed and it seems to be open season for charges and counter charges.

Zenophobia or pique?

The “establishment” and a large swathe of Indians, bred on traditional distrust of the “Ugly American”, are quick to take offence at the in-your-face lobbying. To be fair, Facebook clearly went over the top in pushing its case. Americans play hardball and have to be restrained when dealing with other cultures, like ours, where soft, behind-the-scenes contact achieves far more.

In the instant case, Facebook’s evangelical assertion that Free Basics is all about giving free access to the “poor” lacks credibility. Free Basics is a process innovation to improve business for Facebook and the telecommunication service provider (TSP), which provides the access. But isn’t that what all successful businesses are supposed to do. Why else would you invest in them?

TRAI has developed a solid reputation for being a savvy, growth-oriented regulator. The recent outburst is quite out of sync with its image and one hopes that it remains an outlier.

The case against free access “walled gardens”

Now, on to the substance of the matter. The case against “walled gardens” like Free Basics is built around two reasons.

First, in a price-sensitive market like India, a freebie is habit forming – like reading a free newspaper which provides selective news. But it is insulting to readers to assume that they cannot see that they are getting only limited stuff. For getting a child married, they are unlikely to use the freebie and instead insert an advertisement in a popular daily, if they can afford to do so.

The second argument is that TSPs are likely to favour content providers who pay them in return for free access and shun or disadvantage others who do not. This discriminates against start-ups which do not have the financial muscle to reimburse the TSP for free access. Thereby innovation itself will be stifled, like great art which remains undiscovered because the big galleries will only stock established artists.

These are powerful concerns in an ecosystem which has grown around unhindered and near real time access to innovation via the internet.

Strict net neutrality imposes unnecessary costs on the final user of the net and sharply constrains assess in poor countries which walled gardens can help breach   

There are three counter arguments why fears that innovation will be stifled by walled gardens.

First, internet-based content is a growing market-especially in India. Only 25 per cent of Wi-Fi subscribers in India access it via a mobile. Less than a 100 million people in India have a 3G or a 4G enabled handset (one of every twelve persons). This illustrates that the potential for new business via new and better content providers is virtually unlimited.

Network_neutrality_poster_symbol

Second, creating content is a highly competitive business like tailoring. If your trousers don’t fit, you are unlikely to order repeats. Similarly, if the content on Free Basics fails to keep up with content in the same space available elsewhere, you will switch your TSP or opt out of Free Basics. If enough apps on Free Basics are duds, it will eventually negatively impact Facebook itself, as users will either migrate to another “free walled garden”. Even if walled gardens are habit forming, they will compete with each other, possibly even on the same TSP network.

Third, the IT ecosystem automatically filters out non performers. The TSP needs data traffic to make its returns. Content providers need eyeballs for successive rounds of funding or they are forced to shut shop, merge or sell out.  This is not an ecosystem which is kind to those who are not on-top.

If the concern is to ensure voice for minorities, there is nothing to stop a walled garden from coming up specifically targeted at socially important, but fringe, groups – the lonely blogger writing on about the rights of the Rohingyas; social activists raging against growing inequality and other such laudable causes. There is nothing to stop a government-supported entity from launching a free wall where anyone can post and to which access is free. This has a parallel in public service broadcasting. Facebook’s social objectives may be doubtful. But surely non-state actors can fill that breach.

Light touch regulation requires nerves of steel and a deep resolve to not be influenced, either by public opinion or ideology. It also requires technical expertise and industry experience to drill down from motherhood concepts like “net neutrality” and contextualize its application to the market and the regulated entities. So long as the regulator remains neutral, the net is safe.

Net Neutrality can be breached if it is in national interest; does not result in dominant monopoly and is the outcome of technical or business innovation. Let’s not hang our hat by outdated ideological shibboleths. Sometimes majoritarian opinion is worth considering even if it comes via an industry biggie.

Adapted from the authors’ article in Swarajyamag http://swarajyamag.com/biz/trais-misplaced-rage-against-facebook/

Being workaholics and 24×7 people, Team Modi must be avid coffee drinkers, with a yen for espresso. For the uninitiated, espresso is the end product of forcing boiling water through ground coffee, thereby concentrating the caffeine content and enhancing the “kick”.

espresso

photo credit: http://www.utube.com

India’s “espresso” moment happened last Saturday in New Delhi with the grand inauguration of “Start Up Stand Up”, the new campaign with the unfortunate acronym SUSU. This new mission focuses government resources and effort around the creation of new entrepreneurs. Established businessmen were not welcome to join the party at Vigyan Bhawan. And some confusion prevailed whether startups in the old economy space were on the guest list, or it was restricted to the “new economy” subset of IT-enabled startups.

But the crowd of young “been there and wannabe” entrepreneurs were not quibbling about such nit-picky issues. They were there to bond, stamp their feet and whistle their approval at being noticed and included in the national mainstream.

The presence of the founders of Uber, WeWork and Softbank was icing on the cake, which undoubtedly was an extended opportunity for “selfies” with Prime Minister Modi.  Expectedly, older inhabitants of this charmed business space were not impressed by the ground swell of support from the young. They spent their time warning against the danger of expecting too much from this space, which is already clogged. Apparently of the 500 e-commerce startups launched in India, only 10 survive — a survival rate of 2 per cent. Internationally, the survival rate for startups is better at 40 per cent.

