governance, political economy, institutional development and economic regulation

Us versus Them

IAS

Prime Minister Modi addresses young IAS officers – the elite civil service of India, February 16, 2015.

“Tribes” exist in India other than the ones provided for in Part X of the constitution. The largest is the “Tribe” of government servants – to be distinguished from the even larger body of public servants.

Sheltering under the benign glow of the Ashoka Pillar lions, this tribe is the worst afflicted by the “Us versus Them” syndrome. The “Them” in this case being private entities, derisively called “box wallahs” during the colonial period. This is odd for an economy where the private sector contributes around two thirds of value added. How can we develop more empathy between the two “tribes”?

Bridge the chasm

First, systematically bridging the chasm between government systems and private sector processes can help. Yes, private business works for profit whilst government works in public interest. But both work in the same economic environment. There is little reason then, for such a wide chasm in systems and processes.

mamta

Winds of change: Firebrand Chief Minister, Mamata Banerjee “Didi” of West Bengal has Amit Mitra previously of FICCI (a premier business association) as Finance Minister. Seen here rapping with Kolkata industrialists. Photo credit: The hindu.com

Better accounting systems

One such chasm is the system of accounts used by the two. Government follows the cash based accounting system. The formal private sector uses accrual based accounting. In a cash system, the focus is on cash-in and cash-out. But the cost of future liabilities and potential receipts foregone tend to be overlooked. Government can afford to do this. It can print money or just raise taxes to bridge the deficit. But like in a Ponzy scheme, fiscal unsustainability catches up and eventually ends the party, although at huge economic cost. Government already disciplines itself with strict constrains on public deficits. We should not relax this constraint.

But it is also important to transparently cost our contingent liabilities and share these with citizens. We do not do this very well. As a result, even government managers lose sight of these because the eventual cost of adopting the business-as-usual approach is hidden. Similarly, the opportunity cost of indifferent asset management is largely ignored within government. Accrual accounting helps generate such future costs.

Factor in the cost of risk

Second, government routinely underestimates the cost of risk incurred from operations. For example, government cars or buildings are never insured against loss or damage. Project estimates never factor in risks like the cost of time overruns or cost creep, despite a long trend line of evidence to the contrary. The cost of failing to meet targets is left open ended.

Consider the case of nuclear power. Our strict liability law requires private suppliers to bear the risk of damage from contamination. But the real risk is borne by a publicly owned General Insurance Company and indirectly by the government. It is the same with public sector banks whose losses from massive bad loans in the past, are now being borne by the government. Government must be more transparent whilst accepting risk. Accrual accounting unearths the data required for factoring in the risk of failure.

Government as a participant

Third, government is unused to be a mere participant in the commercial eco system. This derives from its sovereign mandate to be a rule maker and regulator. It also has sovereign functions. No one would want to replace the Indian army with private military contractors. Citizens prefer better policing to paying for private guards. No one wants unelected non-state entities to make our laws. Similarly preserving natural resources and the provision of public goods are best regulated by the government and not by markets.

But modern governments have added on a host of non-core social and economic functions, including the actual delivery of public services. Some of these can be outsourced  to the private sector – electricity supply or transport services. For others building “Chinese walls” between officials who discharge sovereign functions- like formulating policy, proposing legislation and developing programs – and others who implement programs and projects can internalize private sector concerns into the government.

Government entities like the Indian Railways; defence production units; public research laboratories; drinking water utilities; irrigation departments; public works departments; public institutes of tertiary education and hospitals can be usefully extracted from government, into publicly owned corporations subject to all the regulatory requirements as the private sector.

Stepping out of the “confining glow” of government and becoming a public limited corporation, even if it is 100 percent owned by the government, changes the organizational culture. In colonial days, financial relief to rehabilitate drought hit farmers was handed out by District Collectors. Since the late 1970s we have used public sector banks for this purpose. Today, crop insurance is the financial backstop for failed crops. This will incentivize even private banks to expand rural lending for profit. And farmers will not have the incentives they have today to exchange loan forgiveness for votes.

In the Union government alone, 66% of the 3 million civilian staff can be hived off to corporations. If this mammoth task seems undoable, look back to 2000, when the Department of Telecommunications (DOT) was restructured and 320,000 staff hived off into the Bharat Sanchar Nigam Limited (BSNL) leaving the DOT with just around 3000 staff.

Copy-paste the Telecom story

Telecom grew unshackled once the government stopped worrying only about protecting BSNL.  The empowered regulator -Telecom Regulatory Authority of India- in sync with the government since 1999, developed a fiercely competitive market. Private providers cater to 90% of the market. Subscribers have increased from a paltry 0.3 per 100 in 1999 to 88 per 100 population – pretty close already to China, which has 95 per 100 but at a per capita income five times higher than India. Indian telecom tariffs are a fraction of what they were in 1999 and are the lowest in the world. A telephone connection with a direct dialing facility was the preserve of business and the elite, fifteen years ago. Today a mobile is in the pocket of the common man and has become a can’t-do-without tool for empowering women. Low cost, high quality wireless internet access is expected to double, the 300 million internet users today, by 2019.

This transformation was achieved by deliberate, visionary steps taken to restructure the government and the telecom market for growth and efficiency. Application of these principles, across all sectors, can liberate the economy from the shackles of inherited, institutional constraints; bridge the “us versus them” chasm and squeeze out the fat in government.

computer

Digitally savvy India’s young are its future Photo credit: Globallearninggroup.com

 

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Comments on: "Us versus Them" (1)

  1. Sindhushree Khullar said:

    At the heart of this public vs private sector argument is the power vs pelf logic. Govt means power and private means pelf and both bargain for more of the other. And the balance is never ideal. A challenge that we must address is to incentivize quality in service delivery whether in schools hospitals or telephony or roads. Both public and private sectors are are wanting in this respect. Not much gyan available on ways to do this
    Sindhushree K

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