Friday, February 22, 2008

Equilibrium coalitions in the rent seeking economy

In this post, I will argue that corruption and rent seeking contributes significantly towards keeping prices low, thereby perpetuating a tenuous equilibium which suits all the major stakeholders in the dominant socio-economic and political coalition. Though this equilibrium keeps costs lower, the quality of services delivered suffer. But as will be seen, this balancing act that involves all stakeholders is often institutionalized and deeply embedded in the system, can persist for long and is not very easy to destabilize. It also partially explains why eliminating corruption is a formidable challenge.

Let me illustrate with three examples. First, the Vijayawada Municipal Corporation used to pay much less than the minimum wage to its sanitation workers, who are recruited as Self Help Groups (SHGs) and awarded sanitation contracts. Originally, the SHG was to be entrusted sanitation work in a certain locality and paid a specific sum for undertakling this task. Over the years, this has evolved into the VMC paying a fixed amount to each member of the SHG depending on the number of days they work, an effective daily wage.

But this system spawned corrupt practices in the form of workers periodically staying away from work, but claiming wages by colluding with their supervisors. The wages so claimed were shared between the workers, supervisors, municipal councillors, press and other stakeholders. In order to control this absenteeism and the resultant corruption, it was decided to introduce a more rigorous attendance monitoring system by taking the IRIS scan of each worker four times a day. The attendance figures soared, complaints dropped and sanitation services improved.

This new attendance monitoring system however met with stiff opposition from workers unions and local political representatives, who demanded scrapping it for very specious reasons. When it became clear that the new system was here to stay and everyone had reconciled to it, demand for raising wages made its appearance. This was surprising given that despite the daily wage being just Rs 58 for the past four years, wage revision was never a major demand. The workers share of the rents had more than made up for their lower wages. But this wage revision demand now was understandable given the fall in rents.

Second, the VMC have long been using hired water tankers for supplying water and tippers/tractors for transporting garbage. Such contracting is ususally done based on annual open tenders. But surprisingly enough, the old tenders were being extended since 2002 despite the Standard Schedule of Rates (SSR) tender rates and the diesel prices having gone up substantially. Since there were a number of allegations going around that these vehicles were not doing the full requirement of trips but were claiming the trip charges, it was decided to introduce GPS based monitoring technology.

Though the contractors and their drivers initially responded by deliberately tampering the installed GPS devices, it was soon controlled and the GPS monitoring system got standardized. Complaints fell and garbage lifting improved. Then the demands for recalling tenders based on the new rates started growing, and finally climaxed in fresh tenders being called and contracting done at the latest SSR rates. Hitherto, the trips evaded had more than made up for the loss suffered by way of lower trip charges. But now the GPS had reduced the trip evasion possibilities, thereby making the old rates unsustainable.

Third, the VMC executes engineering works worth about Rs 40 Cr every year through contractors under the supervision of the Engineering officials. There is a wonderfully balanced equilibrium in this long standing arrangement, which is widely acknowledged as being rampantly corrupt. The contractors boost their margins by diluting the quality of the works and shares it with the supervising engineers who are therefore incentivized to look the other direction on quality. The corporators and political representatives are also co-opted into this arrangement, and do not complain about the quality of works. Despite occasionally highlighting the lapses in quality, the media too generally prefer to turn a blind eye and take a share in the spoils. In order to improve quality and control this rent seeking, it was decided to introduce a system of Third Party Quality Control checks on all works, and computerize the entire work flow of recording, check measurements, bills preparation, bills sanction and payment.

Once the initial resistance, which involved all efforts to sabotage the new measures, had died down and the stakeholders had become reconciled to the changes, the underlying problems began to surface. The TPQC enhanced the quality and the work flow automation reduced rent seeking opportunities. The actual costs began to rise for the contractors, and the other stakeholders started facing declining rents. Works which were hitherto being tendered out at a discount to the estimated contract values, despite the rising construction costs, were now being finalized at the maximum permissible tender premium. The pool of contractors bidding for works shrunk, as those unqualified and fly-by-night contractors felt the quality side pressures and dropped out. Contractors associations started highlighting their genuine problems arising from fluctuating market rates for construction materials and the inadequate SSR. In fact, a crisis loomed with the contractors staying away from participating in engineering works and many bigger works could not be entrusted because of failure to attract bidders despite repeated tenders.

In all cases, the IRIS, GPS, TPQC and the work flow automation were exogeous interventions that disrupted the inefficient, but mutually beneficial equilibrium. The equilibrium was sustained by the strength of the coalition between the various stakeholders that thrived on the rent sharing. Interestingly in all the cases, the rent seeking was controlled in the process of improving quality of services and products delivered. But in the process, the expenditures increased as the agents started facing the real costs of the services. All this in trun sets in motion a spiral of efficiency and performance improvements.

These interventions were done more as a quality enhancement drive, than as a specific anti-corruption drive, thereby putting the rent coalition on the backfoot. Improving quality is widely acknowledged as a desirable, and steps taken to improve it does not face open opposition. In contrast, specific anti-corruption drives is more likely to face open opposition on many specious grounds.

But this success of IRIS or TPQC or GPS is not the final word. The rent seeking coalition will continuously explore the possibility of forming new alignments, that can overcome the obstacles posed by the external interventions. A new equilibrium develops and rent seeking continues, till another exogenous intervention comes. A robust civil society through say, a Residents Welfare Association, can play a critical role in quality oversight and check corruption. Ultimately this demand-driven, social audit is the only sustainable, long-term and most effective weapon against corruption.

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