But India’s burgeoning, literate, young “wannabe” entrepreneurs would have no truck with such pessimism. They pushed and shoved and cheered their way into the frisson of excitement which Team Modi had carefully generated for the event. Hope sprung eternal in every ones’ heart as Prime Minister Modi stoked the embers of youth entrepreneurship. So how long will the “espresso moment” last?

Adrenalin has a self-regulating mechanism for ramping down. The Prime Minister’s gesture is a welcome beginning to look beyond the “big men in suits” for business solutions. Mr Modi is right when he looks to the young and the intrepid to take risks, follow their dreams and escape the golden handcuffs of contracted servitude. If we want to scale up jobs and disperse commercial opportunities across the country,facilitating small startups is likely to give the biggest bang for the public buck.

Indian corporates- too many tiny ones

India is not short of business enterprises. We have 1.4 million registered companies though 30 per cent are closed, being liquidated or not functional. In comparison, our workforce is around 700 million. Just one working company per 700 workers is way too low. Even worse,75 per cent of the operational companies have an authorised capital of less than Rs 25 lakh ($38,000) and one-third have less than Rs 1 lakh ($1,500). This illustrates their limited potential for adding to gross employment. It also explains why only 1.5 per cent of the workforce is in formal, private employment, with the government providing jobs for another 2 per cent. Incentivising new entrepreneurs makes sense.

The Prime Minister announced a package of goodies to induce those present to just go and do it — tax breaks; venture capital; easier entry and exit processes and innovation hubs. These are the basics for any industry to grow. But startups need more. By definition, a successful startup is small but poised for explosive growth company. This is what attracts investors to accept the higher risk in anticipation of the huge rewards from added volumes and scale.

Government best placed to scale up social sector startups

The government is best placed to help in adding scale. However, care must be taken that government finance does not dilute the financial discipline which private finance imposes. One option is for the finance minister to encourage ministries to spend a small proportion of their purchase budgets for this purpose. The Union government has a residual budget of around of Rs 7 lakh crore ($100 billion), after accounting for salaries and pensions, overheads, interest payments and transfers to state governments. Even a 1 per cent allocation for buy-back arrangements with startups translates into performance-dependent support of Rs 7,000 crore ($1 billion) annually. This amount could usefully provide a revenue cushion to around 500 startups.

The Prime Minister proposed to provide Rs 2,000 crore ($300 million) annually as a public grant for institutional finance and a guarantee of around Rs 400 crore ($60 million) to de-risk venture capital.  Letting actual user departments contract directly with startups using their individual budgets is preferable.

Four next steps to embed the startup culture in government

First, encouraging government departments to work with startups has the hope that some of the private sector mojo will rub-off on them. Indeed, government officials who participated in the inaugural function seemed a far cry from the stodgy, grumps that “babus” are presumed to be.

Second, organically linking actual government users with startup founders bridges the chasm between small business and government. Startups are nimble problem solvers and disrupters. They can be used beneficially to enhance the effectiveness of public spending. But babus have a deep aversion to be fingered by audit. Only an explicit budgetary direction to engage tangibly with startups can nudge departmental secretaries to risk public money.

Third, it makes sense to de-concentrate the mandate for growing startups across the entire government architecture. Embedding this objective into central schemes further extends this mission to the state governments which manage these schemes.

Lastly, government should focus on encouraging startups in enhancing the rule of law, social protection, human development and agriculture. Commerce and industry are already well serviced by established mentors and private venture capital funds.

Last Saturday’s fever in Vigyan Bhawan was just the froth at the top of a cup of espresso. Keeping the adrenalin going will take far more grounded effort to keep those who stood up from sitting down again.

Adapted from the authors article in Asian Age January 20, 2016 http://www.asianage.com/columnists/how-keep-start-ups-standing-009

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photo credit: http://www.rediff.com

So what is a Public Private Partnership (PPP)? And why have industry insiders declared it as broken even though India has 1200 such projects in operation (the largest number internationally for any economy) with a total investment of over Rs 7 lakh crores (US $ 100 billion)? And does it matter?

PPP defined

We really do not have a peg to hang the definition of PPP on. This is where  the report of the Vijay Kelkar Committee on Revisiting and Revitalising PPP Model, submitted in November but  made public last week, does salutary service. It presents a simple definition which can be paraphrased as follow

A PPP is a large project in which the government, or a subordinate authority of the government, has not more than a minority share; which provides a public good or service; which is operated for a defined time period – usually medium term – by a private firm, under a “concession”, which defines contractual, mutually binding obligations and provides to the concessionaire a market-determined revenue stream to ensure commercially viability.

By proposing a definition, the report makes four important distinctions from what the practice is today.

First, it highlights the need for a PPP policy duly presented to Parliament, so that an appropriate regulatory regime could be specifically designed, possibly under a new legislation. The report is mindful of the current political economy, which has created an impasse in Parliament. This is why it recommends against an immediate resort to legislation to solve implementation problems, as has been the trend in recent times, albeit ineffectually.

Second, it recognizes that for a PPP to work majority ownership must be with the private party. This is how PPPs are designed. This design advantage is completely subverted when government uses a notional PPP route to set up a special purpose vehicle with a state owned enterprise (SOE), even if the latter is incorporated under the Companies Act. The report warns against this fudge. It thereby implicitly acknowledges, what is internationally accepted, that SOEs are just not as efficient or nimble as a private firm. Nor would they be able to pull-in the additionality of managerial experience and private investment, which is one of the main objectives of a PPP.

Third, not all instances of public-private joint investment are PPPs. A firm producing steel and set up with an assured buy-back arrangement from government would not be a PPP because steel is a private, and not a public, good. This is how Tata Steel’s Jamshedpur plant was set up way back in 1907. But what of units proposed to be set up for defence equipment, under the “make in India” route, on a similar basis? This remains unclear and hence the need for a policy.

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PM Modi seals the Rafale “buy and make in India ” deal in France. Photo credit: www. timesofindia.com

Lastly, by specifying the need for a “market-determined” revenue stream and commercial viability, the report deftly strikes a three-in-one blow for transparency, competition and efficiency. All three are hallmarks of a successful PPP. Related body blows are struck against crony capitalism and gold-plating through the emphasis on long term, high quality service as a monitored output linked to the revenue stream, rather than just one-time payment for construction of an asset.

What needs to be fixed?

So what ails PPPs today? Industry pundits ascribe deep problems with the manner in which PPP projects are designed, bid-out, financed and implemented as key reasons for the logjam in private investment, along with an unfavorable international economic environment after the 2008 financial crisis.

Happily the report also acknowledges that the PPP ecosystem has come a long way from when it all began in the mid-1990s.

—There are now standardised documents for every stage of the procurement  and contractual cycle, introducing transparency and predictability for investors. Development finance is also available under the India Infrastructure Project Development Fund to meet the significant transactions costs of doing a “good” PPP.

—An Appraisal Committee weeds out early flaws in PPP proposals.

—Financing of projects is supported by the India Infrastructure Finance Company.

—The Reserve Bank of India (RBI) has been continually adapting banking norms to facilitate PPP lending.

A great deal of capacity building has been done through training programmes, tool kits, outreach, pilot projects and structured exchange of learning along with real time support from PPP cells in state governments and at the centre.

So with all this under our belt, why is the PPP model broken?

First, the domination of public sector banks often results in less-than-sensible due diligence and risky lending for large, politically important PPP projects. The report has studied this aspect in some detail. Here, mere words are unlikely to help, till the governance structures of the public sector banks are made autonomous of government, something the RBI is trying to do. Banks must strictly not finance, and government must not bid out, projects till all clearances and authorisations have been received. Ministry of Surface Transport data shows that 40 per cent of highway projects overshoot time and cost targets resulting in commercial disputes due to regulatory delays.

Second, 85 per cent of the PPPs have been in the highway sector. Not surprisingly, the concessionaires are realty and construction firms. The downturn in the realty market since 2012 has hit them hard. This has significantly reduced their financial capacity to invest in new ventures and they are selling, not creating, assets.

The report suggests that “monetizing” the existing public assets can help by leasing out the operation and maintenance functions. O&M concessions are less capital intensive and also less risky since the project is operational. Alternatively, the government could front load the proportion of public financing in a PPP – an evolution of the existing viability gap funding – with the concessionaire repaying the government for the enhanced support, over time from the revenue stream earned by it or by resort to “take out” financing from risk averse finance companies. This is a good suggestion.

But a new ecosystem of O&M service suppliers would need to be evolved and supporting documentation standardised. Also the inefficiency, gold-plating and poor quality associated with public asset creation would continue to present serious problems. The revealed cost of privately maintaining poorly-built public assets to ensure high service quality will always be higher than what the government spends to provide poor quality service. This leads to the myth of private management being more expensive, as the report has noted.

Third, improved and time-bound dispute resolution systems can reduce regulatory delays. According to Assocham, Rs 12 lakh crores (US$182billion) of investment in infrastructure is stuck because of regulatory delays. The report recommends that independent regulators could also help solve some disputes and oversee contract management. According to Crisil, more than one-third of highway PPPs get stuck because actual revenue earnings from traffic are less those assumed in the bid documents. The expectation that independent regulation can solve commercial problems is not justified by the experience over the last two decades. With honourable exceptions (mostly at the central level) independent regulators tend to be handmaidens of the government of the day. Worse, they adopt a narrow bureaucratic, defensive approach to recognizing and working with private developers to resolve unforeseen business risks, which inevitably crop up.

Why do PPP’s matter?

Lastly, why does a robust PPP eco-system matter? Rewind to the dwindling years of the UPA government, specifically to 2012 when the 12th Five Year Plan (2012-17) was prepared. The government had adopted a twin target for infrastructure – a significant scaling up of investment in infrastructure and a never-before-achieved share of 48 per cent in investment for private investors. This was significantly more than the 37 per cent share achieved in the 11th Five Year Plan (2008-12) also under the UPA government and 25 per cent in the 10th Five Year Plan (2002-07) under the NDA-1. But achievement has been tardy over the first two years of the 12th Plan – 2013 to 2015. Public investment is 20 per cent lower than target and private investment is 40 per cent below target. Low investment adversely affects economic growth which, in turn, squeezes new job creation.

The conundrum

Here, then, is the conundrum. India needs to invest 8 per cent of GDP in infrastructure. We invest one half of this proportion. The only way out is to shrink the scope of direct ownership and management of public assets by letting the private sector have a larger share. The trick is to keep a close eye on the heightened macroeconomic and project risk the government would incur, should a more aggressive fiscal policy be followed.

This is why the report suggests first picking the low hanging fruit. Speeding up statutory clearances, improving dispute resolution mechanisms by rationalizing the risk incurred by government negotiators and decision makers of being unfairly fingered as being corrupt and, simultaneously, increasing accountability along the governance chain to also reduce petty corruption (which usually has a disproportionately higher fiscal impact).

The options

This report makes 49 key recommendations across the three pillars of institutional development, transparency and financing, all of which deserve careful consideration.

Two recommendations herald bold new beginnings in governance. First, removing the hanging sword of Damocles of government audit of a concessionaire’s accounts, post the award of contract, subject, of course, to the highest standards of corporate governance being followed and the quality of service being maintained. This can substantially reduce risk for the private partner. Second, making concessions majority owned by government and SOEs ineligible for PPP benefits can contain “gaming” and avoid unfair capture of centrally-provided viability gap funding.

But four others reek of defensiveness and could be abandoned. First, banning the Swiss challenge option is unnecessarily conservative. Second, a 3PI (a PPP institute of excellence) is a public waste. Instead, facilitating a virtual network of academic and consulting talent in IIMs, National Law Schools and IITs could provide competitive, high quality learning and evidence based research at lower cost.

Third, the recommendation of avoiding small PPPs is regressive. At the heart of decentralization and local government are small infrastructure and social sector PPPs which provide local jobs and build local entrepreneurs. Simpler regulations for these projects work well without diluting accountability since the community oversees implementation closely.

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photo credit: http://www.businesscalltoaction.org

Fourth, there are good reasons why PPPs need to be fast forwarded. But scaremongering that India could “grow old – lose the demographic dividend – before it becomes wealthy” is not one of them. If we remain poor, we will not grow old. Wealth creates the impetus to constrain population. Poverty has no disincentives for population growth. In the modern world, all cultures think of babies as “wealth”. But only poor countries keep producing them.

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photo credit: http://www.snopes.com

Adapted from the authors article in Swarajyamag January 6, 2016 http://swarajyamag.com/economy/kelkar-ppp-report-saving-government-from-itself/

Small guys always win

Star Wars episode VII tells it like it is, in reel life. The small guys — with fire in the belly and a higher moral purpose as their force — always win in the end.

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In this universe, big is evil. Thomas Picketty, the celebrated French economist, agrees. The bigger you get the further behind you leave most people. Just a handful hoarding wealth can’t be good and it isn’t.

Government of the underdogs but not for the underdogs

India has a long tradition of the government trying to protect small guys against the big guys. Our post-colonial mindset and our laws pretend to penalise the rich and big business. In actual fact, they work against the middle class and the poor. To make things worse, government has been pretty poor at doing the things rich people and big business could do, like investing in infrastructure and creating jobs.

The government in China manages to do this. But the government there has some advantages: The tight social compact between it and citizens and its credibility based on sustained growth, increasing incomes and improving lifestyles. Higher levels of homogeneity help.

In real life, of course, being big is often an advantage. Teenagers will agree instantly. Older folk may not be so sure. A great body with bulging muscles looks awesome at 19. But as the 40s kick in, things begin to sag and get lumped around as useless weight. Nations are no different. India is a big, old nation with a governance history and systems developed over the last 500 years. It is unsurprising that it is flabby today.

Our options

We can go two ways. Either we can reenergise the existing, highly-centralised system of governance or invent a new, highly-decentralised system celebrating the small guy.

Technology enables efficient centraisation

Technology enables and often induces a higher degree of centralisation today than ever before. In earlier times the bigger an empire became, the more loosely were the far reaches managed. It took the British force, marching up from Calcutta, three months to relieve the siege of the Lucknow Residency in 1857.

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Today a trained and equipped special force can reach a trouble spot anywhere in India within a day. Things can be monitored in real time, across enormous distances, providing early signals of “hot spots” or flashpoints for potential trouble. Social media has created a new, real time, citizen-centric information ecosystem. For every two Indians there is one mobile connection. Of these 20 per cent are smart phones. Within five years there will be as many mobile connections as Indians and 60 per cent of these will be smart phones.

Standardisation is another advantage of centralisation. Education, health, products and services all reflect the “Big Mac” effect — places change but the service remains the same. This is very attractive if you are a fan of robotic life. It also reduces the cost of doing things.

But centralized templates sap innovation

But there are problems which come with big, centralised empi-res. One problem is how to manage the concentration of power at the top. Humans have coped with inequity for generations. But “glass ceilings” sap potential and deaden the desire to innovate and take risks.

Choice is at the heart of efficiency. Old, immigrant nations like the United States retain their mojo because people choose to become citizens; virtually no one is born to a job and everyone has a voice. China is also a meritocracy, though choice is limited there.

But humans are neither robots nor pets. We are honed to express our individuality, search for better alternatives, a better way of doing things.

Inefficient, small, good guys versus efficient, big, bad guys

In Star Wars terms, India is the good guy and China the bad guy. We are the small good guy. We cannot destabilise the world economy. China can. We do not have a history of flexing our muscles. China does. We don’t deliberately infringe human rights. China puts national interest above human rights. But we the inefficient small guy, unlike Singapore, Mauritius or Malaysia, whilst China is the efficient, big guy.

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Competition and choice make decentralized systems efficient

Large, efficient democracies are not born overnight. They are nurtured over six to eight generations. Ours is just three generations old. Our Constitution recognises that one size does not fit all. That is why it establishes state and local governments. Most state governments haven’t empowered local governments, partly because even their own empowerment is very recent. Smaller state governments work better than bigger ones. The shining stars are the five southern states, Punjab and Haryana. Gujarat and Maharashtra are the outlier, efficient, big states. The bigger northern and eastern states illustrate that size is a handicap especially if coupled with antagonistic social diversity.

Choice is embedded in our Constitution. But powerless local governments make choice a redundant option. Our nascent democracy makes us obsessive about potential threats to the unity of India. Destabilising threats from our immediate neighborhood heighten this paranoia.

Consciously dumbing down the Center to the bare essentials of sovereignty is the only way of making the big guy efficient. Empower state governments by transferring human development and social protection functions with the required financial resources. Make the transfers conditional to states empowering their local governments in turn. A cascading stream of resources empowering the smaller guys is the mantra for equity with efficiency. It is only then that India will become an efficient good guy, even as we grow bigger and bigger.

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Adapted from the authors article in Asian Age December 26, 2015 http://www.asianage.com/columnists/small-guys-always-win-373

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Photo credit: huffingtonpost.in

Facebook CEO Mark Zuckerberg’s pledge to give away 99 per cent of his shares in the company, assessed at $45 billion, is the most recent in a series of over 138 billionaires who have signed the “giving pledge” to donate 50 per cent of their fortunes to charity. The 500 top billionaires in the Forbes list have a net worth of $4.7 trillion. Donations to charity, in the US alone, amount to over $300 billion every year.

Compare this with the fate of the pledge to stop climate change, proposed at just $100 billion every year from 2020 onwards. The nations of the world are scrapping over who should pay how much. Nothing better illustrates the ascendancy of the “box wallahs” (big business) versus the public bankruptcy of nation states.

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photo credit: http://www.cnbc.com

The leaders of 190 nations of the world and their extensive delegations could have more effectively sought an appoint-ment with the 1,826 billionaires in the Forbes list with a net worth of $7.5 trillion — equal to around 10 per cent of the world’s gross domestic product. With an estimated annual income of around $150 to $200 billion they could potentially make up for the international intransigence in funding the global commons.

Private wealth has always been a metric of success, especially if it is built up within one’s lifetime, if it is legitimate and if some of it is used to do good deeds. Could the talent, which has demonstrated private success, be institutionalised for achieving similar success in global public affairs?

This rhetorical question merits consideration because the governance record of multilateral institutions has been pretty lacklustre, particularly in matters related to promoting the global commons. And time is running out.

Cynics would assert that billionaires are created from unpaid taxes, which they are big enough to avoid paying, unlike common folk. Others may baulk at trusting rich folks with the world’s future — after all many have grown their private wealth at public expense — as is the case with oil, mining and tobacco companies.

Why trust those who don’t walk the talk?

But it sounds somewhat ridiculous that the heads of 196 nations should have more “voice” in managing our future than 138 billionaires who are willing to pledge more money to charity, than all these nations can collectively gather over the next two decades, to protect the global commons.

Big is not beautiful

Have we ballooned the functions of nation states way beyond what they can efficiently do? Is the nation state a “fit for purpose” entity for the new, integrated world order of this century and beyond?

It is conventional to think it necessary to limit the power of the state versus the human rights of citizens — a concept embedded in the principle of the rule of law. It is less conventional to think it necessary to limit the economic functions and fiscal powers of the state. The success of “developmental” states, like China, in sharply reducing poverty and spurring economic growth has bolstered the case for fiscally empowered, intrusive or “nanny” states. The world and India are rediscovering the virtues of public finance-led growth.

This is a sharp departure from the conventional wisdom, which prevailed from the latter half of the 1980s till the 2008 financial crisis, that private investment and management trump public finance options in effectiveness. The 12th Five Year Plan (2012-2017) — incidentally possibly the “last supper” for planning in India — reflected this earlier consensus by relying on private investment for around one half of the plan outlay. The definition of “private investment”, of course, was somewhat disingenuous. Loans taken by a private firm from a publ-ic sector bank were categorised as private investment. Today, such loans, particularly to private infrastructure developers, have turned sour and increase the non-performing assets (NPAs) of publicly owned banks.

Minimum government equals maximum governance

Fiscally muscular, democratic states, with expansive public ambitions, are wasteful and inefficient. Their instinct is to throw money at the problem. This is always the politically safest option though it may not be the most efficient “value for money” alternative. Examples abound. Why is it easier to construct a village school building than to staff it with teachers? Why are public buses in Delhi, bought just five years back during the Commonwealth Games in 2010, increasingly seen on the roads in a breakdown condition? In both cases, a fiscal windfall — a central scheme or a high-prestige project — makes available the capital investment, but there is no link with sustainable revenues for keeping the asset operational over its useful life.

India’s electricity supply industry is another case in point. In the First Five Year Plan, large-scale public investment was the planner’s choice for rapid electrification. More than six decades on, distribution utilities — primarily publicly-owned and managed — have an accumulated loss of $50 billion despite two previous bailouts in 2012 and 2002. Sadly, even on the most easily achieved efficiency metric of transmission and distribution loss, only the private utilities and some public utilities in Maharashtra, Gujarat and West Bengal perform well. In others, between a quarter to one half of the energy input into the grid, never gets billed to customers.

The core developmental function of the government is to regulate by setting standards of performance and by financing the delivery of public goods and services, which the private sector would otherwise have no incentive to supply. In India, unfortunately, our first response is to propose the direct delivery of public goods and services via state-owned enterprises. This in-house option is often preferred as being less time consuming and more controllable. There is also the implicit comfort that no one gets punished for the inefficiency of the public sector. But officers rooting for private sector service delivery face the challenge of having to stand ready to be hauled over the coals for the slightest mishap.

If our concern is jobs and better service delivery, it is only private investment and management which can generate results. Open the gates to the innovative genius of public-spirited billionaires. Why look a gift horse in the mouth?

Adapted from the authors article in the Asian Age December 10, 2015 http://wwv.asianage.com/columnists/let-billionaires-save-world-605

Paris cops

Paris cops patrol the streets prior to COP21: photo credit: http://www.nytimes.com

The Paris terror attack, days before the COP21 meet, seemed to be the only outlier in the run up to this event. Expectations from the meet were low and procedural, rather than substantive, in terms of doing something concrete and time bound to limit global warming.

There will be a deal…but it will be minimalist…noncontroversial….and most importantly universal…it will not make the commitment or the result legally binding…it will sidestep… review of the INDCs.On additional finance…it will not mention specifics” thereby freeing developed countries from their obligation under the UN Framework Convention on Climate Change to take the first and drastic actions because of their historical responsibility

Sunita Narain, India’s combative, veteran climate campaigner,November 22, 2015.

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The UNFCC (UN Framework Convention on Climate Change) has assessed the Intended Nationally Determined Contributions (INDCs), comprising actions till 2030, submitted by 166 countries as insufficient to hold global temperature increase over pre-industrial levels at the targeted 2⁰C. This is not what signatories to the 1997 Kyoto Protocol intended when they signed on for equitable, differentiated commitments to reduce Green House Gas (GHG) emissions.

The Science Of Climate Change

In the two decades since Kyoto, despite regular conferences of the parties to the UNFCCC 1992, an agreement has been elusive on the timelines and volumes for mitigation actions by specified countries. Adequate finance for mitigations is another problem. Meanwhile GHGs have continued to accumulate and the globe has continued to warm up.

Each of the last three decades has been the warmest since 1880. The global average temperature was 0.8⁰C higher in 2012 than in 1850. The science on what has caused the increase in temperature points to the accumulation of GHG – 78 per cent of which is carbon dioxide emissions from the burning of fossil fuels.

The IPCC (Intergovernmental Panel on Climate Change) in its fifth report in 2014 estimated that the maximum emissions the globe can adjust to, without severe adverse consequences, is around 2900 Giga tons of CO2. Accumulations by 2011 were already 1900 Gt CO2 leaving just around 1000 Gt of carbon space for future emissions. With annual emissions at around 50 GtCO2 in 2010 this leaves just about 20 years (till 2030) to prevent the globe going over the “tipping point”- popularized by the metric of a mean temperature increase of 2⁰C.

“Enormous costs and human suffering are inevitable unless adequate concessional finance drives mitigation aggressively and countries pull together to define a common strategy”

R. K. Pachauri Director General TERI and ex chair IPCC, November 27, 2015

The Conundrum

Collective action involving 196 sovereign nations is a gigantic task. Consider how porous the implementation of the Non Proliferation Treaty 1970, banning nuclear proliferation, has been even though it recognizes just five countries as Nuclear Weapon States.

At the heart of the problem of climate change compliance is the long disconnect between irresponsible behavior today and consequences occurring a century later. Corporate entities and nations rarely strategize beyond twenty years. This implies we should budget for crossing the tipping point. The inevitability of this scary scenario is what most nations – developed and developing – seem to be working towards.

Is there still time to do something?

Rapid economic growth in the developing economies is the best solution to even out the existing asymmetry between the capacity of the developed and the developing world to deal with climate change. But it also advances the “tipping point” by filling up the available carbon space. One-third of the world GDP today and nearly one half of incremental GDP added during the period 2000 to 2014 was contributed by low and middle income countries.

The OECD estimates that its trend growth till 2050 will be around 1¾ to 2¼ per cent per year. Compare this with expected growth in non-OECD countries of 7 per cent till 2020 declining to around 5 per cent in the 2030s and to about half that by the 2050s. Today’s developing countries will account for more than 60 per cent of the world’s GDP by 2030. This will still be less than their share of 85 per cent in the world population of 8.5 billion in that year, as assessed by UNDESA (UN Department of Economic and Social Affairs). But the continuing differential in economic growth will empower these new economies.

The Kyoto Protocol arrangements visualized a static world divided into Annex 1 (industrialized) and other countries, with only the former morally obliged to reduce emissions to “pay for the pollution” they had created. This argument – thin as it was even then – has proved impractical in the face of a dynamic and integrated world economy.

The developing world has copied the carbon-intensive path as it has grown richer. A bald per capita comparison of energy consumption across countries hides the fact that elites in developing countries – who are the domestic role models – are at least as energy profligate as people of a similar income level in the industrialized world. Moral outrage at the profligate West is mere rhetoric. But it is also true that the rich have not uniformly stepped up to the plate. In contrast, several “newly emerged economies”, like India, are pulling above their weight.

Interim strategies till 2030

Some more scientific clarity please

Much of the resistance to spending more on adaptation and mitigation relates to the uncertainty with respect to the timing and magnitude of the impact and the credibility of mitigation options. Diluting the uncertainties can greatly enhance the willingness to invest in green options for growth.

360⁰ strategy for sustainable development

Global climate concerns need to be built into local development strategies. Working bottom upwards rather than the more usual top down approach can pay rich dividends in resolving the presumed trade-off between development and the environment.

Take sea level rise – that most dramatic of adverse effects – which is expected to force people in small islands and low lands to migrate. A Climate Central Research Report estimates that a 3⁰C increase in temperature is expected to result in a rise in the sea level between 4.7 to 8.2 meters and induce displacement of between 255 to 597 million people based on 2010 population levels.

China has the most to lose from habitat disruptions followed by India, Bangladesh, Vietnam, Indonesia, Japan, the United States, Philippines, Egypt, Brazil, Thailand, Myanmar and the Netherlands, in descending order. Land use and building regulations can regulate further construction in the areas to adapt infrastructure to the likelihood of being inundated. But as the recent Chennai disaster shows, government and citizens are not sensitized to this threat.

Taxing land use appropriately can boost local government revenues whilst also optimizing land use, resulting in more energy efficient cities and villages. A 360⁰ approach to sustainable development, as embedded in the Sustainable Development Goals adopted earlier this year, is the way to go.

Compensate for the conservation of natural resources

Just as forests are a carbon sink, coal or oil reserves, left unexploited in the ground, are also voluntary economic sacrifices. Compensating the public or private owners could incentivize conservation. Of course there are political economy issues associated with compensatory transfers. Natural resource rich countries may be non-democratic and dictatorial. Some oil rich regimes in West Asia use oil wealth to indirectly support the political use of terror. Empowering such governments with fiscal transfers may cross humanitarian and security “red lines”. But the principle can be applied selectively to freeze the threat of incremental carbon emissions.

New institutional arrangements

Effective institutions raise the benefits of cooperative solutions or the costs of defection, to use game theoretic terms

Douglass C. North, Nobel Laureate and Institutional Economics Guru.

-Douglass_North

Institutional change imposes costs. But it can be the game changer for getting results by aligning incentives with outcomes. We would do well to recall this central thesis of Nobel Laureate Douglass C North, Institutional Economist, who passed on last month. Changing the institutional framework within which foreign aid works and international cooperation arrangements are structured can have similar outcomes.

Incentives for improving cooperation

Unless shifts in the international economic fundamentals are explicitly recognized and factored into the architecture for cooperation, useful outcomes become prisoners to the asymmetry between intent, capacity and authority of individual countries. Implementation of the long sought for reforms in the governance of multilateral institutions could be one option to signal the need for emerging economies to play a more substantive role.

Going beyond voluntary pledges of finance

Additional finance is critical for mitigation. The existing arrangements seek to funnel additional funds provided by developed countries into the Green Climate Fund. But only $10.2 billion has been pledged against the targeted annual receipt of $100 billion by 2020. Dwindling growth, ageing populations and a reducing share of the rich countries in the world GDP are unlikely to create the political economy drivers for making them more generous.

“India is pulling above its weight to contain climate change. But without similar additional effort from the legacy economic powerhouses, achieving the target of 2⁰C is tough. No developing country should be pushed into having to trade-off growth for environment.”

Ashok Lavasa, Secretary Environment. Government of India, November 27, 2015

Lavasa

A universal “carbon tax” is an alternative, straight forward approach. But it raises implacable issues of equity based on differential natural endowments and differential access to technology across countries.

Show me the money!

A better proxy of wealth to tax is cross-border investment. Imposing a tax on international capital flows, at a time when liquidity needs to be enhanced, does not make intuitive sense. But the distortionary impact can be minimized by keeping the tax at low levels making it too fractional to inhibit individual transactions.

The annual flow of cross-border private investments (debt, portfolio and foreign direct investments) has reduced significantly since the downturn of 2008 but the IMF still estimates it at US$ 4 trillion. Capital exporting countries also tend to be those which are growing well. Green bonds are already in the market. One driver of cross-border investments is the search for higher returns abroad or risk diversification. These drivers are unlikely to be diluted by a marginal tax on private capital outflow. The green tax could be a significant and buoyant source of green finance.

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Time is running out. The existing clunky climate arrangements are broken. A new institutional framework is needed to integrate growth, development and environmental preservation. Improving the science of climate change is critical for a nuanced least-cost assessment of the balance between mitigation and adaptation. “Value for money” must replace today’s environmental theology to make people willing to pay for change.

Adapted from the authors article in http://swarajyamag.com/world/beyond-the-paris-meet

Sarkari pay: Too much love

A picture is worth a thousand words. Even the Oxford dictionary has conceded as much by admitting the emoji “tears of joy” as the first ever “pic-ord” which sums up the prevailing worldwide emotion of relief at even small mercies.

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This emoji must have resonated with the 10 million employees and pensioners of the Union government as they read the generally beneficent recommendations of the Seventh Pay Commission presented to Union finance minister Arun Jaitley this week.

 

Coming as it does against the disturbing backdrop of faujis (Army veterans) having to resort to public agitations to get their due, the commission’s key objective seems to have been to soothe jangled sarkari nerves by adopting equity as the leitmotif of its recommendations.

 

Even recommending erosion of the pay “edge” enjoyed by the Indian Administrative Service (IAS) by making it available to all other Group A services, fits in well with this axiom. It mollifies the other cadres whilst giving ample opportunity to the IAS to retain its predominance by other means. After all they are the ones who write the rules today.

 Equity – yes! but for whom?

But equity is an expansive concept spanning generations. How equitable, for example, are the recommendations versus citizens? Citizens have never been considered “stakeholders” by any of the commissions till now.

 

Prime Minister Narendra Modi, however, has different ideas. He wants IAS officers to go beyond the files and the political intermediaries who crowd around key government employees and to consult directly with people to know the truth. Incidentally, this was why district collectors in earlier times went on extensive tours and camped in villages. One wishes that the Commission had also followed this practice of consulting the intended beneficiaries of public services, instead of limiting consultations to only government employees.

Fiscal impact to crowd out public investment, as usual 

The Commission assesses the direct fiscal impact of its recommendations at `1 lakh crore ($15.5 billion) per year on pay, allowances and pension for 10 million employees and pensioners. The unassessed indirect impact will be at least thrice this amount, since the ripple effect raises all public sector employees’ wages in state and local governments and those in the state-owned enterprises who number 12 million, excluding pensioners.

 

The question that 220 million households — comprising the rest of India who do not partake of this public bounty — are likely to ask is why should each of them pay an additional `4,500 every year to finance this splurge?

Income Tax

Government pay is already indexed 100 per cent to inflation and pension is similarly indexed substantially. Any increase in the “real” pay — after accounting for inflation — needs to be justified against additional or better work performed. There is no evidence of any such link compelling the proposed enhancements.

 

Most importantly, the additional burden is ill-timed. It is mere statistical jugglery to justify the fiscal burden (0.65 per cent of GDP) by pleading that it is less than the burden (0.77 per cent of GDP) imposed by the preceding Sixth Pay Commission a decade ago. Another argument is that the prospects for economic growth are bright, making the additional burden manageable. This is iffy reasoning.

 

The fiscal challenges faced by the government today are far more daunting than in 2009, when there were expectations of a quick rebound in world economic growth. Consider that the aggregate, cumulative loss of state electricity boards alone is around `3 lakh crores ($45.5 billion) which needs to be dealt with to improve electricity supply. Union minister of state for power, coal, new and renewable energy Piyush Goyal has taken a hard stand against the Union government bearing the burden without basic reform within these entities. This is the right way to go. If subsidies for the poor need to be narrowly targeted, so must “real” public sector salary enhancements, and that too only to reward the few performers in the vast government machinery and not spread equitably like largesse to all.

Link public pay enhancement to higher than targeted GDP growth 

Given this background prudence dictates that even if the recommendations are accepted in-principle, actual accrual and pay out of these amounts should be graduated. An option to link pay enhancements with performance is to link their payout to GDP growth which is a specific, measurable, assignable, realistic, time-related specific, measurable, assignable, realistic, time-related (SMART) metric for aggregate government performance.

 

One obvious option is to use the existing proportion of emoluments to GDP of 2.77 per cent. This can be thought of as the “share” of Union government employees in GDP. A similar share can be justified for distribution of the recommended pay enhancements out of the actual additional value created above the GDP growth target.

 

Using this principle, for every 0.5 per cent of growth above the target (say 7.5 per cent instead of 7 per cent), the amount available in that year would be around `30,000 crore. This is less than one third of the assessed fiscal impact of the Commission’s recommendations. Once sufficient “additional” growth has been achieved — say over the next three years — the recommendations can kick in. Alternatively the implementation can be staggered annually. This forces government to perform before increasing the “real” pay of its employees. From the citizens’ point of view this is akin to hiring an auto rickshaw. You only pay after the driver has brought you to your destination — not in advance.

ice cream

No ice cream without results

There is more evidence of excessive generosity. An assured annual increment of 3 per cent seems too generous for an inflation-indexed salary even though it is calculated only on the basic pay. Unearned annual increments should not be more than 1 per cent at best.

Fauji “pension edge” levelled yet again

The concern with equity has driven the commission to extend the principle of One Rank One Pension — granted by the government to the armed forces just prior to the submission of the Commission’s report — to civilians also. This is akin to compounding an earlier mistake. Levelling the armed forces’ and civilian pensions means taking away the “pension edge” which was so tenaciously fought for and won by the armed forces. The downside is that it may spark off a second round of fauji gussa (anger).

veterans

The Commission has done stellar work in sharing employee demographics for the first time. It has also laboriously listed an incredible 196 different allowances and worked meticulously to simplify and rationalise them by recommending termination of 52 and clubbing 36 others into other allowances. That still leaves 108 allowances to be dealt with later. The government would do well to heed the advice that fuller and more transparent budgeting of allowances is necessary.

 

But pay commissions, despite their expansive mandates, are not really expected to create a new architecture for public service. Their job is to shut the maximum number of mouths with the least amount of cash. The Justice Mathur Commission could have done worse. Thank God for small mercies!

7th PC

Adapted from the authors article in the Asian Age November 22, 2015  http://www.asianage.com/columnists/it-s-rip-127

 

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